AnnuAl RepoRt to ShAReholdeRS
Closer to our customers
399 Route 23 | po Box 353 | Franklin, nJ 07416 | 973-827-2914 | sussexbank.com
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President and CEO’s Message
Anthony Labozzetta, President and CEO
We are excited about our accomplishments this past year.
As we entered 2012, we were mindful of the potential
headwinds: flat economic growth, prolonged low interest
rates, flat yield curve, intensified competition and a more
burdensome regulatory environment. These difficult challenges
became part of the 2012 operating environment for financial
institutions. Nevertheless, we made substantial progress
toward our goals of reducing problem assets and building
our business, which strengthened our Company’s financial
condition and improved our shareholder value.
INVESTOR INFORMATION
Stock Information
Sussex Bancorp’s Common Stock is
traded on the Nasdaq Global Market
using the symbol “SBBX.”
Registrar and Transfer Agent
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10007
800-937-5449
www.amstock.com
Independent Auditors
ParenteBeard LLC
350 5th Ave.
68th Floor
New York, NY 10118-0110
General Counsel
Windels Marx, Lane and Mittendorf
120 Albany Street Plaza, 6th Floor
New Brunswick, NJ 08901
SEC Counsel
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Investor Information
Steven M. Fusco, CFO
200 Munsonhurst Road
Franklin, NJ 07416
973-827-2914
Information on Sussex Bancorp, Inc. can also
be found at: www.sussexbank.com
LOCATIONS
Branches
Andover
165 Route 206
Andover, NJ 07821
973-786-5150
Augusta
100 Route 206
Augusta, NJ 07822
973-940-7950
Franklin
399 Route 23
Franklin, NJ 07416
973-827-2404
Montague
266 Clove Road
Montague, NJ 07827
973-293-3488
Newton
15 Trinity Street
Newton, NJ 07860
973-383-2211
Offices
Port Jervis
20-22 Fowler Street
Port Jervis, NY 12771
845-856-7400
Executive Office
200 Munsonhurst Road
Franklin, NJ 07416
973-827-2914
Tri-State Insurance Agency
96 Route 206
Augusta, NJ 07822
973-579-6776
201 West Passaic Street
Suite 406
Rochelle Park, NJ 07662
201-490-4695
Regional Lending Office
201 West Passaic Street
Suite 406
Rochelle Park, NJ 07662
201-490-4695
Sparta
33 Main Street
Sparta, NJ 07871
973-729-7223
Vernon
7 Church Street
Vernon, NJ 07462
973-764-6175
Wantage
378 Route 23
Wantage, NJ 07461
973-875-9957
Warwick
65-67 Main Street
Warwick, NY 10990
845-986-6021
DIRECTORS AND
EXECUTIVE OFFICERS
Board of Directors:
SUSSEX BANK and SUSSEX BANCORP
Edward J. Leppert
Chairman of the Board
Anthony Labozzetta
President and Chief Executive Officer
Anthony S. Abbate
Patrick Brady
Richard Branca
Katherine H. Caristia
Mark J. Hontz
Donald L. Kovach
Rev. Timothy Marvil
Robert McNerney
Richard W. Scott
John E. Ursin
Executive and Senior Officers:
SUSSEX BANK
Anthony Labozzetta
President and
Chief Executive Officer
Steven M. Fusco
Executive Vice President and
Chief Financial Officer
Kurt Breitenstein
Executive Vice President and
Chief Lending Officer
Vito Giannola
Executive Vice President and
Chief Retail Officer
Neill Schreyer
Senior Vice President and
Chief Credit Officer
Elizabeth Martin
Senior Vice President and
IT/Operations Officer
Barbara Muccia
Vice President and
Human Resources Director
Sarah Roskowsky
Vice President and
Marketing Director/Public Relations
TRI-STATE INSURANCE AGENCY
George Lista
President and
Chief Executive Officer
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ImProved CredIT QuAlITy
Total Problem Assets (in thousands)
Reducing legacy nonperforming assets,
or NPAs, to levels consistent with or better
than peer banks continues to be our top
priority. In 2012, we made significant
progress toward this goal by reducing
our NPAs 30.1%, as compared to year-
end 2011. This improvement brought the
ratio of NPAs-to-total-assets down to 4.6%
from the historic high of 6.7% at year-end
2011.
As a result of our proactive approach,
our total problem assets (defined as
criticized and classified assets plus
other real estate owned) have been
considerably reduced, which slowed
the rate of growth of our NPAs. Over
the past three years, our total problem
assets have declined considerably, as
illustrated in the chart. Total problem
assets declined by 29.5% for the year
and brought the total decrease to 44.4%,
from the historic high of $62.8 million at
March 31, 2010.
FINANCIAl reSulTS
While our workout team is focused on
reducing NPAs, our production teams are
concentrating on building our business
responsibly and our commercial lending
team is gaining momentum. In 2012,
we closed about $70 million in new
loans — an increase in production
of 146.5% over the prior year. Our
pipeline continues to grow. To date,
approximately 41% of our outstanding
loans were originated over the past
three years, utilizing the improved
credit standards implemented by our
management team. It is worth noting that
we have not experienced any charge-offs
from this new production and none of the
loans are classified as problem assets.
Another exciting announcement for our
customers this year was the introduction
of the Sussex Bank mobile app for the
iPhone and Android.
We made substantial progress against
our NPAs; nevertheless, our net income
continues to be burdened by the cost
to resolve the legacy credit problems.
In 2012, we incurred $7.2 million in
costs to resolve problem assets, which
resulted in net income for the year of
$735,000, or $0.22 per diluted share.
As our problem assets decrease to
more normal levels, we can expect to
significantly reduce the run rate of credit-
related costs, which will considerably
benefit our earnings.
Our retail business is also making
progress. In 2012, we grew our market
share, and more notably we improved
the composition of our deposits by
growing the average of our noninterest-
bearing demand accounts 19.2%.
Our subsidiary, Tri-State Insurance
Agency, Inc., or Tri-State, is continuing to
build its business and in 2012, reported
net income before taxes of $261,000,
as compared to $152,000 in the
prior year. Moreover, Tri-State is now
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3/106/109/1012/103/116/119/1112/113/126/129/1212/12$20,000$25,000$30,000$35,000$40,000$45,000$50,000$55,000$60,000$65,0009/0912/09 fully integrated with our business lines,
which has resulted in more successful
joint sales efforts and increased referrals
amongst all business lines.
Despite reducing our NPAs by 30.1%
from 2011 and our problem assets by
44.4% from the historic high at March
31, 2010, we managed to build our
capital, and it remains strong. Our
leverage, Tier I and risk-based capital
ratios were 9.27%, 12.88% and
14.13%, respectively — well in excess
of the ratios required to be considered
“well capitalized.” The improvement in
NPAs and continued profitability have
benefited our price per share. As of
February 28, 2013, our stock price
had increased approximately 59% since
December 31, 2011, and has more
than doubled over the past three years.
CommuNITy
Being a good corporate citizen means
giving back and helping the communities
we serve through donations, charitable
giving and volunteerism. To further
our commitment we formed the SB
Foundation, Inc. The purpose of our
foundation is to make a positive impact
by raising funds for charitable causes
in the communities we serve. We look
forward to making a difference.
At the NASDAQ, we recently celebrated our 15th year of being listed on the exchange.
lookINg AheAd
We remain in a protracted period
of uncertainty about the economy.
Combined with prolonged low interest
rates, a flat yield curve, intensified
competition and rising regulatory
demands, the tough operating
environment will continue. To succeed,
we must efficiently grow our business.
The commitment we have to our
employees has helped us become
an employer of choice. In turn, our
employees deliver an exceptional
customer experience, build relationships
and create value for our customers, all
of which drive our business growth. I
am confident that the resiliency and
capability of our team will allow us to
overcome the challenges of the new year
and also help us achieve our objectives
of normalizing NPAs and growing
our business. I would like to thank our
Board of Directors, our shareholders,
our customers and our employees for
their confidence and support. We look
forward to 2013.
Anthony Labozzetta,
President and CEO
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:2)
(cid:3)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-29030
SUSSEX BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
22-3475473
(I.R.S. Employer Identification No.)
200 Munsonhurst Road
Franklin, New Jersey 07416
(Address of principal executive offices) (Zip Code)
(973) 827-2914
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:3) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:3) No (cid:2)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (cid:2) No (cid:3)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes (cid:2) No (cid:3)
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. (cid:3)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:3)
Accelerated filer (cid:3) Non-accelerated filer (cid:3)
Smaller reporting company (cid:2)
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:3) No (cid:2)
Based upon the closing price of $5.20 on June 29, 2012, the aggregate market value of the voting and non-voting common equity held by non-
affiliates was $14,449,062. The number of shares of the registrant’s common stock, no par value, outstanding as of March 11, 2013 was 3,423,713.
Portions of the Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
DOCUMENTS INCORPORATED BY REFERENCE
(cid:2)
(cid:2)
(cid:2)
INDEX
FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
(cid:2)
ITEM 5.
ITEM 6.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
(cid:2)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.
(cid:2)
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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FORWARD-LOOKING STATEMENTS
We may, from time to time, make written or oral “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities
and Exchange Commission (the “SEC”), our reports to shareholders and in other communications by us. This
Annual Report on Form 10-K contains “forward-looking statements,” which may be identified by the use of such
words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-
looking statements include, but are not limited to, estimates with respect to our financial condition, results of
operation and business that are subject to various factors which could cause actual results to differ materially from
these estimates. These factors include, but are not limited to:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
changes to interest rates, the ability to control costs and expenses;
our ability to integrate new technology into its operations;
general economic conditions;
the success of our efforts to diversify its revenue base by developing additional sources of non-
interest income while continuing to manage its existing fee based business;
the impact on us of the changing statutory and regulatory requirements; and
the risks inherent in commencing operations in new markets.
Any or all of our forward-looking statements in this Annual Report on Form 10-K, and in any other public
statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties. Consequently, no forward-looking statements can be guaranteed.
We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances
after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.
Unless the context indicates otherwise, all references in this prospectus to “Sussex Bancorp,” “we,” “us,”
“our company,” “corporation” and “our” refer to Sussex Bancorp and its subsidiaries. References to the “Bank” are
to Sussex Bank, our wholly owned bank subsidiary.
i
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ITEM 1. BUSINESS
General
PART I
Sussex Bancorp is a bank holding company incorporated under the laws of the State of New Jersey in
January 1996 and the parent company of Sussex Bank (the “Bank”). Pursuant to the Bank Holding Company Act of
1956, as amended (the “BHC Act”) and the New Jersey Banking Act of 1948, as amended (the “Banking Act”), and
pursuant to approval of the Board of Directors of the Bank and shareholders of the Bank, Sussex Bancorp acquired
the Bank and became its holding company on November 20, 1996. The only significant asset of Sussex Bancorp is
its investment in the Bank. At December 31, 2012, the Company had consolidated total assets of $514.7 million,
loans of $347.7 million, deposits of $432.4 million and stockholders’ equity of $40.4 million.
The Bank is a commercial bank formed under the laws of the State of New Jersey in 1975 and is regulated
by New Jersey Department of Banking and Insurance (the “Department”). The Bank’s wholly owned subsidiaries
are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, Wheatsworth
Properties Corp., PPD Holding Company, LLC and Tri-State Insurance Agency, Inc. (“Tri-State”). SCB Investment
Company, Inc. and SCBNY Company, Inc. hold portions of the Bank’s investment portfolio. ClassicLake
Enterprises, LLC, PPD Holding Company, LLC and Wheatsworth Properties Corp. hold certain foreclosed
properties. Tri-State provides insurance agency services mostly through the sale of property and casualty insurance
policies.
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.
Our Business
Our primary business is ownership and supervision of the Bank. Through the Bank, we conduct a
traditional commercial banking business, and offer services including personal and business checking accounts and
time deposits, money market accounts and savings accounts. We structure our specific services and charges in a
manner designed to attract the business of the small and medium sized business and professional community as well
as that of individuals residing, working and shopping in the northern New Jersey and Orange County, New York
trade areas. We engage in a wide range of lending activities and offer commercial, consumer, mortgage, home
equity and personal loans.
Through the Bank’s subsidiary, Tri-State, we operate a full service general insurance agency, offering both
commercial and personal lines of insurance.
We have two business segments, banking and financial services and insurance services. For financial data
on the segments see Note 2 of our consolidated financial statements located elsewhere in this report.
Market Area
Our service area primarily consists of Sussex and Bergen Counties in New Jersey and Orange County, New
York; although we make loans throughout New Jersey and the New York metropolitan markets. We operate from
our main office at 399 Route 23, Franklin, New Jersey and our nine branch offices located in Andover, Augusta,
Montague, Newton, Sparta, Vernon, and Wantage, New Jersey, and in Port Jervis and Warwick, New York. In the
fourth quarter of 2011 we opened a loan production and insurance agency satellite office in Rochelle Park, New
Jersey. Our market area is among the most affluent in the nation.
Competition
We operate 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 us. Many large financial
institutions in New York City and other parts of New Jersey compete for the business of customers located in our
service area. Many of these institutions have significantly higher lending limits than us and provide services to their
customers which we do not offer.
1
Management believes we are able to compete on a substantially equal basis with our competitors because
we provide responsive personalized services through management’s knowledge and awareness of our service area,
customers and business.
Personnel
At December 31, 2012, we employed 89 full-time employees and 25 part-time employees. None of these
employees are covered by a collective bargaining agreement and we believe that our employee relations are good.
Regulation and Supervision
The Company and the Bank are subject to extensive regulation under federal and state laws. The
regulatory framework applicable to bank holding companies and their insured depository institutions subsidiaries
is intended to protect depositors, federal deposit insurance funds, consumers and the banking system as a whole,
and not necessarily investors in bank holding companies such as the Company. Insurance agencies licensed in
New Jersey are regulated under state law by the New Jersey Department of Banking and Insurance.
Set forth below is a description of the significant elements of the laws and regulations applicable to the
Company and the Bank. 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.
Recent Regulatory Changes
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on
July 21, 2010, significantly changed the bank regulatory landscape and has impacted and will continue to impact the
lending, deposit, investment, trading and operating activities of insured depository institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and
regulations. Certain provisions of the Dodd-Frank Act applicable to the Company and the Bank are discussed
herein.
International reforms, such as the Basel III capital requirements, have also been proposed to be
implemented in the United States. In June 2012, the Board of Governors of the Federal Reserve System (the
“Federal Reserve Board”), the Office of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation (“FDIC”) issued three proposals that would amend the existing capital adequacy requirements of
insured depository institutions and their holding companies. The three proposals would, among other things,
implement the Basel III capital standards, as well as the Basel II standardized approach for almost all banking
organizations in the United States. The Basel III proposal would increase the minimum levels of required capital,
narrow the definition of capital and places greater emphasis on common equity. The Basel II standardized proposal
would modify the risk weights for various asset classes for purposes of calculating capital ratios. The U.S. rules are
still pending with regulators, and the Company is still in the process of assessing the impacts of these complex
proposals.
The requirements of the Dodd-Frank Act and other regulatory reforms continue to be implemented. It is
difficult to predict at this time what specific impact certain provisions and yet to be finalized implementing rules and
regulations will have on the Company, including any regulations promulgated by the Consumer Financial Protection
Bureau (“CFPB”). Financial reform legislation and rules could have adverse implications on the financial industry,
the competitive environment, and our ability to conduct business. Management will have to apply resources to
ensure compliance with all applicable provisions of the regulatory reform including the Dodd-Frank Act and any
implementing rules, which may increase our costs of operations and adversely impact our earnings.
Bank Holding Company Regulation
General. As a bank holding company registered under the BHC Act, we are subject to the regulation and
supervision of the Federal Reserve Board. We are required to file with the Federal Reserve Board annual reports
and other information regarding our business operations and those of our subsidiaries.
The BHC Act requires, among other things, the prior approval of the Federal Reserve Board in any case
where a bank holding company proposes to (i) acquire all or substantially all of the assets of any other bank,
2
(ii) acquire direct or indirect ownership or control of more than 5% of any class of 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 Federal Reserve Board 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. When
reviewing acquisitions or mergers, the Federal Reserve Board also considers, among other factors, capital adequacy
and the financial and managerial resources and future prospects of the companies and the banks concerned, the
convenience and needs of the community to be served and the effectiveness of the companies and the banks in
combatting money laundering.
The BHC Act also generally prohibits a bank holding company, with certain limited exceptions, from
(i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of
any company which is not a bank or bank holding company; or (ii) engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be properly incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefits to the public, such as, greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as, undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
Bank holding companies whose subsidiary banks meet certain capital, management and Community
Reinvestment Act standards, and which elect to become “financial holding companies,” are permitted to engage in a
substantially broader range of non-banking activities than is otherwise permissible for bank holding companies
under the BHC Act. These activities include certain insurance, securities and merchant banking activities. In
addition, financial holding companies may often give after-the-fact notice for a variety of nonbank activities and
acquisitions rather than needing advance regulatory approval. As our business is currently limited to activities
permissible for a bank, we have not elected to become a financial holding company.
Source of Strength Doctrine. Federal Reserve Board policy requires bank holding companies to act as a
source of financial and managerial strength to their subsidiary insured depository institutions. The Dodd-Frank Act
codified the requirement that holding companies act as a source of financial strength. As a result, the Company is
expected to commit resources to support the Bank, including at times when the Company may not be in a financial
position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary depository
institutions are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary
institution. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to
a federal banking agency to maintain the capital of a subsidiary insured depository institution will be assumed by the
bankruptcy trustee and entitled to priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve Board has adopted
risk-based and leverage capital guidelines for bank holding companies similar to the capital requirements developed
for banks discussed below. The risk-based capital guidelines are designed to make regulatory capital requirements
sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid, low-risk assets. The capital guidelines apply on a
consolidated basis to bank holding companies with consolidated assets of $500 million or more, and to certain bank
holding companies with less than $500 million in assets if they are engaged in substantial non-banking activity or
meet certain other criteria. We did not have a minimum consolidated risk-based or leverage capital requirement at
the holding company level in 2012. Under Federal Reserve reporting requirements, a bank holding company that
reaches $500 million or more in total consolidated assets as of June 30 of the preceding year must begin reporting its
consolidated capital beginning in March of the following year. As of June 30, 2012, Sussex Bancorp’s total assets
exceeded $500 million. Therefore, the Company will begin reporting its consolidated capital in March of 2013. The
Dodd-Frank Act also requires depository institution holding companies with assets greater than $500 million to be
subject to capital requirements at least as stringent as to those applicable to insured depository institutions, meaning,
for instance, that such holding companies will no longer be able to count trust preferred securities issued on or after
May 19, 2010 as Tier 1 capital. However, the Dodd-Frank Act allows for trust preferred securities issued before
May 19, 2010, by depository institution holding companies with total consolidated assets of less than $15 billion as
of year-end 2009 to continue to count as Tier 1 capital. Our trust preferred securities were issued prior to May 19,
2010.
3
Bank Regulation
As a New Jersey-chartered commercial bank, the Bank is subject to the regulation, supervision, and
enforcement authority of the Department and the FDIC. 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, including, but not limited to, those described below.
Insurance of Deposits
The deposits of the Bank are insured up to the applicable limits by the Deposit Insurance Fund (“DIF”) of
the FDIC and are subject to the deposit insurance premium assessments to maintain the DIF. Under the Dodd-Frank
Act, the standard deposit insurance amount has been permanently increased to $250,000. The FDIC currently
maintains a risk-based assessment system under which assessment rates vary based on the level of risk posed by the
institution to the DIF.
In February 2011, the FDIC issued rules to implement changes to the deposit insurance assessment base,
and risk-based assessments mandated by the Dodd-Frank Act. The base for insurance assessments changed from
domestic deposits to consolidated assets less tangible equity. Assessment rates are calculated using formulas that
take into account the risk of the institution being assessed. The rule was effective April 1, 2011. On September 28,
2011, the FDIC issued notification to insured depository institutions that the transition guidance for reporting certain
leveraged and subprime loans on the Call Report had been extended from October 1, 2011 to April 1, 2012. The
Company is still in the process of assessing the impact of the final rule on the overall FDIC assessment rate.
The Bank’s FDIC deposit insurance assessment expenses totaled $681 thousand, $700 thousand and $911
thousand, for the years ended December 31, 2012, 2011, and 2010, respectively. FDIC insurance expense includes
deposit insurance assessments and Financing Corporation (“FICO”) assessments related to outstanding FICO bonds.
The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of
1987, whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan
Insurance Corporation.
Under the Federal Deposit Insurance Act (the “FDIA”), the FDIC may terminate deposit insurance upon a
finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
The Company’s management is not aware of any practice, condition or violation that might lead to the termination
of deposit insurance.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository
institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured
depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other
general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured
depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including
the parent bank holding company, with respect to any extensions of credit they have made to such insured
depository institution.
Dividend Rights
The principal source of the Company’s liquidity is dividends from the Bank. As a New Jersey-chartered
bank, the 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.
Federal Reserve System
Federal Reserve Board regulations require insured depository institutions to maintain non-interest-earning
reserves against their transaction accounts (primarily interest-bearing and regular checking accounts). The Bank’s
required reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required reserves, in the
form of a balance maintained with the Federal Reserve Bank of New York. The Federal Reserve Board regulations
4
currently require that reserves be maintained against aggregate transaction accounts except for transaction accounts
up to $12.4 million, which are exempt. Transaction accounts greater than $12.4 million up to $79.5 million have a
reserve requirement of 3%, and those greater than $79.5 million have a reserve requirement of $2.013 million plus
10% of the amount over $79.5 million. The Federal Reserve Board generally makes annual adjustments to the tiered
reserves. The Bank is in compliance with these requirements.
