-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kx9CbULkuZWqo4BYWKmbCARJia/d+1157Uq5puqwJrljLYhsg2QZtZpus3/MLpBw /kWAD0fbGPGJo/BvfzHbWg== 0000914317-08-002724.txt : 20081114 0000914317-08-002724.hdr.sgml : 20081114 20081114102055 ACCESSION NUMBER: 0000914317-08-002724 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081114 DATE AS OF CHANGE: 20081114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSSEX BANCORP CENTRAL INDEX KEY: 0001028954 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 223475473 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1015 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12569 FILM NUMBER: 081187656 BUSINESS ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 BUSINESS PHONE: 9738272914 MAIL ADDRESS: STREET 1: 399 RTE 23 CITY: FRANKLIN STATE: NJ ZIP: 07416 10-Q 1 form10q-94877_sussex.htm FORM 10-Q form10q-94877_sussex.htm
 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549
___________________

FORM 10-Q

(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2008


[  ]
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
22-3475473
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
200 Munsonhurst Rd., Franklin, NJ
07416
(Address of principal executive offices)
(Zip Code)

 (973) 827-2914
(Registrant's telephone number, including area code)

______________________________________________________________
  (Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]               No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Accelerated filer [  ]
Non-accelerated filer [  ]
Smaller reporting company [X]
   
(Do not check if a smaller reporting company)
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [   ]                No [X]

As of November 7, 2008 there were 3,298,367 shares of common stock, no par value, outstanding, as adjusted for the 6.5% stock dividend declared October 15, 2008.

 

 



SUSSEX BANCORP
FORM 10-Q

INDEX



 



-2-




PART I - FINANCIAL INFORMATION
            
             
Item 1 - Financial Statements
            
             
SUSSEX BANCORP
  
CONSOLIDATED BALANCE SHEETS
  
(Dollars In Thousands)
  
(Unaudited)
  
             
ASSETS
  
September 30, 2008
    
December 31, 2007
  
             
Cash and due from banks
   $ 10,537     $ 7,985  
Federal funds sold
     15,470       3,790  
   Cash and cash equivalents
     26,007       11,775  
                 
Interest bearing time deposits with other banks
     100       100  
Trading securities
     13,519       14,259  
Securities available for sale
     64,487       48,397  
Federal Home Loan Bank Stock, at cost
     2,111       2,032  
                 
Loans receivable, net of unearned income
     312,330       300,646  
   Less:  allowance for loan losses
     5,080       5,140  
        Net loans receivable
     307,250       295,506  
                 
Foreclosed real estate
     3,931       -  
Premises and equipment, net
     8,697       9,112  
Accrued interest receivable
     2,058       2,035  
Goodwill
     2,820       2,820  
Other assets
     8,099       7,496  
                 
Total Assets
   $ 439,079     $ 393,532  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
Liabilities:
                
   Deposits:
                
      Non-interest bearing
   $ 40,430     $ 36,625  
      Interest bearing
     316,231       271,913  
   Total Deposits
     356,661       308,538  
                 
Borrowings
     36,160       35,200  
Accrued interest payable and other liabilities
     2,572       2,467  
Junior subordinated debentures
     12,887       12,887  
                 
Total Liabilities
     408,280       359,092  
                 
Stockholders' Equity:
                
   Common stock, no par value, authorized 5,000,000 shares;
                
       issued shares 3,311,312 in 2008 and 3,104,374 in 2007;
                
       outstanding shares 3,298,367 in 2008 and 3,093,699 in 2007
     28,119       26,651  
   Retained earnings
     3,676       7,774  
   Accumulated other comprehensive income (loss)
     (996 )     15  
                 
Total Stockholders' Equity
     30,799       34,440  
                 
Total Liabilities and Stockholders' Equity
   $ 439,079     $ 393,532  
                 
                 
See Notes to Unaudited Consolidated Financial Statements
  


-3-



SUSSEX BANCORP
  
CONSOLIDATED STATEMENTS OF INCOME
  
(Dollars In Thousands Except Per Share Data)
  
(Unaudited)
  
                         
   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2008
    
2007
    
2008
    
2007
  
INTEREST INCOME
                        
   Loans receivable, including fees
   $ 4,887     $ 5,038     $ 14,335     $ 14,572  
   Securities:
                                
      Taxable
     631       439       1,698       1,239  
      Tax-exempt
     248       255       710       762  
   Federal funds sold
     111       193       223       354  
   Interest bearing deposits
     1       1       2       4  
         Total Interest Income
     5,878       5,926       16,968       16,931  
                                 
INTEREST EXPENSE
                                
   Deposits
     2,219       2,548       6,417       7,111  
   Borrowings
     377       241       1,132       706  
   Junior subordinated debentures
     135       226       459       460  
        Total Interest Expense
     2,731       3,015       8,008       8,277  
                                 
        Net Interest Income
     3,147       2,911       8,960       8,654  
PROVISION FOR LOAN LOSSES
     279       324       569       868  
        Net Interest Income after Provision for Loan Losses
     2,868       2,587       8,391       7,786  
                                 
OTHER INCOME
                                
   Service fees on deposit accounts
     409       362       1,111       1,016  
   ATM and debit card fees
     123       109       348       300  
   Insurance commissions and fees
     576       618       1,972       2,136  
   Investment brokerage fees
     22       26       117       239  
   Holding gains (losses) on trading securities
     (8 )     194       13       192  
   Gain on sale of securities, available for sale
     -       10       152       10  
   Impairment write-down on equity securities
     (3,526 )     -       (3,526 )     -  
   Other
     129       149       445       396  
      Total Other Income
     (2,275 )     1,468       632       4,289  
                                 
OTHER EXPENSES
                                
   Salaries and employee benefits
     1,842       1,792       5,697       5,403  
   Occupancy, net
     315       319       977       932  
   Furniture, equipment and data processing
     372       372       1,119       1,066  
   Stationary and supplies
     50       46       141       138  
   Professional fees
     140       120       337       424  
   Advertising and promotion
     92       174       379       415  
   Insurance
     42       41       127       135  
   FDIC assessment
     95       9       280       26  
   Postage and freight
     34       36       118       124  
   Amortization of intangible assets
     14       15       43       78  
   Other
     443       360       1,261       1,119  
      Total Other Expenses
     3,439       3,284       10,479       9,860  
                                 
       Income (Loss) before Income Taxes
     (2,846 )     771       (1,456 )     2,215  
PROVISION FOR INCOME TAXES
     181       238       575       664  
      Net Income (Loss)
   $ (3,027 )   $ 533     $ (2,031 )   $ 1,551  
                                 
EARNINGS (LOSS) PER SHARE
                                
   Basic
   $ (0.92 )   $ 0.16     $ (0.62 )   $ 0.46  
   Diluted
   $ (0.92 )   $ 0.16     $ (0.62 )   $ 0.46  
                                 
See Notes to Unaudited Consolidated Financial Statements
  


-4-


SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2008 and 2007
(Dollars In Thousands, Except Per Share Amounts)
  
(Unaudited)
  
                                     
                     
Accumulated
              
   
Number of
                
Other
          
Total
  
   
Shares
    
Common
    
Retained
    
Comprehensive
    
Treasury
    
Stockholders'
  
   
Outstanding
    
Stock
    
Earnings
    
Income (Loss)
    
Stock
    
Equity
  
                                     
Balance December 31, 2006
     3,152,374     $ 27,306     $ 7,415     $ (129 )   $ -     $ 34,592  
Adjustment to opening balance, net of tax, for the adoption
                                                
   of SFAS No. 159 (see Note 8)
     -       -       (262 )     262       -       -  
Adjusted opening balance, January 1, 2007
     3,152,374       27,306       7,153       133       -       34,592  
                                                 
Comprehensive income:
                                                
   Net income
     -       -       1,551       -       -       1,551  
   Change in unrealized gains on securities
                                                
        available for sale, net of tax
     -       -       -       (177 )     -       (177 )
Total Comprehensive Income
                                             1,374  
                                                 
Treasury shares purchased
     (30,800 )     -       -       -       (397 )     (397 )
Treasury shares retired
     -       (397 )     -       -       397       -  
Exercise of stock options
     20,851       256       -       -       -       256  
Income tax benefit of stock options exercised
     -       18       -       -       -       18  
Restricted stock vested during the period (a)
     1,925       -       -       -       -       -  
Compensation expense related to stock option and
                                                
   restricted stock grants
     -       54       -       -       -       54  
Compensation expense related to stock awards
     1,000       15       -       -       -       15  
Dividends on common stock ($0.20 per share)
     -       -       (667 )     -       -       (667 )
                                                 
Balance September 30, 2007
     3,145,350     $ 27,252     $ 8,037     $ (44 )   $ -     $ 35,245  
                                                 
Balance December 31, 2007
     3,093,699     $ 26,651     $ 7,774     $ 15     $ -     $ 34,440  
Comprehensive loss:
                                                
   Net loss
     -       -       (2,031 )     -       -       (2,031 )
   Change in unrealized losses on securities
                                                
        available for sale, net of tax
     -       -       -       (1,011 )     -       (1,011 )
Total Comprehensive Loss
                                             (3,042 )
                                                 
Treasury shares purchased
     (4,765 )     -       -       -       (40 )     (40 )
Treasury shares retired
     -       (40 )     -       -       40       -  
Exercise of stock options
     3,606       34       -       -       -       34  
Income tax benefit of stock options exercised
     -       1       -       -       -       1  
Restricted stock vested during the period (a)
     4,025       -       -       -       -       -  
Compensation expense related to stock option and
                                                
   restricted stock grants
     -       60       -       -       -       60  
Dividends on common stock ($0.20 per share)
     -       -       (654 )     -       -       (654 )
6.5% stock dividend
     201,802       1,413       (1,413 )     -       -       -  
                                                 
Balance September 30, 2008
     3,298,367     $ 28,119     $ 3,676     $ (996 )   $ -     $ 30,799  
                                                 

(a) Balance of unvested shares of restricted stock; 12,945 in 2008 and 10,675 in 2007
          

             
             
See Notes to Unaudited Consolidated Financial Statements


-5-


SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

   
Nine Months Ended September 30,
  
   
2008
    
2007
  
Cash Flows from Operating Activities
            
Net income (loss)
   $ (2,031 )   $ 1,551  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                
   Provision for loan losses
     569       868  
   Provision for depreciation and amortization
     775       770  
   Net change in trading securities
     740       2,488  
   Impairment on equity securities
     3,526       -  
   Net amortization of securities premiums and discounts
     8       5  
   Net realized gain on sale of securities
     (152 )     (10 )
   Earnings on investment in life insurance
     (78 )     (79 )
   Compensation expense for stock options and stock awards
     60       69  
   (Increase) decrease in assets:
                
       Accrued interest receivable
     (23 )     (136 )
       Other assets
     107       (615 )
   Increase in accrued interest payable and other liabilities
     106       647  
                 
