ANNUAL REPORT TO SHAREHOLDERS
2015
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BUILDINGA PATH FORWARD INVESTOR INFORMATION
Stock Information
Sussex Bancorp’s Common Stock is traded on the
Nasdaq Global Market using the symbol “SBBX”.
Registrar and Transfer Agent
American Stock Transfer & Trust Co.
59 Maiden Lane, New York, NY 10007
800-937-5449
www.amstock.com
Independent Auditors
BDO USA, LLP
100 Park Ave, New York, NY 10017
General Counsel
Windels Marx, Lane and Mittendorf
120 Albany Street Plaza, 6th Floor
New Brunswick, NJ 08901
SEC Counsel
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
Investor Information
Steven M. Fusco, CFO
100 Enterprise Drive, Suite 700
Rockaway, NJ 07866
844-256-7328
Information on Sussex Bancorp, Inc. can also be
found at: www.sussexbank.com
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FROM THE CHAIRMAN OF THE BOARD
Dear Fellow Shareholders,
It is with great pride that I share with you our 2015 financial results. If 2014 was
the year we repaid you for your faith, then 2015 was the year we rewarded you
for your continued confidence and trust.
Our core lines of business continue to expand—fueling our overall performance
and for the second year in a row, outpacing our peer group, the KBW Banking
Index, and the Nasdaq.
Financial Performance
Several years ago, your Board of Directors adopted a strategic plan that we felt would set the
stage for impressive operating results. As we continue to execute on these strategic initiatives,
it is clear we are on the right path. Since day one, the task of implementing this strategic plan
has been charged to our management team. And once again, under the leadership of Tony
Labozzetta, this impressive group of executives executed flawlessly and produced another year
of outstanding financial results.
Our core lines of business continue to expand—fueling our overall performance and for the
second year in a row, outpacing our peer group, the KBW Banking Index, and the Nasdaq. In
what remains a very difficult economic environment, we believe our results are truly noteworthy.
Net income for 2015 was $3.7 million, representing an increase of over 40% compared to
2014. Though organic growth was the key to our success, we also benefited from increases in
insurance fee income and continued to reduce our credit quality costs.
Our stock price increased an impressive 28%, significantly outperforming the KBW Bank index
and the Nasdaq Composite Index. And our Board of Directors approved a $0.04 quarterly
dividend, confirming our commitment to generating shareholder value and confidence in
the bank’s long-term prospects.
The Path Forward
As we enter a new year, we remain confident and optimistic about our business and its long-
term prospects. The economic and regulatory environments are challenging, but our balance
sheet continues to get stronger each year. And while it is unclear how the Federal Reserve Bank
will address interest rate policy, we remain poised to continually manage our interest spreads
responsibly.
Our core businesses continue to deliver solid growth as we expand our banking centers into
new markets. In 2015, we opened a new banking center in Astoria, New York, and in the first
quarter of 2016 we opened a new banking center in Oradell, NJ. The expansion into New York
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City and Bergen County, NJ is a key component of our long-term organic growth strategy and provides access to
new opportunities in markets that are already very familiar to us.
Additionally, our management team anticipated the transformative role technology would play in our industry
and developed a new approach to banking that we now call the “integrated banking experience.” Our decision
to invest in this endeavor proved to be a wise one, as we are now better equipped to deliver a comprehensive
customer experience. Banking anytime, anywhere, from any device will be our industry’s new standard and we will
continue to exceed our customers’ expectations.
40 Years of Enduring Values
As we look forward, we must also take a moment to reflect on the past. In 2016, Sussex Bank will be celebrating
an important milestone—our 40th anniversary. Over those 40 years, we have weathered multiple economic cycles
but today our bank is more vibrant than ever. This didn’t just happen by chance. Adherence to our core values
keeps us grounded in the belief that when you do what is right for your employees, your customers and your
communities, you also end up doing what is right for your shareholders.
Success Built on Teamwork and Collaboration
I am very pleased with the progress that our company has made over the past several years, but I remain keenly
aware of the many things yet to accomplish. In addition to our esteemed management team, I am privileged to
be able to work with my fellow Directors, who are an extremely talented, dedicated, and diverse group. Their
business acumen and insights are valuable assets to the organization and I will continue to lean on them heavily
for their advice and guidance.
Most importantly, I would like to once again thank all of our employees. Simply put, we would not be where we
are today without their hard work, dedication, and professionalism. Their relentless focus on providing the best
customer experience imaginable is a shining example of what comes to pass when one hires and retains the best
and the brightest. As we continue to grow our brand, we will count on them to pass along our collective values
and what it means to be “closer to our customers”.
The Next 40 Years
As we enter middle age we are not concerned about getting older, instead we are focused on getting better. The
strategy that we deployed just a few years ago is now a proven concept, delivering solid results. Our experienced
team has been battle-tested, and is poised to bring our company to the next level. Our Board of Directors will
continue to apply the same patient and disciplined approach to managing our business and sustaining our growth
trajectory. And while our future is bright, we realize that it would not be if not for the patience and loyalty of our
shareholders.
Thank you for your continued trust and confidence in Sussex Bancorp.
Sincerely,
Edward J. Leppert
Chairman of the Board
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FROM THE PRESIDENT AND CEO
Dear Fellow Shareholders,
It gives me great pleasure to echo Ed’s comments about our positive 2015 financial results.
The management team continues to make significant and meaningful progress improving the
company’s balance sheet and earnings. In 2015, our total assets increased 15% and now stand at
$685 million. This increase in total assets was largely driven by organic growth in loans of 15.1%
and strong deposit growth of 13%. And for that reason, I would like to acknowledge a debt of
gratitude to my entire team for a job well done. It is their hard work and dedication that have
made 2015 an outstanding year for Sussex Bancorp.
Using our “growing responsibly” philosophy as a guide, avoiding undue risk and
staying true to our disciplined credit culture, we will open new banking centers
in strategically important markets where we can compete, grow market share
and create shareholder value.
Financial Performance & Shareholder Value
I am also pleased to report a 42.1% increase in net income per diluted common share to $0.81
for the year ended December 31, 2015, as compared to $0.57 for the same period last year. The
improvement in 2015 was driven by our strong topline growth and contributions from our core
lines of business.
Our relationship-based approach to banking enabled us to organically grow both our loan portfolio
by 15% or $71 million, and our deposit base 13% or $60 million—which now stands at $518
million. We also applied that same relationship-based approach to our insurance subsidiary and
increased its pre-tax income by 34% or $169,000. Those positive contributions kept our net interest
margins stable and improved our fee income, thereby creating the favorable operating conditions
that drove these financial results.
Our capital remains strong. Our leverage, Common Equity Tier I, Tier I and Total risk-based capital
ratios were 9.45%, 11.74%, 11.74% and 12.79%, respectively, all in excess of ratios required to
be considered a “well capitalized” bank.
Our year-over-year (2014 vs. 2015) stock price is up 28.3%. And, over a three year period from
2012 through 2015, our stock price grew an impressive 143.3%.
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Growth Strategy
Expanding our geographic footprint is an important next phase of our strategic plan, and that process is well under
way. Using our “growing responsibly” philosophy as a guide, avoiding undue risk and staying true to our disciplined
credit culture, we will open new banking centers in strategically important markets where we can compete, grow
market share and create shareholder value. These banking centers will feature our “integrated banking experience.”
By integrating technology-based banking solutions with a staffing model that emphasizes higher value customer
engagements, we are able to deliver a customer experience that better meets the needs of the 21st century customer.
The alignment of both technology and human interactions integrated into our digital banking platform creates a
seamless, unified and consistent customer experience.
We are also placing commercial lending teams in geographically important banking centers to improve customer
interactions and build stronger personal relationships. These new initiatives are all intended to enhance our customers’
experience so we can grow our business by generating positive operating leverage, increase revenues and ultimately,
shareholder value.
In March 2015, we opened our first banking center in Astoria, NY, and within ten months of operation, the center
turned profitable—exceeding our break-even projections by many months. And in the first quarter of 2016, we entered
Bergen County, NJ and opened a new banking center in Oradell, NJ. We expect our banking centers and “integrated
banking experience” will continue to fuel additional earnings growth.
Our Management Team and Employees
As Ed mentioned, this year we will be celebrating our 40th anniversary. Throughout our history, and more prominently
in the last six years that I have been here, the one constant has been our management team and our employees—who
have kept the customer at the center of everything we do. As active members of their communities, our employees
recognize the critical role they play in improving the financial lives of their friends and neighbors. At the end of the day,
personal relationships matter, and we think we do an outstanding job at connecting with our customers.
A History of Serving Customers and Communities
We demonstrate our commitment to philanthropy and our communities in several ways. We support events and
causes through Sussex Bank on a corporate and local banking center level and through our own SB Foundation.
In 2015 SB Foundation, Inc. proudly made donations to many local charities including—but not limited to—
The Hemophilia Foundation, Karen Ann Quinlan Hospice, The Boys and Girls Club of Paterson, Bergen Chapter
NJSCPA, Oasis—A Haven for Women and Children, Habitat for Humanity of Bergen County and Community
Hope for Morris County.
Additionally, our Foundation awarded scholarships to the Sussex County Community College Foundation, US Armed
Forces Reservist Advantage Scholarship and the US Armed Forces College Start Scholarship. We are honored to help
support these fine organizations and the great work they do in making our communities better places to live.
The Road Ahead
As we continue to evaluate the company’s performance and the environmental conditions impacting it, the
management team will remain vigilant in ensuring that the decisions we make today will deliver high-quality and
sustainable growth tomorrow. Though 2016 promises to be filled with challenges, I firmly believe that Sussex Bank
has a solid plan and a high performing management team in place that will build the franchise and create long-term
shareholder value. I would like to conclude by thanking the shareholders for their continued trust and confidence,
as we remain committed to earning it every day.
With Gratitude,
Anthony Labozzetta
President and CEO
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:54)
(cid:133)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2015
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to ________
Commission File Number 0-29030
SUSSEX BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
22-3475473
(I.R.S. Employer Identification No.)
100 Enterprise Drive, Suite 700
Rockaway, New Jersey 07866
(Address of principal executive offices) (Zip Code)
(844) 256-7328
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
(cid:133) No (cid:54)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
(cid:133) No (cid:54)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:54) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:54) No (cid:133)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:133)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133)
Accelerated filer (cid:133)
Non-accelerated filer (cid:133)
(Do not check if a smaller reporting company)
Smaller reporting company (cid:54)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes (cid:133) No (cid:54)
Based upon the closing price of $12.05 on June 30, 2015, the aggregate market value of the voting and non-voting common
equity held by non-affiliates was $46,919,724. The number of shares of the registrant’s common stock, no par value, outstanding
as of March 9, 2016 was 4,675,976.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by reference into Part III of this
Annual Report on Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days
of the registrant’s fiscal year ended December 31, 2015.
INDEX
FORWARD-LOOKING STATEMENTS
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 6.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 7.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9.
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 13.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(cid:3)
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FORWARD-LOOKING STATEMENTS
We may, from time to time, make written or oral “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities
and Exchange Commission (the “SEC”), our reports to stockholders and in other communications by us. This
Annual Report on Form 10-K contains “forward-looking statements,” which may be identified by the use of such
words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-
looking statements include, but are not limited to, estimates with respect to our financial condition, results of
operation and business that are subject to various factors which could cause actual results to differ materially from
these estimates. These factors include, but are not limited to:
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
changes to interest rates, the ability to control costs and expenses;
our ability to integrate new technology into our operations;
general economic conditions;
the success of our efforts to diversify our revenue base by developing additional sources of non-
interest income while continuing to manage our existing fee based business;
the impact on us of the changing statutory and regulatory requirements; and
the risks inherent in commencing operations in new markets.
Any or all of our forward-looking statements in this Annual Report on Form 10-K, and in any other public
statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties. Consequently, no forward-looking statements can be guaranteed.
We disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances
after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.