Transactions with Affiliates
Under federal law, transactions between insured depository institutions and their affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act (“FRA”). In a holding company context, at a minimum, the parent
holding company of an insured depository institution, and any companies which are controlled by such parent
holding company, are affiliates of the institution. Generally, sections 23A and 23B are intended to protect insured
depository institutions from losses arising from transactions with non-insured affiliates, by limiting the extent to
which a depository institution or its subsidiaries may engage in covered transactions with any one affiliate and with
all affiliates of the depository institution in the aggregate, and by requiring that such transactions be on terms that
are consistent with safe and sound banking practices.
Loans to Insiders
Section 22(h) of the FRA restricts loans to directors, executive officers, and principal stockholders (“insiders”).
Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding
loans to such persons and affiliated entities, the insured depository institution’s total capital and surplus. Loans to
insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section
22(h), loans to directors, executive officers and principal stockholders must be made on terms substantially the same
as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made
under a benefit or compensation program that is widely available to the bank’s employees and does not give
preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to
executive officers.
Capital and Prompt Corrective Action
The federal banking agencies have established by regulation, for each capital measure, the levels at which
an insured institution is “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized.” Regulations require the Bank to meet the following standards in
order to be “adequately capitalized”:
(1) have a total risk-based capital ratio of 8.0 percent or greater;
(2) have a Tier 1 risk-based capital ratio of 4.0 percent or greater; and
(3) have a leverage ratio of 4.0 or greater or a leverage ratio of 3.0 percent or greater if the Bank is rated
composite 1 under the CAMELS rating system in the most recent examination of the Bank and is not
experiencing or anticipating significant growth.
The federal banking agencies are required to take prompt corrective action with respect to insured
institutions that fall below the “adequately capitalized” level. For example, generally, a bank is considered “well-
capitalized” if it has a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage
ratio of 5%, and is not subject to any written agreement, order, capital directive, or prompt corrective action
directive to meet and maintain a specific capital level for any capital measure. As of December 31, 2012, Bank’s
capital exceeded well-capitalized levels.
Anti-Money-Laundering
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to
identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to
U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from
federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the
5
above purposes is encouraged by an exemption granted to complying financial institutions from the privacy
provisions of Gramm-Leach-Bliley Act and other privacy laws. Financial institutions that hold correspondent
accounts for foreign banks or provide private banking services to foreign individuals are required to take measures
to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money
laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of
particular concern. The primary federal banking agencies and the Secretary of the Treasury have adopted regulations
to implement several of these provisions. Financial institutions also are required to establish internal anti-money
laundering programs. The effectiveness of institutions in combating money laundering activities is a factor to be
considered in any application submitted by an insured depository institution under the Bank Merger Act. The
Company and the Bank have in place a Bank Secrecy Act and USA PATRIOT Act compliance program and engage
in very few transactions of any kind with foreign financial institutions or foreign persons.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign
countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the
U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting
countries take many different forms. Generally, the sanctions contain one or more of the following elements:
i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect
imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial
transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned
country; and ii) a blocking of assets in which the government or specially designated nationals of the sanctioned
country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the
possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out,
withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these
sanctions could have serious legal and reputational consequences.
Consumer Compliance
The Bank is subject to a number of federal and state laws designed to protect borrowers and promote
lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the
Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement
Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which
constitutes part of the Dodd-Frank Act and established the CFPB.
On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified
mortgage (“QM”) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”).
The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are
able to repay their mortgages before extending the credit based on a number of factors and consideration of financial
information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the
QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied
the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting
the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements.
The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative
amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio
for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA
underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject
to the 43% debt-to-income limits. The QM Rule will become effective January 10, 2014.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), the Bank has a continuing and affirmative obligation,
consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including
low-and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs
for insured depository institutions, nor does it limit an institution’s discretion to develop the types of products and
services that it believes are best suited to its particular community, so long as such practices are consistent with the
CRA. The CRA requires that regulators, in connection with their examination of banks, assess each institution’s
record of meeting the credit needs of its community and to take such record into account in evaluating certain
6
applications by those banks. The Bank’s failure to comply with the provisions of the CRA could, at a minimum,
result in regulatory restrictions on its activities and the activities of the Company.
The Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent examination.
Financial Privacy Laws
Federal law and certain state laws currently contain client privacy protection provisions. These provisions
limit the ability of banks and other financial institutions to disclose non-public information about consumers to
affiliated companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and,
in some circumstance, allow consumers to prevent disclosure of certain personal information to affiliates or non-
affiliated third parties by means of “opt out” or “opt in” authorizations. Pursuant to the Gramm-Leach-Bliley Act
and certain state laws companies are required to notify clients of security breaches resulting in unauthorized access
to their personal information.
Incentive Compensation
The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote on executive
compensation at their first annual meeting taking place six months after the date of enactment and at least every
three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and
acquisitions. The legislation also authorizes the Securities and Exchange Commission (“SEC”) to promulgate rules
that would allow stockholders to nominate their own candidates using a company’s proxy materials. Additionally,
the Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting of incentive-
based compensation and prohibiting excessive incentive-based compensation paid to executives of depository
institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is
publicly traded or not. In April 2011, the Federal Reserve Board, along with other federal banking agencies, issued a
joint notice of proposed rulemaking implementing those requirements. The Dodd-Frank Act gives the SEC authority
to prohibit broker discretionary voting on elections of directors, executive compensation matters and any other
significant matter.
Available Information
We file annual reports, quarterly reports, proxy statements and other documents with the SEC under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy any materials
that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, D.C.
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-
800-SEC-0330. Also, the SEC maintains a website that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The public can obtain any documents that
we file with the SEC at www.sec.gov.
We maintain a website at www.sussexbank.com. Through a link to our Investor Relations section of our
website, we make available, free of charge, copies of each of our filings with the SEC, including our Annual Report
on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and, if applicable, any
amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC.
7
ITEM 1A. RISK FACTORS
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and
nonperformance. Our allowance for loan losses may not be adequate to cover actual losses, and future provisions
for loan losses could materially and adversely affect the results of our operations. Risks within the loan portfolio are
analyzed on a continuous basis by management and, periodically, by an independent loan review function and by the
Board of Directors. A risk system, consisting of multiple-grading categories, is utilized as an analytical tool to
assess risk and the appropriate level of loss reserves. Along with the risk system, management further evaluates risk
characteristics of the loan portfolio under current economic conditions and considers such factors as the financial
condition of the borrowers, past and expected loan loss experience and other factors management feels deserve
recognition in establishing an adequate reserve. This risk assessment process is performed at least quarterly and as
adjustments become necessary, they are realized in the periods in which they become known. The amount of future
losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that
may be beyond our control, and these losses may exceed current estimates. State and federal regulatory agencies, as
an integral part of their examination process, review our loans and allowance for loan losses and have in the past
required an increase in our allowance for loan losses. Although we believe that our allowance for loan losses is
adequate to cover probable and reasonably estimated losses, we cannot assure you that we will not further increase
the allowance for loan losses or that our regulators will not require us to increase this allowance. Either of these
occurrences could adversely affect our earnings.
Our non-performing assets have substantially increased over the past five years, and this has, and will continue,
to affect our results of operations.
Our total non-performing assets have increased to $23.8 million, or 4.6% of our total assets at December
31, 2012, from $13.5 million, or 3.4% of our total assets at December 31, 2007, but have decreased 30.1% from
December 31, 2011. The increase in non-performing assets reflects difficulties experienced by borrowers due to
declining real estate values and the general slowdown in the economy in our trade area. The increase in non-
performing assets has negatively impacted our results of operations, through additional provisions for loan losses,
reduced interest income, loan collection costs, expenses related to foreclosed real estate, further write-downs on
foreclosed real estate and will continue to impact our performance until these assets are resolved. In addition, future
increases in our non-performing assets will further negatively affect our results of operations. We can give you no
assurance that our non-performing assets will not increase further.
Our earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and
exploit opportunities to generate fee-based income.
We have experienced growth, and our future business strategy is to continue to expand. Historically, the
growth of our loans and deposits has been the principal factor in our increase in net-interest income. In the event
that we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be
adversely impacted. Our ability to continue to grow depends, in part, upon our ability to expand our market share,
to successfully attract core deposits and identify loan and investment opportunities, as well as opportunities to
generate fee-based income. Our ability to manage growth successfully will also depend on whether we can continue
to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our
control, such as economic conditions and interest-rate trends.
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.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our profitability, like that of most financial institutions, depends substantially on our net interest income,
8
which is the difference between the interest income earned on our interest-earning assets and the interest expense
paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand and make it more
difficult for borrowers to repay adjustable rate loans. In addition, as market interest rates rise, we will have
competitive pressures to increase the rates we pay on deposits, which will result in a decrease of our net interest
income.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates
may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in
increased prepayments of loans and mortgage-related securities as borrowers refinance to reduce borrowing costs.
Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash
received from such prepayments at rates that are comparable to the rates on existing loans and securities.
Certain of our intangible assets may become impaired in the future.
Intangible assets are tested for impairment on a periodic basis. Impairment testing incorporates the current
market price of our common stock, the estimated fair value of our assets and liabilities, and certain information of
similar companies. It is possible that future impairment testing could result in a decline in value of our intangibles,
which may be less than the carrying value, which may adversely affect our financial condition. If we determine that
impairment exists at a given point in time, our earnings and the book value of the related intangibles will be reduced
by the amount of the impairment. Notwithstanding the foregoing, the results of impairment testing on our intangible
assets have no impact on our tangible book value or regulatory capital levels.
We are subject to extensive government regulation and supervision.
We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily
intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not
shareholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy
and growth, among other things. Congress, the State of New Jersey and federal regulatory agencies continually
review banking and insurance laws, regulations and policies for areas warranting changes. Changes to statutes,
regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or
policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs,
limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to comply with laws, regulations or policies
could result in sanctions by regulatory agencies, civil money penalties, private lawsuits, and/or reputation damage,
which could have a material adverse effect on our business, financial condition and results of operations. While we
have policies and procedures designed to prevent any such violations, there can be no assurance that such violations
will not occur. See the section captioned “Regulation and Supervision” in Item 1. Business, which is located
elsewhere in this report.
Compliance with the Dodd-Frank Act will alter the regulatory regime to which we are subject, and may increase
our costs of operations and adversely impact our business.
On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act represents a
significant overhaul of many aspects of the regulation of the financial-services industry. Among other things, the
Dodd-Frank Act creates a new federal CFPB, tightens capital standards, imposes clearing and margining
requirements on many derivatives activities, and generally increases oversight and regulation of financial institutions
and financial activities.
The CFPB began operations on July 21, 2011. It has broad authority to write regulations regarding
consumer financial products and services. These regulations will apply to numerous types of entities, including
insured depository institutions such as the Bank, and mortgage servicing providers. It is impossible to predict at this
time the content or number of such regulations.
The Dodd-Frank Act also requires depository institution holding companies with assets greater than $500
million to be subject to capital requirements at least as stringent as to those applicable to insured depository
institutions, meaning, for instance, that such holding companies will no longer be able to count trust preferred
securities issued on or after May 19, 2010 as Tier 1 capital. However, the Dodd-Frank Act allows for trust preferred
securities issued before May 19, 2010, by depository institution holding companies with total consolidated assets of
9
less than $15 billion as of year-end 2009 to continue to count as Tier 1 capital(cid:3)if the securities qualified as Tier 1
capital on that date for the remaining life of the security. Our trust preferred securities were issued prior to May 19,
2010. Moreover, agreements among bank regulators across the world (including the United States) known as the
Basel III capital accord also call for the removal of trust preferred securities from Tier 1 capital for holding
companies of all sizes, encourage more reliance on common equity as the main component of capital, and call for
increased levels of capital. Rules implementing Basel III have not be yet been proposed in the United States.
In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for over 200
administrative rulemakings by various federal agencies to implement various parts of the legislation. While some
rules have been finalized and/or issued in proposed form, many have yet to be proposed. It is impossible to predict
when all such additional rules will be issued or finalized, and what the content of such rules will be. We will have to
apply resources to ensure that we are in compliance with all applicable provisions of the Dodd-Frank Act and any
implementing rules, which may increase our costs of operations and adversely impact our earnings.
The Dodd-Frank Act and any implementing rules that are ultimately issued could have adverse implications
on the financial industry, the competitive environment, and our ability to conduct business.
We cannot predict the effect on our operations of any future legislative or regulatory initiatives.
We cannot predict what, if any, additional legislative or regulatory initiatives any governmental entity may
undertake in the future, and what, if any, effects such initiatives may have on our operations. The U.S. federal, state
and foreign governments have taken or are considering extraordinary actions in an attempt to ameliorate the
worldwide financial crisis and the severe decline in the global economy, and to make further reforms to the U.S.
financial services system. Further, there can be no assurance that any initiative enacted or adopted in response to the
ongoing economic crisis will be effective at dealing with the ongoing economic crisis and improving economic
conditions globally, nationally or in our markets, or that any such initiative will not have adverse consequences to
us.
There is a risk that we may not be repaid in a timely manner, or at all, for loans we make.
The risk of non-payment (or deferred or delayed payment) of loans is inherent in commercial banking.
Such non-payment, or delayed or deferred payment of loans to us, if they occur, may have a material adverse effect
on our earnings and overall financial condition. Additionally, in compliance with applicable banking laws and
regulations, we maintain an allowance for loan losses created through charges against earnings. As of December 31,
2012, our allowance for loan losses was $5.0 million. Our marketing focus on small to medium-size businesses may
result in the assumption by us of certain lending risks that are different from or greater than those which would
apply to loans made to larger companies. We seek to minimize our credit risk exposure through credit controls,
which include evaluation of potential borrowers’ available collateral, liquidity and cash flow. However, there can be
no assurance that such procedures will actually reduce loan losses.
We are in competition with many other financial service providers, including larger commercial banks which
have greater resources than us.
The banking industry within our trade area is highly competitive. Our principal market area is also served
by branch offices of large commercial banks and thrift institutions. In addition, in 1999 the Gramm-Leach-Bliley
Financial Modernization Act of 1999 was passed into law. The Modernization Act permits other financial entities,
such as insurance companies and securities firms, to acquire or form financial institutions, thereby further increasing
competition. A number of our competitors have substantially greater resources than we do to expend upon
advertising and marketing, and their substantially greater capitalization enables them to make much larger loans.
Our success depends upon our ability to serve small business clients in a more responsive manner than the large and
mid-size financial institutions against whom we compete in our principal market area. In addition to competition
from larger institutions, we also face competition for individuals and small businesses from recently formed banks
seeking to compete as “home town” institutions. Most of these new institutions have focused their marketing efforts
on the smaller end of the small business market we serve.
10
The laws that regulate our operations are designed for the protection of depositors and the public, but not our
shareholders.
The federal and state laws and regulations applicable to our operations give regulatory authorities extensive
discretion in connection with their supervisory and enforcement responsibilities and generally have been
promulgated to protect depositors and the deposit insurance funds and to foster economic growth and not for the
purpose of protecting stockholders. These laws and regulations can materially affect our future business. Laws and
regulations now affecting us may be changed at any time, and the interpretation of such laws and regulations by
bank regulatory authorities is also subject to change. We can give no assurance that future changes in laws and
regulations or changes in their interpretation will not adversely affect our business.
We depend on our executive officers and key personnel to continue the implementation of our long-term business
strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part upon the skills of our
management team. The competition for qualified personnel in the financial services industry is intense, and the loss
of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect
our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional
qualified personnel. We have employment agreements with our Chief Executive Officer, Chief Financial Officer,
Chief Lending Officer, Chief Retail Officer and Chief Executive Officer of Tri-State Insurance Agency, and the loss
of the services of one or more of our executive officers and key personnel could impair our ability to continue to
develop our business strategy.
Changes in local economic conditions could adversely affect our loan portfolio.
Our success depends to a great extent upon the general economic conditions of the local markets that we
serve. Unlike larger banks that are more geographically diversified, we provide banking and financial services
primarily to customers in the two counties in the New Jersey and New York markets in which we have branches, so
any decline in the economy of this specific region could have an adverse impact on us.
The ability of our borrowers to repay their loans, our financial results, the credit quality of our existing loan
portfolio, and the ability to generate new loans with acceptable yield and credit characteristics may be adversely
affected by changes in prevailing economic conditions, including declines in real estate values, changes in interest
rates, adverse employment conditions and the monetary and fiscal policies of the federal government. We cannot
assure you that continued negative trends or developments would not have a significant adverse effect on us.
The nationwide recession may adversely affect our business by reducing real estate values in our trade area and
stressing the ability of our customers to repay their loans.
Our trade area, like the rest of the United States, is currently experiencing economic contraction. As a
result, many companies have experienced reduced revenues and have laid off employees. These factors have
stressed the ability on both commercial and consumer customers to repay their loans, and have, and may in the
future continue to, result in higher levels of non-accrual loans. In addition, real estate values have declined in our
trade area. Since the majority of our loans are secured by real estate, declines in the market value of real estate
impact the value of the collateral securing our loans, and could lead to greater losses in the event of defaults on loans
secured by real estate.
We cannot predict how changes in technology will impact our business.
The financial services market, including banking services, is increasingly affected by advances in
technology, including developments in: telecommunications; data processing; automation; internet-based banking;
telephone banking; and debit cards and so-called “smart cards.”
Our ability to compete successfully in the future will depend on whether we can anticipate and respond to
technological changes. To develop these and other new technologies, we will likely have to make additional capital
investments. Although we continually invest in new technology, we cannot assure you that we will have sufficient
resources or access to the necessary proprietary technology to remain competitive in the future.
11
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure,
interruption or breach in security of these systems could result in failures or disruptions in our customer-relationship
management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to
prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no
assurance that any such failures, interruptions or security breaches will not occur; or, if they do occur, that they will
be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information
systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory
scrutiny or expose us to civil litigation and possible financial liability; any of which could have a material adverse
effect on our financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We conduct our business through our principal executive office located at 200 Munsonhurst Road, Route
517, Franklin, New Jersey, our ten banking offices, one loan production office, and our insurance agency office.
The following table sets forth certain information regarding our properties as of December 31, 2012. All properties
are adequately covered by insurance.
LOCATION
LEASED OR OWNED
DATE OF
LEASE EXPIRATION
399 Route 23
Franklin, New Jersey
7 Church Street
Vernon, New Jersey
266 Clove Road
Montague, New Jersey
96 Route 206
Augusta, New Jersey
378 Route 23
Wantage, New Jersey
455 Route 23
Wantage, New Jersey
15 Trinity Street
Newton, New Jersey
165 Route 206
Andover, New Jersey
100 Route 206
Augusta, New Jersey
33 Main Street
Sparta, New Jersey
200 Munsonhurst Road
Franklin, New Jersey
20-22 Fowler Street
Port Jervis, New York
65-67 Main Street
Warwick, New York
201 West Passaic Street
Rochelle Park, New Jersey
Owned
Owned
Leased
Leased
Owned
Owned (1)
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
N/A
N/A
March, 2017
July, 2015
N/A
N/A
N/A
N/A
N/A
N/A
December, 2013
June, 2016
December, 2013
September, 2015
(1) We own the building housing our former Wantage branch. The land on which the building is located is leased
pursuant to a ground lease which runs until December 31, 2020, and contains an option for us to extend the
lease for an additional 25 year term.
12
ITEM 3. LEGAL PROCEEDINGS
We are periodically involved in various legal proceedings as a normal incident to our business. In the
opinion of management no material loss is expected from any such pending lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the NASDAQ Global Market, under the symbol “SBBX.” As of December
31, 2012, we had approximately 641 holders of record.
The following table shows the high and low sales price during the periods indicated, as well as dividends
declared:
2012
Fourth Quarter ended December 31
Third Quarter ended September 30
Second Quarter ended June 30
First Quarter ended March 31
2011
Fourth Quarter ended December 31
Third Quarter ended September 30
Second Quarter ended June 30
First Quarter ended March 31
High
$6.00
$5.30
$5.50
$5.50
High
$5.50
$6.97
$7.00
$7.64
Low
$5.10
$4.40
$4.64
$4.30
Low
$4.14
$4.10
$5.85
$5.51
Cash Dividends
Declared
-
-
-
-
Cash Dividends
Declared
-
-
-
-
The payment of dividends depends upon our debt and equity structure, earnings, financial condition, need
for capital in connection with possible future acquisitions and other factors, including economic conditions,
regulatory restrictions and tax considerations. We cannot guarantee the payment of dividends.
The only funds available for the payment of dividends on our capital stock will be cash and cash
equivalents held by us, dividends paid to us by the Bank, and borrowings. The Bank will be prohibited from paying
cash dividends to us to the extent that any such payment would reduce the Bank’s capital below required capital
levels. See “Bank Holding Company Regulation – Capital Adequacy Guidelines for Bank Holding Companies” and
“Bank Regulation” for a discussion of these restrictions. For additional information see Note 19 in our consolidated
financial statements contained elsewhere in this report.
There were no sales by us of unregistered securities during the year ended December 31, 2012. There were
no purchases made by or on behalf of us of our common stock during the fourth quarter of 2012.
14
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 our audited consolidated financial statements and the accompanying notes.