Net Cash Provided by Operating Activities
     3,607       5,558  
                 
Cash Flows from Investing Activities
                
Securities available for sale:
                
   Purchases
     (33,720 )     (15,475 )
   Proceeds from sale of securities
     5,240       2,335  
   Maturities, calls and principal repayments
     7,322       6,886  
Net increase in loans
     (16,560 )     (31,740 )
Proceeds from sale of foreclosed real estate
     316       -  
Purchases of premises and equipment
     (317 )     (1,795 )
Increase in FHLB stock
     (79 )     (170 )
                 
Net Cash Used in Investing Activities
     (37,798 )     (39,959 )
                 
Cash Flows from Financing Activities
                
Net increase in deposits
     48,123       24,661  
Proceeds from borrowings
     3,000       8,000  
Repayments of borrowings
     (2,040 )     (6,038 )
Proceeds from junior subordinated debentures
     -       12,887  
Repayments of junior subordinated debentures
     -       (5,155 )
Proceeds from the exercise of stock options
     34       256  
Purchase of treasury stock
     (40 )     (397 )
Dividends paid
     (654 )     (667 )
                 
Net Cash Provided by Financing Activities
     48,423       33,547  
                 
Net Increase(Decrease) in Cash and Cash Equivalents
     14,232       (854 )
Cash and Cash Equivalents - Beginning
     11,775       22,165  
Cash and Cash Equivalents - Ending
   $ 26,007     $ 21,311  
Supplementary Cash Flows Information
                
Interest paid
   $ 8,207     $ 7,920  
Income taxes paid
   $ 384     $ 1,227  
Supplementary Schedule of Noncash Investing and Financing Activities
                
Foreclosed real estate acquired in settlement of loans
   $ 4,247     $ -  
                 
See Notes to Unaudited Consolidated Financial Statements
  


-6-

SUSSEX BANCORP
Notes to Consolidated Financial Statements (Unaudited)


Note 1 - Basis of Presentation

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., and Tri-State Insurance Agency, Inc. (“Tri-State”) a full service insurance agency located in Sussex County, New Jersey.  Tri-State’s operations are considered a separate segment for financial disclosure purposes.  All inter-company transactions and balances have been eliminated in consolidation.  Sussex Bank is also a 49% partner of SussexMortgage.com LLC, an Indiana limited liability company and mortgage banking joint venture with National City Mortgage, Inc.  The Bank operates ten banking offices, eight located in Sussex County, New Jersey and two in Orange County, New York.  The Bank has also received regulatory approval for a branch location in Pike County, Pennsylvania.

 The Company is subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the "FRB").  The Bank's deposits are insured by the Deposit Insurance Fund ("DIF") of the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits.  The operations of the Company and the Bank are subject to the supervision and regulation of the FRB, FDIC and the New Jersey Department of Banking and Insurance (the "Department") and the operations of Tri-State are subject to supervision and regulation by the Department.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for full year financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature.  Operating results for the nine-month period ended September 30, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto that are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007.


Note 2 - - Stockholders’ Equity and Subsequent Events

On October 15, 2008, the Board of Directors declared a 6.5% common stock dividend payable on November 12, 2008 to shareholders of record as of October 29, 2008.  Accordingly, 201,802 shares of common stock will be issued to the Company’s stockholders and $1,413,000 will be transferred from retained earnings to common stock.  The effect of the stock dividend has been retroactively reflected as of September 30, 2008 in the consolidated balance sheet and the consolidated statement of stockholders’ equity.  The earnings per share amounts, stock options, restricted stock grants and dividend per share amounts disclosed in the consolidated financial statements and related footnote reflect the effect of the stock dividend as noted.


Note 3 –Other Than Temporary Impairment

As previously announced in an 8-K filing on September 8, 2008, Sussex Bancorp held Fannie Mae and Freddie Mac perpetual preferred stock at September 30, 2008 with a cost basis of approximately $3.8 million.  These securities were subject to an other than temporary impairment (“OTTI”) charge.  On September 7, 2008, the Federal Housing Finance Agency placed both Fannie Mae and Freddie Mac under conservatorship.  Although this action did not eliminate the equity in Fannie Mae and Freddie Mac represented by the perpetual preferred stock, it has negatively impacted the value of the perpetual preferred stock.   The fair value of these securities at September 30, 2008 was $284 thousand and the OTTI charge taken in the quarter ended September 30, 2008 was $3.5 million.

At September 30, 2008, Sussex Bank’s capital ratios were all above the level required to be categorized as a “well capitalized” bank.  Sussex Bank’s total risk-based capital, Tier I capital and leverage ratios were 12.16%, 10.91% and 8.41%, respectively.

While the reported results for the three and nine month periods reflect the effects of the OTTI charge, they do not reflect the change in tax treatment enacted as part of the Emergency Economic Stabilization Act of 2008 (the “Act”), which was

-7-

adopted on October 3, 2008. Under the Act, the Company is permitted to deduct the loss as an ordinary loss for tax purposes, thereby offsetting a portion of the Company’s ordinary income. However, since the Act was not enacted until the fourth quarter, the Company can not recognize this tax benefit as part of its third quarter results. The tax benefit will be recognized in the fourth quarter, and it is expected to amount to approximately $1.3 million or $0.40 per share, based on the average shares outstanding for the quarter ended September 30, 2008 and adjusted for the 6.5% stock dividend.


Note 4 – Earnings (Loss) per Share

Basic earnings (loss) per share are calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period, as adjusted for the dividend discussed in Note 2.  Diluted earnings (loss) per share reflects additional common shares that would have been outstanding if dilutive potential common shares (nonvested restricted stock grants and stock options) had been issued, as well as any adjustment to income that would result from the assumed issuance of potential common shares that may be issued by the Company. For the three months and nine months ended September 30, 2008, the Company had 9,237 and 14,363 shares, respectively, not included in the below calculation due to their anti-dilutive effect on earnings per share.  Potential common shares related to stock options are determined using the treasury stock method.

The following table sets forth the computations of basic and diluted earnings (loss) per share as retroactively adjusted for the 6.5% stock dividend declared October 15, 2008.

   
Three Months Ended September 30, 2008
    
Three Months Ended September 30, 2007
  
               
Per
                
Per
  
   
Income
    
Shares
    
Share
    
Income
    
Shares
    
Share
  
(In thousands, except per share data)
  
(Numerator)
  
(Denominator)
  
Amount
    
(Numerator)
  
(Denominator)
  
Amount
  
Basic earnings (loss) per share:
                                    
     Net income (loss) applicable to common stockholders
   $ (3,027 )     3,299     $ (0.92 )   $ 533       3,363     $ 0.16  
Effect of dilutive securities:
                                                
     Stock options
     -     -               -     25          
Diluted earnings (loss) per share:
                                                
     Net income (loss) applicable to common stockholders
                                              
        and assumed conversions
   $ (3,027 )   3,299   $ (0.92 )   $ 533     3,388   $ 0.16  
                                                 
             
   
Nine Months Ended September 30, 2008
    
Nine Months Ended September 30, 2007
  
                   
Per
                    
Per
  
   
Income
    
Shares
    
Share
    
Income
    
Shares
    
Share
  
(Dollars in thousands, except per share data)
  
(Numerator)
  
(Denominator)
  
Amount
    
(Numerator)
  
(Denominator)
  
Amount
  
Basic earnings (loss) per share:
                                                
     Net income (loss) applicable to common stockholders
 $ (2,031 )     3,300     $ (0.62 )   $ 1,551       3,366     $ 0.46  
Effect of dilutive securities:
                                                
     Stock options
     -     -               -     33          
Diluted earnings (loss) per share:
                                                
     Net income (loss) applicable to common stockholders
                                                
        and assumed conversions
   $ (2,031 )   3,300   $ (0.62 )   $ 1,551     3,399   $ 0.46  
                                                 

Note 5 - Comprehensive Income

The components of other comprehensive income (loss) and related tax effects are as follows:

   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
(Dollars in thousands)
2008
    
2007
    
2008
    
2007
  
Unrealized holding gain (loss) on available for sale securities
   $ (4,357 )   $ 382     $ (5,060 )   $ (283 )
Reclassification adjustments for gains (losses) included in net income
     (3,526 )     10 (10)     (3,374 )     10  
     Net unrealized gain (loss)
     (831 )     372       (1,686 )     (293 )
Tax effect
     333       (150 )     675       116  
     Other comprehensive income (loss), net of tax
   $ (498 )   $ 222     $ (1,011 )   $ (177 )

 

-8-




Note 6 – Segment Information

      The Company’s insurance agency operations are managed separately from the traditional banking and related financial services that the Company also offers.  The insurance agency operation provides commercial, individual, and group benefit plans and personal coverage.

   
Three Months Ended September 30, 2008
  
Three Months Ended September 30, 2007
  
   
Banking and
    
Insurance
          
Banking and
    
Insurance
        
(Dollars in thousands)
  
Financial Services
    
Services
    
Total
  
Financial Services
    
Services
    
Total
  
Net interest income from external sources
   $ 3,147     $ -     $ 3,147     $ 2,911     $ -     $ 2,911  
Other income from external sources
     (2,851 )     576       (2,275 )     850       618       1,468  
Depreciation and amortization
     241       12       253       247       10       257  
Income (loss) before income taxes
     (2,822 )     (24 )     (2,846 )     756       15       771  
Income tax expense (benefit) (1)
     191       (10 )     181       232       6       238  
Total assets
     435,932       3,147       439,079       388,650       3,284       391,934  

             
   
Nine Months Ended September 30, 2008
  
Nine Months Ended September 30, 2007
  
   
Banking and
    
Insurance
          
Banking and
    
Insurance
        
(Dollars in thousands)
  
Financial Services
    
Services
    
Total
  
Financial Services
    
Services
    
Total
  
Net interest income from external sources
   $ 8,960     $ -     $ 8,960     $ 8,654     $ -     $ 8,654  
Other income from external sources
     (1,340 )     1,972       632       2,153       2,136       4,289  
Depreciation and amortization
     741       34       775       740       30       770  
Income (loss) before income taxes
     (1,540 )     84       (1,456 )     1,922       293       2,215  
Income tax expense (1)
     541       34       575       547       117       664  
Total assets
     435,932       3,147       439,079       388,650       3,284       391,934  
                                                 
 (1) Insurance services calculated at statutory tax rate of 40%


Note 7 - Stock-Based Compensation

The Company currently has stock-based compensation plans in place for directors, officers, employees, consultants and advisors of the Company.   Under the terms of these plans the Company may grant restricted shares and stock options for the purchase of the Company’s common stock.  The stock-based compensation is granted under terms determined by the Compensation Committee of the Board of Directors.  Stock options granted have a maximum term of ten years, generally vest over periods ranging between one and four years, and are granted with an exercise price equal to the fair market value of the common stock on the date the options are granted.  Restricted stock is valued at the market value of the common stock on the date of grant and generally vests between two and five years.  All dividends paid on restricted stock, whether vested or unvested, are granted to the shareholder.