Unless the context indicates otherwise, all references in this Annual Report on Form 10-K to “Sussex
Bancorp,” “we,” “us,” “our” and “the Company” refer to Sussex Bancorp and its subsidiaries. References to the
“Bank” are to Sussex Bank, our wholly owned bank subsidiary.
i
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ITEM 1. BUSINESS
General
PART I
Sussex Bancorp is a bank holding company under the Bank Holding Company Act of 1956, as amended
(the “BHC Act”) and was incorporated under the laws of the State of New Jersey in January 1996. The Company is
the parent company of Sussex Bank (the “Bank”). The only significant asset of Sussex Bancorp is its investment in
the Bank. At December 31, 2015, the Company had consolidated total assets of $684.5 million, gross loans of
$544.1 million, deposits of $517.9 million and stockholders’ equity of $53.9 million.
The Bank is a commercial bank formed under the laws of the State of New Jersey in 1975 and is regulated
by the New Jersey Department of Banking and Insurance (the “Department”) and the Federal Deposit Insurance
Corporation (the “FDIC”). The Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY
Company, Inc., ClassicLake Enterprises, LLC, Wheatsworth Properties Corp., PPD Holding Company, LLC and
Tri-State Insurance Agency, Inc. (“Tri-State”). SCB Investment Company, Inc. and SCBNY Company, Inc. hold
portions of the Bank’s investment portfolio. ClassicLake Enterprises, LLC, PPD Holding Company, LLC and
Wheatsworth Properties Corp. hold certain foreclosed properties. Tri-State provides insurance agency services
mostly through the sale of property and casualty insurance policies.
The corporate office of the Company is located at 100 Enterprise Drive, Suite 700, Rockaway, New Jersey,
07866, and the telephone number is (844) 256-7328.
Our Business
Our primary business is ownership and supervision of the Bank. Through the Bank, we conduct a
traditional commercial banking business, and offer services including personal and business checking accounts and
time deposits, money market accounts and savings accounts. We structure our specific services and charges in a
manner designed to attract the business of the small and medium sized business and professional community as well
as that of individuals residing, working and shopping in the northern New Jersey and New York markets. We
engage in a wide range of lending activities and offer commercial, consumer, mortgage, home equity and personal
loans.
Through the Bank’s subsidiary, Tri-State, we operate a full service general insurance agency, offering both
commercial and personal lines of insurance.
We have two business segments, banking and financial services and insurance services. For financial data
on the segments see Note 2 of our consolidated financial statements located elsewhere in this report.
Market Area
Our service area primarily consists of Sussex, Morris and Bergen Counties in New Jersey and Orange and
Queens Counties, New York; although we make loans throughout New Jersey and the New York metropolitan
markets. We operate from our corporate office in Rockaway, New Jersey, our eleven branch offices located in
Andover, Augusta, Franklin, Hackettstown, Montague, Newton, Sparta, Vernon, and Wantage, New Jersey, and in
Port Jervis and Astoria, New York, our regional office and corporate center in Wantage, New Jersey, our regional
lending office in Rochelle Park, New Jersey, and our insurance agency offices in Augusta and Rochelle Park, New
Jersey. On December 18, 2013 we permanently closed our Warwick, New York branch location and during the first
and third quarters of 2014 we opened a corporate office and a regional office and corporate center in Rockaway and
Wantage, New Jersey, respectively. We opened a new branch location in Astoria, New York during the first quarter
of 2015. On January 28, 2016 we announced our intent to close our Port Jervis branch as early as April 29, 2016.
On March 5, 2016 we opened a new branch location in Oradell, NJ in Bergen County. Our market area is among the
most affluent in the nation.
Competition
We operate in a highly competitive environment competing for deposits and loans with commercial banks,
thrifts and other financial institutions, many of which have greater financial resources than us. Many large financial
institutions in New York City and other parts of New Jersey compete for the business of customers located in our
1
service area. Many of these institutions have significantly higher lending limits than us and provide services to their
customers which we do not offer.
Management believes we are able to compete on a substantially equal basis with our competitors because
we provide responsive personalized services through management’s knowledge and awareness of our service area,
customers and business.
Personnel
At December 31, 2015, we employed 119 full-time employees and 20 part-time employees. None of these
employees are covered by a collective bargaining agreement and we believe that our employee relations are good.
Supervision and Regulation
The Company, the Bank and certain of its non-banking subsidiaries are subject to extensive regulation
under federal and state laws. The regulatory framework applicable to bank holding companies and their subsidiary
banks is intended to protect depositors, federal deposit insurance funds, and the U.S. banking system as a whole.
This system is not designed to protect investors in bank holding companies such as the Company.
Statutes, regulations and policies are subject to ongoing review by Congress, state legislatures and federal
and state agencies. A change in any statute, regulation or policy applicable to the Company may have a material
effect on the Company’s operations and financial performance. Financial reform legislation and regulations,
including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), may
have adverse implications on the financial industry, the competitive environment and our ability to conduct business.
As a result, we may incur additional expenses to comply with applicable laws and regulations, which may increase
our costs of operations and adversely impact our earnings.
Overview
The Company is a separate and distinct legal entity from the Bank. As a registered bank holding company,
the Company is regulated under the BHC Act, and is subject to inspection, examination and supervision by the FRB.
The Company is also subject to the jurisdiction of the U.S. Securities and Exchange Commission (“SEC”) and the
regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, as administered by the SEC. The Company’s common stock is listed on the NASDAQ under the trading
symbol, “SBBX,” and the Company is subject to the NASDAQ rules for listed companies.
The Bank is organized as a state-chartered commercial bank pursuant to the banking laws and regulations
of the Department. The Bank is subject to the supervision of, and to regular examination by, the Department as its
primary chartering authority, as well as by the FDIC as its primary federal regulator and deposit insurer. Financial
products and services offered by the Company and the Bank are subject to federal consumer protection laws and
regulations promulgated by the Consumer Financial Protection Bureau (“CFPB”). The Company, the Bank and
certain of its nonbank subsidiaries are also subject to oversight by state attorneys general for compliance with state
consumer protection laws. The Bank's deposits are insured by the FDIC up to the applicable deposit insurance
limits in accordance with FDIC laws and regulations. The non-bank subsidiaries of the Company and the Bank are
subject to federal and state laws and regulations, including regulations of the FRB and the Department, respectively.
Insurance agencies are licensed by the State of New Jersey and are regulated by the Department under state law.
The Dodd-Frank Act has significantly changed the U.S. financial regulatory landscape. Several provisions
of the Dodd-Frank Act are subject to further rulemaking, guidance and interpretation by the federal banking
agencies. As a result, management cannot predict the ultimate impact of the Dodd-Frank Act or the extent to which
it could affect operations of the Company and the Bank.
Set forth below is a summary of the significant laws and regulations applicable to the Company and the
Bank. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its
entirety by reference to the particular statutory and regulatory provisions. Any change in the applicable law or
regulation may have a material effect on the operations and business of the Company and the Bank.
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Federal Bank Holding Company Regulation
The Company is a bank holding company under the BHC Act. The BHC Act generally limits the business
of the Company to banking, managing or controlling banks, and other activities that the FRB has determined to be
so closely related to banking “as to be a proper incident thereto.” The Company is required to file periodic reports
with the FRB and other information regarding its business operations and those of its subsidiaries.
The BHC Act requires, among other things, prior FRB approval where a bank holding company proposes
to (i) acquire all or substantially all of the assets of any other bank, (ii) acquire direct or indirect ownership or
control of more than 5% of any class of voting stock of any bank (unless it owns a majority of such bank’s voting
shares) or (iii) merge or consolidate with any other bank holding company. The FRB will not approve any
acquisition, merger, or consolidation that would have a substantially anti-competitive effect, unless the anti-
competitive impact of the proposed transaction is clearly outweighed by a greater public interest in meeting the
convenience and needs of the community to be served. When reviewing acquisitions or mergers, the FRB also
considers, among other factors: (i) capital adequacy; (ii) the financial and managerial resources and future prospects
of the companies and the banks concerned; (iii) the convenience and needs of the community to be served; and (iv)
the effectiveness of the companies and the banks in combatting money laundering.
The BHC Act also generally prohibits a bank holding company, with certain limited exceptions, from
(i) acquiring or retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of
any company which is not a bank or bank holding company; or (ii) engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or performing services for its subsidiaries, unless such
non-banking business is determined by the FRB to be so closely related to banking or managing or controlling banks
“as to be properly incident thereto”. In making such determinations, the FRB is required to weigh the expected
benefits to the public, such as, greater convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as, undue concentration of resources, decreased or unfair competition, conflicts of interest or
unsound banking practices.
Bank holding companies whose subsidiary banks meet certain capital, management and standards under the
Community Reinvestment Act (“CRA”), which elect to become “financial holding companies,” are permitted to
engage in a substantially broader range of non-banking financial activities than is otherwise permissible for bank
holding companies under the BHC Act. These activities include certain insurance, securities and merchant banking
activities. As our business is currently limited to activities permissible for a bank holding company, we have not
elected to become a financial holding company.
Source of Strength Doctrine
FRB policy requires that bank holding companies act as a source of financial and managerial strength to
their subsidiary banks. Section 616 of the Dodd-Frank Act codifies the requirement that bank holding companies
serve as a source of financial strength to their subsidiary depository institutions. As a result, the Company is
expected to commit resources to support the Bank, including at times when the Company may not be in a financial
position to provide such resources. Any capital loan by the Company to the Bank is subordinate in right of payment
to deposits and to certain other indebtedness of such subsidiary banks. The U.S. bankruptcy code provides that, in
the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled
to priority of payment.
Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking
entities, such as the Company, from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain
types of funds (“Covered Funds”), subject to certain limited exceptions. The implementing regulation defines a
Covered Fund to include certain investments such as collateralized loan obligation (“CLO”) and collateralized debt
obligation securities. The regulation also provides, among other exemptions, an exemption for CLOs meeting certain
requirements. Compliance with the Volcker Rule is generally required by July 21, 2017. Given the Company’s size
and the scope of its activities, the Company does not believe the implementation of the Volcker Rule will have a
significant effect on its financial statements.
3
Dividend Rights
The principal source of the Company’s liquidity is dividends from the Bank. As a New Jersey-chartered
bank, the Bank may declare and pay dividends only if, after payment of the dividend, the capital stock of the Bank
will be unimpaired and either the Bank will have a surplus of not less than 50% of its capital stock or the payment of
the dividend will not reduce the Bank’s surplus.
Capital Adequacy and Prompt Corrective Action
In July 2013, the FRB, the Office of the Comptroller of the Currency (the “OCC”) and the FDIC approved
final rules (the “Capital Rules”) that established a new capital framework for U.S. banking organizations. The
Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”)
December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards.
In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of
Section 939A to remove references to credit ratings from the federal banking agencies’ rules.
The Capital Rules substantially revised the risk-based capital requirements applicable to bank holding
companies and their depository institution subsidiaries. The risk-based capital guidelines are designed to make
regulatory capital requirements sensitive to differences in risk profiles among banks and bank holding companies, to
account for off-balance sheet exposures and to minimize disincentives for holding liquid, low-risk assets. The capital
guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $1 billion or more,
and to certain bank holding companies with less than $1 billion in assets if they are engaged in substantial non-
banking activity or meet certain other criteria. Under FRB reporting requirements, a bank holding company that
reaches $1 billion or more in total consolidated assets as of June 30 of the preceding year must begin reporting its
consolidated capital beginning in March of the following year. The threshold for capital consolidation was raised
from $500 million to $1 billion effective May 15, 2015, As a result, the Company is no longer required to report its
consolidated capital. The Bank, however, must continue to meet minimum capital requirements under the Capital
Rules.
The Capital Rules: (i) require a capital measure called “Common Equity Tier 1” (“CET1”) and related
regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and
“Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most
deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital;
and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. The
Capital Rules revised the definitions and the components of regulatory capital and impacted the calculation of the
numerator in banking institutions’ regulatory capital ratios. The Capital Rules became effective for the Company on
January 1, 2015, subject to phase-in periods for certain components and other provisions. Under the Capital Rules,
for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual
preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation
for loan losses, in each case, subject to the Capital Rules’ specific requirements.