$
$
$
(Dollars in thousands, except per share data))
SUMMARY OF INCOME:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expenses
Income (loss) before income tax expense (benefit)
Income tax (benefit) expense
Net income (loss)
WEIGHTED AVERAGE NUMBER OF SHARES: (1)
Basic
Diluted
PER SHARE DATA:
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash dividends (2)
Stock dividends
BALANCE SHEET:
Loans, net
Total assets
Total deposits
Total stockholders’ equity
Average assets
Average stockholders’ equity
PERFORMANCE RATIOS:
Return on average assets
Return on average stockholders’ equity
Average equity/average assets
Net interest margin
Efficiency ratio (3)
Other income to net interest income plus other income
Dividend payout ratio
CAPITAL RATIOS:
Tier I capital to average assets
Tier I capital to total risk-weighted assets
Total capital to total risk-weighted assets
ASSET QUALITY RATIOS:
Non-accrual loans to total gross loans
Non-performing assets to total assets (4)
Net loan charge-offs to average total loans
Allowance for loan losses to total gross loans at period end
Allowance for loan losses to non-performing loans (4)
2012
19,967 $
3,800
16,167
4,330
11,837
7,040
18,471
406
(329)
735 $
As of and for the Year Ended December 31
2010
2011
2009
21,340 $
4,427
16,913
3,306
13,607
5,283
15,783
3,107
637
2,470 $
22,028 $
5,613
16,415
3,280
13,135
4,611
15,028
2,718
542
2,176 $
23,055 $
8,053
15,002
3,404
11,598
5,544
14,679
2,463
452
2,011 $
2008
22,653
10,843
11,810
1,350
10,460
1,991
14,589
(2,138)
(1,096)
(1,042)
3,261,809
3,287,017
3,256,183
3,327,379
3,249,706
3,299,369
3,247,723
3,258,549
3,291,710
3,291,710
$0.23
0.22
-
-
$0.76
0.74
-
-
$0.67
0.66
-
-
$0.62
0.62
0.03
-
342,760 $
514,734
432,436
40,372
510,565
40,720
332,495 $
506,953
425,376
39,902
483,627
38,369
331,837 $
474,024
385,967
36,666
477,739
35,999
327,463 $
454,841
372,075
34,527
463,616
33,390
0.14%
1.81%
7.98%
3.52%
79.59%
30.34%
-
9.27%
12.88%
14.13%
5.14%
4.61%
3.70%
1.43%
26.93%
0.51%
6.44%
7.93%
3.87%
71.11%
23.80%
-
9.29%
13.05%
14.31%
7.15%
6.71%
0.73%
2.12%
26.03%
0.46%
6.04%
7.54%
3.81%
71.47%
21.93%
-
9.04%
12.37%
13.63%
6.71%
5.58%
0.72%
1.89%
26.60%
0.43%
6.02%
7.20%
3.60%
71.44%
26.98%
5%
9.07%
11.91%
13.17%
6.07%
6.01%
1.14%
1.65%
23.39%
($0.32)
(0.32)
0.20
6.5%
315,067
440,595
360,081
31,910
419,725
33,699
(0.25%)
(3.09%)
8.03%
3.12%
105.71%
14.43%
(63%)
8.59%
11.04%
12.29%
3.04%
3.41%
0.22%
1.81%
52.62%
(1) The weighted average number of shares outstanding was computed based on the average number of shares outstanding during each period as adjusted
for subsequent stock dividends.
(2) Cash dividends per common share are based on the actual number of common shares outstanding on the dates of record as adjusted for subsequent stock
dividends.
(3) Efficiency ratio is total other expenses divided by net interest income and total other income.
(4) Non-performing loans includes non-accrual loans, loans past due 90 and still accruing and troubled debt restructured loans still accruing.
15
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a bank holding company of a community bank primarily operating in Sussex and Bergen Counties
in New Jersey and Orange County in New York that provides diversified financial services to both consumer and
business customers. Our primary source of revenues, approximately 70%, is derived from net interest income which
represents the difference between the interest we earn on our assets, principally loans and investment securities, and
interest we pay on our deposits and borrowings. When expressed as a percentage of average interest-earning assets,
it is referred to as net interest margin (“margin”). Our margin is directly impacted by the market interest rate
environment. Our margin was adversely impacted during the year ended December 31, 2012, as interest rates
remained at historically low levels. The impact resulted in interest earning asset yields declining faster interest
bearing deposits rates, which reduced our margin by 35 basis points to 3.52% for the year ended 2012 compared to
3.87% for the year ended 2011.
We augment our primary revenue source through non-interest income sources that include insurance
commissions from our wholly owned subsidiary, Tri-State Insurance Agency, Inc. (“Tri-State”), service charges on
deposits, bank-owned life insurance (“BOLI”) income and commissions on mutual funds and annuities. In addition,
we from time to time may recognize income on gains on sales of securities; however, we do not consider this a
primary source of income, as we no longer have a securities trading portfolio.
For 2012, the United States economy remained relatively weak as unemployment levels were still elevated
and real estate markets continued to be adversely impacted. Real estate is typically the main form of collateral for
community bank lending. We have also been affected by the weakened economy and the deterioration in the real
estate market, which is reflected in the credit quality of our loan portfolio. We have also experienced a significant
increase in credit related costs over the last several years. During 2010 and 2011, we made considerable changes in
executive and senior management and continue to make strides in controlling and mitigating our credit quality
issues.
We made significant progress in 2012 towards reducing our problem assets, which was one of our primary
goals. For 2012, we had a 30.1% improvement in non-performing assets (“NPAs”) and our total problem assets
declined by 29.5% as compared to 2011. In addition, our overall problem assets are down 44.4% from their
historical high at March 31, 2010, and the ratio of NPAs to total assets improved to 4.6% at December 31, 2012
from 6.7% at December 31, 2011.
For 2012, our net income declined to $735 thousand, or $0.22 per diluted share as compared to $2.5
million, or $0.74 per diluted share, for the year ended December 31, 2011. Our operating results for 2012 were
negatively impacted by high levels of credit quality costs (expenses and write-downs related to foreclosed real estate
and provision for loan losses), which increased $2.7 million over 2011, as we continued to resolve legacy problem
assets.
Total loans receivable, net of unearned income, increased $8.0 million, or 2.4%, to $347.7 million at
December 31, 2012, from $339.7 million at year-end 2011. This increase was primarily attributed to increases in the
commercial loan portfolios. One of our primary objectives has been to increase deposits, particularly core deposits.
Our total deposits increased $7.0 million, or 1.7%, to $432.4 million at December 31, 2012, from $425.4 million at
December 31, 2011. The increase in deposits was due to an increase in non-interest bearing deposits of $3.6 million,
or 8.1%, and an increase in interest bearing core deposits of $10.7 million, or 4.0%, which was partially offset by a
decrease in time deposits of $7.2 million, or 6.5%, for December 31, 2012 as compared to December 31, 2011.
At December 31, 2012, our total stockholders’ equity was $40.4 million, an increase of $470 thousand
when compared to December 31, 2011. At December 31, 2012, the leverage, Tier I risk-based capital and total risk-
based capital ratios for the Bank were 9.27%, 12.88% and 14.13%, respectively, all in excess of the ratios required
to be deemed “well-capitalized.”
16
Management Strategy
Our goal is to serve as a community-oriented financial institution serving northern New Jersey,
northeastern Pennsylvania and the Orange County, New York marketplace. While offering traditional community
bank loan and deposit products and services, we obtain significant non-interest income through Tri-State’s insurance
brokerage operations and the sale of non-deposit products. We report the operations of Tri-State as a separate
segment from our commercial banking operations. See Note 2 to our consolidated financial statements contained
elsewhere in this report for additional information regarding our two segments.
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 to our
consolidated financial statements included elsewhere in this report. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions about future events that affect the amounts reported in our
consolidated financial statements and accompanying notes. Since future events and their effect cannot be
determined with absolute certainty, actual results may differ from those estimates. Management makes adjustments
to its assumptions and judgments when facts and circumstances dictate. The amounts currently estimated by us are
subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates
and judgments on historical experience and on various other factors that are believed to be reasonable under the
circumstances. Management believes the following critical accounting policies encompass the more significant
judgments and estimates used in preparation of our consolidated financial statements.
Allowance for Loan Losses. The provision for loan losses charged to operating expense reflects the
amount deemed appropriate by management to provide for known and inherent losses in the existing loan portfolio.
Management’s judgment is based on the evaluation of the past experience of individual loans, the assessment of
current economic conditions, and other relevant factors. Loan losses are charged directly against the allowance for
loan losses and recoveries on previously charged-off loans are added to the allowance. Management uses significant
estimates to determine the allowance for loan losses. Consideration is given to a variety of factors in establishing
these estimates including current economic conditions, diversification of the loan portfolio, delinquency statistics,
borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance
for loan losses is dependent to a great extent on conditions that may be beyond our control, it is possible that
management’s estimates of the allowance for loan losses and actual results could differ in the near term. Although
we believe that we use the best information available to establish the allowance for loan losses, future additions to
the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions
used in making the evaluation. For example, a downturn in the local economy could cause increases in non-
performing loans. Additionally, a decline in real estate values could cause some of our loans to become
inadequately collateralized. In either case, this may require us to increase our provisions for loan losses, which
would negatively impact earnings. Additionally, a large loss could deplete the allowance and require increased
provisions to replenish the allowance, which would negatively impact earnings. Finally, regulatory authorities, as an
integral part of their examination, periodically review the allowance for loan losses. They may require additions to
the allowance for loan losses based upon their judgments about information available to them at the time of
examination. Future increases to our allowance for loan losses, whether due to unexpected changes in economic
conditions or otherwise, could adversely affect our future results of operations.
Appraisal Policy. We have a detailed policy covering the real estate appraisal process, including the
selection of qualified appraisers, review of appraisal reports upon receipt, and complying with the federal regulatory
standards that govern the minimum requirements for obtaining appraisals or evaluations. Appraisals and evaluations
are considered to be current when the valuation date is within 12 months of a new loan or 24 months of any renewal
of an existing loan, provided that certain conditions are met. The appraisal is not considered to be current if there
has been a substantial change in value, demand, supply or competitive factors.
The following types of transactions require a real estate appraisal:
(cid:2) Non-residential transactions when the transaction value exceeds $250,000.
(cid:2)
Loan transactions in which real estate is used as the primary security for the loan, regardless of the
type of loan (commercial, installment or mortgage), including:
17
(cid:2) New loans, loan modifications, loan extensions and renewals, provided that certain conditions are
met.
(cid:2)
(cid:2)
The purchase, sale, exchange or investment in real property or an interest in real property where
the “transaction value” of the real property interest exceeds $250,000.
The long-term lease of real estate, which is the economic equivalent of a purchase or sale where
the “transaction value” of the real property interest exceeds $250,000.
(cid:2)
Purchase of a loan or pool of loans, or participation therein, or of an interest in real property, providing
that any individual loan or property interest exceeds $250,000, and further provided that a satisfactory
appraisal of the property relating to that loan or interest has not been made available to the Bank by
another party to the transaction.
The need for real estate appraisals applies to initial loan underwriting and subsequently when the value of
the real estate collateral might be materially affected by changing market conditions, changes in the occupancy of
the property, changes in cash flow generated by the property, changes in the physical conditions of the property, or
other factors. These factors include changes in the sales prices of comparable properties, absorption rates,
capitalization rates, effective rental rates and current construction costs.
Real estate appraisals are not required for the following transactions:
(cid:2) New loans, loan modifications, loan extensions and renewals with real property interest value of
$250,000 or less.
(cid:2)
(cid:2)
(cid:2)
Purchase, sale, exchange, long-term lease or investment in real property where the “transaction value”
of the real property interest does not exceed $250,000.
Renewal or extension of an existing loan in excess of $250,000 provided that certain conditions are
met.
Purchase of a loan or pool of loans, or participation therein, or of an interest in real property where a
satisfactory appraisal of the property relating to that loan or interest has been made available to the
Bank by another federally insured depository institution that is subject to Title XI of Financial
Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA).
While real estate appraisals are not required for transactions of $250,000 or less, we will consider obtaining
one if the orderly liquidation of the collateral is the primary source of repayment. To the extent that an appraisal is
not required for a real estate collateralized transaction, we will obtain for its credit files another acceptable form of
valuation, i.e. equalized value with a reasonable market relevance or evaluation.
Additionally, real estate appraisals are not required on transactions over $250,000 when taking a lien on
real property as collateral solely through an “abundance of caution,” and where the terms of the transaction have not
been made more favorable than would have been in the absence of the mortgage lien. In determining whether an
appraisal can be waived due to this reason, approval must be obtained from our Chief Credit Officer.
Generally, we obtain updated appraisals for real estate loan renewals and modifications or certain classified
loans depending on the age of the last appraisal, volatility of the local market, and other factors. In certain
circumstances, if we can support an appraisal that is greater than one year old with an evaluation, utilizing current
information, including, but not limited to, current comparable sales, independent appraisal, consultant data or tax
assessment values, then it may continue to use the existing appraisal. For classified/criticized loans, when it is
determined that a deficiency exists utilizing the above evaluation methods, a new appraisal will be ordered.
Stock Compensation Plans. We currently have a stock plan in place for our employees and directors. We
account for stock-based compensation under the accounting guidance of Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 718, Compensation-Stock Compensation, which requires
that the compensation cost relating to share-based payment transactions be recognized in financial statements. The
stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and
recognized over predefined vesting periods.
18
Income Taxes. Management considers accounting for income taxes as a critical accounting policy due to
the subjective nature of certain estimates that are involved in the calculation and evaluation of the timing and
recognition of resulting tax assets and liabilities. Management uses the asset liability method of accounting for
income taxes in which deferred tax assets and liabilities are established for the temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities. Deferred tax expense is the result of changes
between deferred tax assets and liabilities. The principal types of differences between assets and liabilities for
financial statement and tax return purposes are allowance for loan losses, deferred compensation and securities
available for sale.
Goodwill and Other Intangible Assets. We have recorded goodwill of $2.8 million at December 31, 2012,
primarily related to the acquisition of Tri-State in October of 2001. FASB ASC 350, Intangibles-Goodwill and
Others, requires that goodwill is not amortized to expense, but rather be tested for impairment at least annually. We
periodically assess whether events or changes in circumstances indicate that the carrying amounts of goodwill
require additional impairment testing. We perform our 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. We determined that no impairment write-offs were necessary during 2012 and
2011.
Business unit valuation is inherently subjective, with a number of factors based on assumptions and
management judgments. Among these are future growth rates, discount rates and earnings capitalization rates.
Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance
could result in different assessments of the fair value and could result in impairment charges in the future.
Investment Securities Impairment Evaluation. Management evaluates securities for other-than-temporary
impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3) if we do not intend to sell the security,
and it is more likely than not that we will not have to sell the security before recovery of its cost basis, we will
recognize the credit component of an other-than-temporary impairment of the security in earnings and the remaining
portion in other comprehensive income. For held to maturity securities, the amount of an other-than-temporary
impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary
impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of
future estimated cash flows of the security. No held to maturity securities at December 31, 2012 or December 31,
2011 were deemed to be impaired. We did recognize other-than-temporary impairment charges in 2011 of $231
thousand on certain available for sale equity securities.
During the fourth quarter of 2011, we recognized a $231 thousand pre-tax ($183 thousand after-tax, or
$0.06 per share) non-cash other-than-temporary impairment charge related to an equity portfolio fund that had an
amortized cost of $250 thousand with a termination date of December 31, 2012, and an equity security that had an
amortized cost of $230 thousand. An impairment charge of $144 thousand on an equity portfolio fund was
recognized because the market value of this security was below our amortized cost for an extended period of time
along with credit deterioration in some of the underlying collateral and it was not believed the market value of this
security would recover to our amortized cost before its termination in December 2012. The fund comprises private
and public stocks of bank holding companies. An impairment charge of $87 thousand on an equity security of a
bank holding company was recognized because the market value of this security was below our amortized cost for
an extended period of time and it was not believed the market value of this security would recover to our amortized
cost in the foreseeable future.
COMPARISON OF FINANCIAL CONDITION AT YEAR-END DECEMBER 31, 2012 AND 2011
General. At December 31, 2012, we had total assets of $514.7 million compared to total assets of $507.0
million at December 31, 2011, an increase of $7.8 million, or 1.5%. Gross loans increased $8.0 million, or 2.4%, to
$347.7 million at December 31, 2012 from $339.7 million at December 31, 2011. Total deposits increased 1.7% to
$432.4 million at December 31, 2012 from $425.4 million at December 31, 2011.
Cash and Cash Equivalents. Our cash and cash equivalents decreased $25.8 million, or 68.9%, at
December 31, 2012 to $11.7 million from $37.5 million at December 31, 2011. This decrease was predominantly
due to growth within our securities portfolio.
19
Trading Securities and Securities Portfolio. Our securities portfolio is designed to provide interest
income, including tax-exempt income, and also provide a source of liquidity, diversify the earning assets portfolio,
allow for management of interest rate risk, and provide collateral for public fund deposits and borrowings.
Securities are classified as either trading, available for sale or held to maturity. 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.
We periodically conduct reviews to evaluate whether unrealized losses on our investment securities
portfolio are deemed temporarily impaired or whether an other-than-temporary impairment has occurred. Various
inputs to economic models are used to determine if an unrealized loss is other-than-temporary. All of our debt and
equity securities have been evaluated as of December 31, 2012, and we do not consider any security other than
temporarily impaired. We evaluated the prospects of the issuers in relation to the severity and the duration of the
unrealized losses. Our securities in unrealized loss positions are mostly driven by wider credit spreads and changes
in interest rates. Based on that evaluation we do not intend to sell any security in an unrealized loss position, and it
is more likely than not that we will not have to sell any of our securities before recovery of its cost basis.
Our available for sale securities are stated at fair value while securities held to maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts. Trading securities are recorded at fair value with
changes in fair value included in earnings. Unrealized gains and losses on securities available for sale are excluded
from results of operations, and are reported as a separate component of stockholders’ equity net of taxes. Securities
classified as available for sale include securities that may be sold in response to changes in interest rates, changes in
prepayment risk, the need to increase regulatory capital or other similar requirements. Management determines the
appropriate classification of securities at the time of purchase.
The following table shows the carrying value of our available for sale security portfolio as of December 31,
2012, 2011 and 2010. Securities available for sale are stated at their fair value.
(Dollars in thousands)
U.S. government agencies
State and political subdivisions
Mortgage-backed securities
U.S. government-sponsored enterprises
Private mortgage-backed securities
Equity securities-financial services industries and other
Total available for sale
2012
December 31,
2011
2010
-
27,741
$
- $
20,570
90,709
-
431
71,998
2,477
1,279
118,881 $
96,324 $
21,189
28,735
33,286
4,807
1,363
89,380
$
$
Our securities, available for sale, increased by $22.6 million, or 23.4%, to $118.9 million at December 31,
2012 from $96.3 million at December 31, 2011. We purchased $96.0 million in new securities during 2012, $37.5
million in securities were sold and $34.2 million in securities matured, were called or were repaid. There was a
$606 thousand net decrease in unrealized gains in the available for sale portfolio and a $1.8 million net realized gain
on the sale of available for sale securities.
We had $5.2 million of our security portfolio classified as held to maturity at December 31, 2012, an
increase of $1.0 million from December 31, 2011. Held to maturity securities, carried at amortized cost, consist of
the following at December 31, 2012, 2011 and 2010.
(Dollars in thousands)
State and political subdivisions
Total held to maturity securities
2012
2011
2010
$
$
5,221 $
5,221 $
4,220 $
4,220 $
1,000
1,000
The securities portfolio contained no high-risk securities or derivatives as of December 31, 2012.
The contractual maturity distribution and weighted average yield of our available for sale securities at
December 31, 2012, 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
20
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.
(Dollars in thousands)
Available for sale:
State and political subdivisions
Mortgage-backed securities
U.S. government-sponsored enterprises
Equity securities-financial services industries
and other
Total available for sale
$
$
Due under 1 Year
Due 1-5 Years
Due 5-10 Years
Due over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
-
-
-
-
- % $
- %
- %
- % $
-
-
-
-
- % $
1,837
3.59% $
25,504
3.09%
- %
2,708
1.40%
87,779
0.90%
- %
- % $
-
4,545
- %
460
2.28% $ 113,743
- %
1.39%
The contractual maturity distribution and weighted average yield of our securities held to maturity, at cost,
at December 31, 2012, are summarized in the following table. 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.
(Dollars in thousands)
Held to maturity:
Due under 1 Year
Due 1-5 Years
Due 5-10 Years
Due over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
State and political subdivisions
Total held to maturity
$
$
1,223
1,223
1.55% $
1.55% $
-
-
- % $
- % $
1,307
1,307
2.60% $
2.60% $
2,691
2,691
3.67%
3.67%
We hold $2.0 million in Federal Home Loan Bank of New York (FHLBNY) stock at December 31, 2012
that we do not consider an investment security. Ownership of this restricted stock is required for membership in the
FHLBNY.
Loans. The loan portfolio comprises the largest component of our earning assets. Total loans receivable,
net of unearned income, at December 31, 2012, increased $8.0 million, or 2.4%, to $347.7 million from $339.7
million at December 31, 2011. During the year ended December 31, 2012, new originations have exceeded payoffs
both through scheduled maturities and prepayments. Loan growth for 2012 occurred in commercial real estate loans
(an increase of $9.2 million, or 4.2%) and commercial and industrial loans (an increase of $2.4 million, or 17.9%).
These increases were partially offset by declines in construction loans (a decrease of $1.5 million, or 17.8%) and
residential real estate loans (a decrease of $1.9 million, or 1.9%).
The following table summarizes the composition of our loan portfolio by type as of December 31, 2008
through 2012:
December 31,
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
2012
2011
2010
2009
2008
$
16,158 $
13,711 $
15,045 $
17,016 $
7,004
225,345
98,301
1,255
8,520
216,191
100,175
1,336
20,862
204,407
96,659
1,395
27,555
193,091
93,558
1,919
22,346
38,413
174,218
84,412
1,621
Total gross loans
$
348,063 $
339,933 $
338,368 $
333,139 $
321,010
The increase in loans was funded during 2012 by an increase in our deposits.
21
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, 2012, are presented in the following table.
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total loans
Interest rates:
Fixed or predetermined
Floating or adjustable
Total loans
Due Under
One Year
December 31, 2012
Due 1-5
Years
Due Over
Five Years
$
$
$
$
4,685 $
4,157
14,499
2,558
413
26,312 $
24,241 $
2,071
26,312 $
5,975 $
789
11,101
8,265
329
26,459 $
20,360 $
6,099
26,459 $
5,498
2,058
199,745
87,478
513
295,292
84,991
210,301
295,292
Loan and Asset Quality. Non-performing assets consist of non-accrual loans, loans over ninety days
delinquent and still accruing interest, troubled debt restructured loans still accruing, foreclosed real estate and
impaired securities. Total non-performing assets decreased by $10.3 million, or 30.1%, to $23.8 million at year-end
2012 from $34.0 million at year-end 2011. The ratio of non-performing assets to total assets for December 31, 2012
and December 31, 2011 were 4.6% and 6.7%, respectively.