During the first nine months of 2008 and 2007, the Company expensed $60 thousand and $54 thousand, respectively, in stock-based compensation under stock option plans and restricted stock awards, including $12 thousand in 2008 and $15 thousand in 2007 related to previous grants under stock option plans.  No stock options have been granted in 2008.  As of September 30, 2008, all unrecognized compensation expense for stock option plans has been expensed.
 
Information regarding the Company’s stock option plans as of September 30, 2008 was as follows, as adjusted for the 6.5% stock dividend:

         
Weighted
    
Weighted
        
   
Number of
    
Average Exercise
    
Average
    
Aggregate Intrinsic
  
   
Shares
    
Price Per Share
    
Contractual Term
    
Intrinsic Value
  
Options outstanding, beginning of year
     231,974     $ 12.31              
   Options exercised
     (3,840 )     8.80              
   Options forfeited
     (9,531 )     11.69              
Options outstanding, end of quarter
     218,603     $ 12.32       6.88     $ 436  
Options exercisable, end of quarter
     218,603     $ 12.32       6.88     $ 436  
Option price range at end of quarter
   $ 6.88 to $16.45                          
Option price range for exercisable shares
   $ 6.88 to $16.45                          

The total intrinsic value or fair market price over the exercise price, of stock options exercised was $7 thousand during the first nine months of 2008.

-9-

Information regarding the Company’s restricted stock activity as of September 30, 2008, as adjusted for the 6.5% stock dividend, was as follows:

         
Weighted Average
  
   
Number of
    
Grant Date
  
   
Shares
    
Fair Value
  
Restricted stock, beginning of year
     11,371     $ 14.14  
     Granted
     7,237       9.77  
     Forfeited
     (533 )     13.03  
     Vested and stock dividend
     (5,130 )     13.80  
Restricted stock, end of quarter
     12,945     $ 12.68  

Compensation expense recognized for restricted stock was $48 thousand for the first nine months of 2008.  At September 30, 2008, unrecognized compensation expense for non-vested restricted stock was $128 thousand, which is expected to be recognized over an average period of 2.9 years.

Note 8 - Guarantees

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit.  Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers.  The Company, generally, holds collateral and/or personal guarantees supporting these commitments.  The Company had $2,343,000 of undrawn standby letters of credit outstanding as of September 30, 2008.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The amount of the liability as of September 30, 2008 for guarantees under standby letters of credit issued is not material.

Note 9 - Adoption of SFAS 157 and 159

The Company elected to early adopt Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, including an amendment of FASB Statement No. 115 and FASB Statement No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements.  SFAS No. 159, which was issued in February 2007, generally permits the measurement of selected eligible financial instruments at fair value at specified election dates, subject to the conditions set forth in the standard, one of which is a requirement to adopt all the requirements of SFAS No. 157 at the early adoption date of SFAS No. 159 or earlier.

On January 1, 2007, the Company elected to early adopt SFAS No. 159 for 28, or 20.3%, of its 138 available for sale securities, or $14.4 million of its $23.2 million in mortgage-backed securities, and reclassified them as trading securities.  At December 31, 2006, it was the Company’s intent to hold these investments until maturity or market price recovery and the Company classified the securities as available for sale.  In the weeks following the filing of the Company’s annual report on Form 10-K, the Company evaluated the impact of the adoption of each of the statements on the Company’s consolidated balance sheets and consolidated statements of income.  The purposes weighing most heavily in favor of adoption of SFAS No. 159 included the potential net-interest margin improvements afforded by the election and the balance sheet management flexibility which the Company has achieved.  The Company selected these mortgage-backed securities primarily on the basis of yield.

The following table summarizes the impact of adopting SFAS No. 159 for certain investment securities:

   
Balance Sheet
    
Balance Sheet
    
Balance Sheet
  
   
1/1/2007 prior
    
Adjustment
    
1/1/2007 after
  
(Dollars in thousands)
to adoption
    
Pretax
    
FVO adoption
  
Securities, available for sale, at amortized cost
   $ 54,851     $ (14,828 )   $ 40,023  
Net unrealized losses on securities available for sale
     (216 )     436       220  
Securities available for sale, at fair value
     54,635       (14,392 )     40,243  
Trading securities
     -       14,392       14,392  
    $ 54,635     $ -     $ 54,635  
Pretax cumulative effect of adoption of the fair value option
           $ (436 )        
Increase in deferred tax assets
             174          
Cumulative effect of adoption of the fair value option (charged to retained earnings)
           $ (262 )        


-10-

The Company records trading securities at fair value.  Any holding gains and losses on those trading securities are reflected in the consolidated statement of income. The degree of judgment utilized in measuring the fair value of trading securities generally correlates to the level of pricing observability.  Pricing observability is impacted by a number of factors, including the type of asset, whether the asset has an established market and the characteristics specific to the transaction.  Trading securities with readily active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value.  Conversely, assets rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value.

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value.  Other real estate owned is evaluated at the time the loan is foreclosed upon at market value.  Market value is measured based on the value of the collateral securing these loans and assets.  The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by the Company.  Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and management’s expertise and knowledge of the client and client’s business.  Impaired loans and other real estate owned are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Under SFAS No. 157, there is a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring assets and liabilities at fair value.  The three broad levels defined by the SFAS No. 157 hierarchy are as follows:

Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2 - 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 3 - Assets and liabilities that have little to no pricing observability as of reported date.  These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following table summarizes the valuation of the Company’s assets measured at fair value by the above SFAS No. 157 pricing observability levels:
 
         
Fair Value Measurements Using:
  
         
Quoted Prices in
    
Significant
        
         
Active Markets
    
Other
    
Significant
  
   
Fair
    
for Identical
    
Observable
    
Unobservable
  
   
Value
    
Assets
    
Inputs
    
Inputs
  
(Dollars in thousands)
  
Measurements
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
At  September 30, 2008:
                        
Trading securities
   $ 13,519     $ -     $ 13,519     $ -  
Available for sale securities
     64,487       -       64,487       -  
Impaired loans
     9,629       -       -       9,629  
Other real estate owned
     3,931       -       -       3,931  
                                 
At  December 31, 2007:
                                
Trading securities
   $ 14,259     $ -     $ 14,259     $ -  
Available for sale securities
     48,397       -       48,397       -  
Impaired loans
     13,461       -       -       13,461  
Other real estate owned
     -       -       -       -  

The Company’s trading securities and available for sale securities portfolios contain investments which are all rated within the Company’s investment policy guidelines and upon review of the entire portfolio all securities are marketable and have observable pricing inputs. There was an unrealized gain on trading securities recorded on the income statement of $13 thousand for the nine months ended September 30, 2008 and $192 thousand unrealized gain for the same period in 2007.





-11-

The table below presents a reconciliation for assets measured at fair value using Level 3 significant unobservable inputs:

   
2008
  
2007
  
   
Impaired
    
Other Real
          
Impaired
    
Other Real
        
   
Loans
    
Estate Owned
    
Total
  
Loans
    
Estate Owned
    
Total
  
                                     
Beginning balance, January 1,
   $ 13,461     $ -     $ 13,461     $ 2,185     $ -     $ 2,185  
Total gains or losses (realized/unrealized):
                                                
     Included in earnings
     -       -       -       -       -       -  
     Other changes in fair value
     (612 )     -       (612 )     25       -       25  
Purchases, Issuances, and settlements
     (3,220 )     3,931       711       6,357       -       6,357  
Transfers in and/or out of Level 3
     -       -       -     -       -       -  
Ending balance, September 30,
   $ 9,629     $ 3,931     $ 13,560   $ 8,567     $ -     $ 8,567  

Impaired loans, which are measured for impairment using the fair value of collateral-dependent loans, had carrying amounts of $11.2 million and $9.1 million, with valuation allowances of $1.6 million and $502 thousand at September 30, 2008 and 2007, respectively.  For the nine month period ended September 30, 2008, a $122 thousand decrease in the provision for loan losses was recorded, as $522 thousand in impaired loans were charged-off.  In the nine month period ended September 30, 2007, impaired loans required an additional provision for loan losses of $480 thousand.

Note 10 - New Accounting Standards

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”  This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements.  This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life of Intangible Assets.”  This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R, and other GAAP.  This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited.  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In June 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”  This FSP clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders.  Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied.  This FSP is effective for fiscal years beginning after December 15, 2008.  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In June 2008, the FASB ratified EITF Issue No. 08-3, “Accounting for Lessees for Maintenance Deposits Under Lease Arrangements” (EITF 08-3). EITF 08-3 provides guidance for accounting for nonrefundable maintenance deposits.  It also provides revenue recognition accounting guidance for the lessor.  EITF 08-3 is effective for fiscal years beginning after December 15, 2008.  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (Statement 161).  Statement 161 requires entities that utilize derivative instruments to provide qualitative disclosures about their objectives and strategies for using such instruments, as well as any details of credit-risk-related contingent features contained within derivatives.  Statement 161 also requires entities to disclose additional information about the amounts and location of derivatives located within the financial statements, how the provisions of SFAS 133 have been applied, and the impact that hedges have on an entity’s financial position, financial performance, and cash flows.  Statement 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

-12-

 

In February 2008, the FASB issued a Staff Position (FSP) FAS 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP addresses the issue of whether or not these transactions should be viewed as two separate transactions or as one "linked" transaction. The FSP includes a "rebuttable presumption" that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. The FSP will be effective for fiscal years beginning after November 15, 2008 and will apply only to original transfers made after that date; early adoption will not be allowed. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

FASB statement No. 141(R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its consolidated financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008.  This new pronouncement will impact the Company’s accounting for business combinations completed beginning January 1, 2009.

FASB statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” was issued in December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after December 15, 2008. The Company is currently evaluating the potential impact the new pronouncement will have on its consolidated financial statements.

In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market.  FSP 157-3 is effective immediately and applies to our September 30, 2008 financial statements.  The application of the provisions of FSP 157-3 did not materially affect our results of operations or financial condition as of and for the periods ended September 30, 2008.

In September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP 133-1 and FIN 45-4).  FSP 133-1 and FIN 45-4 amends and enhances disclosure requirements for sellers of credit derivatives and financial guarantees.  It also clarifies that the  disclosure requirements of SFAS No. 161 are effective for quarterly periods beginning after November 15, 2008, and fiscal years that include those periods.  FSP 133-1 and FIN 45-4 is effective for reporting periods (annual or interim) ending after November 15, 2008.  The implementation of this standard will not have a material impact on our consolidated financial position and results of operation.