Pursuant to the Capital Rules, the minimum capital ratios as of January 1, 2015 are:
(cid:404) 4.5% CET1 to risk-weighted assets;
(cid:404) 6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to risk-weighted assets;
(cid:404) 8.0% Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and
(cid:404) 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements
(known as the “leverage ratio”).
The Capital Rules also requires a “capital conservation buffer,” composed entirely of CET1, on top of these
minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of
economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the
capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and
compensation based on the amount of the shortfall. When fully phased-in on January 1, 2019, the capital standards
applicable to the Company will include an additional capital conservation buffer of 2.5% of CET1, effectively
resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at
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least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of
at least 10.5%.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for
example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that
could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial
entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in
the aggregate, exceed 15% of CET1.
In addition, under the prior general risk-based capital rules, the effects of accumulated other comprehensive
income or loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in
the available-for-sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital
ratios. Under the Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations
not using the advanced approaches, including the Company were permitted to make a one-time permanent election
to continue to exclude these items in January 2015. The Capital Rules also preclude certain hybrid securities, such
as trust preferred securities issued after May 19, 2010, from inclusion in bank holding companies’ Tier 1 capital.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be
phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).
The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and
increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.
With respect to the Bank, the Capital Rules revised the “prompt corrective action” (“PCA”) regulations
adopted pursuant to Section 38 of the Federal Deposit Insurance Act (the “FDIA”), by: (i) introducing a CET1 ratio
requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5%
for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the
minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to 6%); and (iii) eliminating the
provision that permitted a bank with a composite supervisory rating of 1 and a 3% leverage ratio to be considered
adequately capitalized. The Capital Rules did not change the total risk-based capital requirement for any PCA
category.
The Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting
categories from the four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive
number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and
agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset
classes.
Management believes that the Bank is in compliance, and will remain in compliance, with the targeted
capital ratios as such capital requirements are phased in.
Depositor Preference
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository
institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured
depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other
general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured
depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including
the parent bank holding company, with respect to any extensions of credit they have made to such insured
depository institution
Federal Deposit Insurance
The Dodd-Frank Act increased the maximum amount of deposit insurance for banks, savings institutions
and credit unions to $250,000 per depositor per insured institution. The Bank’s deposit accounts are fully insured by
the FDIC Deposit Insurance Fund (the “DIF”) up to the deposit insurance limits in accordance with applicable laws
and regulations.
The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix
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that accounts for a bank's capital level and supervisory rating (“CAMELS rating”). The risk matrix uses different
risk categories distinguished by capital levels and supervisory ratings. As a result of the Dodd-Frank Act, the base
for deposit insurance assessments is now consolidated average assets less average tangible equity. Assessment rates
are calculated using formulas that take into account the risk of the institution being assessed. In addition to deposit
insurance assessments, the FDIA provides for additional assessments to be imposed on insured depository
institutions to pay for the cost of Financing Corporation (“FICO”) funding. The FICO is a mixed-ownership
government corporation established by the Competitive Equality Banking Act of 1987, whose sole purpose was to
function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. The FICO
assessments are adjusted quarterly to reflect changes in the assessment base of the DIF and do not vary depending
upon a depository institution’s capitalization or supervisory evaluation.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that an insured depository
institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations,
or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The Company’s
management is not aware of any practice, condition or violation that might lead to the termination of deposit
insurance.
Reserve Requirements
FRB regulations require insured depository institutions to maintain non-interest earning reserves against
their transaction accounts (primary interest-bearing and regular checking accounts). The Bank’s required reserves
can be in the form of vault cash. If vault cash does not fully satisfy the required reserves, in the form of a balance
maintained with the Federal Reserve Bank of New York. FRB regulations required for 2015 that reserves be
maintained against aggregate transaction accounts, except for transaction accounts which are exempt up to $14.5
million. Transaction accounts greater than $14.5 million up to and including $103.6 million have a reserve
requirement of 3%. A 10% reserve ratio will be assessed on transaction accounts in excess of $103.6 million. The
FRB generally makes annual adjustments to the tiered reserves. The FRB generally makes annual adjustments to the
tiered reserves. The Bank is in compliance with these reserve requirements.
Transactions with Affiliates and Insiders
Under federal law, transactions between depository institutions and their affiliates are governed by Sections
23A and 23B of the Federal Reserve Act (“FRA”) and its implementing Regulation W. In a bank holding company
context, at a minimum, the parent holding company of a bank, and any companies which are controlled by such
parent holding company, are affiliates of the bank. Generally, sections 23A and 23B of the FRA are intended to
protect insured depository institutions from losses arising from transactions with non-insured affiliates by limiting
the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all
affiliates of the bank in the aggregate, and requiring that such transactions be on terms consistent with safe and
sound banking practices.
Further, Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive
officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests
may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total
capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of
directors. Further, under Section 22(h) of the FRA, loans to directors, executive officers and principal stockholders
must be made on terms substantially the same as offered in comparable transactions to other persons, except that
such insiders may receive preferential loans made under a benefit or compensation program that is widely available
to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA
places additional limitations on loans to executive officers.
Anti-Money-Laundering
The Bank Secrecy Act (“BSA”), as amended by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), imposes
obligations on U.S. financial institutions, including banks and broker-dealer subsidiaries, to implement policies,
procedures and controls which are reasonably designed to detect and report instances of money laundering and the
financing of terrorism. The USA PATRIOT Act requires all financial institutions, including the Company and the
Bank, to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or
prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law
enforcement agencies concerning their customers and their transactions. The USA PATRIOT Act also encourages
information-sharing among financial institutions, regulators, and law enforcement authorities by providing an
exemption from the privacy provisions of the GLB Act for financial institutions that comply with this provision. The
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effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any
application submitted by the financial institution under the Bank Merger Act, which applies to the Bank, or the BHC
Act, which applies to the Company. Failure of a financial institution to maintain and implement adequate programs
to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could
have serious legal, financial and reputational consequences. As of December 31, 2015, the Company and the Bank
believe that they are in compliance with the BSA and the USA PATRIOT Act, and implementing regulations.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign
countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the
U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting
countries take many different forms. Generally, they contain one or more of the following elements: i) restrictions
on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from
and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to
making investments in, or providing investment-related advice or assistance to, a sanctioned country; and ii) a
blocking of assets in which the government or specially designated nationals of the sanctioned country have an
interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or
control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off or
transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious
legal and reputational consequences.
Consumer Protection Laws and CFPB Supervision
The Dodd-Frank Act centralized responsibility for federal consumer financial protection in the CFPB,
which is an independent agency charged with responsibility for implementing, enforcing, and examining compliance
with federal consumer laws and regulations. The Company and the Bank are subject to a number of federal and
state laws designed to protect borrowers and promote lending to various sectors of the economy. Among others,
these laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the
Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the
Consumer Financial Protection Act of 2010, which established the CFPB.
On January 10, 2013, the CFPB issued a final rule implementing the ability-to-repay and qualified
mortgage (“QM”) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”).
The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are
able to repay their mortgages before extending the credit based on a number of factors and consideration of financial
information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the
QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied
the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting
the QM requirements, and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements.
The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative
amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio
for borrowers if the loan is to meet the QM definition, though some mortgages that meet GSE, FHA and VA
underwriting guidelines may, for a period not to exceed seven years, meet the QM definition without being subject
to the 43% debt-to-income limits. The QM Rule became effective on January 10, 2014.
The CFPB is expected to continue to issue and amend rules implementing the consumer financial
protection laws, which may impact the Bank’s operations and activities.
Community Reinvestment Act of 1977
The Bank has a responsibility under the CRA and its implementing regulations to help meet the credit
needs of its communities, including low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the
types of products and services that it believes are best suited to its particular community. Regulators periodically
assess the Bank’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair
Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes.
The Bank’s failure to comply with the CRA could, at a minimum, result in regulatory restrictions on its activities
and the activities of the Company. The Bank received a “Satisfactory” CRA rating in its most recent examination.
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Financial Privacy Laws
Section V of the Gramm-Leach-Bliley Act and its implementing regulations require all financial
institutions, including the Company and the Bank, to adopt privacy policies, restrict the sharing of nonpublic
customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect
customer data from unauthorized access. In addition, the Fair Credit Reporting Act (“FCRA”), as amended by the
Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”), includes many provisions affecting the Company,
Bank, and/or their affiliates, including provisions concerning obtaining consumer reports, furnishing information to
consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among
affiliated companies, and other provisions. The FACT Act requires persons subject to FCRA to notify their
customers if they report negative information about them to a credit bureau or if they are granted credit on terms less
favorable than those generally available. The CFPB and the Federal Trade Commission (“FTC”) have extensive
rulemaking authority under the FACT Act, and the Company and the Bank are subject to the rules that have been
promulgated under the FACT Act, including rules regarding limitations on affiliate marketing and implementation
of programs to identify, detect and mitigate certain identity theft red flags. The Company has developed policies
and procedures for itself and its subsidiaries, including the Bank, and believes it is in compliance with all privacy,
information sharing, and notification provisions of the GLB Act and the FACT Act. The Bank is also subject to data
security standards, privacy and data breach notice requirements, primarily those issued by the FDIC.
Employee Compensation
The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive
compensation at least every three years and on so-called “golden parachute” payments in connection with approvals
of mergers and acquisitions. The legislation also authorizes the SEC to promulgate rules that would allow
stockholders to nominate their own candidates using a company’s proxy materials. The Dodd-Frank Act also gives
the SEC authority to prohibit broker discretionary voting on elections of directors, executive compensation matters
and any other significant matter.
Future Legislative Initiatives
From time to time, various legislative and regulatory initiatives are introduced by Congress, state
legislatures, and financial regulatory agencies. Such initiatives may include proposals to expand or contract the
powers of bank holding companies and/or depository institutions or proposals to substantially change the financial
institution regulatory system. Such legislation could change banking statutes and the operating environment of the
Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of
doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings
associations, credit unions, and other financial institutions. The Company cannot predict whether any such
legislation will be enacted, and, if enacted, the effect that it or any implementing regulations would have on the
financial condition or results of operations of the Company. A change in statutes, regulations, or regulatory policies
applicable to the Company or any of its subsidiaries could have a material effect on the business of the Company.
Available Information
We file annual reports, quarterly reports, proxy statements and other documents with the SEC under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy any materials
that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-
0330. Also, the SEC maintains a website that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The public can obtain any documents that we
file with the SEC at www.sec.gov.
We maintain a website at www.sussexbank.com. Through a link to our Investor Relations section of our
website, we make available, free of charge, copies of each of our filings with the SEC, including our Annual Report
on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and, if applicable, any
amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the SEC.
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ITEM 1A. RISK FACTORS
Our allowance for loan losses may not be adequate to cover actual losses.
Like all financial institutions, we maintain an allowance for loan losses to provide for loan defaults and
nonperformance. Our allowance for loan losses may not be adequate to cover actual losses, and future provisions
for loan losses could materially and adversely affect the results of our operations. In addition to periodic reviews by
an independent loan review function, risks within the loan portfolio are analyzed on a continuous basis by
management and by the Board of Directors. A risk system, consisting of multiple-grading categories, is utilized as
an analytical tool to assess risk and the appropriate level of loss reserves. Along with the risk system, management
further evaluates risk characteristics of the loan portfolio under current economic conditions and considers such
factors as the financial condition of the borrowers, past and expected loan loss experience and other factors
management feels deserve recognition in establishing an adequate reserve. This risk assessment process is
performed at least quarterly and any necessary adjustments are realized in the periods in which they become known.
The amount of future losses is susceptible to changes in economic, operating and other conditions, including
changes in interest rates that may be beyond our control, and these losses may exceed current estimates. State and
federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan
losses and have in the past required an increase in our allowance for loan losses. Although we believe that our
allowance for loan losses is adequate to cover probable and reasonably estimated losses, we cannot assure you that
we will not further increase the allowance for loan losses or that our regulators will not require us to increase this
allowance. Either of these occurrences could adversely affect our earnings.