Our non-accrual loan balance decreased $6.4 million, or 26.4%, to $17.9 million at December 31, 2012,
from $24.3 million at December 31, 2011. Troubled debt restructured loans still accruing decreased $2.8 million to
$608 thousand at December 31, 2012 from $3.4 million at December 31, 2011. Foreclosed assets decreased $443
thousand to $5.1 million at December 31, 2012, from $5.5 million at December 31, 2011.
Management continues to monitor our asset quality and believes that the non-accrual loans are adequately
collateralized and anticipated material losses have been adequately reserved for in the allowance for loan losses.
The following table provides information regarding risk elements in the loan and securities portfolio as of
December 31, 2008 through 2012.
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total nonaccrual loans
Loans past due 90 days and still accruing
Troubled debt restructured loans still
accruing
Total non-performing loans
Impaired securities
Foreclosed real estate
Total non-performing assets
Non-accrual loans to total loans
Non-performing assets to total assets
Interest income received on nonaccrual
loans
Interest income that would have been
recorded under the original terms of the
loans
$
$
$
2012
2011
December 31,
2010
2009
2008
$
27 $
32 $
78 $
240 $
2,462
12,062
3,315
1
17,867
208
608
18,683
-
5,066
2,458
19,311
2,482
-
24,283
803
3,411
28,497
-
5,509
6,430
14,930
1,244
-
22,682
49
1,318
24,049
-
2,397
4,307
15,211
457
1
20,216
1,392
1,885
23,493
-
3,843
23,749 $
34,006 $
26,446 $
27,336 $
5.14%
4.61%
7.15%
6.71%
6.71%
5.58%
6.07%
6.01%
301 $
408 $
463 $
488 $
336
5,042
3,460
896
11
9,745
-
1,302
11,047
93
3,864
15,004
3.04%
3.41%
61
996 $
1,509 $
1,323 $
1,153 $
858
22
In addition to non-performing loans we continue to monitor our portfolio for potential problem loans.
Potential problem loans are defined as loans which cause management to have serious concerns as to the ability of
such borrowers to comply with the present loan repayment terms and which may cause the loan to be placed on non-
accrual status. As of December 31, 2012, we had seven loans totaling $3.5 million that it deemed potential problem
loans. Management is actively monitoring these loans.
Future increases in the allowance for loan losses may be necessary based on the growth of the loan
portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and
charge-offs, and the impact the deterioration of the real estate and economic environments in our lending region.
Although we use the best information available, the level of allowance for loan losses remains an estimate that is
subject to significant judgment and short-term change. For additional information, see Critical Accounting Policies
above and as more fully described in Note 1 to our consolidated financial statements included elsewhere in this
report.
Allowance for Loan Losses. The allowance for loan losses consists of general and specifc components.
The specific component relates to loans that are classified as impaired. For those loans that are classified as
impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of
the impaired loan is lower than the carrying value of that loan. The general component covers all other loans and is
based on historical loss experience adjusted for qualitative factors. Other adjustments may be made to the allowance
for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in
the historical loss or risk rating data are made.
Management regularly assesses the appropriateness and adequacy of the loan loss reserve in relation to
credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors,
and believes the reserve is reasonable and adequate for each of the periods presented.
At December 31, 2012, the allowance for loan losses was $5.0 million, a decrease of $2.2 million, or
31.0%, from $7.2 million at December 31, 2011. The provision for loan losses was $4.3 million and there were $6.7
million in charge-offs and $107 thousand in recoveries during 2012. The allowance for loan losses as a percentage
of total loans was 1.43% at December 31, 2012 compared to 2.12% on December 31, 2011.
The table below presents information regarding our provision and allowance for loan losses for each of the
periods presented.
(Dollars in thousands)
2012
2011
2010
2009
2008
Balance at beginning of year
$
Provision charged to operating expenses
Recoveries of loans previously charged-off:
7,210 $
4,330
6,397 $
3,306
5,496 $
3,280
5,813 $
3,404
5,140
1,350
Year Ended December 31,
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total recoveries
Loans charged-off:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total charge-offs
Net charge-offs
2
-
78
-
27
107
169
1,538
3,904
998
62
6,671
6,564
6
516
8
-
19
549
24
909
2,057
12
40
3,042
2,493
126
-
2
-
19
147
241
768
1,462
-
55
2,526
2,379
4
-
60
71
17
152
1,345
1,632
588
242
66
3,873
3,721
Balance at end of year
$
4,976 $
7,210 $
6,397 $
5,496 $
Net charge-offs to average loans outstanding
Allowance for loan losses to year-end loans
3.70%
1.43%
23
0.73%
2.12%
0.72%
1.89%
1.14%
1.65%
6
-
3
-
30
39
34
-
504
68
110
716
677
5,813
0.22%
1.81%
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,
2012
2011
2010
(Dollars in thousands)
Amount
Commercial and industrial
$
Percent
of Loans
in Each
Category
to Total
Loans
4.6% $
2.0%
64.7%
28.3%
0.4%
Amount
304
294
4,833
987
9
Percent
of Loans
in Each
Category
to Total
Loans
4.0% $
3.1%
63.2%
29.3%
0.4%
-
783
-
Amount
436
1,183
3,760
798
56
164
271
223
3,395
869
38
180
$
4,976
100.0% $
7,210
100.0% $
6,397
Allowance for Loans Losses at December 31,
2009
2008
Percent
of Loans
in Each
Category
to Total
Loans
Amount
$
$
379
1,387
3,283
323
94
30
5,496
5.1% $
8.3%
58.0%
28.0%
0.6%
-
100.0% $
Amount
520
2,245
2,223
705
55
65
5,813
Percent
of Loans
in Each
Category
to Total
Loans
4.4%
6.2%
60.4%
28.6%
0.4%
-
100.0%
Percent
of Loans
in Each
Category
to Total
Loans
7.0%
12.0%
54.2%
26.3%
0.5%
-
100.0%
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
Premises and Equipment. Premises and equipment decreased by $302 thousand, or 4.5%, from $6.8
million at December 31, 2011 to $6.5 million at December 31, 2012.
Bank-owned Life Insurance (BOLI). Our BOLI carrying value increased to $11.5 million at December
31, 2012 from $11.1 million at December 31, 2011. The increase was principally the result of $394 thousand in net
earnings on bank owned life insurance policies in 2012.
Deposits. Total deposits increased $7.1 million, or 1.7%, to $432.4 million at December 31, 2012, from
$425.4 million at December 31, 2011. The increase in deposits was due to an increase in non-interest bearing
deposits of $3.6 million, or 8.1%, and an increase in interest bearing core deposits of $10.7 million, or 4.0%, which
was partially offset by a decrease in time deposits of $7.2 million, or 6.5%, for December 31, 2012, as compared to
December 31, 2011. The Company’s funding mix continues to improve as low cost deposits grow.
Total average deposits increased $24.8 million from $403.4 million for the year ended December 31, 2011,
to $428.1 million for the year ended December 31, 2012, a 6.1% increase. Average NOW accounts increased to
$96.4 million for 2012, an increase of $15.1 million, or 18.5%, from $81.4 million for 2011. The average time
24
deposit account increased $7.7 million, or 7.8%, from $98.7 million for 2011 to $106.4 million for 2012. The
average money market account balances increased $605 thousand, or 3.9% from $15.5 million for 2011 to $16.1
million for 2012. Declines in savings accounts, on average, of $6.2 million or 3.7% partly offset the aforementioned
increases in deposits.
The average balances and weighted average rates paid on deposits for 2012, 2011 and 2010 are presented
below.
Year Ended December 31,
(Dollars in thousands)
Demand, non-interest bearing
NOW
Money market
Savings
Time
Total deposits
2012 Average
2011 Average
2010 Average
Balance
Rate
Balance
Rate
Balance
Rate
$
$
47,180
96,432
16,110
162,052
106,372
428,146
$
0.17%
0.34%
0.37%
1.57%
0.58% $
39,596
81,374
15,505
168,233
98,673
403,381
$
0.47%
0.54%
0.67%
1.57%
0.78% $
38,255
67,729
13,189
174,208
101,354
394,735
0.76%
0.71%
0.98%
1.66%
1.01%
The remaining maturity for certificates of deposit accounts of $100,000 or more as of December 31, 2012 is
presented in the following table.
(Dollars in thousands)
3 months or less
3 to 6 months
6 to 12 months
Over 12 months
Total
$
$
5,262
9,962
3,998
17,886
37,108
Borrowings. Borrowings may consist of short and long-term advances from the FHLBNY and a line of
credit at Atlantic Central Bankers Bank. The FHLBNY advances are secured under terms of a blanket collateral
agreement by a pledge of qualifying investment securities and certain mortgage loans. At December 31, 2012, we
had $26.0 million in long term advances outstanding at a weighted average interest rate of 4.03%.
The following table summarizes short-term borrowings and weighted average interest rates paid during the
past three years.
(Dollars in thousands)
Average daily amount of short-term borrowings outstanding during the
period
Weighted average interest rate on average daily short-term borrowings
Maximum short-term borrowings outstanding at any month-end
Short-term borrowings outstanding at period end
Weighted average interest rate on short-term borrowings at period end
$
$
$
Year Ended December 31,
2012
2011
2010
53 $
642 $
0.42%
1,500
-
- %
$
$
0.44%
5,500
-
- %
$
$
137
0.38%
10,000
10,000
0.38%
Junior Subordinated Debentures. On June 28, 2007, we raised $12.5 million in capital through the
issuance of junior subordinated debentures to a non-consolidated statutory trust subsidiary. The subsidiary in turn
issued $12.5 million in variable rate capital trust pass through securities to investors in a private placement. The
interest rate is based on the three-month LIBOR plus 144 basis points and adjusts quarterly. The rate at December
31, 2012 was 1.75%. The capital securities are redeemable by us during the first five years at a redemption price of
103.5% of par for the first year and thereafter on a sliding scale down to 100% of par on or after September 15, 2012
in whole or in part or earlier if the regulatory capital or tax treatment of the securities is substantially changed.
These trust preferred securities must be redeemed upon final maturity on September 15, 2037. The proceeds of
25
these trust preferred securities, which have been contributed to the Bank, are included in the Bank’s capital ratio
calculations and treated as Tier I capital.
In accordance with FASB ASC 810, Consolidation, our wholly owned subsidiary, Sussex Capital Trust II,
is not included in our consolidated financial statements. For regulatory reporting purposes, the Federal Reserve
allows trust preferred securities to continue to qualify as Tier I capital subject to specified limitations.
Equity. Stockholders’ equity inclusive of accumulated other comprehensive income, net of income taxes,
was $40.4 million at December 31, 2012, an increase of $470 thousand, from the $39.9 million at year-end 2011.
The increase in stockholders’ equity was due to $735 thousand in net income recorded in 2012, which was partially
offset by a $363 thousand decrease in unrealized gains on securities available for sale, net of tax.
COMPARISON OF OPERATING RESULTS FOR YEAR-END DECEMBER 31, 2012 AND 2011
Results of Operations. Our net income is impacted by five major components and each of them is reviewed
in more detail in the following discussion:
(cid:2)
(cid:2)
(cid:2)
(cid:2)
(cid:2)
net interest income, or the difference between interest income earned on loans and investments and
interest expense paid on deposits and borrowed funds;
provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for
inherent losses on loans;
non-interest income, which is made up primarily of certain loan and deposit fees, insurance
commissions and gains and losses from sales of securities or other transactions;
non-interest expense, which consists primarily of salaries, employee benefits, credit collection and
write-off costs and other operating expenses; and
income taxes.
Our net income decreased 70.2% to $735 thousand, or $0.22 per diluted share, for the year ended
December 31, 2012 over the same period in 2011. We attribute the decrease in net income to an increase in
expenses and write-downs related to foreclosed real estate, greater provision for loan losses, higher operating costs
resulting from growth initiatives of the Company and a decline in the net interest margin. These increases in
expenses were partly offset by increases in gains on the sale of securities and higher Tri-State Insurance Agency,
Inc. net income for the year ended December 31, 2012 as compared to the same period last year.
Net Interest Income. Net interest income is the most significant component of our income from
operations. Net interest income is the difference between interest earned on total interest-earning assets (primarily
loans and investment securities), on a fully taxable equivalent basis, where appropriate, and interest paid on total
interest-bearing liabilities (primarily deposits and borrowed funds). Fully taxable equivalent basis represents income
on total interest-earning assets that is either tax-exempt or taxed at a reduced rate, adjusted to give effect to the
prevailing incremental federal tax rate, and adjusted for nondeductible carrying costs and state income taxes, where
applicable. Yield calculations, where appropriate, include these adjustments. Net interest income depends on the
volume and interest rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing
liabilities.
26
Comparative Average Balance and Average Interest Rates. The following table presents, on a fully
taxable equivalent basis, a summary of our interest-earning assets and their average yields, and interest-bearing
liabilities and their average costs for each of the years ended December 31, 2012 and 2011. The average balances of
loans include non-accrual loans, and associated yields include loan fees, which are considered adjustment to yields.
Twelve Months December 31,
2012
2011
Average
Balance
Interest (1)
Average
Rate (2)
Average
Balance
Interest (1)
Average
Rate (2)
$
$
$
(Dollars in thousands)
Earning Assets:
Securities:
Tax exempt (3)
Taxable
Total securities
Total loans receivable (4)
Other interest-earning assets
Total earning assets
Non-interest earning assets
Allowance for loan losses
Total Assets
Sources of Funds:
Interest bearing deposits:
NOW
Money market
Savings
Time
Total interest bearing deposits
Borrowed funds
Junior subordinated debentures
Total interest bearing liabilities
Non-interest bearing liabilities:
Demand deposits
Other liabilities
Total non-interest bearing liabilities
Stockholders' equity
Total Liabilities and Stockholders' Equity
$
31,397 $
86,456
117,853
339,927
18,154
475,934
41,795
(7,164)
510,565
96,432 $
16,110
162,052
106,372
380,966
26,053
12,887
419,906
47,180
2,759
49,939
40,720
510,565
1,724
1,148
2,872
17,646
35
20,553
5.49% $
1.33%
2.44%
5.19%
0.19%
4.32%
29,692 $
54,425
84,117
339,770
28,547
452,434
1,770
1,314
3,084
18,798
60
21,942
5.96%
2.41%
3.67%
5.53%
0.21%
4.85%
38,507
(7,314)
483,627
$
164
54
606
1,670
2,494
1,065
241
3,800
0.17% $
0.34%
0.37%
1.57%
0.65%
4.09%
1.87%
0.90%
$
3.52%
386
83
1,122
1,550
3,141
1,064
222
4,427
0.47%
0.54%
0.67%
1.57%
0.86%
3.99%
1.72%
1.10%
81,374 $
15,505
168,233
98,673
363,785
26,642
12,887
403,314
39,596
2,348
41,944
38,369
483,627
3.87%
17,515
(602)
$
16,913
Net Interest Income and Margin (5)
Tax-equivalent basis adjustment
Net Interest Income
16,753
(586)
16,167
$
(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, on a fully tax equivalent basis, decreased $762 thousand, or 4.4%, to $16.8 million for
the year ended December 31, 2012, as compared to $17.5 million for same period in 2011. Our net interest margin
declined 35 basis points to 3.52% for the year ended December 31, 2012, compared to 3.87% for the same period
last year. The decline was mostly attributed to a 34 basis point decline in the average rate earned on loans to 5.19%,
which was partly offset by a 20 basis point decrease in the average rate paid on interest bearing liabilities to 0.90%
for the year ended December 31, 2012, as compared to the same period last year and a $23.5 million, or 5.2%,
increase in average interest earning assets, principally securities.
27
Interest Income. Total interest income, on a fully taxable equivalent basis, decreased $1.4 million, or
6.3%, to $20.6 million for the year ended December 31, 2012 compared to $21.9 million for the year ended
December 31, 2011. The decline in interest income was largely due to decreases in average rates earned on total
earning assets, which decreased 53 basis points to 4.32% in 2012 from 4.85% for 2011. The average rates for both
the securities and loan portfolio’s declined by 123 basis points and 34 basis points, respectively, for the year ended
December 31, 2012 as compared to the same period in 2011.
Interest income from securities, on a fully taxable equivalent basis, decreased $212 thousand, or 6.9%, for
the year ended December 31, 2012 compared to the same period in 2011. The average rate decreased 123 basis
points to 2.44% for 2012 from 3.67% for 2011. The decline was largely attributed to 28.9% of the security portfolio
either maturing, being called or principal repayments, which were mostly reinvested in a lower interest rate
environment.
Interest income from the loan portfolio decreased by $1.2 million, or 6.1%, to $17.6 million for 2012 from
$18.8 million for 2011. The decline was due to lower average rates earned on loans, which decreased 34 basis
points to 5.19% for the year ended December 31, 2012 from 5.53% for the same period in 2011.
Interest Expense. Total interest expense decreased $627 thousand, or 14.2%, to $3.8 million for the year
ended December 31, 2012 from $4.4 million for the same period in 2011. The decrease was principally due to a
decline in the average rates paid on interest-bearing liabilities of 20 basis points to 0.90% in 2012 compared to
1.10% in 2011. The decline in average rates paid on interest-bearing liabilities was largely due to a decrease in rates
paid on savings deposits and NOW accounts of 30 basis points for 2012 compared to 2011. The benefit derived
from a decline in average rates more than offset the increase in interest expense associated with the growth of
average interest-bearing liabilities of $16.6 million for 2012 compared to the prior year. The growth in average
interest-bearing liabilities occurred primarily in NOW accounts, which increased $15.0 million.
The following table reflects the impact on net interest income from changes in the volume of earning assets
and interest bearing liabilities and changes in rates earned and paid by us 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.
(Dollars in thousands)
Securities:
Tax exempt
Taxable
Total securities (1)
Total loans receivable (2)
Other interest-earning assets
Total net change in income on interest-
earning assets
Interest bearing deposits:
NOW
Money market
Savings
Time
Total interest bearing deposits
Borrowed funds
Junior subordinated debentures
Total net change in expense on interest-
bearing liabilities
December 31, 2012 v. 2011
December 31, 2011 v. 2010
Increase (decrease)
Due to changes in:
Increase (decrease)
Due to changes in:
Volume
Rate
Total
Volume
Rate
Total
$
99 $
(145) $
(46)
$
48 $
60 $
576
675
9
(20)
(742)
(887)
(166)
(212)
(1,161)
(1,152)
(5)
(25)
54
102
471
(8)
(536)
(476)
(730)
3
108
(482)
(374)
(259)
(5)
664
(2,053)
(1,389)
565
(1,203)
(638)
61
3
(40)
121
145
(24)
-
(283)
(32)
(476)
(1)
(792)
25
19
(222)
(29)
(516)
120
(647)
1
19
89
15
(57)
(44)
3
(242)
-
(215)
(24)
(530)
(88)
(857)
(87)
(3)
(126)
(9)
(587)
(132)
(854)
(329)
(3)
121
(748)
(627)
(239)
(947)
(1,186)
Change in net interest income
$
543 $
(1,305) $
(762)
$
804 $
(256) $
548
(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
28
Provision for Loan Losses. Provision for loan losses increased $1.0 million to $4.3 million for the year
ended December 31, 2012, as compared to $3.3 million for the same period last year. The increases in the provision
for loan losses for the year-ended December 31, 2012 were largely attributed to an increase in charge-offs related to
the resolution of problem loans. The provision for loan losses reflects management review, analysis and judgment
of the credit quality of the loan portfolio for 2012 and the effects of current economic environment and lower real
estate collateral values from the time the loans were originated. Our non-accrual loans decreased $6.4 million, or
26.4%, to $17.9 million at December 31, 2012 from $24.3 million at December 31, 2011. We believe these loans
are adequately provided for in our loan loss provision or are sufficiently collateralized at December 31, 2012. The
provision for loan losses reflects management’s judgment concerning the risks inherent in our 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 deemed necessary. Also see Note 6 to our consolidated financial statements and “Allowance for Loan
Losses and Credit Quality of Financing Receivables” herein for further discussion.
Non-Interest Income. Non-interest income consists of all income other than interest and dividend income
and is principally derived from: service charges on deposits; insurance commission income; commissions on sales of
annuities and mutual funds; ATM and debit card income; BOLI income and net gains on sale of securities and loans.
We recognize the importance of supplementing net interest income with other sources of income as it continues to
explore new opportunities to generate non-interest income.
Non-interest income increased $1.8 million, or 33.3%, to $7.0 million for the year ended December 31,
2012, as compared to the same period last year. The increase in non-interest income was largely due to increases in
gains on sale of securities, insurance commissions and fees and other income, which increased $1.2 million, $214
thousand and $135 thousand, respectively. Additionally, there was a $231 thousand impairment write-down on
equity securities that occurred in the same period last year that did not recur in 2012.
Non-Interest Expense. Total non-interest expense increased $2.7 million, or 17.0%, to $18.5 million for
the year ended December 31, 2012, as compared to the same period last year. The increase during 2012 compared
to 2011 was largely due to increases in expenses and write-downs related to foreclosed real estate and salaries and
benefits of $1.7 million and $459 thousand, respectively. The increase in expenses and write-downs related to
foreclosed real estate was principally due to the prospective sales of foreclosed real estate properties. The increase
in salaries and employee benefits was mostly attributed to costs related to the hiring of additional commercial
lenders and support staff, higher medical benefit costs and severance costs of $110 thousand for a former executive
during the first quarter of 2012.
Income Taxes. The (benefit) or provision for income taxes was $(329) thousand and $637 thousand for
2012 and 2011, respectively. The Company’s effective tax rate was (81.0)% and 20.5% for 2012 and 2011,
respectively. See Notes 1 and 16 to our consolidated financial statements for further discussion on income taxes.