In September 2008, the FASB ratified EITF Issue No. 08-5, “Issuer’s Accounting for Liabilities Measured at Fair Value With a Third-Party Credit Enhancement” (EITF 08-5).  EITF 08-5 provides guidance for measuring liabilities issued with an attached third-party credit enhancement (such as a guarantee).  It clarifies that the issuer of a liability with a third-party credit enhancement should not include the effect of the credit enhancement in the fair value measurement of the liability.  EITF 08-5 is effective for the first reporting period beginning after December 15, 2008.  The Company is currently assessing the impact of EITF 08-5 on its consolidated financial position and results of operations.


Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations


MANAGEMENT STRATEGY

The Company's goal is to serve as community-oriented financial institution serving the northwestern New Jersey, northeastern Pennsylvania and Orange County, New York marketplace.  Our market presence has expanded by opening branch offices in Port Jervis and Warwick, New York.  In addition, the Company has received regulatory approval to open an office in Pike County, Pennsylvania.  While offering traditional community bank loan and deposit products and services, the Company obtains non-interest income through its Tri-State Insurance Agency, Inc. ("Tri-State") insurance brokerage operations and the sale of non-deposit products.  We report the operations of Tri-State as a separate segment from our commercial banking operations.

-13-



The Company has continued to face competition for cost effective deposits in its primary trade area. This competition has caused us to rely more heavily on promotional rate savings and time deposits than traditional deposit accounts to fund our loan portfolio and maintain liquidity. There has been a concentrated effort to increase lower costing deposits relationships with business customers to help offset the high cost of competing for deposits in the present economic environment.  Additionally, the reduction in interest rates continues to pressure our ability to increase the Company’s net interest margin.  In response, the Company closely monitors rates offered on deposit products, continues to market lower costing commercial products, through the efforts of its retail business development and loan personnel, and seeks to maximize its return on interest earning assets.   The Company has maintained its loan to deposit ratio in 2008 to within policy guidelines while focusing on its more profitable loan and deposit relationships and deemphasizing construction development loans.  Management believes this will benefit the Company’s net interest margin and profitability.


CRITICAL ACCOUNTING POLICIES

Our accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.  Disclosure of the Company’s significant accounting policies is included in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes.  Since future events and their effect cannot be determined with absolute certainty, actual results may differ from those estimates.  Management makes adjustments to its assumptions and judgments when facts and circumstances dictate.  The amounts currently estimated by us are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances.  Management believes the critical accounting policies relating to the allowance for loan losses, stock-based compensation, goodwill and other intangible assets, and investment securities impairment evaluation, encompass the most significant judgments and estimates used in preparation of our consolidated financial statements.  These estimates, judgments and policies were unchanged from the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.


FORWARD LOOKING STATEMENTS

When used in this discussion the words: “believes”, “anticipates”, “contemplates”, “expects” or similar expressions are intended to identify forward looking statements.  Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected.  Those risks and uncertainties include changes to interest rates, the ability to control costs and expenses, general economic conditions, the success of the Company’s efforts to diversify its revenue base by developing additional sources of non-interest income while continuing to manage its existing fee based business, risks associated with the quality of the Company’s assets and the ability of its borrowers to comply with repayment terms, and the risks inherent in integrating acquisitions into the Company and commencing operations in new markets.  The Company undertakes no obligation to publicly release the results of any revisions to those forward looking statements that may be made to reflect events or circumstances after this date or to reflect the occurrence of unanticipated events.







-14-



COMPARISION OF OPERATING RESULTS FOR THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Overview - The Company realized a net loss of $3.0 million for the third quarter of 2008, a decrease of $3.6 million from the $533 thousand in net income reported for the same period in 2007. Basic and diluted earnings per share for the three months ended September 30, 2008 were ($0.92) compared to $0.16 for the comparable period of 2007.

The decrease in both net income and earnings per share reflects a $3.5 million other than temporary impairment charge related to our holdings of Fannie Mae and Freddie Mac preferred stock. The reported loss does not take into account a tax benefit we will recognize in the fourth quarter, when we are able to offset the loss against our ordinary income for Federal tax purposes.  The fourth quarter benefit will be approximately $1.3 million or $0.40 per share, based on the average shares outstanding for the quarter ended September 30, 2008 and adjusted for the stock dividend.

During the quarter, our net interest income increased compared to the prior year period, as our interest income remained stable and our interest expense declined, reflecting changes in market rates offset by increases in average earning assets and average liabilities.

 
Comparative Average Balances and Average Interest Rates
 
The following table presents, on a fully taxable equivalent basis, a summary of the Company’s interest-earning assets and their average yields, and interest-bearing liabilities and their average costs for the three month period ended September 30, 2008 and 2007.
       
(Dollars in thousands)
  
2008
    
2007
  
   
Average
          
Average
    
Average
          
Average
  
Earning Assets:
  
Balance
    
Interest (1)
    
Rate (2)
    
Balance
    
Interest (1)
    
Rate (2)
  
Securities:
                                    
      Tax exempt  (3)
   $ 24,131     $ 370       6.10 %   $ 24,187     $ 329       5.40 %
      Taxable
     53,957       631       4.65 %     36,026       439       4.83 %
Total securities
     78,088       1,001       5.10 %     60,213       768       5.06 %
Total loans receivable (4)
     308,154       4,887       6.31 %     288,773       5,038       6.92 %
Other interest-earning assets
     22,653       112       1.97 %     14,959       194       5.16 %
Total earning assets
     408,895     $ 6,000       5.84 %     363,945     $ 6,000       6.54 %
                                                 
Non-interest earning assets
     32,386                       29,053                  
Allowance for loan losses
     (4,955 )                     (3,878 )                
Total Assets
   $ 436,326                     $ 389,120                  
                                                 
Sources of Funds:
                                                
Interest bearing deposits:
                                                
      NOW
   $ 57,983     $ 174       1.20 %   $ 60,917     $ 329       2.15 %
      Money market
     19,933       98       1.95 %     41,624       393       3.75 %
      Savings
     110,888       825       2.96 %     37,294       86       0.91 %
      Time
     121,689       1,122       3.67 %     141,317       1,740       4.88 %
Total interest bearing deposits
     310,493       2,219       2.84 %     281,152       2,548       3.60 %
      Borrowed funds
     36,165       377       4.08 %     20,218       241       4.65 %
      Junior subordinated debentures
     12,887       135       4.10 %     13,335       226       6.65 %
Total interest bearing liabilities
     359,545     $ 2,731       3.02 %     314,705     $ 3,015       3.80 %
                                                 
Non-interest bearing liabilities:
                                                
      Demand deposits
     40,581                       37,076                  
      Other liabilities
     2,481                       2,320                  
Total non-interest bearing liabilities
     43,062                       39,396                  
Stockholders' equity
     33,719                       35,019                  
Total Liabilities and Stockholders' Equity
   $ 436,326                     $ 389,120                  
                                                 
Net Interest Income and Margin (5)
           $ 3,269       3.18 %           $ 2,985       3.25 %
 
(1) Includes loan fee income
  
(2) Average rates on securities are calculated on amortized costs
  
(3) Fully taxable equivalent basis, using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance
  
(4) Loans outstanding include non-accrual loans
  
(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets
  

Net Interest Income - Net interest income is the difference between interest and fees on loans and other interest-earning assets and interest paid on interest-bearing liabilities.  Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities that support those assets, as well as changing interest rates when differences exist in repricing dates of assets and liabilities.

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Net interest income, on a fully taxable equivalent basis (a 39% tax rate), increased $284 thousand, or 9.5%, to $3.3 million for the three months ended September 30, 2008 from $3.0 million for the third quarter of 2007.  Total average interest earning assets increased by $45.0 million, or 12.4%, to $409.0 million for the three months ended September 30, 2008, while total interest bearing liabilities increased $44.8 million, or 14.3 %, to $359.5 million during the same three month period. The major increase in average earning assets were in the loan and investment securities portfolios, while the largest increase in interest bearing liabilities was in savings deposits.
 
The net interest margin decreased, on a fully taxable equivalent basis, by 7 basis points to 3.18% for the three months ended September 30, 2008 compared to 3.25% for the same period in 2007, as the yield on total earning assets decreased 70 basis points to 5.84% and the cost of total interest bearing liabilities decreased 78 basis points to 3.02% in the three month period ended September 30, 2008 from the same period a year earlier.  The decrease in yield on earning assets reflects the decrease in market rates of interest and the increase in non-performing loans while the decrease in cost of interest bearing liabilities is related to a shift from higher costing time deposits to a lower costing savings account product.  During 2008, the Company began offering a higher yielding savings account product linked to a demand deposit account. The goal of the program is to reduce the Company’s interest expense by increasing savings and demand deposit accounts, reducing reliance on time deposits, and increasing the Company’s total deposits.

Interest Income - Total interest income, on a fully taxable equivalent basis, was unchanged at $6.0 million for both three month periods ended September 30, 2008 and 2007.  Total interest income primarily reflects a $151 thousand decrease in interest earned on third quarter average loan receivable balances, as the yield on loan receivables decreased 61 basis points to 6.31% for the three month period ended September 30, 2008 from 6.92% in the same period in 2007. This decrease in loan receivable income and yield was offset by a $233 thousand increase in interest income earned on average investment securities.

Total interest income on securities, on a fully taxable equivalent basis, increased $233 thousand, to $1.0 million for the quarter ended September 30, 2008 from $768 thousand for the third quarter of 2007.  As the average balance of total securities increased $17.9 million, or 29.7%, the yield on securities increased 4 basis points, from 5.06% in the third quarter of 2007 to 5.10% for the third quarter of 2008.  The increase in the average balance in the securities portfolio reflects a $17.9 million increase in taxable securities and a $56 thousand decrease in tax-exempt securities, as new purchases exceeded sales, paydowns and maturities of securities.  The increase in yield was accomplished by the repricing of existing mortgage backed securities, new security purchases and the effective tax rate adjustments on tax exempt securities between the two third quarter periods.  The suspension of dividends on the Freddie Mac and Fannie Mae securities resulted in a $51 thousand reduction to income and a 38 basis point decrease in the yield on taxable securities in the third quarter of 2008.
 
The average balance in loans receivable increased $19.4 million, or 6.7%, to $308.2 million in the current three month period from $288.8 million in the same period of 2007, while the interest earned on total loans receivable decreased $151 thousand, or 3.0% from the third quarter of 2007 to the current period.  The average rate earned on loans decreased 61 basis points from 6.92% for the three months ended September 30, 2007 to 6.31% for the same period in 2008.  The increase in our loan portfolio average balance reflects our continuing efforts to build market share, while the decrease in yield is the result of increased loan competition on the basis of rate and the impact of non-accrual loans.   At September 30, 2008, non-accrual loan balances increased $3.1 million, to $10.0 million from $6.8 million at September 30, 2007.
 