If our non-performing assets increase, our earnings will be negatively impacted.
At December 31, 2015, our non-performing assets (“NPAs”) (which consist of non-accrual loans, loans 90
days or more delinquent, performing troubled debt restructurings and foreclosed real estate assets) totaled $10.2
million, which was a decrease of $1.8 million or 15.2% from December 31, 2014. However, we can give no
assurance that our NPAs will continue to decrease and we may experience increases in NPAs in the future. Our
NPAs adversely affect our net income in various ways. We do not record interest income on non-accrual loans or
real estate owned. We must reserve for estimated credit losses, which are established through a current period
charge to the provision for loan losses, and from time to time, if appropriate, we must write down the value of
properties in the other real estate owned portfolio to reflect changing market values. Additionally, there are legal
fees associated with the resolution of problem assets as well as carrying costs, including taxes, insurance and
maintenance related to our other real estate owned. Further, the resolution of NPAs requires the active involvement
of management, potentially distracting them from the overall supervision of our operations and other income-
producing activities.
Our earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and
exploit opportunities to generate fee-based income.
We have experienced growth, and our future business strategy is to continue to expand. Historically, the
growth of our loans and deposits has been the principal factor in our increase in net-interest income. In the event
that we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be
adversely impacted. Our ability to continue to grow depends, in part, upon our ability to expand our market share,
to successfully attract core deposits and identify loan and investment opportunities, as well as opportunities to
generate fee-based income. Our ability to manage growth successfully will also depend on whether we can continue
to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our
control, such as economic conditions and interest-rate trends.
We do not have any control over the commissions our insurance business expects to earn on the sale of insurance
products, which are based on premiums and commission rates set by insurers and the conditions prevalent in the
insurance market.
The revenues of our fee-based insurance business are derived primarily from commissions from the sale of
insurance policies, which commissions are generally calculated as a percentage of the policy premium. Commission
rates and premiums can change based on the prevailing economic and competitive factors that affect insurance
underwriters. In addition, the insurance industry has been characterized by periods of intense price competition due
to excessive underwriting capacity and periods of favorable premium levels due to shortages of capacity. We cannot
9
predict the timing or extent of future changes in commission rates or premiums or the effect any of these changes
will have on the operations of our insurance business.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our profitability, like that of most financial institutions, depends substantially on our net interest income,
which is the difference between the interest income earned on our interest-earning assets and the interest expense
paid on our interest-bearing liabilities. Increases in interest rates may decrease loan demand and make it more
difficult for borrowers to repay adjustable rate loans. In addition, as market interest rates rise, we will have
competitive pressures to increase the rates we pay on deposits, which will result in a decrease of our net interest
income.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates
may affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in
increased prepayments of loans and mortgage-related securities as borrowers refinance to reduce borrowing costs.
Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash
received from such prepayments at rates that are comparable to the rates on existing loans and securities.
Certain of our intangible assets may become impaired in the future.
Intangible assets are tested for impairment on a periodic basis. Impairment testing incorporates the current
market price of our common stock, the estimated fair value of our assets and liabilities, and certain information of
similar companies. It is possible that future impairment testing could result in a decline in value of our intangibles,
which may be less than the carrying value, which may adversely affect our financial condition. If we determine that
impairment exists at a given point in time, our earnings and the book value of the related intangibles will be reduced
by the amount of the impairment. Notwithstanding the foregoing, the results of impairment testing on our intangible
assets have no impact on our tangible book value or regulatory capital levels.
We operate in a highly-regulated environment and are subject to extensive government supervision and
regulation that affects our operations and may adversely impact our business.
We are subject to extensive federal and state supervision and regulation that govern nearly all aspects of
our operations and can have a material impact on our business. Financial regulatory authorities have significant
discretion regarding the supervision, regulation and enforcement of banking laws and regulations.
Banking and insurance laws, regulations and policies are subject to amendment by Congress, the State of
New Jersey and federal and state financial regulatory agencies. Changes to statutes, regulations or policies,
including changes in the administrative interpretation of regulations or policies, could materially impact our
business. These changes could impose additional costs on us and limit the types of financial products and services
that we may offer our customers. Compliance with laws and regulations can be difficult and costly, and changes to
laws and regulations often impose significant compliance costs. Failure to comply with any laws, regulations or
policies could result in sanctions by financial regulatory agencies, including civil money penalties, private lawsuits
or reputational damage, any of which could adversely affect our business or results of operations. While we have
policies and procedures designed to prevent such violations, there can be no assurance that violations will not occur.
See the section titled “Supervision and Regulation” in ITEM 1. Business.
Since the 2008 global financial crisis, financial institutions have been subject to increased scrutiny from
Congress, state legislatures and federal and state financial regulatory agencies. Recent changes to the legal and
regulatory framework have significantly altered the laws and regulations under which we operate. These changes
may reduce our ability to effectively compete in attracting and retaining customers. The passage and continued
implementation of the Dodd-Frank Act, among other laws and regulations, has increased our costs of doing business
and resulted in decreased revenues and net income. The Dodd-Frank Act and implementing regulations could also
have adverse implications on the financial industry, the competitive environment and our ability to conduct business.
Several provisions of the Dodd-Frank Act are subject to further rulemaking, guidance and interpretation by the
federal financial regulatory agencies. As a result, we cannot provide assurance that future changes in laws,
regulations and policies will not adversely affect our business.
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State and federal financial regulatory agencies periodically conduct examinations of our business, including for
compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or
become subject as a result of such examinations may adversely affect our business.
Federal and state financial regulatory agencies periodically conduct examinations of our business, including
our compliance with laws and regulations. If, as a result of an examination, an agency were to determine that the
financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our
operations had become unsatisfactory, or violates any law or regulation, federal financial agencies may take several
different remedial or enforcement actions it deems appropriate to correct any deficiency. Such actions include the
power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from
any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in the
bank’s capital, to restrict the bank’s growth, to assess civil monetary penalties against the bank’s officers or
directors, to remove officers and directors and, if the FDIC concludes that such conditions cannot be corrected or
there is an imminent risk of loss to depositors, to terminate our deposit insurance. The Department, as the
supervisory and regulatory authority for state-chartered banks, has similar enforcement powers with respect to our
banking business and insurance agency. The CFPB has the authority to take enforcement actions, including cease-
and-desist orders or civil monetary penalties against us if it finds that we offer consumer financial products and
services in violation of federal consumer financial protection laws.
If we were unable to comply with future regulatory directives, or if we were unable to comply with the
terms of any future supervisory requirements to which we may become subject, then we could become subject to a
variety of supervisory actions and orders, including cease and desist orders, prompt corrective actions, MOUs,
and/or other regulatory enforcement actions. If our financial regulators were to take such supervisory actions, then
we could, among other things, become subject to greater restrictions on our ability to develop any new business, as
well as restrictions on our existing business, and we could be required to raise additional capital, dispose of certain
assets and liabilities within a prescribed period of time, or both. Failure to implement remedial measures as required
by financial regulatory agencies could result in additional orders or penalties from federal and state regulators,
which could result in one or more of the remedial actions described above. The terms of any supervisory action and
associated consequences with any failure to comply with any supervisory action could have a material negative
effect on our business, operating flexibility and overall financial condition.
There is a risk that we may not be repaid in a timely manner, or at all, for loans we make.
The risk of non-payment (or deferred or delayed payment) of loans is inherent in commercial banking.
Such non-payment, or delayed or deferred payment of loans to us, if they occur, may have a material adverse effect
on our earnings and overall financial condition. Additionally, in compliance with applicable banking laws and
regulations, we maintain an allowance for loan losses created through charges against earnings. As of December 31,
2015, our allowance for loan losses was $5.6 million. Our marketing focus on small to medium-size businesses may
result in the assumption by us of certain lending risks that are different from or greater than those which would
apply to loans made to larger companies. We seek to minimize our credit risk exposure through credit controls,
which include evaluation of potential borrowers’ available collateral, liquidity and cash flow. However, there can be
no assurance that such procedures will actually reduce loan losses.
We are in competition with many other financial service providers, including larger commercial banks which
have greater resources than us.
The banking industry within our trade area is highly competitive. Our principal market area is also served
by branch offices of large commercial banks and thrift institutions. In addition, in 1999, the Gramm-Leach-Bliley
Financial Modernization Act of 1999 was passed into law. The Modernization Act permits other financial entities,
such as insurance companies and securities firms, to acquire or form financial institutions, thereby further increasing
competition. A number of our competitors have substantially greater resources than we do to expend upon
advertising and marketing, and their substantially greater capitalization enables them to make much larger loans.
Our success depends upon our ability to serve small business clients in a more responsive manner than the large and
mid-size financial institutions against whom we compete in our principal market area. In addition to competition
from larger institutions, we also face competition for individuals and small businesses from recently formed banks
seeking to compete as “home town” institutions. Most of these new institutions have focused their marketing efforts
on the smaller end of the small business market we serve.
11
We depend on our executive officers and key personnel to continue the implementation of our long-term business
strategy and could be harmed by the loss of their services.
We believe that our continued growth and future success will depend in large part upon the skills of our
management team. The competition for qualified personnel in the financial services industry is intense, and the loss
of our key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect
our business. We cannot assure you that we will be able to retain our existing key personnel or attract additional
qualified personnel. We have employment agreements and/or change in control agreements with our Chief
Executive Officer, Chief Financial Officer, Chief Technology Officer, Chief Lending Officer, Chief Retail Officer
and Chief Executive Officer of Tri-State, and the loss of the services of one or more of our executive officers and
key personnel could impair our ability to continue to develop our business strategy.
Changes in local economic conditions could adversely affect our loan portfolio.
Our success depends to a great extent upon the general economic conditions of the local markets that we
serve. Unlike larger banks that are more geographically diversified, we provide banking and financial services
primarily to customers in the New Jersey and New York markets in which we have branches, so any decline in the
economy of this specific region could have an adverse impact on us.
The ability of our borrowers to repay their loans, our financial results, the credit quality of our existing loan
portfolio, and the ability to generate new loans with acceptable yield and credit characteristics may be adversely
affected by changes in prevailing economic conditions, including declines in real estate values, changes in interest
rates, adverse employment conditions and the monetary and fiscal policies of the federal government. We cannot
assure you that negative trends or developments would not have a significant adverse effect on us.
We cannot predict how changes in technology will impact our business.
The financial services market, including banking services, is increasingly affected by advances in
technology, including developments in telecommunications, data processing, automation, internet-based banking,
telephone banking, and debit cards and so-called “smart cards.”
Our ability to compete successfully in the future will depend on whether we can anticipate and respond to
technological changes. To develop these and other new technologies, we will likely have to make additional capital
investments. Although we continually invest in new technology, we cannot assure you that we will have sufficient
resources or access to the necessary proprietary technology to remain competitive in the future.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure,
interruption or breach in security of these systems could result in failures or disruptions in our customer-relationship
management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to
prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no
assurance that any such failures, interruptions or security breaches will not occur, or, if they do occur, that they will
be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information
systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory
scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse
effect on our financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
12
ITEM 2. PROPERTIES
We conduct our business through our corporate office in Rockaway, New Jersey, our regional office and
corporate center in Wantage, New Jersey, our regional lending office in Rochelle Park, New Jersey, our insurance
agency offices in Augusta and Rochelle Park, New Jersey, and our eleven branch offices. The following table sets
forth certain information regarding our properties as of December 31, 2015. We believe that our existing facilities
are sufficient for our current needs. All properties are adequately covered by insurance.