Operational Risk
We are exposed to a variety of operational risks that can affect each of its business activities, particularly
those involving processing and servicing of loans. Operational risk is defined as the risk of loss resulting from
inadequate or failed internal processes, people or systems from external events. The risk of loss also includes losses
that may arise from potential legal actions that could result from operational deficiencies or noncompliance with
contracts, laws or regulations. We monitor and evaluate operational risk on an ongoing basis through systems of
internal control, formal corporate-wide policies and procedures, and an internal audit function.
Liquidity, Capital Resources and Off-Balance Sheet Arrangements
Liquidity. A fundamental component of our business strategy is to manage liquidity to ensure the
availability of sufficient resources to meet all financial obligations and to finance prospective business opportunities.
Liquidity management is critical to our stability. Our liquidity position over any given period of time is a product of
our operating, financing and investing activities. The extent of such activities is often shaped by such external
factors as competition for deposits and loan demand.
Traditionally, financing for our loans and investments is derived primarily from deposits, along with
interest and principal payments on loans and investments. At December 31, 2012, total deposits amounted to $432.4
million, an increase of $7.1 million, or 1.7%, over the prior comparable year. At December 31, 2012, advances from
29
the FHLBNY and subordinated debentures totaled $38.9 million and represented 7.6% of total assets as compared to
$38.9 million and 7.7% of total assets, at December 31, 2011.
Loan production continued to be our principal investing activity. Net loans at December 31, 2012 amounted
to $342.8 million, an increase of $10.3 million, or 3.1%, compared to the same period in 2011.
Our most liquid assets are cash and due from banks and federal funds sold. At December 31, 2012, the
total of such assets amounted to $11.7 million, or 2.3%, of total assets, compared to $37.5 million, or 7.4%, of total
assets at year-end 2011. Another significant liquidity source is our available for sale securities. At December 31,
2012, available for sale securities amounted to $118.9 million compared to $96.3 million at year-end 2011.
In addition to the aforementioned sources of liquidity, we have available various other sources of liquidity,
including federal funds purchased from other banks and the Federal Reserve discount window. The Bank also has
the capacity to borrow an additional $30.0 million through its membership in the FHLBNY and $4 million at
Atlantic Central Bankers Bank at December 31, 2012. Management believes that our sources of funds are sufficient
to meet our present funding requirements.
Capital Resources. The Bank’s regulators have classified and defined bank capital as consisting of Tier I
capital, which includes tangible stockholders’ equity for common stock and certain preferred stock and other hybrid
instruments, and Tier II capital, which includes a portion of the allowance for loan losses, certain qualifying long-
term debt and preferred stock which does not qualify for Tier I capital.
The Bank’s regulators have implemented risk-based guidelines which require banks to maintain certain
minimum capital as a percent of such assets and certain off-balance sheet items adjusted for predefined credit risk
factors (risk-adjusted assets). Banks are required to maintain Tier I capital as a percent of risk-adjusted assets of
4.0% and Tier II capital as of risk-adjusted assets of 8.0% at a minimum. At December 31, 2012, the Bank’s Tier I
and Tier II capital ratios were 12.88% and 14.13%, respectively. We also maintained $980 thousand in cash and
cash equivalents, which could be contributed to the Bank as capital.
In addition to the risk-based guidelines discussed above, the Bank’s regulators require that banks, which
meet the regulators’ highest performance and operational standards, maintain a minimum leverage ratio (Tier I
capital as a percent of tangible assets) of 4.0%. For those banks with higher levels of risk or that are experiencing or
anticipating growth, the minimum will be proportionately increased. Minimum leverage ratios for each bank and
bank holding company are established and updated through the ongoing regulatory examination process. As of
December 31, 2012, the Bank had a leverage ratio of 9.27%.
Off-Balance Sheet Arrangements. Our consolidated 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, 2012 totaled $68.5 million, which consisted of $34.5 million in commitments to
grant commercial and residential loans, $32.3 million in unfunded commitments under lines of credit and $1.8
million in outstanding letters of credit. 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 us. Management
believes that any amounts actually drawn upon can be funded in the normal course of operations.
Market Risk
Market risk is generally described as the sensitivity of income to adverse changes in interest rates, foreign
currency exchange rates, commodity prices, and other relevant market rates or prices. Market rate sensitive
instruments include: financial instruments such as investments, loans, mortgage-backed securities, deposits,
borrowings and other debt obligations; derivative financial instruments, such as futures, forwards, swaps and
options; and derivative commodity instruments, such as commodity futures, forwards, swaps and options that are
permitted to be settled in cash or another financial instrument.
We do not have any material exposure to foreign currency exchange rate risk or commodity price risk. We
did not enter into any market rate sensitive instruments for trading purposes nor did we engage in any trading or
hedging transactions utilizing derivative financial instruments during 2012. Our real estate loan portfolio,
concentrated largely in northern New Jersey, is subject to risks associated with the local and regional economies.
Our primary source of market risk exposure arises from changes in market interest rates (“interest rate risk”).
30
Interest Rate Risk
Interest rate risk is generally described as the exposure to potentially adverse changes in current and future
net interest income resulting from: fluctuations in interest rates, product spreads, and imbalances in the repricing
opportunities of interest-rate-sensitive assets and liabilities. Therefore, managing our interest rate sensitivity is a
primary objective of our senior management. Our Asset/Liability Committee (“ALCO”) is responsible for managing
the exposure to changes in market interest rates.
We manage interest rate risk exposure with the assistance of an independent third party who provides
financial modeling and simulation modeling, analysis and reporting. The reports provided by the third party are
used to determine our exposure to market rate changes on net interest income and future economic value of equity.
Our objective is to maximize net interest income within acceptable levels of risk established by policy. The
techniques utilized for managing exposure to market rate changes involve a variety of interest rate, pricing and
volume assumptions. These assumptions include projections on growth, prepayment and withdrawal levels as well
as other embedded options inherently found in financial instruments. We review and validate these assumptions at
least annually or more frequently if economic or other conditions change. At December 31, 2012, we simulated the
effects on net interest income given an instantaneous and parallel shift in the yield curve of up to a 200 basis point
rising interest rate environment and an 200 basis point declining interest rate environment. Based on the simulation,
it was estimated that net interest income, over a twelve-month horizon, would not decrease by more than 5.0%. Our
interest rate risk management policies provide that net interest income should not decrease by more than 5.0% if
interest rates increase from current rates given an instantaneous and parallel shift in the yield curve of a 200 basis
point rise in rates or 200 basis point decline in rates, respectively. Policy exceptions, if any, are reported to the
Board of Directors. At December 31, 2012, we were within policy limits established for changes in net interest
income and future economic value of equity. Economic value of equity is defined as the market value of its assets
less the market value of its liabilities plus (or minus) the market value of any off-balance sheet positions.
The following table sets forth our interest rate risk profile at December 31, 2012 and 2011. 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. Down 200 basis points was not presented for December 31, 2012 and 2011 due to the extremely low
rate environment.
Net Portfolio Value(2)
Net interest Income
Estimated
Estimated Increase
(Decrease)
NPV
Amount
Percent
Estimated
Net Interest
Income (3)
Amount
Estimated Increase
(Decrease)
$ 40,735
$ 48,535
$ (7,800)
-
(11.1)% $ 17,726
$ 16,827
-
$ 899
-
$ 32,453
$ 40,315
$ (7,862)
-
(14.8)% $ 17,670
$ 16,949
-
$ 721
-
Percent
5.3%
-
4.3%
-
(Dollars in thousands)
Change in Interest Rates
(basis points)(1)
December 31, 2012
+200bp
0bp
December 31, 2011
+200bp
0bp
(1) Assumes an instantaneous and parallel shift in interest rates at all maturities.
(2) NPV, also referred to as economic value of equity, is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet
contracts.
(3) Assumes a gradual change in interest rates over a one year period at all maturities.
The simulation described above does not represent forecast and should not be relied upon as being
indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions,
including the nature and timing of interest rate levels including yield curve shape, prepayments on loans and
securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows, and others. While assumptions are developed based upon current economic and local market
conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer
preferences or competitor influences might change.
31
Further, as market conditions vary from those assumed in the simulation, actual results will also differ due
to prepayment/refinancing levels deviating from those assumed, the varying impact of interest rate changes on caps
or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable
rate loans, depositor early withdrawals and product preference changes, and other internal/external variables.
Furthermore, the simulation does not reflect actions that ALCO might take in response to anticipated changes in
interest rates or competitive conditions in the market place.
Impact of Inflation and Changing Prices
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, the level of interest rates has a more significant impact on a financial institution’s
performance than general levels of inflation. Interest rates do not necessarily move in the same direction or change
with the same magnitude as the price of goods and services, which are affected by inflation. Accordingly, the
liquidity, interest rate sensitivity and maturity characteristics of our assets and liabilities are more indicative of its
ability to maintain acceptable performance levels. Management monitors and seeks to mitigate the impact of
interest rate changes by attempting to match the maturities of assets and liabilities, thus seeking to minimize the
potential effect of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related notes thereto may be found on pages F-1 through F-35 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our President and Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure
that information required to be disclosed in the reports we file and submit under the Exchange Act (i) is recorded,
processed, summarized and reported as and when required and (ii) accumulated and communicated to our
management including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
discussion regarding required disclosure.
There have been no changes in our internal control over financial reporting identified in connection with
the evaluation that occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to
materially affect, our internal control over financial reporting.
32
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13A-15 (f) and 15d-15 (f) of the Securities and Exchange Act of 1934. Our internal
control system was designed to provide reasonable assurance to our management and Board of Directors as to the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements, errors or fraud. Also, projections of any evaluations of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal controls over financial reporting as of December 31,
2012. In making this assessment, management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment,
management concluded that as of December 31, 2012, our internal control over financial reporting is operating as
designed and is effective based on the COSO criteria.
ITEM 9B. OTHER INFORMATION
None.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information included in our Definitive Proxy Statement for the 2013 Annual Meeting of Shareholders
(the “Proxy Statement”) under the following captions is incorporated herein by reference: “Election of Directors,”
“Information About the Board of Directors,” “Information About Our Executive Officers,” “Section 16(a)
Beneficial Ownership Reporting Compliance,” “Information About the Board of Directors and Corporate
Governance – Code of Ethics and Corporate Governance Guidelines”
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Proxy Statement under the following captions is incorporated herein by
reference: “Executive Compensation” and “Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information included in the Proxy Statement under the following captions is incorporated herein by
reference: “Security Ownership of Certain Beneficial Owners and Management” and “Equity Awards Outstanding
and Available.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information included in the Proxy Statement under the following captions is incorporated herein by
reference: “Transactions with Related Persons” and “Information About the Board of Directors and Corporate
Governance – Board of Directors Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information included in the Proxy Statement under the following caption is incorporated herein by
reference: “Independent Registered Public Accounting Firm Fees and Services.”
34
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
Reference is made to the consolidated financial statements and the notes thereto included in Item 8 of Part
II hereof.
(a)(2) Financial Statement Schedules
Consolidated financial statement schedules have been omitted because the required information is not
present, or not present in amounts sufficient to require submission of the schedules, or because the required
information is provided in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index
attached hereto and are incorporated herein by reference.
35
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.
SIGNATURES
SUSSEX BANCORP
/s/ Anthony Labozzetta
Anthony Labozzetta
President and Chief Executive Officer
Dated: March 14, 2013
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 March 14, 2013.
Name
/s/ Anthony Labozzetta
Anthony Labozzetta
/s/ Steven M. Fusco
Steven M. Fusco
/s/ Anthony S. Abbate
Anthony S. Abbate
/s/ Patrick Brady
Patrick Brady
/s/ Richard Branca
Richard Branca
/s/ Katherine H. Caristia
Katherine H. Caristia
/s/ Mark J. Hontz
Mark J. Hontz
/s/ Donald L. Kovach
Donald L. Kovach
/s/ Edward J. Leppert
Edward J. Leppert
/s/ Timothy Marvil
Timothy Marvil
/s/ Robert McNerney
Robert McNerney
/s/ Richard W. Scott
Richard W. Scott
/s/ John E. Ursin
John E. Ursin
Title
President and Chief Executive Officer
(Principal Executive Officer)
Senior Vice President
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sussex Bancorp
We have audited the accompanying consolidated balance sheets of Sussex Bancorp and its subsidiary (the
“Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and
comprehensive income, stockholders’ equity and cash flows for each of the years then ended. The Company’s
management is responsible for these financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Sussex Bancorp and its subsidiary as of December 31, 2012 and 2011, and the
results of their operations and their cash flows for each of the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
New York, New York
March 14, 2013
F-1
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
December 31, 2012
December 31, 2011
$
$
$
ASSETS
Cash and due from banks
Interest-bearing deposits with other banks
Cash and cash equivalents
Interest bearing time deposits with other banks
Securities available for sale, at estimated fair value
Securities held to maturity, at cost (estimated fair value of $5,472
at December 31, 2012 and $4,345 at December 31, 2011)
Federal Home Loan Bank Stock, at cost
Loans receivable, net of unearned income
Less: allowance for loan losses
Net loans receivable
Foreclosed real estate
Premises and equipment, net
Accrued interest receivable
Goodwill
Bank-owned life insurance
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Total Deposits
Long-term borrowings
Accrued interest payable and other liabilities
Junior subordinated debentures
Total Liabilities
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Common stock, no par value, 10,000,000 shares authorized;
issued shares 3,409,056 in 2012 and 3,373,793 in 2011;
outstanding shares 3,397,873 in 2012 and 3,372,949 in 2011
Treasury stock, at cost; 11,183 shares in 2012 and 844 shares in 2011
Retained earnings
Accumulated other comprehensive income
Total Stockholders' Equity
6,268 $
5,400
11,668
100
118,881
5,221
1,980
347,736
4,976
342,760
5,066
6,476
1,741
2,820
11,536
6,485
3,903
33,597
37,500
100
96,324
4,220
1,874
339,705
7,210
332,495
5,509
6,778
1,735
2,820
11,142
6,456
514,734 $
506,953
48,375 $
384,061
432,436
26,000
3,039
12,887
474,362
44,762
380,614
425,376
26,000
2,788
12,887
467,051
-
-
28,117
(59)
11,958
356
40,372
27,964
(4)
11,223
719
39,902
Total Liabilities and Stockholders' Equity
$
514,734 $
506,953
See Notes to Consolidated Financial Statements
F-2
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year Ended December 31,
2012
2011
$
17,646 $
18,798
(Dollars in thousands except per share data)
INTEREST INCOME
Loans receivable, including fees
Securities:
Taxable
Tax-exempt
Federal funds sold
Interest bearing deposits
Total Interest Income
INTEREST EXPENSE
Deposits
Borrowings
Junior subordinated debentures
Total Interest Expense
Net Interest Income
PROVISION FOR LOAN LOSSES
Net Interest Income after Provision for Loan Losses
OTHER INCOME
Service fees on deposit accounts
ATM and debit card fees
Bank-owned life insurance
Insurance commissions and fees
Investment brokerage fees
Net gain on sale of loans held for sale
Net gain on securities transactions
Net loss on sale of premises and equipment
Net gain (loss) on sale of foreclosed real estate
Impairment write-downs on equity securities
Other
Total Other Income
OTHER EXPENSES
Salaries and employee benefits
Occupancy, net
Furniture, equipment and data processing
Advertising and promotion
Professional fees
Director fees
FDIC assessment
Insurance
Stationary and supplies
Loan collection costs
Expenses and write-downs related to foreclosed real estate
Amortization of intangible assets
Other
Total Other Expenses
Income before Income Taxes
(BENEFIT) PROVISION FOR INCOME TAXES
Net Income
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized gains on available for sale securities arising during the period
Reclassification adjustment for gain on securities transactions included in net income
Income tax expense (benefit) related to items of other comprehensive (loss) income
Other comprehensive (loss) income, net of income taxes
Comprehensive income
EARNINGS PER SHARE
Basic
Diluted
$
$
$
See Notes to Consolidated Financial Statements
F-3
1,148
1,138
-
35
19,967
2,494
1,065
241
3,800
16,167
4,330
11,837
1,141
627
394
2,484
145
47
1,799
(9)
39
-
373
7,040
8,987
1,450
1,327
285
677
321
681
240
176
713
2,124
5
1,485
18,471
406
(329)
735
1,193
(1,799)
243
(363)
372 $
0.23 $
0.22 $
1,314
1,168
4
56
21,340
3,141
1,064
222
4,427
16,913
3,306
13,607
1,290
545
419
2,270
145
-
645
-
(38)
(231)
238
5,283
8,528
1,412
1,177
172
661
176
700
216
184
824
414
10
1,309
15,783
3,107
637
2,470
1,534
(414)
(448)
672
3,142
0.76
0.74
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 2012 and 2011
Number of
Accumulated
Other
Total
(Dollars In Thousands)
Outstanding
Stock
Earnings
Income
Stock
Equity
Shares Common Retained Comprehensive Treasury Stockholders'
Balance December 31, 2010
Net income
Other comprehensive income
Treasury shares purchased
Restricted stock granted
Restricted stock forfeited
Compensation expense related to
option and restricted stock
3,351,566 $ 27,870 $
-
-
(64)
25,305
(3,858)
-
-
-
-
-
94
8,753 $
2,470
-
47 $
-
672
(4) $
-
-
36,666
2,470
672
-
-
-
-
-
-
-
-
-
-
-
94
Balance December 31, 2011
3,372,949
27,964
11,223
719
(4)
39,902
Net income
Other comprehensive loss
Treasury shares purchased
Restricted stock granted
Restricted stock forfeited
Compensation expense related to
option and restricted stock
-
-
(10,339)
37,496
(2,233)
-
-
-
-
-
735
-
-
-
-
-
(363)
-
-
-
-
-
(55)
-
-
735
(363)
(55)
-
-
-
153
-
-
-
153
Balance December 31, 2012
3,397,873 $ 28,117 $ 11,958 $
356 $
(59) $
40,372
See Notes to Consolidated Financial Statements
F-4
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Year Ended December 31,
2012
2011
$
735 $
Provision for loan losses
Depreciation and amortization
Impairment charge on equity securities
Net amortization of securities premiums and discounts
Net realized gain on sale of securities
Net realized gain on sale of loans held for sale
Proceeds from the sale of loans held for sale
Net realized loss on sale of premises and equipment
Net realized (gain) loss on sale of foreclosed real estate
Write-downs of and provisions for foreclosed real estate
Deferred income taxes
Earnings on bank owned life insurance
Compensation expense for stock options and stock awards
(Increase) decrease in assets:
Accrued interest receivable
Other assets
Increase in accrued interest payable and other liabilities
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Securities available for sale:
Purchases
Sales
Maturities, calls and principal repayments
Securities held to maturity:
Purchases
Maturities, calls and principal repayments
Net increase in loans
Net maturities of interest bearing time deposits
Proceeds from the sale of foreclosed real estate
Purchases of bank premises and equipment
Proceeds from the sale of premises and equipment
Purchases of bank owned life insurance
(Increase) decrease in FHLB stock
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Net increase in deposits
Repayments of borrowings
Purchase of treasury stock
Net Cash Provided by Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Cash and Cash Equivalents - Ending
Supplementary Cash Flows Information
Interest paid
Income taxes paid
Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans
Loans transferred to held for sale
$
$
$
$
$
See Notes to Consolidated Financial Statements
\
F-5
4,330
682
-
2,900
(1,799)
(47)
638
9
(39)
1,785
(329)
(394)
153
(6)
538
251
9,407
(96,002)
37,544
34,235
(2,623)
1,581
(18,518)
-
2,029
(396)
12
-
(106)
(42,244)
7,060
-
(55)
7,005
(25,832)
37,500
11,668 $
3,828 $
263 $
3,332 $
591 $
2,470
3,306
607
231
1,009
(645)
-
-
-
38
145
(378)
(419)
94
181
632
284
7,555
(53,654)
14,670
32,535
(3,227)
-
(8,260)
500
1,001
(626)
-
(550)
398
(17,213)
39,409
(10,000)
-
29,409
19,751
17,749
37,500
4,395
1,103
4,296
-
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, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, Wheatsworth Properties Corp., PPD
Holding Company, LLC and Tri-State Insurance Agency, Inc. (“Tri-State”). All intercompany transactions and
balances have been eliminated in consolidation.
Organization and Nature of Operations
Sussex Bancorp’s business is conducted principally through the Bank. Sussex Bank is a New Jersey state chartered
bank and provides full banking services. The Bank generates commercial, mortgage and consumer loans and
receives deposits from customers at its eight branches located in Sussex County, New Jersey and two branches in
Orange County, New York. As a state bank, the Bank is subject to regulation of the New Jersey Department of
Banking and Insurance and the Federal Deposit Insurance Corporation. Sussex Bancorp is subject to regulation by
the Federal Reserve Board. SCB Investment Company, Inc. and SCBNY Company, Inc. hold portions of the Bank’s
investment portfolio. Tri-State provides insurance agency services mostly through the sale of property and casualty
insurance policies. ClassicLake Enterprises, LLC, PPD Holding Company, LLC and Wheatsworth Properties Corp.
hold certain foreclosed properties. The Company opened a loan production and insurance agency satellite office in
Rochelle Park, New Jersey during the fourth quarter of 2011.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the other-than-temporary impairment, allowance for loan
losses, valuation of goodwill and intangible assets, the valuation of deferred tax assets and the fair value of financial
instruments.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within Sussex County, New Jersey and adjacent
counties in the states of New Jersey, New York and Pennsylvania. Notes 3 and 4 discuss the types of securities that
the Company invests in. The types of lending that the Company engages are included in Note 5. Although the
Company has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s
economy. The Company does not have any significant concentrations in any one industry or customer.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and cash
equivalents, balances due from banks, interest bearing deposits with banks and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods.
Securities
Securities are designated at the time of acquisition as available for sale or held to maturity. Securities that the
Company will hold for indefinite periods of time and that might be sold in the future as part of efforts to manage
interest rate risk or in response to changes in interest rates, changes in prepayment risk, changes in market
conditions or changes in economic factors are classified as available for sale and carried at fair values. Securities
available for sale are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in
other comprehensive (loss) income, net of related deferred tax effect. Securities that the Company has the positive
intent and ability to hold to maturity are designated as held to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions and carried at amortized cost.