Interest Expense - - The Company’s interest expense for the three months ended September 30, 2008 decreased $284 thousand, or 9.4%, to $2.7 million from $3.0 million for the same period in 2007, as the balance in average interest-bearing liabilities increased $44.8 million, or 14.3%, to $359.5 million from $314.7 million in the year ago period.  The average rate paid on total interest-bearing liabilities has decreased by 78 basis points from 3.80% for the three months ended September 30, 2007 to 3.02% for the same period in 2008.  The decrease in rate reflects the Company’s efforts to reprice higher costing time deposits into a promotional savings account product, as well as repricing borrowings and junior subordinated debentures in a declining interest rate environment.

The Company’s time deposits represent the largest component of interest-bearing deposits.  The average balance in time deposits decreased by $19.6 million, or 13.9%, to $121.7 million for the three month period ended September 30, 2008 compared to $141.3 million for the same period in 2007, while the related interest expense on time deposits decreased $618 thousand, or 35.5%, to $1.1 million from $1.7 million in the third quarter of 2007. The average rate paid on time deposits decreased 121 basis points from 4.88% for the three months ended September 30, 2007 to 3.67% for the same period in 2008 reflecting the current decrease in market interest rates and the Company’s emphasis on its new savings account product.

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In February of 2008 the Company began offering a promotional savings account product linked to a demand deposit account.  The new savings account product has been well received by customers.  Third quarter 2008 average savings balances increased by $73.6 million, or 197.3%, over the same period balances in 2007, to $110.9 million.  The yield on savings accounts increased 205 basis points to 2.96% from 0.91% between the three month periods ending September 30, 2008 and 2007, respectively.  The result was an increase of $739 thousand in savings deposit interest expense to $825 thousand for the third quarter of 2008 from $86 thousand a year earlier, while contributing to the overall decline in interest expense.

Offsetting the savings account average balance increase, money market account average balances declined $21.7 million, to $19.9 million for the three month period ended September 30, 2008 from $41.6 million one year earlier.  The yield on money market accounts declined 180 basis points from 3.75% to 1.95% during the two periods as interest expense decreased $295 thousand, or 75.1%, from $393 thousand for the three months ended September 30, 2007 to $98 thousand during the same period in 2008. The decline in yield on our money market account reflects the decline in market rates between the two comparable three month periods.

For the quarter ended September 30, 2008, the Company’s average borrowed funds increased $15.9 million to $36.2 million compared to average borrowed funds of $20.2 million during the third quarter of 2007.  The balance at September 30, 2008 consisted of six convertible notes totaling $30.0 million, one $3.0 million repurchase agreement and one $3.2 million amortizing advance from the Federal Home Loan Bank.  The average rate paid on total borrowed funds decreased 57 basis points from the third quarter of 2007 to the same period in 2008, as $15.0 million in lower yielding convertible advances and $3.0 million in lower yielding repurchase agreements were purchased in December of 2007 and March of 2008, respectively.

The Company had an average balance of $12.9 million in junior subordinated debentures outstanding during the third quarter of 2008 compared to $13.3 million during the same period in 2007.  One $5.2 million debenture which bore a floating rate of interest averaging 9.01% was called and repaid on July 9, 2007 and replaced with a $12.9 million junior subordinated debenture, issued on June 28, 2007 which also bares a floating rate of interest tied to the three month LIBOR. The rate on the new debenture averaged 4.10% for the three months ended September 30, 2008.  The restructuring of the junior subordinated debentures increased the balance of these instruments by $7.7 million while lowering the Company’s cost 255 basis points.
   
Provision for Loan Losses - The loan loss provision for the third quarter of 2008 decreased $45 thousand, or 13.9%, to $279 thousand compared to a provision of $324 thousand in the third quarter of 2007.  The higher provision during the third quarter of 2007 was related to an increase in non-performing loan balances during that period of $2.0 million compared to a decrease in non-performing loans in the third quarter of 2008 of $742 thousand.  The provision for loan losses reflects management’s judgment concerning the risks inherent in the Company’s existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods.  Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions, as management may deem necessary.

Non-Interest Income - The Company’s non-interest income decreased $3.7 million, or 255.0%, to a net expense of $2.3 million for the three months ended September 30, 2008 as compared to non-interest income of $1.5 million for the same period in 2007.  The net expense resulted from a $3.5 million other than temporary impairment charge related to the Company’s holdings of Fannie Mae and Freddie Mac preferred stock, that was written down due to the Federal Housing Finance Agency placing both Fannie Mae and Freddie Mac under conservatorship.  Although this action did not eliminate the equity in Fannie Mae and Freddie Mac perpetual preferred stock, it has negatively impacted its value.

The Company’s non-interest income is primarily generated through insurance commissions earned through the operation of Tri-State and service fees on deposit accounts.  Insurance commission income from Tri-State has decreased $42 thousand, or 6.8%, to $576 thousand in the third quarter of 2008 over the same period in 2007.  For the three months ended September 30, 2008, we recognized a loss before taxes of $24 thousand from Tri-State’s operations, compared to net income before taxes of $15 thousand in the year ago period, as market pricing has fallen between the two third quarter periods.  Service fees on deposit accounts have increased by $47 thousand, or 13.0%, to $409 thousand in the third quarter of 2008 from $362 thousand during the same period in 2007.  ATM and debit card fees increased $14 thousand, or 12.8%, from $109 thousand in the third quarter of 2007 to $123 thousand in the three month period ended September 30, 2008, due to increased usage of our ATMs and debit cards.

-17-


The Company had $8 thousand in holding losses on trading securities in the third quarter of 2008, compared to $194 thousand in holding gains reported in the same period one year ago.  The trading securities losses reflect the mark to market adjustment at each quarter end to the investment securities for which the Company has elected the fair value option under SFAS No. 159.   The Company reported no gains or losses on the sale of securities available for sale in the third quarter of 2008 compared to $10 thousand gain in the same period of 2007.  Investment brokerage fees have decreased $4 thousand, or 15.4%, to $22 thousand in the third quarter of 2008 compared to $26 thousand during the same period in 2007.

Other non-interest income decreased $20 thousand, or 13.4%, in the third quarter of 2008 to $129 thousand from $149 thousand during the same period a year earlier.  The majority of the decrease in other income in the third quarter of 2008 was an $18 thousand decrease in other loan fee income compared to third quarter 2007 earnings.

Non-Interest Expense - Total non-interest expense increased $155 thousand, or 4.7%, from $3.3 million in the third quarter of 2007 to $3.4 million in the third quarter of 2008, as the Company has instituted several cost containment measures during 2008.  Salaries and employee benefits increased 2.8% due to restricted pay increases and recent reductions to staff; furniture, equipment and data processing expenses remained unchanged at $372 thousand and occupancy expenses decreased $4 thousand, or 1.3%, between the two periods.  Advertising and promotion expenses decreased $82 thousand, or 47.1%, in the third quarter of 2008 from the same period in 2007 as the Company decreased its newspaper advertising and reduced its marketing campaign for new account promotions in the third quarter of 2008.

FDIC insurance premiums related to the new assessment rate calculations from the Federal Deposit Insurance Reform Act of 2005 increased $86 thousand to $95 thousand for the third quarter of 2008 from $9 thousand in the same year ago period.  Professional fees have increased $20 thousand, or 16.7%, to $140 thousand in the third quarter of 2008, as we retained consultants to review the executives’ deferred compensation plan and perform an operational review of Tri-State Insurance Company.  The $83 thousand increase in other non-interest expenses in third quarter 2008 over 2007 was mostly attributable to a $75 thousand increase in foreclosed real estate expenses directly related to the $3.9 million in foreclosed real estate owned by the Company which was not present during the third quarter of 2007.

Income Taxes - The Company’s income tax provision, which includes both federal and state taxes, was $181 thousand and $238 thousand for the three months ended September 30, 2008 and 2007, respectively.  This $57 thousand decrease in income taxes resulted from a decrease in income before taxes.  While the reported results for the three month period ended September 30, 2008 reflects the $3.5 million other than temporary impairment charge for the Company’s holdings in Fannie Mae and Freddie Mac perpetual preferred stock, it does not reflect the change in tax treatment enacted as part of the Emergency Economic Stabilization Act of 2008 (the “Act”), which was adopted on October 3, 2008. Under the Act, the Company is permitted to deduct the loss as an ordinary loss for tax purposes, thereby offsetting a portion of the Company’s ordinary income. However, since the Act was not enacted until the fourth quarter, the Company can not recognize this tax benefit as part of its third quarter results. The tax benefit will be recognized in the fourth quarter, and it is expected to amount to approximately $1.3 million.






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COMPARISION OF OPERATING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Overview - For the nine months ended September 30, 2008, the Company reported a net loss of $2.0 million, a decrease of $3.6 million from the net income of $1.6 million reported for the same period in 2007.  Basic and diluted earnings per share were ($0.62) and $0.46 for the nine month period ended September 30, 2008 and 2007, respectively.  The decline in net income reflects an other than temporary impairment charge of $3.5 million for the write-down of Fannie Mae and Freddie Mac preferred equity securities and a $619 thousand increase in non-interest expenses, offset by a $306 thousand increase in net interest income and a $299 thousand decrease in the provision for loan losses

Comparative Average Balances and Average Interest Rates
 
The following table presents, on a fully taxable equivalent basis, a summary of the Company’s interest-earning assets and their average yields, and interest-bearing liabilities and their average costs for the nine month period ended September 30, 2008 and 2007.

 (Dollars in thousands)
  
2008
    
2007
  
   
Average
          
Average
    
Average
          
Average
  
Earning Assets:
  
Balance
    
Interest (1)
    
Rate (2)
    
Balance
    
Interest (1)
    
Rate (2)
  
Securities:
                                    
      Tax exempt  (3)
   $ 22,906     $ 1,061       6.19 %   $ 24,083     $ 992       5.51 %
      Taxable
     45,576       1,698       4.98 %     34,773       1,239       4.76 %
Total securities
     68,482       2,759       5.38 %     58,856       2,231       5.07 %
Total loans receivable (4)
     304,859       14,335       6.28 %     278,102       14,572       7.01 %
Other interest-earning assets
     14,350       225       2.10 %     9,283       358       5.16 %
Total earning assets
     387,691     $ 17,319       5.97 %     346,241     $ 17,161       6.63 %
                                                 
Non-interest earning assets
     30,837                       28,420                  
Allowance for loan losses
     (5,188 )                     (3,626 )                
Total Assets
   $ 413,340                     $ 371,035                  
                                                 
Sources of Funds:
                                                
Interest bearing deposits:
                                                
      NOW
   $ 58,277     $ 604       1.38 %   $ 59,130     $ 971       2.20 %
      Money market
     26,346       451       2.29 %     38,379       1,097       3.82 %
      Savings
     73,098       1,376       2.51 %     38,860       264       0.91 %
      Time
     130,380       3,986       4.08 %     132,081       4,779       4.84 %
Total interest bearing deposits
     288,101       6,417       2.98 %     268,450       7,111       3.54 %
      Borrowed funds
     35,998       1,132       4.13 %     19,785       706       4.70 %
      Junior subordinated debentures
     12,887       459       4.68 %     8,052       460       7.54 %
Total interest bearing liabilities
     336,986     $ 8,008       3.17 %     296,287     $ 8,277       3.74 %
                                                 
Non-interest bearing liabilities:
                                                
      Demand deposits
     39,721                       37,454                  
      Other liabilities
     2,207                       2,252                  
Total non-interest bearing liabilities
     41,928                       39,706                  
Stockholders' equity
     34,426                       35,042                  
Total Liabilities and Stockholders' Equity
   $ 413,340                     $ 371,035                  
                                                 
Net Interest Income and Margin (5)
           $ 9,311       3.21 %           $ 8,884       3.43 %
 
(1) Includes loan fee income
  
(2) Average rates on securities are calculated on amortized costs
  
(3) Fully taxable equivalent basis, using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance
  
(4) Loans outstanding include non-accrual loans
  
(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets
  

Net Interest Income - Net interest income, on a fully taxable equivalent basis (a 39% tax rate), increased $427 thousand, or 4.8%, to $9.3 million for the nine months ended September 30, 2008 from $8.9 million for the same nine month period in 2007.  The net interest margin decreased, on a fully taxable equivalent basis, by 22 basis points to 3.21% for the nine months ended September 30, 2008 compared to 3.43% for the same period in 2007, as the yield on total earning assets decreased 66 basis points to 5.97% and the cost of total interest bearing liabilities decreased 57 basis points to 3.17% in the nine month period ended September 30, 2008 from the same period a year earlier.  The decrease in both yield on earning assets and cost of interest bearing liabilities largely reflects the decrease in market rates of interest and, with regard to the decrease in yield on earning assets, an increase in non-accrual loans.