LOCATION
LEASED OR OWNED
28-21 Astoria Blvd
Astoria, New York
399 Route 23
Franklin, New Jersey
7 Church Street
Vernon, New Jersey
266 Clove Road
Montague, New Jersey
96 Route 206
Augusta, New Jersey
378 Route 23
Wantage, New Jersey
455 Route 23
Wantage, New Jersey
15 Boulder Hills Blvd.
Wantage, New Jersey
15 Trinity Street
Newton, New Jersey
165 Route 206
Andover, New Jersey
100 Route 206
Augusta, New Jersey
33 Main Street
Sparta, New Jersey
100 Enterprise Drive, Suite 700
Rockaway, New Jersey
20-22 Fowler Street
Port Jervis, New York
430 Schooley's Mtn. Road
Hackettstown, New Jersey
296 Kinderkamack Road
Oradell, New Jersey
Leased
Owned
Owned
Leased
Leased
Owned
Owned (1)
Leased
Owned
Owned
Owned
Owned
Leased
Leased
Leased
Leased
DATE OF LEASE
EXPIRATION
November, 2019
N/A
N/A
March, 2017
July, 2017
N/A
N/A
June, 2020
N/A
N/A
N/A
N/A
January, 2020
June, 2016
June, 2017
September, 2027
201 West Passaic Street
Rochelle Park, New Jersey
(1) We own the building housing our former Wantage branch. The land on which the building is located is leased pursuant to a ground lease
September, 2016
Leased
which runs until December 31, 2020, and contains the sole option of the bank to extend the lease for an additional 25 year term.
ITEM 3. LEGAL PROCEEDINGS
We are periodically involved in various legal proceedings as a normal incident to our business. In the
opinion of management no material loss is expected from any such pending lawsuit.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
13
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the NASDAQ Global Market, under the symbol “SBBX.” As of December
31, 2015, we had approximately 571 holders of record.
The following table shows the high and low sales price during the periods indicated, as well as dividends
declared:
2015
Fourth Quarter ended December 31
Third Quarter ended September 30
Second Quarter ended June 30
First Quarter ended March 31
2014
Fourth Quarter ended December 31
Third Quarter ended September 30
Second Quarter ended June 30
First Quarter ended March 31
Dividend Policy
High
$13.79
$12.87
$12.80
$11.30
High
$10.75
$10.55
$9.50
$9.40
Low
$12.30
$11.90
$11.11
$9.81
Low
$9.67
$8.96
$8.53
$7.53
Cash Dividends
Declared
$0.04
$0.04
$0.04
$0.04
Cash Dividends
Declared
$0.03
$0.03
$0.03
-
The payment of dividends depends upon our debt and equity structure, earnings, financial condition, need
for capital in connection with possible future acquisitions and other factors, including economic conditions,
regulatory restrictions and tax considerations. We cannot guarantee the payment of dividends.
The only funds available for the payment of dividends on our capital stock will be cash and cash
equivalents held by us, dividends paid to us by the Bank, and borrowings. The Bank is prohibited from paying cash
dividends to us to the extent that any such payment would reduce the Bank’s capital below required capital levels.
See “Bank Holding Company Regulation – Capital Adequacy Guidelines for Bank Holding Companies” and “Bank
Regulation” for a discussion of these restrictions. For additional information see Note 19 in our consolidated
financial statements contained elsewhere in this report.
Recent Sales of Unregistered Securities
There were no sales by us of unregistered securities during the year ended December 31, 2015.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
There were no purchases made by or on behalf of us of our common stock during the fourth quarter of
2015.
14
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data as of December 31 for each of the five years presented should be read
in conjunction with our audited consolidated financial statements and the accompanying notes.
(Dollars in thousands, except per share data))
As of and for the Year Ended December 31
2015
2014
2013
2012
2011
$
$
SUMMARY OF INCOME:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expenses
Income before income tax expense
Income tax expense (benefit)
Net income
WEIGHTED AVERAGE NUMBER OF SHARES: (1)
Basic
Diluted
PER SHARE DATA:
Basic earnings per share
Diluted earnings per share
Cash dividends (2)
BALANCE SHEET:
Loans, net
Total assets
Total deposits
Total stockholders’ equity
Average assets
Average stockholders’ equity
PERFORMANCE RATIOS:
Return on average assets
Return on average stockholders’ equity
Average equity/average assets
Net interest margin
Efficiency ratio (3)
Other income to net interest income plus other income
Dividend payout ratio
CAPITAL RATIOS: (4)
Tier I capital to average assets
Tier I capital to total risk-weighted assets
Total capital to total risk-weighted assets
Common equity Tier 1 capital to total risk-weighted
t
ASSET QUALITY RATIOS:
Non-accrual loans to total loans
Non-performing assets to total assets (5)
Net loan charge-offs to average total loans
Allowance for loan losses to total loans at period end
Allowance for loan losses to non-performing loans (6)
$
23,644 $
21,300 $
19,642 $
3,568
20,076
636
19,440
6,453
20,553
5,340
1,640
3,700 $
3,294
18,006
1,537
16,469
5,961
18,829
3,601
1,001
2,600 $
3,201
16,441
2,745
13,696
6,093
18,228
1,561
133
1,428 $
19,967 $
3,800
16,167
4,330
11,837
7,001
18,432
406
(329)
735 $
21,340
4,427
16,913
3,306
13,607
5,321
15,821
3,107
637
2,470
4,559,316
4,591,822
4,541,305
4,580,350
3,781,562
3,816,904
3,261,809
3,287,017
3,256,183
3,327,379
0.81 $
0.81
0.16
0.57 $
0.57
0.09
0.38 $
0.37
-
0.23 $
0.22
-
0.76
0.74
-
$
537,833 $
466,332 $
386,981 $
342,760 $
684,503
517,856
53,941
595,915
458,270
51,229
533,911
430,297
46,425
514,734
432,436
40,372
627,298
559,885
529,152
510,565
52,715
49,494
42,382
40,720
0.59%
7.02%
8.40%
3.45%
77.47%
24.32%
19.75%
9.45%
11.74%
12.79%
11.74%
0.98%
1.49%
0.14%
1.03%
81.43%
0.46%
5.25%
8.84%
3.49%
78.56%
24.87%
15.79%
10.19%
12.79%
14.02%
N/A
1.26%
2.02%
0.33%
1.20%
74.23%
0.27%
3.37%
8.01%
3.41%
80.89%
27.04%
-
10.38%
14.21%
15.47%
N/A
3.03%
3.10%
0.65%
1.38%
39.73%
0.14%
1.81%
7.98%
3.52%
79.56%
30.22%
-
9.27%
12.88%
14.13%
N/A
5.14%
4.61%
3.70%
1.43%
26.93%
332,495
506,953
425,376
39,902
483,627
38,369
0.51%
6.44%
7.93%
3.87%
71.16%
23.93%
-
9.29%
13.05%
14.31%
N/A
7.15%
6.71%
0.73%
2.12%
26.03%
(1) The weighted average number of shares outstanding was computed based on the average number of shares outstanding during each period as
adjusted for subsequent stock dividends.
(2) Cash dividends per common share are based on the actual number of common shares outstanding on the dates of record as adjusted for
subsequent stock dividends, if any.
15
(3) Efficiency ratio is total other expenses divided by net interest income and total other income.
(4) Bank capital ratios.
(5) NPAs include non-accrual loans, loans past due 90 days and still accruing, troubled debt restructured loans still accruing and foreclosed real
estate.
(6) Non-performing loans include non-accrual loans, loans past due 90 days and still accruing and troubled debt restructured loans still accruing.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a bank holding company of a community bank primarily operating in northern New Jersey and New
York that provides diversified financial services to both consumer and business customers. Our primary source of
revenues, approximately 75%, is derived from net interest income which represents the difference between the
interest we earn on our assets, principally loans and investment securities, and interest we pay on our deposits and
borrowings. Net interest income expressed as a percentage of average interest-earning assets is referred to as net
interest margin. Our net interest margin was negatively impacted during the year ended December 31, 2015 due to
the continued low interest rate environment. The impact resulted in interest earning asset yields decreasing faster
than rates on interest bearing deposits, which decreased our net interest margin by 4 basis points to 3.45% for the
year ended 2015 compared to 3.49% for the year ended 2014.
We augment our primary revenue source through non-interest income sources that include insurance
commissions from our wholly owned subsidiary, Tri-State, service charges on deposits, bank-owned life insurance
(“BOLI”) income and commissions on mutual funds and annuities. In addition, we from time to time may recognize
income on gains on sales of securities; however, we do not consider this a primary source of income.
We continued to make progress in 2015 towards reducing our problem assets, which was one of our
primary goals. For 2015, we had a 15.2% improvement in NPAs and our total problem assets, which consists of
foreclosed real estate and criticized and classified loans, declined by 5.1% as compared to 2014. In addition, the
ratio of NPAs to total assets improved to 1.5% at December 31, 2015 from 2.0% at December 31, 2014.
For 2015, our net income increased to $3.7 million, or $0.81 per basic and diluted share, as compared to net
income of $2.6 million, or $0.57 per basic and diluted share, for the same period last year. The increase in net
income for the year ended December 31, 2015 was largely due to an increase in net interest income of $2.1 million,
a decline in the provision for loan losses of $901 thousand and higher non-interest income of $492 thousand, which
were partially offset by increases in non-interest expenses of $1.7 million and income tax expense of $639 thousand.
Total loans receivable, net of unearned income, increased $71.5 million, or 15.1%, to $543.4 million at
December 31, 2015, from $472.0 million at year-end 2014. This increase was primarily attributed to growth in the
commercial loan portfolio. Our total deposits increased $59.6 million, or 13.0%, to $517.9 million at December 31,
2015, from $458.3 million at December 31, 2014. The increase in deposits was due to increases in both interest
bearing deposits of $42.9 million, or 11.1%, and non-interest bearing deposits of $16.7 million, or 23.7%, for
December 31, 2015, as compared to December 31, 2014.
At December 31, 2015, our total stockholders’ equity was $53.9 million, an increase of $2.7 million when
compared to December 31, 2014. The increase was largely due to net income for the year ended December 31,
2015. At December 31, 2015, the leverage, Tier I risk-based capital, total risk-based capital and common equity
Tier I capital ratios for the Bank were 9.45%, 11.74%, 12.79% and 11.74%, respectively, all in excess of the ratios
required to be deemed “well-capitalized.”
Management Strategy
Our goal is to serve as a community-oriented financial institution serving northern New Jersey and the New
York marketplace. While offering traditional community bank loan and deposit products and services, we obtain
significant non-interest income through Tri-State’s insurance brokerage operations. We report the operations of Tri-
State as a separate segment from our commercial banking operations. See Note 2 to our consolidated financial
statements contained elsewhere in this report for additional information regarding our two segments.
16
Critical Accounting Policies
Our accounting policies are fundamental to understanding Management’s Discussion and Analysis of
Financial Condition and Results of Operations. Our accounting policies are more fully described in Note 1 to our
consolidated financial statements included elsewhere in this report. The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions about future events that affect the
amounts reported in our consolidated financial statements and accompanying notes. Since future events and their
effect cannot be determined with absolute certainty, actual results may differ from those estimates. Management
makes adjustments to its assumptions and judgments when facts and circumstances dictate. The amounts currently
estimated by us are subject to change if different assumptions as to the outcome of future events are subsequently
made. We evaluate our estimates and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Management believes the following critical accounting policies
encompass the more significant judgments and estimates used in preparation of our consolidated financial
statements.
Allowance for Loan Losses. The allowance for loan losses reflects the amount deemed appropriate by
management to provide for known and inherent losses in the existing loan portfolio. Management’s judgment is
based on the evaluation of the past loss experience of individual loans, the assessment of current economic
conditions, and other relevant factors. Loan losses are charged directly against the allowance for loan losses and
recoveries on previously charged-off loans are added to the allowance. Management uses significant estimates to
determine the allowance for loan losses. Consideration is given to a variety of factors in establishing these
estimates, including current economic conditions, diversification of the loan portfolio, delinquency statistics,
borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance
for loan losses is dependent to a great extent on conditions that may be beyond our control, it is possible that
management’s estimates of the allowance for loan losses and actual results could differ in the near term. Although
we believe that we use the best information available to establish the allowance for loan losses, future additions to
the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions
used in making the evaluation. For example, a downturn in the local economy could cause increases in non-
performing loans. Additionally, a decline in real estate values could cause some of our loans to become
inadequately collateralized. In either case, this may require us to increase our provisions for loan losses, which
would negatively impact earnings. Additionally, a large loss could deplete the allowance and require increased
provisions to replenish the allowance, which would negatively impact earnings. Finally, regulatory authorities, as an
integral part of their examination, periodically review the allowance for loan losses. They may require additions to
the allowance for loan losses based upon their judgments about information available to them at the time of
examination. Future increases to our allowance for loan losses, whether due to unexpected changes in economic
conditions or otherwise, could adversely affect our future results of operations.