Purchase premiums and discounts are recognized in interest income using the level yield method over the
contractual terms of the securities. Gains and losses realized on sales of securities are determined on the specific
identification method and are reported in non-interest income.
F-6
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically evaluates the security portfolio to determine if a decline in the fair value of any security
below its cost basis is other-than-temporary. The Company’s evaluation of other-than-temporary impairment
considers the duration and severity of the impairment, the company’s intent and ability to hold the securities and our
assessments of the reason for the decline in value and the likelihood of a near-term recovery. If a determination is
made that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the
unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will
be recognized as an other-than-temporary impairment charge in non-interest income. The non-credit related
component will be recorded as an adjustment to accumulated other comprehensive income, net of tax.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its
district FHLB according to a predetermined formula. Based on redemption provisions of the FHLB, the stock has
no quoted market value and is carried at cost. The FHLB stock was carried at $2.0 million and $1.8 million for the
years ended December 31, 2012 and 2011, respectively.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred
fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans.
The Bank is generally amortizing these amounts over the contractual life of the loan.
The loans receivable portfolio is segmented into commercial and consumer loans. Commercial loans consist of the
following classes: commercial and industrial, commercial real estate, and construction loans. Consumer loans
consist of the following classes: residential real estate and consumer and other loans.
For all classes of loans, the accrual of interest is discontinued when the contractual payment of principal or interest
has become 90 days past due or management has serious doubts about further collectability of principal or interest,
even though the loan is currently performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the
allowance for loan losses. Interest received on nonaccrual loans including impaired loans generally are either
applied against principal or reported as interest income, according to management’s judgment as to the collectability
of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate
collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of
loans receivable is determined based on contractual due dates for loan payments.
Allowance for Loan Losses
The allowance for loan losses represents the amount, which, in management’s judgment, will be adequate to absorb
credit losses inherent in the loan portfolio as of the balance sheet date. The adequacy of the allowance is determined
by management’s evaluation of the loan portfolio based on such factors as the differing economic risks associated
with each loan category, the current financial condition of specific borrowers, the economic environment in which
borrowers operate, the level of delinquent loans, the value of any collateral and, where applicable, the existence of
any guarantees or indemnifications.
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 for loan losses. The allowance for loan losses consists of specific and general components.
The specific component relates to loans that are classified as impaired. For such loans, an allowance is established
when the discounted cash flows, collateral value or observable market price is lower than the carrying value for that
loan. The general component covers all other loans and is based on historical loss experience adjusted for
qualitative factors.
F-7
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A loan is considered impaired when, based on current information and events, it is probable that the Company will
be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial,
commercial real estate and construction loans by either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is
collateral dependent.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2)
the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Foreclosed Real Estate
Foreclosed real estate is primarily comprised of property acquired through a foreclosure proceeding or acceptance of
a deed-in-lieu of foreclosure. Foreclosed real estate is initially recorded at fair value, less cost to sell at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenues and
expenses from operations and changes in the valuation allowance are included in expenses related to foreclosed real
estate.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the following estimated useful lives of the related assets:
Buildings and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Computer equipment and software
Years
20 – 40
5 – 10
5 – 10
3 – 5
Bank Owned Life Insurance
Bank-owned life insurance (BOLI) is carried at the amount that could be realized under the Company’s life
insurance contracts as of the date of the consolidated balance sheets and is classified as a non-interest earning asset.
BOLI involves purchasing life insurance by the Company on a chosen group of employees. The Company is the
owner and beneficiary of the policies. Increases in the carrying value are recorded as non-interest income in the
consolidated statements of income and insurance proceeds received are generally recorded as a reduction of the
carrying value. The carrying value consists of cash surrender value of $11.5 million at December 31, 2012 and $11.1
million at December 31, 2011.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. At December
31, 2012 and 2011, the Company has recorded goodwill totaling $2.8 million, primarily as a result of the acquisition
of an insurance agency in 2001. In accordance with current accounting standards, goodwill is not amortized, but
evaluated at least annually for impairment. Any impairment of goodwill results in a charge to income. The
Company periodically accesses whether events and changes in circumstances indicate that the carrying amounts of
goodwill and intangible assets may be impaired. The estimated fair value of the reporting segment exceeded its
F-8
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has an amortizable core deposit intangible asset related to the premium paid on the acquisition of
deposits. The core deposit intangible was created during 2006 and is being amortized on a seven year accelerated
schedule. This intangible was $1 thousand and $6 thousand, net of accumulated amortization of $119 thousand and
$114 thousand as of December 31, 2012 and 2011, respectively.
Other intangible assets are included in other assets on the balance sheets for December 31, 2012 and 2011.
Amortization expense on intangible assets was $5 thousand and $10 thousand for the years ended December 31,
2012, and 2011, respectively. Amortization expense is estimated to be $1 thousand for the year ending December
31, 2013.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Income Taxes
The Company accounts for income taxes under the asset/liability method in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Taxes. The income tax
guidance results in two components of income tax expense: current and deferred. Current income tax expense
reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the
taxable income or excess of deductions over revenues. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period in which they occur. A valuation allowance
is established against deferred tax assets when, in the judgment of management, it is more likely than not that such
deferred tax assets will not become available. Because the judgment about the level of future taxable income is
dependent to a great extent on matters that may, at least in part, be beyond the Company’s control, it is at least
reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could
change in the near term.
In connection with the accounting guidance related to accounting for uncertainty in income taxes, which sets out a
consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions, the
Company has evaluated its tax positions as of December 31, 2012. A tax position is recognized as a benefit only if
it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of the tax benefit that has more than a 50
percent likelihood of being realized on examination. For tax positions not meeting the “more likely than not” test,
no tax benefit is recorded. Under the “more likely than not” threshold guidelines, the Company believes no
significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-
recognition of an existing tax benefit. As of December 31, 2012 the Company had no material unrecognized tax
benefits or accrued interest or penalties. The Company’s policy is to account for interest as a component of interest
expense and penalties as a component of other expense. Sussex Bancorp and its subsidiaries file a consolidated
federal income tax return as well as income tax returns in the States of New Jersey, New York and Pennsylvania.
The Company’s federal and state income tax returns before 2009 remain subject to examination by respective tax
authorities.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. Such financial instruments are recorded in the balance sheet
when they are funded.
Stock Compensation Plans
The Company currently has several stock plans in place for employees and directors of the Company.
FASB ASC 718, Compensation-Stock Compensation, requires that the compensation cost relating to
F-9
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share-based payment transactions be recognized in financial statements. The share-based compensation
accounting guidance requires that compensation cost for all stock awards be calculated and recognized over a
defined vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis
over the requisite vesting period for the entire award. A Black-Scholes model is used to estimate the fair value of
stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock
awards. Stock-based compensation expense related to stock plans for the year ended December 31, 2012 and 2011
was $153 thousand and $94 thousand, respectively. As of December 31, 2012, there was $477 thousand of
unrecognized compensation costs related to non-vested restricted stock awards remaining to expense.
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. The weighted-average common shares outstanding
include the weighted-average number of shares of common stock outstanding less the weighted average number of
unvested shares of restricted stock. 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.
Treasury Stock
Repurchases of shares of Company common stock are recorded at cost as a reduction of stockholders’ equity.
Reissuances of shares of treasury stock are recorded at average cost.
Segment Reporting
The Company acts as an independent community financial services provider and offers traditional banking and
related financial services to individual, business and government customers. Through its branch and automated
teller machine networks, the Bank offers a full array of commercial and retail financial services, including taking of
time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of
other financial services. The Bank also performs fiduciary services through its Trust Department. Management
does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail,
trust and mortgage banking operations of the Bank. As such, discrete financial information is not available and
segment reporting would not be meaningful. The Company’s insurance agency is managed separately from the
traditional banking and related financial services that the Company offers. The insurance operations provides
primarily property and casualty coverage. See Note 2 for segment reporting of insurance operations.
Insurance Agency Operations
Tri-State 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 Tri-State on a monthly basis. For direct bill policies, Tri-State records commissions as
revenue when the data necessary to reasonably determine such amounts is obtained. On a monthly basis, Tri-State
receives notification from each insurance carrier of total premiums written and collected during the month, and the
broker’s net commission due for their share of business produced by them.
Under the agency billing arrangement, the broker bills and collects from the customer directly, retains their
commission, and remits the net premium amount to the insurance carrier. Virtually all agency-billed policies are
billed and collected on an installment basis (the number of payments varies by policy). Tri-State records revenues
for the first installment as of the policy effective date. Revenues from subsequent installments are recorded at the
installment due date. Tri-State records its commission as a percentage of each installment due.
F-10
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company
had assets under management of $414 thousand and $948 thousand at December 31, 2012 and 2011, respectively.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31,
2012 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was
conducted through the date these financial statements were issued.
Reclassifications
Certain amounts in 2011 consolidated financial statements have been reclassified to conform to the 2012
consolidated financial statement presentation.
New Accounting Standards
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income. This ASU requires entities to disclose the effect of items reclassified out of accumulated
other comprehensive income (“AOCI”) on each affected net income line item. For AOCI reclassification items that
are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures. This
information may be provided either in the notes or parenthetically on the face of the financials. For public entities,
the guidance is effective for annual reporting periods beginning after December 15, 2012 and interim periods within
those years. The Company will be required to provide the disclosures beginning with financial statements for the
first quarter of 2013. We do not expect that the adoption of this guidance will have a material impact on our
consolidated financial statements
In December, 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update 2011-
05. In response to stakeholder concerns regarding the operational ramifications of the presentation of these
reclassifications for current and previous years, the FASB has deferred the implementation date of this provision to
allow time for further consideration. The requirement in ASU 2011-05, Presentation of Comprehensive Income, for
the presentation of a combined statement of comprehensive income or separate, but consecutive, statements of net
income and other comprehensive income is still effective for fiscal years and interim periods beginning after
December 15, 2011 for public companies. The adoption of this guidance did not have a material impact on our
consolidated financial statements.
F-11
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SEGMENT REPORTING
Segment information for 2012 and 2011 is as follows:
(Dollars in thousands)
Banking and
Financial Services
Insurance
Services
Total
Year Ended December 31, 2012:
Net interest income from external sources $
Other income from external sources
Depreciation and amortization
Income before income taxes
Income tax (benefit) expense (1)
Total assets
Year Ended December 31, 2011:
Net interest income from external sources $
Other income from external sources
Depreciation and amortization
Income before income taxes
Income tax expense (1)
Total assets
(1) Calculated at statutory tax rate of 40%
16,167 $
4,556
672
145
(433)
511,837
16,913 $
3,013
595
2,955
576
504,076
- $
2,484
10
261
104
2,897
- $
2,270
12
152
61
2,877
16,167
7,040
682
406
(329)
514,734
16,913
5,283
607
3,107
637
506,953
NOTE 3 – FAIR VALUE OF ASSETS AND LIABILITIES
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however,
there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the
fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale
transaction on the dates indicated. The 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 fair values of these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year end.
Under FASB ASC 820, there is a hierarchical disclosure framework associated with the level of pricing
observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by the FASB
ASC 820 hierarchy are as follows:
Level I - Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly
observable as of the reported date. The nature of these asset and liabilities include items for which quoted prices
are available but traded less frequently, and items that are fair valued using other financial instruments, the
parameters of which can be directly observed.
Level III - Assets and liabilities that have little to no pricing observability as of reported date. These items do
not have two-way markets and are measured using management’s best estimate of fair value, where the inputs
into the determination of fair value require significant management judgment or estimation.
F-12
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the fair value of the Company’s financial assets measured on a recurring basis by
the above FASB ASC 820 pricing observability levels as of December 31, 2012 and 2011:
Quoted Prices in
Active Markets
for Identical
Assets
(Level I)
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
Fair
Value
Measurements
(Dollars in thousands)
December 31, 2012:
State and political subdivisions
Mortgage-backed securities
$
27,741 $
- $
27,741 $
U.S. government-sponsored enterprises
Equity securities-financial services industry
and other
90,709
431
-
431
90,709
-
December 31, 2011:
State and political subdivisions
Mortgage-backed securities
$
20,570 $
- $
20,570 $
U.S. government-sponsored enterprises
Private mortgage-backed securities
71,998
2,477
-
-
71,998
2,477
Equity securities-financial services industry
and other
1,279
1,279
-
-
-
-
-
-
-
-
The Company’s available for sale securities portfolio contains investments, which are all rated within the
Company’s investment policy guidelines and upon review of the entire portfolio all securities are marketable and
have observable pricing inputs.
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value
hierarchy used at December 31, 2012 and 2011 are as follows:
Fair
Value
Measurements
Quoted Prices in
Active Markets
for Identical
Assets
(Level I)
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
6,239 $
3,612
11,571 $
4,959
- $
-
- $
-
- $
-
- $
-
6,239
3,612
11,571
4,959
(Dollars in thousands)
December 31, 2012:
Impaired loans
Foreclosed real estate
December 31, 2011:
Impaired loans
Foreclosed real estate
$
$
F-13
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents additional qualitative information about assets measured at fair value on a nonrecurring
basis and for which Level 3 inputs were used to determine fair value:
(Dollars in thousands)
December 31, 2012:
Impaired loans
Qualitative Information about Level 3 Fair Value Measurements
Fair
Value
Estimate
Unobservable
Input
Valuation
Techniques
Range
(Weighted
Average)
$
6,239 Appraisal of
collateral
Appraisal
adjustments (1)
Selling
expenses (1)
0% to -57.1%
(-21.8%)
-7.0% (-7.0%)
Foreclosed real estate
3,612 Appraisal of
collateral
December 31, 2011:
Impaired loans
$
11,571 Appraisal of
collateral
Foreclosed real estate
4,959 Appraisal of
collateral
Appraisal
adjustments (1)
Selling
expenses (1)
0% to -43.9%
(-2.4%)
-7.0% (-7.0%)
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling
expenses. The range and weighted average of selling expenses and other appraisal adjustments are presented as a percent of the
appraisal.
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, 2012 and 2011:
Cash and Cash Equivalents (Carried at Cost): The carrying amounts reported in the balance sheet for cash and
cash equivalents approximate those assets’ fair value.
Deposits (Carried at Cost): Fair value for fixed-rate time certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits. The Company generally purchases amounts below the
insured limit, limiting the amount of credit risk on these time deposits.
Securities: The fair value of securities, available for sale (carried at fair value) and securities held to maturity
(carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities
exchanges (Level I), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted market prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded
in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-
transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of
such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and
external support on certain Level 3 measurements. Internal cash flow models using a present value formula that
F-14
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers
(where available) were used to support fair values of certain Level 3 investments.
Loans Receivable (Carried at Cost): The fair values of loans are estimated using discounted cash flow analyses,
using the market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans.
Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and
prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values.
Impaired Loans (Carried at Lower of Cost or Fair Value): Impaired loans are those that are accounted for under
FASB ASC 310, Accounting by Creditors for Impairment of a Loan, in which the Company has measured
impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon
independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.
These assets are included in Level 3 fair values, based upon the lowest level of input that is significant to the fair
value measurements. At December 31, 2012 and 2011, the fair value consists of the loan balances of $6.2 million
and $13.5 million, net of valuation allowance of $365 thousand and $1.9 million, respectively. Additional
provisions for loan losses were $207 thousand and $1.4 million for the years ended December 31, 2012 and 2011,
respectively.
Federal Home Loan Bank Stock (Carried at Cost): The carrying amount of restricted investment in bank stock
approximates fair value and considers the limited marketability of such securities.
Deposit Liabilities (Carried at Cost): The fair values disclosed for demand, savings and money market accounts are,
by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Borrowings (Carried at Cost): Fair values of FHLB advances are estimated using discounted cash flow analysis,
based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining
maturity. These prices obtained from this active market represent a market value that is deemed to represent the
transfer price if the liability were assumed by a third party.
Junior Subordinated Debentures (Carried at Cost): Fair values of junior subordinated debt are estimated using
discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk
characteristics, terms and remaining maturity.
Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost): The carrying amounts of accrued
interest receivable and payable approximate its fair value.
Off-Balance Sheet Instruments (Disclosed at Cost): Fair values for the Company’s off-balance sheet financial
instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter
into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit
standing.
F-15
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s financial instruments at December 31, 2012 and 2011 were as follows:
December 31, 2012
Fair
Value
Carrying
Amount
Quoted Prices in Significant
Active Markets
for Identical
Assets
(Level I)
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
11,668 $
100
118,881
5,221
1,980
11,668 $
100
118,881
5,472
1,980
11,668 $
100
431
-
-
- $
-
118,450
5,472
1,980
-
-
-
-
-
342,760
1,741
353,208
1,741
-
-
-
1,741
353,208
-
328,856
103,580
26,000
12,887
273
327,096
105,680
29,476
6,315
273
327,096
-
-
-
-
-
105,680
29,476
6,315
273
-
-
-
-
-
(Dollars in thousands)
Financial assets:
$
Cash and cash equivalents
Time deposits with other banks
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans receivable, net of
allowance
Accrued interest receivable
Financial liabilities:
Non-maturity deposits
Time deposits
Borrowings
Junior subordinated debentures
Accrued interest payable
December 31, 2011
Fair
Value
Carrying
Amount
Quoted Prices in Significant
Active Markets
for Identical
Assets
(Level I)
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
37,500 $
100
96,324
4,220
1,874
37,500 $
100
96,324
4,345
1,874
37,500 $
100
1,316
-
-
- $
-
95,008
4,345
1,874
-
-
-
-
-
332,495
1,735
334,403
1,735
-
-
-
1,735
334,403
-
314,570
110,806
26,000
12,887
301
314,571
113,527
29,686
6,613
301
314,571
-
-
-
-
-
113,527
29,686
6,613
301
-
-
-
-
-
(Dollars in thousands)
Financial assets:
$
Cash and cash equivalents
Time deposits with other banks
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans receivable, net of
allowance
Accrued interest receivable
Financial liabilities:
Non-maturity deposits
Time deposits
Borrowings
Junior subordinated debentures
Accrued interest payable
F-16
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – SECURITIES
Available for Sale
The amortized cost and fair value of securities available for sale as of December 31, 2012 and 2011 are summarized
as follows:
(Dollars in thousands)
December 31, 2012
State and political subdivisions
Mortgage-backed securities:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
27,341 $
594 $
(194) $
27,741
U.S. government-sponsored enterprises
90,487
671
(449)
90,709
Equity securities-financial services industry and
other
December 31, 2011
State and political subdivisions
Mortgage-backed securities:
U.S. government-sponsored enterprises
Private mortgage-backed securities
Equity securities-financial services industry and
other
$
$
$
460
118,288 $
16
1,281 $
(45)
(688) $
431
118,881
19,706 $
883 $
(19) $
20,570
71,684
2,423
786
58
1,312
95,125 $
1
1,728 $
(472)
(4)
(34)
(529) $
71,998
2,477
1,279
96,324
Securities with a carrying value of approximately $26.1 million and $21.5 million at December 31, 2012 and 2011,
respectively, were pledged to secure public deposits and for other purposes required or permitted by applicable laws
and regulations.
The amortized cost and fair value of securities available for sale at December 31, 2012 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)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total state and political subdivisions
Mortgage-backed securities:
U.S. government-sponsored enterprises
Equity securities-financial services industry and other
Total available for sale securities
$
$
Amortized
Cost
Fair
Value
- $
-
1,837
25,504
27,341
90,487
460
118,288 $
-
-
1,895
25,846
27,741
90,709
431
118,881
Gross gains on sales of securities available for sale were $1.8 million and $685 thousand and gross losses were $20
thousand and $40 thousand for the years ended December 31, 2012 and 2011, respectively. In addition, we realized
gross gains of $8 thousand on debt securities that were called during the year ended December 31, 2012.
F-17
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporarily Impaired Securities
The following table shows our investments’ gross unrealized losses and fair value with unrealized losses that are not
deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual
available for sale securities have been in a continuous unrealized loss position, at December 31, 2012 and 2011.
(Dollars in thousands)
December 31, 2012
State and political subdivisions
Mortgage-backed securities:
U.S. government-sponsored
enterprises
Equity securities-financial services
industry and other
Total temporarily impaired
securities
December 31, 2011
State and political subdivisions
Mortgage-backed securities:
U.S. government-sponsored
enterprises
Private mortgage-backed
securities
Equity securities-financial services
industry and other
Total temporarily impaired
securities
Less Than Twelve
Months
Fair
Value
Gross
Unrealized
Losses
Twelve Months or More
Total
Fair
Value
Gross
Unrealized
Losses
Gross
Fair Unrealized
Value
Losses
$
9,788 $
(194) $
- $
- $ 9,788 $
(194)
31,901
(305)
4,658
(144)
36,559
(449)
106
(37)
109
(8)
215
(45)
$
41,795 $
(536) $
4,767 $
(152) $ 46,562 $
(688)
$
115 $
(2) $
124 $
(17) $
239 $
(19)
34,576
(472)
518
-
(4)
-
-
-
-
-
34,576
(472)
518
(4)
1,025
(34)
1,025
(34)
$
35,209 $
(478) $
1,149 $
(51) $ 36,358 $
(529)
As of December 31, 2012, we reviewed our investment portfolio for indications of impairment. This review includes
analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial
condition and near-term prospects of the issuer, including any specific events which may influence the operations of
the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt and equity
securities is evaluated based upon our investment strategy for the particular type of security and our cash flow needs,
liquidity position, capital adequacy and interest rate risk position. For each security (including but not limited to
those whose fair value is less than their amortized cost basis), a review is conducted to determine if an other-than-
temporary impairment has occurred.