Interest Income - Total interest income, on a fully taxable equivalent basis, increased by $158 thousand to $17.3 million for the nine months ended September 30, 2008.  The increase in interest income primarily reflects a $41.5 million

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increase in average earning assets, offset by a decline in yield of 66 basis points to 5.97% for the first nine months of 2008 from 6.63% in the same period in 2007.  This decrease in yield is the net result of a 73 basis point decline in the yield on loan receivables and an increase in non-accrual loans offset by a 31 basis point increase in yield on investment securities.

Total interest income on securities, on a fully taxable equivalent basis, increased $528 thousand, to $2.8 million for the first nine months of 2008 from $2.2 million for the first nine months of 2007.  As the average balance of total securities increased $9.6 million, the yield on securities increased 31 basis points, from 5.07% in the first nine months of 2007 to 5.38% for the first nine months of 2008.  The increase in the average balances of the securities portfolio reflects a $10.8 million increase in taxable securities and a $1.2 million decrease in tax-exempt securities, as new purchases exceeded sales, paydowns and maturities of securities.  The increase in yield was accomplished by the repricing of existing mortgage backed securities, new security purchases and the effective tax rate adjustments on tax exempt securities between the two nine month periods.  The suspension of dividends on the Fannie Mae and Freddie Mac preferred equity securities resulted in a $51 thousand loss in interest income, or 2 basis point reduction to the Company’s net interest margin.
The average balance in loans receivable increased $26.8 million, or 9.6%, to $304.9 million in the current nine month period from $278.1 million in the same period of 2007, while the interest earned on total loans receivable decreased $237 thousand, or 1.6% between the two nine month periods.  The average rate earned on loans decreased 73 basis points from 7.01% for the nine months ended September 30, 2007 to 6.28% for the same period in 2008.  The increase in our loan portfolio average balance reflects our continuing efforts to grow our loan portfolio, while the decrease in yield is the result of market competition and the reclassification of $7.1 million in loan receivable balances to non-accrual and foreclosed real estate between the two nine month periods.
 
Interest Expense - - The Company’s interest expense for the nine months ended September 30, 2008 decreased $269 thousand, or 3.3%, to $8.0 million.  During the current nine month period, the balance in average interest-bearing liabilities increased $40.7 million, or 13.7%, to $337.0 million from $296.3 million in the year ago period.  However, the average rate paid on total interest-bearing liabilities has decreased by 57 basis points from 3.74% for the nine months ended September 30, 2007 to 3.17% for the same period in 2008.  The decrease in rate reflects the Company’s successful efforts to reprice interest-bearing liabilities in a declining interest rate environment, while offering very competitive deposit products in the Company’s market area.

The Company’s time deposits represent the largest component of interest-bearing deposits.  The average balance in time deposits decreased by $1.7 million, or 1.3%, to $130.4 million for the nine month period ended September 30, 2008 compared to $132.1 million for the same period in 2007, while the interest expense on time deposits decreased $792 thousand, or 16.6%, to $4.0 million.  The average rate paid on time deposits decreased 76 basis points from 4.84% for the nine months ended September 30, 2007 to 4.08% for the same period in 2008, reflecting the current decrease in market interest rates.

In March of 2008, the Company began offering a high rate savings account associated with a checking account to attract core deposits and build customer relationships.  The promotion has successfully increased savings account average balances by $34.2 million, or 88.1%, to $73.1 million in the first nine months of 2008 from $38.9 million in the same period a year earlier.  The yield on savings accounts increased 160 basis points to 2.51% and interest expense on savings accounts increased $1.1 million to $1.4 million in the first nine months of 2008 from the first nine months of 2007.

Total average interest bearing deposit balances increased $19.7 million, or 7.3%, to $288.1 million, while interest expense decreased $694 thousand, or 9.8%, to $6.4 million during the first nine months of 2008 from the same period in 2007.  As the Company has repositioned higher costing time deposits into lower yielding core deposits in a declining interest rate environment, the average rate paid on interest bearing deposits decreased 56 basis points to 2.98% for the first nine months of 2008 from 3.54% in the first nine months of 2007.   Also contributing to the interest bearing deposit rate decline was a 153 basis point decrease in the rate paid on money market accounts to 2.29% during the first nine months of 2008 from 3.82% during the same period in 2007.  This decline reduced the Company’s interest expense on money market accounts $646 thousand to $451 thousand while average money market balances decreased $12.0 million to $26.3 million in the first nine months of 2008 from the same period in 2007.

For the nine months ended September 30, 2008, the Company’s average borrowed funds increased $16.2 million to $36.0 million compared to average borrowed funds of $19.8 million during the first nine months of 2007.  The average rate paid on total borrowed funds decreased 57 basis points to 4.13% during the first nine months of 2008 from 4.70% for the same period in 2007, as the Company has restructured its advances into lower yielding instruments while meeting asset liability needs.

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The Company had an average balance of $12.9 million in junior subordinated debentures outstanding during the first nine months of 2008 compared to $8.1 million during the same period in 2007.  As described in the three month comparison, the restructuring of the junior subordinated debentures increased the average balance of these instruments by $4.8 million while lowering the Company’s cost 286 basis points between the two nine month periods.
   
Provision for Loan Losses - The loan loss provision for the first nine months of 2008 decreased $299 thousand, or 34.5%, to $569 thousand compared to a provision of $868 thousand in the first nine months of 2007.  The higher provision during the first nine months of 2007 was related to an increase in non-performing loan balances during that period of $4.7 million compared to a decrease in non-performing loans in the first nine months of 2008 of $2.0 million.  In addition, the Company’s loan growth increased 12.1% during the first nine months of 2007, as compared to loan growth of 3.9% in the first nine months of 2008.  The provision for loan losses reflects management’s judgment concerning the risks inherent in the Company’s existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods.  Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions, as management may deem necessary.

Non-Interest Income - The Company’s non-interest income decreased by $3.7 million, or 85.3%, to $632 thousand for the nine months ended September 30, 2008 from $4.3 million for the same period in 2007.  The majority of this decrease was the $3.5 million other than temporary impairment (“OTTI”) charge on equity securities previously discussed in the quarterly operating results.  Net of the OTTI, non-interest income decreased $131 thousand for the first nine months of 2008 compared to the same nine month period in 2007.

Insurance commissions earned through the operation of Tri-State are the Company’s primary source of non-interest income.  Insurance commissions decreased $164 thousand, or 7.7%, in the first nine months of 2008 over the same period in 2007, largely due to a decrease in contingency commission income, which is based upon criteria set by each insurance carrier.  Investment brokerage fees have also decreased in the first nine months of 2008 by $122 thousand, or 51.1%, to $117 thousand compared to $239 thousand during the same period in 2007.  During the first quarter of 2007 several new large brokerage accounts were opened and the Company earned related commission income. There was no similar activity in 2008.  Holding gains on trading securities decreased $179 thousand to $13 thousand for the first nine months of 2008 compared to $192 thousand in holding gains on trading securities recorded in the first nine months of 2007.

Offsetting these decreases, several other sources of non-interest income increased. Service fees on deposit accounts have increased by $95 thousand, or 9.4%, to $1.1 million in the first nine months of 2008 from $1.0 million during the same period in 2007.  Due to increased usage of our ATMs and debit cards, related fees increased $48 thousand, or 16.0%, from $300 thousand in the first nine months of 2007 to $348 thousand in the nine month period ended September 30, 2008.  The Company has reported a $152 thousand gain on the sale of securities available for sale in the first nine months of 2008 compared to gains of $10 thousand in the same period of 2007.  The largest components of the $49 thousand increase in other non-interest income include a $19 thousand increase in loan fees and a $24 thousand increase in joint venture income from SussexMortgage.com between the two nine month periods.

Non-Interest Expense - Total non-interest expense increased $619 thousand, or 6.3%, from $9.9 million in the first nine months of 2007 to $10.5 million in the first nine months of 2008.  The Company has instituted several cost containment measures during 2008 to mitigate the decrease in its net interest margin and increases in other real estate expenses and FDIC insurance assessment.  Salaries and employee benefits increased $294 thousand, or 5.4%, reflecting normal pay increases and an increase in staff, as outsourced loan review and compliance services are now performed internally by salaried staff.  We believe this will provide better quality loan review and compliance at a more effect cost.   Offsetting the increase to salaries and employee benefits is an $87 thousand, or 20.5%, decrease in professional fees to $337 thousand in the first nine months of 2008.

Advertising and promotion expenses decreased $36 thousand, or 8.7%, in the first nine months of 2008 from the same period in 2007 as the Company has reduced its newspaper advertising and new account promotions in a cost cutting effort.  In addition, certain amortization expenses on intangible assets have expired, reducing these expenses $35 thousand in the first nine months of 2008.

FDIC insurance premiums have increased from $26 thousand during the first nine months of 2007 to $280 thousand in the first nine months of 2008.  The increase reflects the exhaustion of one-time assessment credits which were applied in 2007 and higher assessment charges in 2008.  Other non-interest expenses increased $142 thousand, or 12.7%, to $1.3 million as foreclosed real estate expenses increased $131 thousand during the first nine months of 2008 compared to the same period in 2007.

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Occupancy expenses increased $45 thousand or 4.8%, and furniture, equipment and data processing expenses rose $53 thousand, or 5.0%, between the two nine month periods due to an increase in overhead costs associated with the new Wantage branch site, increased energy costs and the purchase of competitive software products and technology enhancements.