Appraisal Policy. We have a detailed policy covering the real estate appraisal process, including the
selection of qualified appraisers, review of appraisal reports upon receipt, and complying with the federal regulatory
standards that govern the minimum requirements for obtaining appraisals or evaluations to support the determination
of the allowance for loan losses. Appraisals and evaluations are considered to be current when the valuation date is
within 12 months of a new loan or 24 months of any renewal of an existing loan, provided that certain conditions are
met. The appraisal is not considered to be current if there has been a substantial change in value, demand, supply or
competitive factors.
The following types of transactions require a real estate appraisal:
• Non-residential transactions when the transaction value exceeds $250,000.
• Loan transactions in which real estate is used as the primary security for the loan, regardless of the
type of loan (commercial, installment or mortgage), including:
o New loans, loan modifications, loan extensions and renewals, provided that certain conditions
are met.
o The purchase, sale, exchange or investment in real property or an interest in real property
where the “transaction value” of the real property interest exceeds $250,000.
o The long-term lease of real estate, which is the economic equivalent of a purchase or sale
where the “transaction value” of the real property interest exceeds $250,000.
17
o Purchase of a loan or pool of loans, or participation therein, or of an interest in real property,
providing that any individual loan or property interest exceeds $250,000, and further provided
that a satisfactory appraisal of the property relating to that loan or interest has not been made
available to the Bank by another party to the transaction.
The need for real estate appraisals applies to initial loan underwriting and subsequently when the value of
the real estate collateral might be materially affected by changing market conditions, changes in the occupancy of
the property, changes in cash flow generated by the property, changes in the physical conditions of the property, or
other factors. These factors include changes in the sales prices of comparable properties, absorption rates,
capitalization rates, effective rental rates and current construction costs.
Real estate appraisals are not required for the following transactions:
• New loans, loan modifications, loan extensions and renewals with real property interest value of
$250,000 or less.
• Purchase, sale, exchange, long-term lease or investment in real property where the “transaction value”
of the real property interest does not exceed $250,000.
• Renewal or extension of an existing loan in excess of $250,000 provided that certain conditions are
met.
• Purchase of a loan or pool of loans, or participation therein, or of an interest in real property where a
satisfactory appraisal of the property relating to that loan or interest has been made available to the
Bank by another federally insured depository institution that is subject to Title XI of Financial
Institutions Reform Recovery and Enforcement Act of 1989.
While real estate appraisals are not required for transactions of $250,000 or less, we will consider obtaining
one if the orderly liquidation of the collateral is the primary source of repayment. To the extent that an appraisal is
not required for a real estate collateralized transaction, we will obtain for its credit files another acceptable form of
valuation (i.e. equalized value with a reasonable market relevance or evaluation).
Additionally, real estate appraisals are not required on transactions over $250,000 when taking a lien on
real property as collateral solely through an “abundance of caution,” and where the terms of the transaction have not
been made more favorable than would have been in the absence of the mortgage lien. In determining whether an
appraisal can be waived due to this reason, approval must be obtained from our Chief Credit Officer.
Generally, we obtain updated appraisals for real estate loan renewals and modifications or certain classified
loans depending on the age of the last appraisal, volatility of the local market, and other factors. In certain
circumstances, if we can support an appraisal that is greater than one year old with an evaluation, utilizing current
information, including, but not limited to, current comparable sales, independent appraisal, consultant data or tax
assessment values, then we may continue to use the existing appraisal. For classified/criticized loans, when it is
determined that a deficiency exists utilizing the above evaluation methods, a new appraisal will be ordered.
Foreclosed real estate is primarily comprised of property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure. Foreclosed real estate is initially recorded at fair value, less cost to sell at
the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell.
Revenues and expenses from operations and changes in the valuation allowance are included in expenses related to
foreclosed real estate.
Income Taxes. Management considers accounting for income taxes as a critical accounting policy due to
the subjective nature of certain estimates that are involved in the calculation and evaluation of the timing and
recognition of resulting tax assets and liabilities. Management uses the asset liability method of accounting for
income taxes in which deferred tax assets and liabilities are established for the temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities. Deferred tax expense is the result of changes
between deferred tax assets and liabilities. The principal types of differences between assets and liabilities for
financial statement and tax return purposes are allowance for loan losses, deferred compensation and securities
available for sale. Significant estimation is required to determine if a valuation allowance for deferred tax assets is
required. A valuation allowance is established against deferred tax assets when, in the judgment of management, it
is more likely than not that such deferred tax assets will not become available. Because the judgment about the level
of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond the
18
Company’s control, it is at least reasonably possible that management’s judgment about the need for a valuation
allowance for deferred taxes could change in the near term.
Goodwill. We have recorded goodwill of $2.8 million at December 31, 2015, primarily related to the
acquisition of Tri-State in October of 2001. FASB ASC 350, Intangibles-Goodwill and Others, requires that
goodwill is not amortized to expense, but rather be tested for impairment at least annually. We periodically assess
whether events or changes in circumstances indicate that the carrying amounts of goodwill require additional
impairment testing. We perform our annual impairment test on the goodwill of Tri-State in the fourth quarter of
each calendar year. If the fair value of the reporting unit exceeds the book value, no write-downs of goodwill are
necessary. If the fair value is less than the book value, an additional test is necessary to assess the proper carrying
value of goodwill. We determined that no impairment write-offs were necessary during 2015 and 2014.
Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and
management judgments. Among these are future growth rates, discount rates and earnings capitalization rates.
Changes in assumptions and results due to economic conditions, industry factors and reporting unit performance
could result in different assessments of the fair value and could result in impairment charges in the future.
Investment Securities Impairment Evaluation. The Company periodically evaluates the security portfolio
to determine if a decline in the fair value of any security below its cost basis is other-than-temporary. The
Company’s evaluation of other-than-temporary impairment considers the duration and severity of the impairment,
the company’s intent and ability to hold the securities and our assessments of the reason for the decline in value and
the likelihood of a near-term recovery. If a determination is made that a debt security is other-than-temporarily
impaired, the Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-
credit related factors. The credit related component will be recognized as an other-than-temporary impairment
charge in non-interest income. The non-credit related component will be recorded as an adjustment to AOCI, net of
tax. For held to maturity securities, the amount of an other-than-temporary impairment recorded in other
comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized
prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the
security. No available for sale and held to maturity securities at December 31, 2015 or December 31, 2014 were
deemed to be impaired.
Fair Value Measurements. We use fair value measurements to record fair value adjustments to certain
assets to determine fair value disclosures. Investment and mortgage-backed securities available for sale are recorded
at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other
assets on a nonrecurring basis, such as impaired loans, real estate owned and certain other assets. These
nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-
downs of individual assets. FASB ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC Topic 820”),
establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The
three levels of the fair value hierarchy under ASC Topic 820 are as follows:
Level 1:
Level 2:
Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Quoted prices in markets that are not active, or inputs that are observable either directly or
indirectly, for substantially the full term of the asset or liability. Level 2 includes debt
securities with quoted prices that are traded less frequently then exchange-traded instruments.
Valuation techniques include matrix pricing which is a mathematical technique used widely in
the industry to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to other benchmark
quoted prices.
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported with little or no market activity).
Under ASC Topic 820, we base our fair values on the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to
maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value
19
measurements, in accordance with the fair value hierarchy in FASB ASC Topic 820. Fair value measurements for
assets where there exists limited or no observable market data and, therefore, are based primarily upon our or other
third-party’s estimates, are often calculated based on the characteristics of the asset, the economic and competitive
environment and other such factors. Management uses its best judgment in estimating the fair value of our financial
instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all
financial instruments, the fair value estimates herein are not necessarily indicative of the amounts we could have
realized in sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their
respective period end and have not been re-evaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to
the respective reporting dates may be different than the amounts reported at each period-end. Additionally, changes
in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly
affect the results of current or future valuations.
COMPARISON OF FINANCIAL CONDITION AT YEAR-END DECEMBER 31, 2015 AND 2014
General. At December 31, 2015, we had total assets of $684.5 million compared to total assets of $595.9
million at December 31, 2014, an increase of $88.6 million, or 14.9%. Gross loans increased $71.5 million, or
15.1%, to $543.4 million at December 31, 2015, from $472.0 million at December 31, 2014. Total deposits
increased 13.0% to $517.9 million at December 31, 2015, from $458.3 million at December 31, 2014.
Cash and Cash Equivalents. Our cash and cash equivalents increased $261 thousand, or 4.5%, at
December 31, 2015 to $6.1 million from $5.9 million at December 31, 2014.
Securities Portfolio. Our securities portfolio is designed to provide interest income, including tax-exempt
income, and also provide a source of liquidity, diversify the earning assets portfolio, allow for management of
interest rate risk, and provide collateral for public fund deposits and borrowings. Securities are classified as either,
available for sale or held to maturity. The portfolio is composed primarily of obligations of U.S. government
agencies and government sponsored entities, including collateralized mortgage obligations issued by such agencies
and entities, and tax-exempt municipal bonds.
We periodically conduct reviews to evaluate whether unrealized losses on our investment securities
portfolio are deemed temporary or whether an other-than-temporary impairment has occurred. Various inputs to
economic models are used to determine if an unrealized loss is other-than-temporary. All of our debt securities in an
unrealized loss position have been evaluated as of December 31, 2015, and we do not consider any security to be
other-than-temporarily impaired. We evaluated the prospects of the issuers in relation to the severity and the
duration of the unrealized losses. Our securities in unrealized loss positions are mostly driven by wider credit
spreads and changes in interest rates. Based on that evaluation we do not intend to sell any security in an unrealized
loss position, and it is more likely than not that we will not have to sell any of our securities before recovery of its
cost basis.
Our available for sale securities are carried at fair value while securities held to maturity are carried at cost,
adjusted for amortization of premiums and accretion of discounts. Unrealized gains and losses on securities
available for sale are excluded from results of operations, and are reported as a separate component of stockholders’
equity net of taxes. Securities classified as available for sale include securities that may be sold in response to
changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar
requirements. Management determines the appropriate classification of securities at the time of purchase.
The following table shows the carrying value of our available for sale security portfolio as of December 31,
2015, 2014 and 2013.
(Dollars in thousands)
U.S. government agencies
State and political subdivisions
Mortgage-backed securities
U.S. government-sponsored enterprises
Equity securities-financial services industries and other
2015
December 31,
2014
2013
$
12,788 $
38,149
42,839
-
7,858 $
26,384
43,724
10
5,380
25,875
58,937
484
90,676
Total available for sale
$
93,776 $
77,976 $
20
Our securities, available for sale, increased by $15.8 million, or 20.3%, to $93.8 million at December 31,
2015 from $78.0 million at December 31, 2014. During 2015 we purchased $46.7 million in new securities, $20.4
million in securities were sold and $8.6 million in securities matured, were called or were repaid. During 2015,
there was a $137 thousand decrease in the net unrealized gain position and a $271 thousand net realized gain on the
sale of available for sale securities.
We had $6.8 million of our security portfolio classified as held to maturity at December 31, 2015, an
increase of $828 thousand from December 31, 2014. Held to maturity securities, carried at amortized cost, consist
of the following at December 31, 2015, 2014 and 2013.
(Dollars in thousands)
State and political subdivisions
Total held to maturity securities
2015
2014
2013
$
$
6,834 $
6,834 $
6,006 $
6,006 $
6,074
6,074
The securities portfolio contained no high-risk securities or derivatives as of December 31, 2015.
The contractual maturity distribution and weighted average yield of our available for sale securities at
December 31, 2015, are summarized in the following table. Securities available for sale are carried at amortized
cost in the table for purposes of calculating the weighted average yield received on such securities. Weighted
average yield is calculated by dividing income within each maturity range by the outstanding amount of the related
investment and has not been tax-effected on the tax-exempt obligations.