State and Political Subdivisions
At December 31, 2012, the decline in fair value and the related unrealized losses for the Company’s state and
political subdivisions portfolio were caused by changes in interest rates and spreads and were not the result of credit
quality. At December 31, 2012, there were seventeen securities with a fair value of $9.8 million that had an
unrealized loss that amounted to $194 thousand. The average loss amounts to 1.9% of amortized cost at December
31, 2012. These securities typically have maturity dates greater than ten years and the fair values are more sensitive
to changes in market interest rates. As of December 31, 2012, the Company did not intend to sell and it was not
more-likely-than-not that the Company would be required to sell any of these securities before recovery of their
amortized cost basis. Therefore none of the Company’s state and political subdivision securities at December 31,
2012 were deemed to be other than temporarily impaired.
F-18
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2011, the improvement in market value and the unrealized losses for the Company’s state and
political subdivisions portfolio were caused by changes in interest rates and spreads and were not the result of credit
quality. At December 31, 2011, there were two securities with a fair value of $239 thousand that had an unrealized
loss that amounted to $19 thousand. The average loss amounts to 7.2% of book value at December 31, 2011. These
securities typically have maturity dates greater than ten years and the fair values are more sensitive to changes in
market interest rates. As of December 31, 2011, the Company did not intend to sell and it was not more-likely-than-
not that the Company would be required to sell any of these securities before recovery of their amortized cost basis.
Therefore none of the Company’s state and political subdivision securities at December 31, 2011 were deemed to be
other than temporarily impaired.
Mortgage-Backed Securities
At December 31, 2012, the decline in fair value and the unrealized losses for our mortgage-backed securities backed
by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not
credit quality. At December 31, 2012, there were twenty-two securities with a fair value of $36.6 million that had
an unrealized loss that amounted to $449 thousand. As of December 31, 2012, we did not intend to sell and it was
not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized
cost basis. Therefore, none of our mortgage-backed securities at December 31, 2012, were deemed to be other-than-
temporarily impaired.
At December 31, 2011, the improvement in fair value and the unrealized losses for our mortgage-backed securities
backed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions
and not credit quality. At December 31, 2011, there were 17 securities with a fair value of $34.6 million that had an
unrealized loss that amounted to $472 thousand. As of December 31, 2011, we did not intend to sell and it was not
more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost
basis. Therefore, none of our mortgage-backed securities at December 31, 2011, were deemed to be other-than-
temporarily impaired.
Equity Securities
Our investments in marketable equity securities consist primarily of one equity portfolio fund and common stock of
entities in the financial services industry. At December 31, 2012, there were two securities with a fair value of $215
thousand that had an unrealized loss of $45 thousand. These securities have been adversely impacted by the effects
of the current economic environment on the financial services industry. We evaluated each of the underlying banks
for credit impairment based on its financial condition and performance. Based on our evaluation and our ability and
intent to hold those investments for a reasonable period of time sufficient for a forecasted recovery of amortized
cost, we do not consider these investments to be other-than-temporarily impaired at December 31, 2012. We
continue to closely monitor the performance of the securities we own as well as the impact from any further
deterioration in the economy or in the banking industry that may adversely affect these securities. We will continue
to evaluate them for other-than-temporary impairment, which could result in a future non-cash charge to earnings.
At December 31, 2011 the Company’s investments in marketable equity securities consisted primarily of a mutual
fund, one equity portfolio fund and common stock of entities in the financial services industry. At December 31,
2011, there were three securities that had an unrealized loss. These securities, other than the mutual fund which had
a fair value of $849 thousand and an unrealized loss of $1 thousand at December 31, 2011, have been adversely
impacted by the effects of the current economic environment on the financial services industry. We evaluated each
of the underlying banks for credit impairment based on its financial condition and performance. Based on our
evaluation and the Company’s ability and intent to hold those investments for a reasonable period of time sufficient
for a forecasted recovery of amortized cost, the Company does not consider these investments to be other-than-
temporarily impaired at December 31, 2011. We continue to closely monitor the performance of the securities we
own as well as the impact from any further deterioration in the economy or in the banking industry that may
adversely affect these securities. The Company will continue to evaluate them for other-than-temporary impairment,
which could result in a future non-cash charge to earnings.
During 2011, the Company recognized a $231 thousand pre-tax ($183 thousand after-tax, or $0.06 per share) non-
cash other-than-temporarily impaired charge related to an equity portfolio fund and common stock. The Company
recognized a $144 thousand charge on the equity portfolio fund comprised of common stocks of bank holding
companies that had an amortized cost of $250 thousand and a termination date of December 2012. The additional
F-19
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$87 thousand impairment charge was recognized on a common stock that had an amortized cost of $230 thousand.
The impairment was recognized because the market value of this security was below the Company’s amortized cost
for an extended period of time along with credit deterioration in some of the underlying collateral and it was not
believed the market value of this security would recover to the Company’s amortized cost.
Held to Maturity Securities
The amortized cost and fair value of securities held to maturity as of December 31, 2012 and 2011 are summarized
as follows:
(Dollars in thousands)
December 31, 2012
State and political subdivisions
December 31, 2011
State and political subdivisions
$
$
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
5,221 $
260 $
(9) $
5,472
4,220 $
125 $
- $
4,345
There were two securities in the held to maturity portfolio on December 31, 2012 with unrealized losses and one
security in the held to maturity portfolio on December 31, 2011 with unrealized losses.
The amortized cost and fair value of securities held to maturity at December 31, 2012 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)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total held to maturity securities
Amortized
Cost
Fair
Value
$
$
1,223 $
-
1,307
2,691
5,221 $
1,223
-
1,331
2,918
5,472
Temporarily Impaired Securities
The following table shows our held to maturity investments’ gross unrealized losses and fair value with unrealized
losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of
time that individual held to maturity securities have been in a continuous unrealized loss position, at December 31,
2012. There were no held to maturity securities with unrealized losses at December 31, 2011.
F-20
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less Than Twelve Months
Twelve Months or More
Total
(Dollars in thousands)
December 31, 2012
State and political
subdivisions
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Gross
Fair Unrealized
Value
Losses
$
830 $
(9) $
- $
- $
830 $
(9)
As of December 31, 2012, we reviewed our held to maturity investment portfolio for indications of impairment. This
review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the
financial condition and near-term prospects of the issuer, including any specific events which may influence the
operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt
and equity securities is evaluated based upon our investment strategy for the particular type of security and our cash
flow needs, liquidity position, capital adequacy and interest rate risk position. For each security whose fair value is
less than their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has
occurred.
State and Political Subdivisions
At December 31, 2012, the decline in fair value and the unrealized losses for our state and political subdivisions
portfolio were caused by changes in interest rates and spreads and were not the result of credit quality. At December
31, 2012, there were two securities with a fair value of $830 thousand that had an unrealized loss that amounted to
$9 thousand. These securities typically have maturity dates greater than 10 years and the fair values are more
sensitive to changes in market interest rates. As of December 31, 2012, we did not intend to sell and it was not
more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost
basis. Therefore, none of our state and political subdivision securities at December 31, 2012, were deemed to be
other-than-temporarily impaired.
NOTE 5 – LOANS
The composition of net loans receivable at December 31, 2012 and 2011 is as follows:
(Dollars in thousands)
December 31, 2012
December 31, 2011
Commercial and industrial loans
Construction
Commercial real estate
Residential real estate
Consumer and other
Unearned net loan origination fees
Allowance for loan losses
Net loans receivable
$
$
16,158 $
7,004
225,345
98,301
1,255
348,063
(327)
(4,976)
342,760 $
13,711
8,520
216,191
100,175
1,336
339,933
(228)
(7,210)
332,495
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 $695 thousand and $852 thousand at December 31, 2012 and
2011, respectively.
F-21
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING
RECEIVABLES
The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable
for the years ended December 31, 2012 and 2011:
(Dollars in
thousands)
December 31, 2012
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
December 31, 2011
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
$
$
$
$
Commercial
and
Industrial
Commercial Residential
Real
Estate
Real
Estate
Consumer
and
Other
Construction
Unallocated
Total
304 $
(169)
2
134
271 $
436 $
(24)
6
(114)
304 $
294 $
(1,538)
-
1,467
223 $
4,833 $
(3,904)
78
2,388
3,395 $
1,183 $
(909)
516
(496)
294 $
3,760 $
(2,057)
8
3,122
4,833 $
987 $
(998)
-
880
869 $
798 $
(12)
-
201
987 $
9 $
(62)
27
64
38 $
56 $
(40)
19
(26)
9 $
783 $
-
-
(603)
180 $
164 $
-
-
619
783 $
7,210
(6,671)
107
4,330
4,976
6,397
(3,042)
549
3,306
7,210
The following table presents the balance in the allowance of loan losses at December 31, 2012 and 2011
disaggregated on the basis of our impairment method by class of loans receivable along with the balance of loans
receivable by class disaggregated on the basis of our impairment methodology:
Allowance for Loan Losses
Loans Receivable
Balance
Related to
Loans
Balance
Related to
Loans
Individually
Collectively
Evaluated for
Evaluated for
Individually
Collectively
Evaluated for
Evaluated for
(Dollars in thousands)
Balance
Impairment
Impairment
Balance
Impairment
Impairment
December 31, 2012
Commercial and industrial $
271 $
27 $
223
3,395
869
38
180
42
230
66
-
-
244
181
3,165
803
38
-
$
16,158 $
27 $
7,004
225,345
98,301
1,255
-
2,462
12,682
3,351
-
-
16,131
4,542
212,663
94,950
1,255
-
$
4,976 $
365 $
4,431
$
348,063 $
18,522 $
329,541
Commercial and industrial $
304 $
16 $
294
4,833
987
9
783
50
1,572
319
-
-
288
244
3,261
668
9
-
$
13,711 $
32 $
8,520
216,191
100,175
1,336
-
2,458
22,722
2,482
-
-
13,679
6,062
193,469
97,693
1,336
-
$
7,210 $
1,957 $
4,470
$
339,933 $
27,694 $
312,239
F-22
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
December 31, 2011
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An age analysis of loans receivable which were past due as of December 31, 2012 and 2011 is as follows:
Recorded
Investment
(Dollars in thousands)
Past Due
Past Due
90 Days (a)
Due
Current
Receivables Accruing
30-59 Days
60-89 days
Than
Total Past
Financing
and
Greater
Total
> 90 Days
December 31, 2012
Commercial and industrial
$
Construction
Commercial real estate
Residential real estate
Consumer and other
- $
-
1,103
207
12
- $
-
1,303
127
3
27 $
27 $
16,131 $
16,158 $
2,462
12,127
3,315
144
2,462
14,533
3,649
159
4,542
7,004
210,812
225,345
94,652
1,096
98,301
1,255
Total
$
1,322 $
1,433
$
18,075 $
20,830 $
327,233 $
348,063 $
December 31, 2011
Commercial and industrial
$
428 $
Construction
Commercial real estate
Residential real estate
Consumer and other
558
5,238
940
17
- $
-
137
-
1
32 $
460 $
13,251 $
13,711 $
3,243
19,311
2,482
18
3,801
24,686
3,422
36
4,719
191,505
96,753
1,300
8,520
216,191
100,175
1,336
Total
$
7,181 $
138
$
25,086 $
32,405 $
307,528 $
339,933 $
-
-
65
-
143
208
-
785
-
-
18
803
(a) includes loans greater than 90 days past due and still accruing and non-accrual loans.
Loans for which the accrual of interest has been discontinued at December 31, 2012 and 2011 were:
(Dollars in thousands)
December 31, 2012
December 31, 2011
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total
$
$
27
2,462
12,062
3,315
1
17,867
$
$
32
2,458
19,311
2,482
-
24,283
F-23
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In determining the adequacy of the allowance for loan losses, the Company estimates losses based on the
identification of specific problem loans through its credit review process and also estimates losses inherent in other
loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan
officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are
assigned loss component factors that reflect the Company’s loss estimate for each group of loans. It is
management’s and the board of directors’ responsibility to oversee the lending process to ensure that all credit risks
are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-
performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-
rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific
information related to expected future cash flows and operating results, collateral values, financial condition,
payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio
delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative
measurements.
The Company’s risk-rating system as defined below is consistent with the system used by regulatory agencies and
consistent with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the
regulatory definitions of classified assets.
Pass: This category represents loans performing to contractual terms and conditions and the primary source
of repayment is adequate to meet the obligation. The Company has five categories within the Pass
classification depending on strength of repayment sources, collateral values and financial condition of the
borrower.
Special Mention: This category represents loans performing to contractual terms and conditions; however
the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in
financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal
and interest or fees due.
Substandard: This category represents loans that the primary source of repayment has significantly
deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments.
The weaknesses require close supervision by the Company’s management and there is a distinct possibility
that the Company could sustain some loss if the deficiencies are not corrected. Such weaknesses could
jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be
expected or evident, however, loan repayment is inadequately supported by current financial information or
pledged collateral.
Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added
provision that collection or liquidation in full is highly questionable and not reasonably assured. The
probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss.
The validity of the extraneous factors must be continuously monitored. Once these factors are questionable
the loan should be considered for full or partial charge-off.
Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as
active assets of the Company is not warranted. Such loans are fully charged off.
F-24
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables illustrate the Company’s corporate credit risk profile by creditworthiness category as of
December 31, 2012 and 2011:
(Dollars in thousands)
December 31, 2012
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
December 31, 2011
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Pass
Special
Mention
Substandard
Doubtful
Total
$
$
$
$
15,860 $
4,542
203,106
93,563
1,112
318,183 $
13,103 $
5,057
180,862
95,491
1,336
295,849 $
269 $
-
4,648
253
-
5,170 $
398 $
-
6,987
494
-
7,879 $
23 $
2,462
17,256
4,485
143
24,369 $
202 $
3,463
27,769
4,190
-
35,624 $
6 $
-
335
-
-
341 $
8 $
-
573
-
-
581 $
16,158
7,004
225,345
98,301
1,255
348,063
13,711
8,520
216,191
100,175
1,336
339,933
F-25
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects information regarding the Company’s impaired loans as of December 31, 2012 and
2011 and for the years then ended:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
December 31, 2012
With no related allowance recorded:
Construction
Commercial real estate
Residential real estate
$
2,421 $
10,466
2,675
2,743 $
13,581
2,768
- $
-
-
3,217 $
13,131
2,192
With an allowance recorded:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Total:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
December 31, 2011
With no related allowance recorded:
27
42
2,216
675
27
2,463
12,682
3,350
27
42
3,135
675
27
2,785
16,716
3,443
27
42
230
66
27
42
230
66
177
66
5,792
558
177
3,283
18,923
2,750
$
18,522 $
22,971 $
365 $
25,133 $
Construction
Commercial real estate
Residential real estate
$
2,062 $
10,346
1,758
2,331 $
12,932
1,758
- $
-
-
3,030 $
11,547
1,235
With an allowance recorded:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Total:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
32
396
12,376
724
32
396
12,399
724
32
2,458
22,722
2,482
-
27,694 $
32
2,727
25,331
2,482
-
30,572 $
$
16
50
1,572
319
16
50
1,572
319
-
1,957 $
72
1,633
9,335
676
72
4,663
20,882
1,911
-
27,528 $
41
81
91
-
-
64
26
-
41
145
117
303
1
198
58
-
-
150
1
-
1
348
59
-
408
The average recorded investment in impaired loans is calculated using the average of impaired loans over the past
five quarter-end periods. 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.
F-26
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to
borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the
loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to
maximize collection.
The following table presents the recorded investment in troubled debt restructured loans as of December 31, 2012
and 2011 based on payment performance status:
(Dollars in thousands)
December 31, 2012
Performing
Non-performing
Total
December 31, 2011
Performing
Non-performing
Total
$
$
$
$
Commercial Real
Estate
Commercial &
Industrial
Residential Real
Estate
Total
$
603
1,829
2,432 $
$
5,592
2,682
8,274 $
- $
6
6 $
8 $
-
8 $
5 $
228
233 $
- $
-
- $
608
2,063
2,671
5,600
2,682
8,282
Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures
in this footnote. As of December 31, 2012, we have not committed to lend additional amounts to customers with
outstanding loans that are classified as troubled debt restructurings.
The following tables summarize troubled debt restructurings that occurred during the year ended December 31, 2012
and 2011:
(Dollars in thousands)
December 31, 2012
Residential real estate
December 31, 2011
Commercial Real Estate
Number of
Loans
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
2 $
1 $
233 $
233
1,535 $
1,535
The troubled debt restructurings described above did not require an allocation of the allowance for credit losses for
the years ended December 31, 2012 and 2011. No charge-offs were recorded during the twelve month periods
ending December 31, 2012 and 2011.
F-27
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the troubled debt restructurings for which there was a payment default within
twelve months following the date of the restructuring for the year ended December 31, 2012 and 2011:
(Dollars in thousands)
Number of Loans
Recorded Investment
December 31, 2012
Residential real estate
December 31, 2011
Commercial Real Estate
1
$
3
$
228
4,345
Loans are considered to be in payment default once it is greater than 30 days contractually past due under the
modified terms. The troubled debt restructurings described above that subsequently defaulted resulted in a net
allocation of the allowance for credit losses of $5 thousand and $262 thousand for the years ended December 31,
2012 and 2011, respectively. There were no charge-offs on these defaulted troubled debt restructurings during the
twelve month periods ended December 31, 2012 and 2011.
NOTE 7 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2012 and 2011 are as follows:
(Dollars in thousands)
2012
2011
Land and land improvements
Building and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Assets in progress
Accumulated depreciation
Premises and equipment, net
$
$
1,978 $
5,907
401
6,908
118
15,312
(8,836)
6,476 $
1,978
5,898
393
6,754
251
15,274
(8,496)
6,778
During the years ended December 31, 2012 and 2011, depreciation expense totaled $677 thousand and $597
thousand, respectively.
NOTE 8 – DEPOSITS
The components of deposits at December 31, 2012 and 2011 are as follows:
(Dollars in thousands)
2012
2011
Demand, non-interest bearing
Savings, money market and interest-bearing demand
Time deposits less than $100 thousand
Time deposits $100 thousand and over
Total deposits
$
$
48,375 $
280,481
66,472
37,108
432,436 $
44,762
269,808
70,868
39,938
425,376
F-28
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2012, the scheduled maturities of time deposits are as follows (in thousands):
(Dollars in thousands)
Within one year
One to two years
Two to three years
Three to four years
After four years
NOTE 9 – BORROWINGS
$
$
60,850
9,324
8,391
22,422
2,593
103,580
At December 31, 2012, the Bank had secured borrowing potential with the Federal Home Loan Bank of New York
(“FHLBNY”) for borrowings of up to $56.1 million and a $4.0 million line of credit at Atlantic Central Bankers
Bank (“ACBB”). The borrowings at the FHLBNY are secured by a pledge of qualifying residential and commercial
mortgage loans, having an aggregate unpaid principal balance of approximately $73.8 million. At December 31,
2012, the Bank had the ability to borrow up to $30.0 million at FHLBNY and $4.0 million at ACBB.
Long-Term Borrowings
At December 31, 2012 and 2011 the Bank had the following long-term borrowings from the FHLBNY (in
thousands):
Maturity Date
Initial
Conversion Date
December 7, 2016
June 21, 2017
December 7, 2017
December 26, 2017
December 26, 2017
December 7, 2008
June 21, 2008
December 7, 2012
December 26, 2009
December 26, 2010
Interest
Rate
4.00%
4.60%
3.97%
3.66%
3.79%
Balance at December 31,
2012
2011
$
$
5,000 $
6,000
5,000
5,000
5,000
26,000 $
Maturities of debt in years subsequent to December 31, 2012 are as follows (in thousands):
Within one year
One to two years
Two to three years
Three to four years
Four to five years
After five years
$
$
5,000
6,000
5,000
5,000
5,000
26,000
-
-
-
5,000
21,000
-
26,000
The above borrowings identified with an Initial Conversion Date are convertible notes that contain an option which
allows the FHLBNY, 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 FHLBNY at their current market rates. The Bank has the option to repay these advances, if
converted, without penalty.
F-29
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – JUNIOR SUBORDINATED DEBENTURES AND MANDATORY REDEEMABLE CAPITAL
DEBENTURES
On June 28, 2007, Sussex Capital Trust II, a Delaware statutory business trust and a non-consolidated wholly-owned
subsidiary of the Company, issued $12.5 million of variable rate capital trust pass-through securities to investors.
Sussex Capital Trust II purchased $12.9 million of variable rate junior subordinated deferrable interest debentures
from Sussex Bancorp. The debentures are the sole asset of the Trust. The terms of the junior subordinated
debentures are the same as the terms of the capital securities. Sussex Bancorp has also fully and unconditionally
guaranteed the obligations of the Trust under the capital securities. The variable interest rate reprices quarterly at
the three month LIBOR plus 1.44% and was 1.75% and 1.99% at December 31, 2012 and 2011, respectively. The
capital securities are redeemable by Sussex Bancorp during the first five years at a redemption price of 103.5% of
par for the first year and thereafter on a sliding scale down to 100% of par on or after September 15, 2012, in whole
or in part or earlier if the deduction of related interest for federal income taxes is prohibited, classification as Tier I
capital is no longer allowed, or certain other contingencies arise. The capital securities must be redeemed upon final
maturity of the subordinated debentures on September 15, 2037.
NOTE 11 – LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Company has operating lease agreements expiring in various years through 2020. The Company has the option
to extend the lease agreements for additional lease terms. The Company is responsible to pay all real estate taxes,
insurance, utilities and maintenance and repairs on its leased facilities.
Future minimum lease payments by year are as follows as of December 31, 2012 (in thousands):
2013
2014
2015
2016
2017
Thereafter
$
$
466
277
200
65
19
39
1,066
Rent expense was $541 thousand and $497 thousand for the years ended December 31, 2012 and 2011, respectively.
NOTE 12 – EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan and Trust (the “401(k) Plan”) for its employees. Non-highly compensated
employees may contribute up to the statutory limit of 75% of their salary to the 401(k) Plan. Highly compensated
employees are restricted to a contribution up to 7% of their salary. The Company provides a 50% match of the
employee's contribution up to 6% of the employee's annual salary. The amount charged to expense related to the
401(k) Plan for the years ended December 31, 2012 and 2011 was $126 thousand and $119 thousand, respectively.