Income Taxes - The Company’s federal and state income tax provision decreased $89 thousand, or 13.4%, to $575 thousand for the nine months ended September 30, 2008 from $664 thousand recorded for the first nine months of 2007.  This income tax provision does not reflect the change in tax treatment resulted from the Emergency Economic Stabilization Act of 2008 (the “ACT”), which permits the Company to deduct the $3.5 million other than temporary impairment charge for the Company’s holding in Fannie Mae and Freddie Mac perpetual preferred stock as an ordinary loss for tax purposes.  Since the Act was not enacted until the fourth quarter, the Company can not recognize this tax benefit as part of its nine month results. The tax benefit of approximately $1.3 million will be recognized in the fourth quarter of 2008. The Company’s effective tax rate was 29.5% for the nine months period ended September 30, 2007 and is below the statutory tax rate due to tax-exempt interest on securities and earnings on the investment in life insurance.


COMPARISION OF FINANCIAL CONDITION AT SEPTEMBER 30, 2008 TO DECEMBER 31, 2007

At September 30, 2008 the Company had total assets of $439.1 million compared to total assets of $393.5 million at December 31, 2007, an increase of 11.6%, or $45.5 million.  Loans receivable, net of unearned income increased $11.7 million, or 3.9%, to $312.3 million while total deposits increased $48.1 million, or 15.6%, to $356.7 million at September 30, 2008 from $308.5 million at December 31, 2007.  Additionally, cash and cash equivalents increased $14.2 million to $26.0 million at September 30, 2008, up from $11.8 million at December 31, 2007 and securities available for sale increased $16.1 million, or 33.3%, to $64.5 million since year end 2007.

Cash and Cash Equivalents - The Company’s cash and cash equivalents increased by $14.2 million at September 30, 2008 to $26.0 million from $11.8 million at December 31, 2007.  This increase mostly reflects the Company’s increase in federal funds sold of $11.7 million to $15.5 million at September 30, 2008 from $3.8 million at year-end 2007.  The increased balance in federal funds sold is the result of the Company’s deposit growth outpacing loan growth in the first nine months of 2008.  The Company intends to use the cash and cash equivalents to fund future loan demand and purchase securities.

Securities Portfolio and Trading Securities - The Company’s securities, available for sale, at fair value, increased $16.1 million from $48.4 million at December 31, 2007 to $64.5 million at September 30, 2008.  During the first nine months of 2008 the Company purchased $33.7 million in new available for sale securities, including $3.6 million in Fannie Mae and Freddie Mac equity securities; $4.9 million in available for sale securities matured; $5.2 million were sold or called and $2.4 million were repaid.  Net amortization expenses were $8 thousand and a realized gain on the sale of securities available for sale of $152 thousand was recorded in the first nine months of 2008.  The Fannie Mae and Freddie Mac equity securities held a fair value of $284 thousand, after the impairment write-down of $3.5 million on September 30, 2008.  As of September 30, 2008 trading securities balances decreased $740 thousand to $13.5 million due to the net effect of $4.7 million in new security purchases, $3.2 million in sales or calls, $2.3 million in paydowns and net amortization expenses offset by $13 thousand in holding gains on trading securities.

Balances in state and municipal tax-exempt securities, at fair value, increased $238 thousand to $24.5 million from $24.3 million at December 31, 2007 and balances in taxable securities, at fair value, increased $15.9 million to $40.0 million at September 30, 2008.  This shift from tax-exempt to taxable security balances was the result of realizing net gains on the sale of municipal securities, while increasing the taxable securities balance to fulfill collateral requirements.

The carrying value of the available for sale portfolio at September 30, 2008 includes a net unrealized loss of $1.7 million, reflected as an accumulated other comprehensive loss of $1.0 million in stockholders’ equity, net of a deferred income tax asset of $664 thousand.  This compares with an unrealized gain at December 31, 2007 of $25 thousand, shown as an accumulated other comprehensive gain of $15 thousand in stockholders’ equity, net of a deferred income tax liability of $10 thousand.  Management considers the unrealized gains and losses to be temporary and primarily resulting from changes in the interest rate environment. Other than the Fannie Mae and Freddie Mac equity securities, as of September 30, 2008, the securities portfolio contains no other high-risk securities or derivatives, as the Company only invests in agency, mortgage-backed and municipal debt securities and marketable equity securities.   There were no held to maturity securities at September 30, 2008 or December 31, 2007.

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Loans - The loan portfolio comprises the largest part of the Company's earning assets. Total loans receivable, net of unearned income, at September 30, 2008 increased $11.7 million to $312.3 million from $300.6 million at year-end 2007.  The balance in loans secured by non-residential property accounts for 50.5% of the Company’s total loan portfolio and increased $3.1 million, to $157.7 million at September 30, 2008 from $154.6 million on December 31, 2007.  The largest percentage increase during this nine month period was in one to four family residential mortgage loans which increased 15.8%, or $11.1 million, from $70.6 million at December 31, 2007 to $81.8 million at September 30, 2008.  Commercial and industrial loans increased 10.9% to $23.0 million at September 30, 2008.   During the first nine months of 2008, the Company had a net decrease in construction and land development loans of $2.8 million, or 6.6%, to $39.2 million from $42.0 million at December 31, 2007, as $3.4 million in these loan balances were transferred to foreclosed real estate properties.  The Company’s does not originate sub-prime or unconventional one to four family real estate loans.

The increase in loans was funded during the first nine months of 2008 by an increase in deposits.  The loan to deposit ratios at September 30, 2008 and December 31, 2007 were 86.2% and 95.8%, respectively.

Loan and Asset Quality - Total non-performing assets, which include non-accrual loans, loans past due 90 days and still accruing, restructured loans, foreclosed real estate owned (“OREO”) and impaired equity securities, increased by $2.2 million to $15.1 million at September 30, 2008 from $12.9 million at year end 2007. The Company’s non-accrual loans decreased $2.3 million to $10.0 million at September 30, 2008 from $12.3 million at December 31, 2007, as $3.9 million in non-accrual loan receivable balances, consisting of four parcels of real estate, were transferred to foreclosed real estate. The Company had no foreclosed real estate properties at December 31, 2007. The non-accrual loans at September 30, 2008 primarily consist of loans which are collateralized by real estate.  The Company had $488 thousand in restructured loans and $433 thousand in loans past due over 90 days and still accruing at September 30, 2008 compared to $494 thousand in restructured loans and $69 thousand in loans past due over 90 days and still accruing at December 31, 2007.  The fair value on September 30, 2008 of the Fannie Mae and Freddie Mac equity securities, which the Company recorded the $3.5 million impairment write-down, was $284 thousand.

The Company seeks to actively manage its non-performing assets.  In addition to active monitoring and collecting on delinquent loans, management has an active loan review process for customers with aggregate relationships of $500,000 or more if the credit(s) are unsecured or secured, in whole or substantial part, by collateral other than real estate and $1,000,000 or more if the credit(s) are secured in whole or substantial part by real estate.  During the first quarter of 2008 the Company has brought the credit review process in-house through the hiring of a credit review officer.

Management continues to monitor the Company’s asset quality and believes that the non-performing assets are adequately collateralized and anticipated material losses have been adequately reserved for in the allowance for loan losses.  However, given the uncertainty of the current real estate market additional provisions for losses may be deemed necessary in future periods.  The following table provides information regarding risk elements in the loan portfolio at each of the periods presented:

(Dollars in thousands)
  
September 30, 2008
    
December 31, 2007
  
Non-accrual loans
   $ 9,964     $ 12,301  
Non-accrual loans to total loans
     3.19 %     4.09 %
Non-performing assets
   $ 15,100     $ 12,864  
Non-performing assets to total assets
     3.44 %     3.35 %
Allowance for loan losses as a % of non-performing loans
     46.67 %     39.96 %
Allowance for loan losses to total loans
     1.63 %     1.71 %

Allowance for Loan Losses - The allowance is allocated to specific loan categories based upon management’s classification of problem loans under the bank’s internal loan grading system and to pools of other loans that are not individually analyzed.  Management makes allocations to specific loans based on the present value of expected future cash flows or the fair value of the underlying collateral for impaired loans and to other classified loans based on various credit risk factors.  These factors include collateral values, the financial condition of the borrower and industry and current economic trends.

Allocations to commercial loan pools are categorized by commercial loan type and are based on management’s judgment concerning historical loss trends and other relevant factors.  Installment and residential mortgage loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and current conditions.  Additionally, all other delinquent loans are grouped by the number of days delinquent with this amount assigned a general reserve amount.

At September 30, 2008, the total allowance for loan losses was $5.1 million, consistent with the allowance at December 31, 2007.  The total provision for loan losses was $569 thousand and there were $662 thousand in charge-offs and $33

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 thousand in recoveries for the first nine months of 2008.  A charge-off for $454 thousand was taken on one loan with a balance of $3.4 million upon transfer to foreclosed real estate at its fair value of $3.0 million.  The allowance for loan losses as a percentage of total loans was 1.63% at September 30, 2008 and 1.71% at December 31, 2007.
 
Management regularly assesses the 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 adequate for each of the periods presented.  Additional provisions for losses may be deemed necessary in future periods due to the uncertainty of current trends in the real estate market.

Deposits - Total deposits increased $48.1 million, or 15.6%, from $308.5 million at December 31, 2007 to $356.7 million at September 30, 2008.  The Company’s total non-interest bearing deposits increased $3.8 million to $40.4 million at September 30, 2008 from $36.6 million at December 31, 2007 and interest-bearing deposits increased $44.3 million to $316.2 million at September 30, 2008 from $271.9 million at December 31, 2007.  In February of 2008 the Company began offering a promotional rate on a savings deposit product which must be opened in conjunction with a checking account.  The focus of the promotion was to attract banking relationships with lower-costing core deposits and reduce the Company’s dependency on higher priced time deposits.  As a result of the highly successful promotion, total savings account balances have increased $83.9 million, or 229.1%, to $120.6 million at September 30, 2008 from $36.7 million on December 31, 2007, while NOW, money market and time deposit balances have decreased a combined $39.6 million, as depositors transferred balances into the new promotional savings account.

Included in time deposit balances at September 30, 2008 are $535 thousand in brokered time deposits, a decrease of $966 thousand from $1.5 million at December 31, 2007.  As a participant with a third party service provider, the Company can either buy, sell or reciprocate balances of time deposits in excess of a single bank’s FDIC insurance coverage with one or more other banks, to ensure that the entire deposit is insured. This permits the Company to obtain time deposits, as an alternate source of funding, when the need arises.  Management continues to monitor the shift in deposits through its Asset/Liability Committee.