(Dollars in thousands)
Available for sale:
U.S. Government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
Total Available for Sale
Due under 1 Year
Due 1-5 Years
Due 5-10 Years
Due over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
$
$
-
-
-
-
- % $
- %
- %
- % $
-
- % $
-
- % $
12,792
0.69%
699
2.96%
2,834
3.39%
34,238
2.85%
-
699
- %
2.96% $
11,759
14,593
2.15%
2.39% $
31,310
78,340
2.08%
2.19%
The contractual maturity distribution and weighted average yield of our securities held to maturity, at cost,
at December 31, 2015, are summarized in the following table. Weighted average yield is calculated by dividing
income within each maturity range by the outstanding amount of the related investment and has not been tax-
effected on the tax-exempt obligations.
(Dollars in thousands)
Held to maturity:
State and political subdivisions
Total held to maturity
Due under 1 Year
Due 1-5 Years
Due 5-10 Years
Due over 10 Years
Amount
Yield
Amount
Yield
Amount Yield
Amount
Yield
$
$
2,953
2,953
0.88% $
0.88% $
-
-
- % $
- % $
2,832
2,832
3.73% $
3.73% $
1,049
1,049
1.66%
1.66%
We held $5.2 million in Federal Home Loan Bank of New York (“FHLBNY”) stock at December 31, 2015
that we do not consider an investment security. Ownership of this restricted stock is required for membership in the
FHLBNY.
Loans. The loan portfolio comprises the largest component of our earning assets. Total loans receivable,
net of unearned income, at December 31, 2015, increased $71.5 million, or 15.1%, to $543.4 million from $472.0
million at December 31, 2014. During the year ended December 31, 2015, new originations have exceeded payoffs
both through scheduled maturities and prepayments. Loan growth for 2015 occurred primarily in commercial real
estate loans (an increase of $55.9 million, or 17.1%) and residential real estate loans (an increase of $15.7 million, or
14.1%).
21
The following table summarizes the composition of our loan portfolio by type as of December 31, 2011
through 2015:
December 31,
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
2015
2014
2013
2012
2011
$
20,023 $
13,348
382,262
127,204
1,253
20,549 $
15,205 $
12,379
326,370
111,498
1,665
7,307
260,664
107,992
1,617
16,158 $
7,004
225,345
98,301
1,255
13,711
8,520
216,191
100,175
1,336
Total gross loans
$
544,090 $
472,461 $
392,785 $
348,063 $
339,933
The increase in loans was funded during 2015 by an increase in our borrowings and deposits.
The maturity ranges of the loan portfolio and the amounts of loans with predetermined interest rates and
floating rates in each maturity range, as of December 31, 2015, are presented in the following table.
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total loans
Interest rates:
Fixed or predetermined
Floating or adjustable
Total loans
Due Under
1 Year
December 31, 2015
Due 1-5
Years
Due Over
5 Years
$
$
$
$
5,842 $
6,843
23,428
4,454
314
40,881 $
35,705 $
5,176
40,881 $
9,150 $
936
14,705
3,967
306
29,064 $
23,312 $
5,752
29,064 $
5,031
5,569
344,129
118,783
633
474,145
132,445
341,700
474,145
Loan and Asset Quality. NPAs consist of non-accrual loans, loans over 90 days delinquent and still
accruing interest, troubled debt restructured loans still accruing and foreclosed real estate. Total NPAs decreased by
$1.8 million, or 15.2%, to $10.2 million at year-end 2015 from $12.0 million at year-end 2014. The ratio of NPAs
to total assets for December 31, 2015 and December 31, 2014 were 1.5% and 2.0%, respectively.
Our non-accrual loan balance decreased $612 thousand, or 10.3%, to $5.3 million at December 31, 2015,
from $5.9 million at December 31, 2014. Troubled debt restructured loans still accruing has remained flat at $1.6
million for December 31, 2015, and December 31, 2014. Foreclosed assets decreased $1.1 million to $3.4 million at
December 31, 2015, from $4.4 million at December 31, 2014.
Management continues to monitor our asset quality and believes that the non-accrual loans are adequately
collateralized and anticipated material losses have been adequately reserved for in the allowance for loan losses.
22
The following table provides information regarding risk elements in the loan and securities portfolio as of
December 31, 2011 through 2015.
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total nonaccrual loans
Loans past due 90 days and still accruing
$
Troubled debt restructured loans still
accruing
Total non-performing loans
Foreclosed real estate
Non-performing assets to total assets
Interest income received on nonaccrual
loans
Interest income that would have been
recorded under the original terms of the
loans
$
$
2015
2014
December 31,
2013
2012
2011
20 $
-
4,016
1,138
138
5,312
-
1,553
6,865
3,354
94 $
-
3,936
1,893
1
5,924
85
1,590
7,599
4,449
- $
-
9,700
2,192
-
11,892
123
1,628
13,643
2,926
27 $
2,462
12,062
3,315
1
17,867
208
608
18,683
5,066
32
2,458
19,311
2,482
-
24,283
803
3,411
28,497
5,509
34,006
7.15%
6.71%
408
Total non-performing assets
$
10,219 $
12,048 $
16,569 $
23,749 $
Non-accrual loans to total loans
0.98%
1.26%
3.03%
5.14%
1.49%
2.02%
3.10%
4.61%
138 $
138 $
122 $
301 $
264 $
301 $
774 $
996 $
1,509
In addition to monitoring non-performing loans we continue to monitor our portfolio for potential problem
loans. Potential problem loans are defined as loans which cause management to have serious concerns as to the
ability of such borrowers to comply with the present loan repayment terms and which may cause the loan to be
placed on non-accrual status. As of December 31, 2015, we had five loans totaling $1.8 million that we deemed
potential problem loans. Management is actively monitoring these loans.
Future increases in the allowance for loan losses may be necessary based on the growth of the loan
portfolio, the change in composition of the loan portfolio, possible future increases in non-performing loans and
charge-offs, and the impact of deterioration of the real estate and economic environments in our lending region.
Although we use the best information available, the level of allowance for loan losses remains an estimate that is
subject to significant judgment and short-term change. For additional information, see Critical Accounting Policies
above and as more fully described in Note 1 to our consolidated financial statements included elsewhere in this
report.
Allowance for Loan Losses. The allowance for loan losses consists of general, specific and unallocated
components. The specific component relates to loans that are classified as impaired. For those loans that are
classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable
market price of the impaired loan is lower than the carrying value of that loan. The general component covers all
other loans and is based on historical loss experience adjusted for qualitative factors. Other adjustments may be
made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that
are not fully reflected in the historical loss or risk rating data.
The allowance contains reserves identified as unallocated. These reserves reflect management's attempt to
ensure that the overall allowance reflects a margin for imprecision and the uncertainty that is inherent in estimates of
probable credit losses.
Management regularly assesses the appropriateness and adequacy of the loan loss reserve in relation to
credit exposure associated with individual borrowers, overall trends in the loan portfolio and other relevant factors,
and believes the reserve is reasonable and adequate for each of the periods presented.
At December 31, 2015, the allowance for loan losses was $5.6 million, a decrease of $51 thousand, or
0.9%, from $5.6 million at December 31, 2014. The provision for loan losses was $636 thousand and there were
23
$769 thousand in charge-offs and $82 thousand in recoveries during 2015. The allowance for loan losses as a
percentage of total loans was 1.03% at December 31, 2015 compared to 1.20% at December 31, 2014. The decrease
in allowance for loan losses as percentage of total loans is mostly due to an increase in total loans of $71.6 million at
December 31, 2015 as compared to December 31, 2014, as well as declining levels of non-performing, classified,
and impaired loans.
The table below presents information regarding our provision and allowance for loan losses for each of the
periods presented.
(Dollars in thousands)
Balance at beginning of year
Provision charged to operating expenses
Recoveries of loans previously charged-off:
$
2015
5,641 $
636
Year Ended December 31,
2013
2014
2012
5,421 $
1,537
4,976 $
2,745
7,210 $
4,330
2011
6,397
3,306
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total recoveries
Loans charged-off:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total charge-offs
Net charge-offs
Balance at end of year
Net charge-offs to average loans outstanding
Allowance for loan losses total loans at year-
end
17
-
41
17
7
82
19
-
560
165
25
769
687
$
5,590 $
0.14%
17
-
39
4
10
70
1
-
122
-
450
112
12
696
55
350
1,168
2,317
246
28
2,996
2,300
181
37
1,387
1,317
5,641 $
0.33%
2
-
78
-
27
107
169
1,538
3,904
998
62
6,671
6,564
6
516
8
-
19
549
24
909
2,057
12
40
3,042
2,493
7,210
0.73%
5,421 $
4,976 $
0.62%
3.70%
1.03%
1.20%
1.38%
1.43%
2.12%
24
The table below presents details concerning the allocation of the allowance for loan losses to the various
categories for each of the periods presented. The allocation is made for analytical purposes and it is not necessarily
indicative of the categories in which future credit losses may occur. The total allowance is available to absorb losses
from any category of loans.
Allowance for Loans Losses at December 31,
2015
2014
2013
Percent
of Loans
in Each
Category
to Total
Loans
(Dollars in thousands)
Amount
Commercial and industrial
$
Percent
of Loans
in Each
Category
to Total
Loans
4.3% $
2.6%
69.1%
23.6%
0.4%
-
Percent
of Loans
in Each
Category
to Total
Loans
3.9%
1.8%
66.4%
27.5%
0.4%
-
Amount
222
308
3,399
941
16
535
Amount
231
383
3,491
903
19
614
85
220
3,646
784
87
768
3.7% $
2.5%
70.2%
23.4%
0.2%
-
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
$
5,590
100.0% $
5,641
100.0% $
5,421
100.0%
Allowance for Loans Losses at December 31,
2012
2011
Percent
of Loans
in Each
Category
to Total
Loans
271
223
3,395
869
38
180
4,976
4.6% $
2.0%
64.7%
28.3%
0.4%
-
100.0% $
Amount
304
294
4,833
987
9
783
7,210
Percent
of Loans
in Each
Category
to Total
Loans
4.0%
3.1%
63.2%
29.3%
0.4%
-
100.0%
(Dollars in thousands)
Amount
Commercial and industrial
$
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
$
Premises and Equipment. Net premises and equipment increased by $229 thousand, or 2.6%, from $8.7
million at December 31, 2014 to $8.9 million at December 31, 2015 primarily due to growth initiatives in new
markets, including the opening of the Astoria branch.
Bank-owned Life Insurance. Our BOLI carrying value increased to $12.5 million at December 31, 2015
from $12.2 million at December 31, 2014. The increase was principally the result of $313 thousand in net earnings
on BOLI policies in 2015.
Deposits. Total deposits increased $59.6 million, or 13.0%, to $517.9 million at December 31, 2015, from
$458.3 million at December 31, 2014. The increase in deposits was due to increases in non-interest bearing deposits
of $16.7 million, or 23.7%, interest bearing transaction deposits of $12.6 million, or 4.5%, and time deposits of
$30.3 million, or 28.4%, for December 31, 2015, as compared to December 31, 2014. Our funding mix continued to
improve as non-interest deposits increased.
Total average deposits increased $46.0 million from $446.2 million for the year ended December 31, 2014
to $492.2 million for the year ended December 31, 2015, a 10.3% increase. Average NOW accounts increased
25
$11.7 million, or 9.8%, from $118.9 million for 2014 to $130.6 million for 2015. Average demand accounts
increased $20.3 million, or 30.9% from $65.7 million for 2014 to $86.0 million for 2015. Average time deposits
increased $13.5 million, or 12.8%, from $105.7 million for 2014 to $119.3 million for 2015. Average money market
balances increased $5.4 million, or 45.3%, from $11.9 million for 2014 to $17.3 million for 2015. Average savings
accounts decreased $4.8 million or 3.4%, from $144.0 million for 2014 to $139.1 million for 2015. Increases to
average NOW accounts and demand deposits were partly offset by the aforementioned decreases in other deposit
categories.