The Company also maintains nonqualified Supplemental Salary Continuation Plans (the “Supplemental Plans”)
covering the Company’s former Chairman and a former executive officer of the Company. Under the provisions of
the Supplemental Plans, the Company has executed agreements providing the officers a retirement benefit.
Payments from the Supplemental Plans for the Chairman began in May of 2008 and the other executive started in
April of 2010. For the years ended December 31, 2012 and 2011, $82 thousand and $76 thousand, respectively was
charged to expense in connection with the Plans.
In March of 2005, the Board of Directors approved an Executive Incentive and Deferred Compensation Plan (the
“Incentive Plan”). The purpose of the Incentive Plan is to motivate and reward participants for achieving bank
financial and strategic goals as well as to provide specified benefits to a select group of management or highly
compensated employees who contribute materially to the continued growth, development and future business
success of the Company. No incentive compensation was recorded under the Incentive Plan for the years ended
F-30
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012 and 2011. Participants may elect to receive their award or defer compensation in a deferral
account which will earn interest at the average interest rate earned by the Company in its investment portfolio,
compounded monthly. For the years ended December 31, 2012 and 2011, the carrying value of deferred
compensation was $147 thousand and $66 thousand, respectively.
In July 2006, the Board of Directors adopted a Director Deferred Compensation Agreement for both the Bank and
the Company (the “DCA”). Under the terms of the DCA, a director may elect to defer all or a portion of his retainer
and fees for the coming year. Under the DCA, only the payment of the compensation earned is deferred, and there
is no deferral of the expense in the Company’s financial statements related to the participant’s deferred
compensation, which will be charged to the Company’s income statement as an expense in the period in which the
participant earned the compensation. The deferred amounts are credited with earnings at a rate equal to the average
interest rate earned by the Company on its investment portfolio or at a rate that tracks the performance of the
Company’s common stock. The participant’s benefit will be distributed to the participant or his beneficiary upon a
change in control of the Company, the termination of the DCA, the occurrence of an unforeseeable emergency, the
termination of service or the participant’s death or disability. Upon distribution, a participant’s benefit will be paid
in monthly installments over a period of ten years. For the years ended December 31, 2012 and 2011, $315
thousand and $177 thousand, respectively, have been deferred.
The Company had an Employee Stock Ownership Plan (the “ESOP Plan”) for the benefit of all employees who met
the eligibility requirements set forth in the ESOP Plan. The amount of employer contributions to the ESOP Plan
was at the discretion of the Board of Directors. There were no contributions charged to expense for the years ended
December 31, 2012 and 2011. The ESOP Plan was dissolved in December 2011 and distributions to all active
participants were made in the Company’s common stock. At December 31, 2011 there were no shares left in the
Plan.
NOTE 13 – COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
The components of other comprehensive (loss) income, both before tax and net of tax, are as follows:
Year Ended December 31, 2012 Year Ended December 31, 2011
Net of
Before
Tax
Tax
Net of
Tax
Before
Tax
Tax
Effect
Tax
Effect
Other comprehensive (loss) income:
Unrealized gains on available for sale
securities
Reclassification adjustment for gains on
securities transactions included in net
income
Total other comprehensive (loss)
income
$
1,193 $
477 $
716 $
1,534 $
614 $
920
(1,799)
(720)
(1,079)
(414)
(166)
(248)
$
(606) $
(243) $
(363) $
1,120 $
448 $
672
F-31
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings per share:
(In thousands, except share and per share data)
Year Ended December 31, 2012:
Basic earnings per share:
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
Net income applicable to common stockholders
$
735
3,261,809 $
0.23
Effect of dilutive securities:
Unvested stock awards
Diluted earnings per share:
Net income applicable to common stockholders and
assumed conversions
Year Ended December 31, 2011:
Basic earnings per share:
Net income applicable to common stockholders
Effect of dilutive securities:
Unvested stock awards
Diluted earnings per share:
Net income applicable to common stockholders and
assumed conversions
$
$
$
-
25,208
735
3,287,017 $
0.22
2,470
3,256,183 $
0.76
-
71,196
2,470
3,327,379 $
0.74
Options to purchase 55,751 and 111,034 shares of common stock were outstanding during December 31, 2012 and
2011, respectively, but were not included in the computation of diluted EPS because the options’ exercise price was
greater than the average market price of the common shares.
NOTE 15 – STOCK INCENTIVE PLANS
During 2005, the stockholders approved the 2004 Equity Incentive Plan (the “2004 Plan”) to provide equity
incentives to selected persons. Awards may be granted to employees, officers, directors, consultants and advisors of
the Company or subsidiary. Awards granted under the 2004 Plan may be either stock options or restricted stock
awards and are designated at the time of grant. Options granted under the 2004 Plan to directors, consultants and
advisors are non-qualified stock options. Options granted to officers and other employees may be incentive stock
options or non-qualified stock options. Restricted stock awards may be made to any plan participant. As of
December 31, 2012, there were 37,683 shares available for future grants under the 2004 Plan.
F-32
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Company's restricted stock grants activity for the years ended December 31, 2012 and
2011 are as follows:
2012
Weighted
Average
Grant Date
Fair Value
Number of
Shares
2011
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Non-vested restricted stock, beginning of year
Granted
Forfeited
Vested
$
115,729
37,496
(2,234)
(27,847)
Non-vested restricted stock, end of year
123,144
$
4.86
4.97
5.27
5.15
4.83
101,991 $
25,305
(3,858)
(7,709)
115,729 $
4.71
6.10
5.89
6.47
4.86
Total stock-based compensation related to restricted stock awards was $153 thousand and $94 thousand for the years
ended December 31, 2012 and December 31, 2011, respectively. As of December 31, 2012 and 2011, there were
$477 thousand and $456 thousand, respectively, of unrecognized compensation cost related to non-vested restricted
stock awards which is expected to be recognized over a weighted average period of 3.0 years and 4.1 years.
Remaining non-vested restricted stock grants at December 31, 2012 are expected to vest as follows:
2013
2014
2015
2016
2017
Number of shares
38,619
36,164
28,990
17,408
1,963
123,144
Restricted stock activity for the years ended December 31, 2012 and 2011 are as follows:
Accumulated shares granted
Vested during the year
Number of Shares
2012
2011
174,089
27,847
138,826
7,709
During 1995, the stockholders approved a stock option plan for nonemployee directors and employees (the “1995
Plan”) and in 2001 the stockholders approved the 2001 Stock Option Plan (the “2001 Plan”) to provide equity
incentives to employees, officers and directors. Both of these plans expired ten years following their approval, and
therefore, at December 31, 2012 there were no authorized shares left to be granted in either plan.
Options granted under the 2001 Plan and the 2004 Plan to officers and other employees and which are incentive
stock options, are subject to limitations under Section 422 of the Internal Revenue Code. The option price under
each such grant shall not be less than the fair market value on the date of the grant. No option will be granted for a
term in excess of ten years. The Company established a vesting schedule that must be satisfied before the options
may be exercised.
F-33
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2012, there are 29,382 options outstanding which will expire between January 2013 and
October 2014 under the 1995 Plan and 26,369 options outstanding under the 2001 Plan which will expire between
January 2013 and October 2015. There were no options outstanding under the 2004 Plan at December 31, 2012.
Stock option transactions under all plans are summarized as follows:
Number of
Shares
Weighted
Average Exercise
Price per Share
Weighted
Average
Contractual Term
Aggregate
Intrinsic Value
Outstanding, December 31, 2010
Options forfeited
Outstanding, December 31, 2011
Options expired
Options forfeited
Outstanding, December 31, 2012
Exercisable, December 31, 2012
116,075 $
(5,041)
111,034
(9,089)
(46,194)
55,751 $
55,751 $
12.33
13.94
12.25
9.12
12.60
12.48
12.48
1.24 $
1.24 $
-
-
The following table summarizes information about stock options outstanding and exercisable at December 31, 2012:
Exercise
Price
Number
Outstanding
Remaining
Contractual Life
Number
Exercisable
8.86
8.99
12.63
13.39
14.67
16.45
8,660
10,273
6,708
7,634
16,886
5,590
55,751
0.0
0.8
2.8
2.0
1.0
1.8
8,660
10,273
6,708
7,634
16,886
5,590
55,751
There were no stock options exercised during 2012 and options outstanding and exercisable had no intrinsic value at
December 31, 2012.
NOTE 16 – INCOME TAXES
The Company and its subsidiary are subject to U.S. federal and state income tax. The components of income tax
expense for the years ended December 31, 2012 and 2011 are as follows:
(Dollars in thousands)
2012
2011
Current:
Federal
State
Deferred:
Federal
State
(22) $
22
-
(375)
46
(329)
(329) $
744
271
1,015
(269)
(109)
(378)
637
$
$
F-34
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the statutory federal income tax at a rate of 34% to the income tax expense (benefit) included
in the statements of income and comprehensive income for the years ended December 31, 2012 and 2011 is as
follows:
(Dollars in thousands)
2012
2011
Federal income tax at statutory rate
Tax exempt interest
State income tax, net of federal income tax
effect
Bank owned life insurance
Other
$
$
138
(398)
45
(134)
20
(329)
34 % $
(98)
11
(33)
5
(81)% $
1,056
(399)
106
(142)
16
637
The components of the net deferred tax asset at December 31, 2012 and 2011 are as follows:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Foreclosed real estate
AMT credit
Intangible assets
Restricted stock
Other-than-temporary impairment
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Prepaid expenses
Unrealized gain on securities, available for sale
Total deferred tax liabilities
Net deferred tax asset
2012
2011
$
$
1,987 $
584
565
532
34
142
96
254
4,194
(260)
(151)
(237)
(648)
3,546 $
34 %
(13)
4
(5)
1
21 %
2,880
504
89
-
40
77
96
131
3,817
(209)
(154)
(480)
(843)
2,974
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 years ended December 31, 2012 and 2011 is summarized as follows:
(Dollars in thousands)
Balance, beginning
Disbursements
Repayments and other
Balance, ending
2012
2011
$
$
4,699 $
1,199
(573)
5,325 $
4,266
865
(432)
4,699
F-35
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain related parties of the Company provided legal services and appraisal services to the Company. Legal
services provided by related parties totaled $144 thousand and $24 thousand for the years ended December 31, 2012
and 2011, respectively. Appraisal services provided by related parties totaled $37 thousand and $13 thousand for
the years ended December 31, 2012 and 2011, respectively. The Company also paid rent to related parties for an
office location in the amount of $181 thousand and $177 thousand for the years ended December 31, 2012 and 2011,
respectively.
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, 2012 and 2011 is as follows:
(Dollars in thousands)
2012
2011
Commitments to grant loans
Unfunded commitments under lines of credit
Outstanding standby letters of credit
$
34,459 $
32,265
1,766
10,308
26,079
1,576
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Since many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may
include personal or commercial real estate, accounts receivable, inventory and equipment.
Outstanding letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments.
These standby letters of credit expire within twelve months, although many have automatic renewal provisions. The
credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan
commitments. The Company requires collateral and personal guarantees supporting these letters of credit as deemed
necessary. Management believes that the proceeds obtained through a liquidation of such collateral and
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, 2012 and 2011
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 $1.7 million at December 31, 2012.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
F-36
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk-weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets,
and of Tier I capital to average assets. Management believes, as of December 31, 2012, that the Bank meets all capital
adequacy requirements to which they are subject.
As of December 31, 2012, the most recent notification from the Federal Deposit Insurance Corporation categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios at December 31, 2012 and 2011 are presented below:
Actual
For Capital Adequacy
Purposes
under Prompt
Corrective Action
Provisions
To be Well Capitalized
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2012
Total capital (to risk-weighted assets): $
Tier I capital (to risk-weighted assets):
Tier I capital (to average assets):
51,672
47,096
47,096
14.13% $
12.88
9.27
>29,246
>14,623
>20,311
>8.00% $
>4.00
>4.00
>36,558
>21,935
>25,389
>10.00%
>6.00
>5.00
As of December 31, 2011
Total capital (to risk-weighted assets): $
Tier I capital (to risk-weighted assets):
Tier I capital (to average assets):
50,541
46,091
46,091
14.31% $
13.05
9.29
>28,260
>14,130
>19,853
>8.00% $
>4.00
>4.00
>35,325
>21,195
>24,816
>10.00%
>6.00
>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, 2012, the Bank’s funds available for payment of dividends were $41.6 million. Accordingly, $7.5
million of the Company’s equity in the net assets of the Bank was restricted as of December 31, 2012.
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.
F-37
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – PARENT COMPANY ONLY FINANCIAL
Condensed financial information pertaining only to the parent company, Sussex Bancorp, is as follows:
BALANCE SHEETS
(Dollars in thousands)
Assets
Cash
Investment in subsidiary
Securities available for sale
Loans
Foreclosed real estate
Accrued interest and other assets
Total Assets
Liabilities and Stockholders' Equity
Other liabilities
Junior subordinated debentures
Stockholders' equity
Total Liabilities and Stockholders' Equity
$
$
$
$
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands)
Interest and fees on loans
Interest on investments
Net realized gain (loss) on sale of securities
Net gain on sale of foreclosed real estate
Impairment charge on equity securities
Interest expense on debentures
Other expenses
Loss before income tax benefit and equity in
undistributed net income of subsidiaries
Income tax benefit
Loss before equity in undistributed net
income of subsidiaries
Equity in undistributed net income of subsidiaries
Net Income
Other comprehensive (loss) income:
Unrealized losses on available for sale securities arising during the period
Reclassification adjustment for (gain) loss on securities transactions included in net income
Income tax (benefit) expense related to other comprehensive (loss) income
Other comprehensive (loss) income, net of income taxes
Comprehensive income
F-38
December 31,
2012
2011
979 $
50,680
324
-
-
1,480
53,463 $
204 $
12,887
40,372
53,463 $
704
50,044
340
598
99
1,130
52,915
126
12,887
39,902
52,915
Year Ended December 31,
2012
2011
$
$
60 $
11
2
3
-
(241)
(232)
(397)
135
(262)
997
735
57
13
(2)
-
(231)
(222)
(132)
(517)
176
(341)
2,811
2,470
(2)
(40)
(2)
(1)
(5)
730 $
233
77
270
2,740
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income
Year Ended December 31,
2011
2012
$
735 $
2,470
Adjustments to reconcile net income to net cash used in operating activities:
Impairment charge on equity securities
Net change in other assets and liabilities
Equity in undistributed net income of subsidiaries
Net Cash Used in Operating Activities
Cash Flows from Investing Activities:
Securities available for sale:
Sales
Maturities, calls and principal repayments
Net decrease in loans
Net Cash Provided by Investing Activities
Cash Flows from Financing Activities:
Purchase of treasury stock
Net Cash Used In Financing Activities
-
(116)
(997)
(378)
7
4
697
708
(55)
(55)
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning of Year
Cash and Cash Equivalents - End of Year
275
704
979 $
$
231
(409)
(2,811)
(519)
67
30
270
367
-
-
(152)
856
704
NOTE 21 – CONTINGENCIES
In the normal course of business, the Company is subject to various lawsuits involving matters generally incidental
to its business. Management is of the opinion that the ultimate liability, if any, resulting from any pending actions or
proceedings will not have a material effect on the financial condition or results of operations of the Company.
F-39
EXHIBIT LIST
Exhibit
Number
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
21.1†
23.1†
31.1†
31.2†
32.1†
Description
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report
on Form 10-Q filed with the SEC on August 15, 2011.)
Amended and Restated By-laws (incorporated by reference to Exhibit 3.II to the Current Report on
Form 8-K filed with the SEC on April 28, 2010.)
1995 Incentive Stock Option Plan (incorporated by reference to Exhibit 99.6 to the Registration
Statement on Form 8-B filed with the SEC on December 13, 1996.)
2001 Stock Option Plan (incorporated by reference to Exhibit B to the Definitive Proxy Statement on
Schedule 14-A filed with the SEC on March 19, 2001.)
2004 Equity Incentive Plan (incorporated by reference to Exhibit 10 to the Current Report on Form 8-
K filed with the SEC on April 29, 2005.)
Amended and Restated Director Deferred Compensation Agreement (incorporated by reference to
Exhibit 10 to the Current Report on Form 8-K filed with the SEC on December 19, 2008.)
Amended and Restated Executive Incentive and Deferred Compensation Plan (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on January 26, 2010.)
Employment Agreement by and between the Company, the Bank and Donald L. Kovach, dated July
15, 2009 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the
SEC on July 20, 2009.)
Salary Continuation Agreement, dated March 15, 2000, by and between the Company and Donald L.
Kovach (incorporated by reference to Exhibit 10.8 to Annual Report on Form 10-K filed with the
SEC on March 16, 2011.)
Amendment #1 to the Salary Continuation Agreement with Donald L. Kovach dated June 11, 2002
(incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K filed with the SEC on
March 16, 2011.)
Amendment #2 to the Salary Continuation Agreement with Donald L. Kovach dated January 7, 2004
(incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on
March 23, 2004.)
Amendment #3 to the Salary Continuation Agreement with Donald L. Kovach dated October 17,
2007 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the
SEC on November 14, 2007.)
Employment Agreement by and between Tri-State Insurance Agency, Inc. and George Lista dated
September 1, 2006 (incorporated by reference to Exhibit 10.A to the Current Report on Form 8-K
filed with the SEC on September 7, 2006.)
Employment Agreement by and between the Company, Bank and Anthony Labozzetta dated January
20, 2010 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on January 26, 2010.)
Supplemental Executive Retirement Agreement, dated July 20, 2011, by and between Sussex
Bancorp and Anthony J. Labozzetta (incorporated by reference to Exhibit 10.1 to the Current Report
on Form 8-K filed with the SEC on July 26, 2011.)
Employment Agreement by and between the Company, Bank and Steven M. Fusco dated June 23,
2010 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on June 29, 2010.)
List of Subsidiaries.
Consent of ParenteBeard LLC.
Certification of pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
101**
Financial statements from the Annual Report on Form 10-K of Sussex Bancorp for the year ended
December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive
Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements
of Cash Flows and (v) Notes to Consolidated Financial Statements.
_________
† Filed herewith.
* Management contract or compensatory plan or arrangement.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not
filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of
1934, as amended, and otherwise are not subject to liability under those sections.
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President and CEO’s Message
Anthony Labozzetta, President and CEO
We are excited about our accomplishments this past year.
As we entered 2012, we were mindful of the potential
headwinds: flat economic growth, prolonged low interest
rates, flat yield curve, intensified competition and a more
burdensome regulatory environment. These difficult challenges
became part of the 2012 operating environment for financial
institutions. Nevertheless, we made substantial progress
toward our goals of reducing problem assets and building
our business, which strengthened our Company’s financial
condition and improved our shareholder value.
INVESTOR INFORMATION
Stock Information
Sussex Bancorp’s Common Stock is
traded on the Nasdaq Global Market
using the symbol “SBBX.”
Registrar and Transfer Agent
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10007
800-937-5449
www.amstock.com
Independent Auditors
ParenteBeard LLC
350 5th Ave.
68th Floor
New York, NY 10118-0110
General Counsel
Windels Marx, Lane and Mittendorf
120 Albany Street Plaza, 6th Floor
New Brunswick, NJ 08901
SEC Counsel
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Investor Information
Steven M. Fusco, CFO
200 Munsonhurst Road
Franklin, NJ 07416
973-827-2914
Information on Sussex Bancorp, Inc. can also
be found at: www.sussexbank.com
LOCATIONS
Branches
Andover
165 Route 206
Andover, NJ 07821
973-786-5150
Augusta
100 Route 206
Augusta, NJ 07822
973-940-7950
Franklin
399 Route 23
Franklin, NJ 07416
973-827-2404
Montague
266 Clove Road
Montague, NJ 07827
973-293-3488
Newton
15 Trinity Street
Newton, NJ 07860
973-383-2211
Offices
Port Jervis
20-22 Fowler Street
Port Jervis, NY 12771
845-856-7400
Executive Office
200 Munsonhurst Road
Franklin, NJ 07416
973-827-2914
Tri-State Insurance Agency
96 Route 206
Augusta, NJ 07822
973-579-6776
201 West Passaic Street
Suite 406
Rochelle Park, NJ 07662
201-490-4695
Regional Lending Office
201 West Passaic Street
Suite 406
Rochelle Park, NJ 07662
201-490-4695
Sparta
33 Main Street
Sparta, NJ 07871
973-729-7223
Vernon
7 Church Street
Vernon, NJ 07462
973-764-6175
Wantage
378 Route 23
Wantage, NJ 07461
973-875-9957
Warwick
65-67 Main Street
Warwick, NY 10990
845-986-6021
DIRECTORS AND
EXECUTIVE OFFICERS
Board of Directors:
SUSSEX BANK and SUSSEX BANCORP
Edward J. Leppert
Chairman of the Board
Anthony Labozzetta
President and Chief Executive Officer
Anthony S. Abbate
Patrick Brady
Richard Branca
Katherine H. Caristia
Mark J. Hontz
Donald L. Kovach
Rev. Timothy Marvil
Robert McNerney
Richard W. Scott
John E. Ursin
Executive and Senior Officers:
SUSSEX BANK
Anthony Labozzetta
President and
Chief Executive Officer
Steven M. Fusco
Executive Vice President and
Chief Financial Officer
Kurt Breitenstein
Executive Vice President and
Chief Lending Officer
Vito Giannola
Executive Vice President and
Chief Retail Officer
Neill Schreyer
Senior Vice President and
Chief Credit Officer
Elizabeth Martin
Senior Vice President and
IT/Operations Officer
Barbara Muccia
Vice President and
Human Resources Director
Sarah Roskowsky
Vice President and
Marketing Director/Public Relations
TRI-STATE INSURANCE AGENCY
George Lista
President and
Chief Executive Officer
7042_SB_2012ARcover-Rev3-12.indd 2
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AnnuAl RepoRt to ShAReholdeRS
Closer to our customers
399 Route 23 | po Box 353 | Franklin, nJ 07416 | 973-827-2914 | sussexbank.com
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