Borrowings - Borrowings consist of long-term advances and a repurchase agreement from the Federal Home Loan Bank (“FHLB”).  The advances are secured under terms of a blanket collateral agreement by a pledge of qualifying investment securities and certain mortgage loans and the repurchase agreement is secured by selected investment securities held at the FHLB.  As of September 30, 2008, the Company had $36.2 million in borrowings at a weighted average interest rate of 4.09%, compared to $35.2 million in borrowings at an average rate of 4.30% at December 31, 2007.  The advances total $30.0 million, all with quarterly convertible options, that allow the FHLB to change the note rate to a then current market rate.  In November of 2005, the Company entered into a $3.2 million amortizing advance that matures on November 3, 2010 at a rate of 5.00%.  A nine month $3.0 million repurchase agreement was entered into in March of 2008 at a rate of 2.24%, replacing a matured $2.0 million repurchase agreement at 5.15%, lowering the weighted average rate on borrowings by 291 basis points.

Junior Subordinated Debentures - On June 28, 2007, the Company raised an additional $12.5 million in capital through the issuance of junior subordinated debentures to a non-consolidated statutory trust subsidiary.  The subsidiary in turn issued $12.5 million in variable rate capital trust pass through securities to investors in a private placement.  The interest rate is based on the three-month LIBOR plus 144 basis points and adjusts quarterly.  The rate at September 30, 2008 was 4.26%.  The capital securities are redeemable by Sussex Bancorp during the first five years at a redemption price of 103.5% of par for the first year and thereafter on a sliding scale down to 100% of par on or after September 15, 2012 in whole or in part or earlier if the regulatory capital or tax treatment of the securities is substantially changed.  The proceeds of these trust preferred securities which have been contributed to the Bank are included in the Bank’s capital ratio calculations and treated as Tier I capital.

In accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, our wholly-owned subsidiary, Sussex Capital Trust II, is not included in our consolidated financial statements.

Equity - -  Stockholders' equity, inclusive of accumulated other comprehensive loss, net of income taxes, was $30.8 million at September 30, 2008, a decrease of $3.6 million over the $34.4 million at year-end 2007, largely due to the $3.5 million impairment write-down on Fannie Mae and Freddie Mac preferred equity securities.  Stockholders' equity decreased due to $2.0 million in a net loss in the first nine months of 2008, a $40 thousand decrease in common stock due to the purchase and retirement of treasury shares, cash dividends paid of $654 thousand and an unrealized loss on securities available for sale, net of income tax, of $1.0 million.   These changes were offset by $34 thousand from the exercise of stock options and $61 thousand through the compensation expense of stock options, restricted stock and the tax benefit of stock options exercised.  The 6.5% stock dividend, as retroactively adjusted to stockholders’ equity, reclassified $1.4 million to common stock from retained earnings.

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LIQUIDITY AND CAPITAL RESOURCES

It is management’s intent to fund future loan demand with deposits and maturities and pay downs on investments.  In addition, the Bank is a member of the Federal Home Loan Bank of New York and as of September 30, 2008, had the ability to borrow up to $75.3 million against selected mortgages and investment securities as collateral for borrowings.  At September 30, 2008, the Bank had outstanding borrowings with the FHLBNY totaling $36.2 million.  The Bank also has available an overnight line of credit and a one-month overnight repricing line of credit, each in an amount of $40.3 million at the Federal Home Loan Bank and an overnight line of credit in the amount of $4.0 million at the Atlantic Central Bankers Bank.

At September 30, 2008, the amount of liquid assets remained at a level management deemed adequate to ensure that contractual liabilities, depositors’ withdrawal requirements, and other operational customer credit needs could be satisfied.  At September 30, 2008, liquid investments totaled $26.0 million and all mature within 30 days.

At September 30, 2008, the Company had $64.5 million of securities classified as available for sale.  Of these securities, $34.2 million had $1.9 million of unrealized losses and therefore are not available for liquidity purposes because management’s intent is to hold them until market price recovery

The Bank's regulators have implemented risk based guidelines which require banks 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.  The Bank meets the well-capitalized regulatory standards applicable to it.  At September 30, 2008, the Bank's Tier I and Tier II capital ratios were 10.91% and 12.16%, respectively. The Company also maintained $26.0 million in cash and cash equivalents which could be contributed to the Bank as capital.

In addition to the risk-based guidelines, the Bank's regulators require that banks which meet the regulators' highest performance and operational standards to maintain a minimum leverage ratio (Tier I capital as a percent of tangible assets) of 4.0%.  As of September 30, 2008, the Bank had a leverage ratio of 8.41%.

On October 14, the United States Treasury (the “UST”) announced its Troubled Assets Relief Program (“TARP”) Capital Purchase Program (“CPP). Under the CPP, the UST will purchase shares of senior preferred stock in insured depository institutions or their holding companies, bearing a dividend rate of 5%. In addition, participating institutions must issue to the UST common stock purchase warrants, permitting the UST to purchase common stock with a value equal to 15% of the UST’s preferred stock investment.  The Company is currently analyzing whether participation in this program is appropriate and will likely file an application to participate to ensure that the Company has that alternative, while assessment of the Government’s requirements continue.

The Company has no investment or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources, except for the junior subordinated debentures of Sussex Capital Trust II.  The Company is not aware of any known trends or any known demands, commitments, events or uncertainties, which would result in any material increase or decrease in liquidity.  Management believes that any amounts actually drawn upon can be funded in the normal course of operations.

Off-Balance Sheet Arrangements - The Company’s financial statements do not reflect off-balance sheet arrangements that are made in the normal course of business.  These off-balance sheet arrangements consist of unfunded loans and letters of credit made under the same standards as on-balance sheet instruments.  These unused commitments, at September 30, 2008 totaled $49.5 million and consisted of $23.1 million in commitments to grant commercial real estate, construction and land development loans, $12.7 million in home equity lines of credit, and $13.7 million in other unused commitments.  These instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Company.  Management believes that any amounts actually drawn upon can be funded in the normal course of operations.


IMPACT OF INFLATION AND CHANGING PRICES

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature.  As a result, the level of interest rates has a more significant impact on a financial institution’s performance than effects of 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 prices are affected by inflation.  Accordingly, the liquidity, interest rate sensitivity and maturity characteristics of the Company’s assets and liabilities are more indicative of its

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ability to maintain acceptable performance levels.  Management of the Company monitors and seeks to mitigate the impact of interest rate changes by attempting to match the maturities of assets and liabilities to gap, thus seeking to minimize the potential effect of inflation.


Item 3 - Quantitative and Qualitative Disclosures about Market Risk

Not applicable


Item 4 (T) - Controls and Procedures

(a)
Evaluation of disclosure controls and procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are, as of the end of the period covered by this report, effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13A-15 (f) and 15d-15 (f) of the Securities and Exchange Act of 1934. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors as to the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, errors or fraud. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

(b)
Changes in Internal Control over Financial Reporting

Not applicable


PART II – OTHER INFORMATION


Item 1 - Legal Proceedings

The Company and the Bank are periodically involved in various legal proceedings as a normal incident to their businesses.  In the opinion of management, except as described below, no material loss is expected from any such pending lawsuit.

In connection with a non-performing asset with a current balance of $3.3 million, the Bank has initiated a foreclosure and collection proceeding. The borrower and the guarantor, who are related parties, have asserted various counterclaims against the Bank, claiming, among other things, that they were coerced into signing loan modifications and that the Bank has breached its obligations under the loan agreements. As is permitted under New Jersey law, the claimants have not made demand for any specific amount of damages. The Bank believes the claims are wholly without merit, and the counterclaims have been dismissed in the foreclosure proceeding, although they are still at issue in the collection action. The Bank intends to vigorously defend the counterclaims in the collection action and pursue the foreclosure and collection actions.


Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

On April 16, 1999 the Company announced a stock repurchase plan whereby the Company may purchase up to 50,000 shares of outstanding stock.  There is no expiration date to this plan.  On April 27, 2005, the Company’s Board increased this plan to 100,000 shares; on April 19, 2006 to 150,000 shares and on August 23, 2007 to 250,000 shares of the Company’s common stock.


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Total Number
    
Maximum
Number of
  
               
of Shares
    
Shares that
  
               
Purchased as
    
May Yet Be
  
   
Total Number
          
Part of Publicly
    
Purchased
  
   
of Shares
    
Average Price
    
Announced Plans
    
Under the Plans
  
Period
  
Purchased
    
Paid per Share
    
or Programs
    
or Programs
  
July 1, 2008 through July 31, 2008
     4,265     $ 8.14       189,062       60,938  
August 1, 2008 through August 31, 2008
     -       -       189,062       60,938  
September 1, 2008 through September 30, 2008
     -       -       189,062       60,938  
     Total
     4,265     $ 8.14       189,062       60,938  



Item 3 - Defaults upon Senior Securities

Not applicable


Item 4 - Submission of Matters to a Vote of Security Holders

Not applicable


Item 5 - Other Information

Not applicable


Item 6 - Exhibits

Number
Description
Certification of Donald L. Kovach pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Candace A. Leatham pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   


In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
SUSSEX BANCORP
   
 
By: /s/ Candace A. Leatham
 
CANDACE A. LEATHAM
 
Executive Vice President and
 
Chief Financial Officer
 
Date: November 14, 2008

 
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 EX-31.1 2 ex31-1.htm EXHIBIT 31.1 ex31-1.htm
Exhibit 31.1

I, Donald L. Kovach, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of Sussex Bancorp;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
By: /s/ Donald L. Kovach
 
DONALD L. KOVACH
 
President and
 
Chief Executive Officer
 
Date: November 14, 2008
 
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 EX-31.2 3 ex31-2.htm EXHIBIT 31.2 ex31-2.htm
Exhibit 31.2

I, Candace A. Leatham, certify that:

 
1.
I have reviewed this quarterly report on Form 10-Q of Sussex Bancorp;

 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and

 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
By: /s/ Candace A. Leatham
 
CANDACE A. LEATHAM
 
Executive Vice President and
 
Chief Financial Officer
 
Date: November 14, 2008

 
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 EX-32 4 ex32.htm EXHIBIT 32 ex32.htm
Exhibit 32


CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002



The undersigned, Donald L. Kovach and Candace A. Leatham hereby jointly certify as follows:

They are the Chief Executive Officer and the Chief Financial Officer, respectively, of Sussex Bancorp (the “Company”);

To the best of their knowledge, the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (the “Report”) complies in all material respects with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

To the best of their knowledge, based upon a review of the Report, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



 
By: /s/ Donald L. Kovach
 
DONALD L. KOVACH
 
President and
 
Chief Executive Officer
 
Date: November 14, 2008
   
 
By: /s/ Candace A. Leatham
 
CANDACE A. LEATHAM
 
Executive Vice President and
 
Chief Financial Officer
 
Date: November 14, 2008

(A signed original of this written statement required by Section 906 has been provided to Sussex Bancorp and will be retained by Sussex Bancorp and furnished to the Securities Exchange Commission or its staff upon request.)

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