The average balances and weighted average rates paid on deposits for 2015, 2014 and 2013 are presented
below.
(Dollars in thousands)
Demand, non-interest bearing
$
NOW
Money market
Savings
Time
Total deposits
$
Year Ended December 31,
2015 Average
2014 Average
2013 Average
Balance
Rate
Balance
Rate
Balance
Rate
86,016
130,569
17,287
139,120
119,256
492,248
- % $
0.17%
0.20%
0.20%
1.03%
65,720
118,913
11,901
143,965
105,748
- % $
0.15%
0.14%
0.21%
1.09%
0.36% $
446,247
0.37% $
56,361
113,535
14,409
153,322
99,025
436,652
- %
0.14%
0.20%
0.23%
1.31%
0.42%
The remaining maturity for certificates of deposit accounts of $100,000 or more as of December 31, 2015 is
presented in the following table.
(Dollars in thousands)
3 months or less
3 to 6 months
6 to 12 months
Over 12 months
Total
$
$
9,607
11,532
19,299
10,092
50,530
Borrowings. Borrowings may consist of short and long-term advances from the FHLBNY and a line of
credit at Atlantic Central Bankers Bank. The FHLBNY advances are secured under terms of a blanket collateral
agreement by a pledge of qualifying residential and commercial mortgage loans. At December 31, 2015, we had
$61.0 million in long-term advances outstanding at a weighted average interest rate of 2.61%. The increase in
borrowings for 2015, as compared to 2014, was necessary to fund loan growth.
The following table summarizes short-term borrowings and weighted average interest rates paid during the
past three years.
(Dollars in thousands)
Year Ended December 31,
2015
2014
2013
Average daily amount of short-term borrowings outstanding during the
period
$
Weighted average interest rate on average daily short-term borrowings
Maximum short-term borrowings outstanding at any month-end
Short-term borrowings outstanding at period end
$
$
Weighted average interest rate on short-term borrowings at period end
8,778 $
0.43%
34,650 $
34,650 $
0.52%
2,657 $
0.34%
23,500 $
23,500 $
0.39%
3,964
0.38%
17,500
-
- %
Junior Subordinated Debentures. On June 28, 2007, we raised $12.9 million in capital through the
issuance of junior subordinated debentures to a non-consolidated statutory trust subsidiary. The subsidiary in turn
issued $12.5 million in variable rate capital trust pass through securities to investors in a private placement. The
interest rate is based on the three-month LIBOR plus 144 basis points and adjusts quarterly. The rate at December
31, 2015 was 1.95%. The capital securities are currently redeemable by us at par in whole or in part. These trust
26
preferred securities must be redeemed upon final maturity on September 15, 2037. The proceeds of these trust
preferred securities, which have been contributed to the Bank, are included in the Bank’s capital ratio calculations
and treated as Tier I capital.
In accordance with FASB ASC 810, Consolidation, our wholly owned subsidiary, Sussex Capital Trust II,
is not included in our consolidated financial statements. For regulatory reporting purposes, the Federal Reserve
Board allows trust preferred securities to continue to qualify as Tier I capital subject to specified limitations.
Equity. Stockholders’ equity inclusive of AOCI, net of income taxes, was $53.9 million at December 31,
2015, an increase of $2.7 million, from the $51.2 million at year-end 2014. The increase in stockholders’ equity was
due to $3.7 million in net income in 2015, which was offset by $746 thousand in dividends declared and a $533
thousand increase in treasury stock at December 31, 2015 as compared to December 31, 2014.
COMPARISON OF OPERATING RESULTS FOR YEAR-END DECEMBER 31, 2015 AND 2014
Results of Operations. Our net income is impacted by five major components and each of them is reviewed
in more detail in the following discussion:
•
•
•
•
•
net interest income, or the difference between interest income earned on loans and investments and
interest expense paid on deposits and borrowed funds;
provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for
inherent losses on loans;
non-interest income, which is made up primarily of certain loan and deposit fees, insurance
commissions and gains and losses from sales of securities or other transactions;
non-interest expense, which consists primarily of salaries, employee benefits, credit collection and
write-off costs and other operating expenses; and
income taxes.
For the year ended December 31, 2015, the Company reported net income of $3.7 million, or $0.81 per
basic and diluted share, as compared to net income of $2.6 million, or $0.57 per basic and diluted share, for the same
period last year. The increase in net income for the year ended December 31, 2015 was primarily attributed to an
increase in net interest income of $2.1 million and a decrease in credit quality costs of $971 thousand, or 41.3%,
which were partially offset by increases in certain non-interest expenses.
Net Interest Income. Net interest income is the most significant component of our income from
operations. Net interest income is the difference between interest earned on total interest-earning assets (primarily
loans and investment securities), on a fully taxable equivalent basis, where appropriate, and interest paid on total
interest-bearing liabilities (primarily deposits and borrowed funds). Fully taxable equivalent basis represents income
on total interest-earning assets that is either tax-exempt or taxed at a reduced rate, adjusted to give effect to the
prevailing incremental federal tax rate, and adjusted for nondeductible carrying costs and state income taxes, where
applicable. Yield calculations, where appropriate, include these adjustments. Net interest income depends on the
volume and interest rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing
liabilities.
27
Comparative Average Balance and Average Interest Rates. The following table presents, on a fully
taxable equivalent basis, a summary of our interest-earning assets and their average yields, and interest-bearing
liabilities and their average costs for each of the years ended December 31, 2015, 2014 and 2013. The average
balances of loans include non-accrual loans, and associated yields include loan fees, which are considered
adjustment to yields.
(Dollars in thousands)
2015
Year Ended December 31,
2014
2013
Average
Average Average
Average Average
Average
Earning Assets:
Securities:
Tax exempt (3)
Taxable
Total securities
Total loans receivable (1) (4)
Other interest-earning assets
Total earning assets
Non-interest earning assets
Allowance for loan losses
Total Assets
Sources of Funds:
Interest bearing deposits:
NOW
Money market
Savings
Time
Total interest bearing deposits
Borrowed funds
Junior subordinated debentures
Total interest bearing liabilities
Non-interest bearing liabilities:
Demand deposits
Other liabilities
Total non-interest bearing
liabilities
Stockholders' equity
Balance
Interest Rate (2) Balance Interest Rate (2) Balance Interest Rate (2)
$
33,688 $
65,402
99,090
488,963
7,109
595,162
1,348 4.00% $
1,239 1.89%
2,587 2.61%
21,497 4.40%
9 0.13%
24,093 4.05%
31,079 $
59,774
90,853
429,320
8,519
528,692
1,362
854
2,216
19,512
11
21,739
4.38% $
1.43%
2.44%
4.54%
0.13%
4.11%
30,758 $
87,155
117,913
372,894
6,488
497,295
1,535
603
2,138
18,007
16
20,161
4.99%
0.69%
1.81%
4.83%
0.25%
4.05%
$
$
37,834
(5,698)
627,298
36,881
(5,688)
559,885
$
37,620
(5,763)
529,152
$
130,569 $
17,287
139,120
119,256
406,232
65,600
12,887
484,719
227
35
282
1,228
1,772
1,576
220
3,568
0.17% $
0.20%
0.20%
1.03%
0.44%
2.40%
1.71%
0.74%
118,913 $
11,901
143,965
105,748
380,527
48,246
12,887
441,660
184
17
296
1,151
1,648
1,434
212
3,294
0.15% $
0.14%
0.21%
1.09%
0.43%
2.97%
1.65%
0.75%
113,535 $
14,409
153,322
99,025
380,291
34,526
12,887
427,704
154
29
351
1,293
1,827
1,157
217
3,201
0.14%
0.20%
0.23%
1.31%
0.48%
3.35%
1.68%
0.75%
86,016
3,848
89,864
52,715
65,720
3,011
68,731
49,494
56,361
2,705
59,066
42,382
Total Liabilities and Stockholders'
Equity
$
627,298
$
559,885
$
529,152
Net Interest Income and Margin (5)
Tax-equivalent basis adjustment
Net Interest Income
20,525
3.45%
(449)
$
20,076
3.49%
18,445
(439)
18,006
$
3.41%
16,960
(519)
16,441
$
(1) Includes loan fee income
(2) Average rates on securities are calculated on amortized costs
(3) Full taxable equivalent basis, using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest
expense disallowance
(4) Loans outstanding include non-accrual loans
(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets
Net interest income on a fully tax equivalent basis increased $2.1 million, or 11.3%, to $20.5 million for the
year ended December 31, 2015 as compared to $18.4 million for same period in 2014. The increase in net interest
income was largely due to an increase in average interest earning assets of $66.5 million or 12.6%, offset by the net
interest margin decreasing 4 basis points to 3.45% for the year ended December 31, 2015 compared to the same
period last year. The increase in average interest earning assets was driven by growth in average total loans
receivable of $59.6 million and by an increase in average securities of $8.2 million. The decrease in the net interest
margin was mostly attributed to a 14 basis point decrease in the average rate earned on loans, which resulted in a
28
decrease in the average rate paid on interest earnings assets of 6 basis points to 4.05% for the year ended December
31, 2015 from 4.11% for the same period in 2014.
Interest Income. Total interest income, on a fully taxable equivalent basis, increased $2.4 million, or
10.8%, to $24.1 million for the year ended December 31, 2015 as compared to $21.7 million for the same period in
2014. The increase in net interest income was largely due to a $66.5 million, or 12.6%, increase in average interest
earning assets, principally loans receivable, which increased $59.6 million, or 13.9%. The increase in interest
income was partly offset by a decline in average rate of 6 basis points to 4.05% for the year ended December 31,
2015 as compared to the same period in 2014. The decline in average rate was mostly attributed to a 14 basis point
decrease in the average rate earned on loans
Interest income from securities, on a fully taxable equivalent basis, increased $371 thousand, or 16.7%, for
the year ended December 31, 2015 compared to the same period in 2014. The increase was due to an increase in the
average balance of the securities portfolio of $8.2 million, or 9.1%, to $99.1 million for the year ended December
31, 2015 as compared to the same period in 2014. The increase in the average balance of the securities portfolio was
complimented by an increase in the average rate of 17 basis points to 2.61% for 2015 from 2.44% for 2014.
Interest income from the loan portfolio increased by $2.0 million, or 10.2%, to $21.5 million for 2015 from
$19.5 million for 2014. The improvement was due to an increase in the average balance on loans, which increased
$59.6 million, or 13.9%, for the year ended December 31, 2015 as compared to the same period in 2014. The
increase in the average balance on loans was partially offset by a decrease of 14 basis points in the average rate on
the loan portfolio for the year ended December 31, 2015 as compared to the same period in 2014.
Interest Expense. Total interest expense increased $274 thousand, or 8.3%, to $3.6 million for the year
ended December 31, 2015 from $3.3 million for the same period in 2014. The increase was principally due to
growth in the average balance of borrowings of $17.4 million and average balance of deposits of $25.7 million in
2015 compared to 2014. The increase in the average balance of borrowings was partially offset by a decrease in
rates paid on borrowings of 57 basis points for 2015 compared to 2014.
The following table reflects the impact on net interest income from changes in the volume of earning assets
and interest bearing liabilities and changes in rates earned and paid by us on such assets and liabilities. For purposes
of this table, nonaccrual loans have been included in the average loan balance. Changes due to both volume and rate
have been allocated in proportion to the relationship of the dollar amount change in each.
(Dollars in thousands)
Securities:
Tax exempt (1)
Taxable
Total securities
Total loans receivable (2)
Other interest-earning assets
Total net change in income on interest-
earning assets
Interest bearing deposits:
NOW
Money market
Savings
Time
Total interest bearing deposits
Borrowed funds
Junior subordinated debentures
Total net change in expense on interest-
bearing liabilities
Change in net interest income
December 31, 2015 v. 2014
December 31, 2014 v. 2013
Increase (decrease)
Due to changes in:
Increase (decrease)
Due to changes in:
Volume
Rate
Total
Volume
Rate
Total
$
109 $
86
195
2,639
(2)
(123) $
299
176
(654)
-
(14) $
385
371
1,985
(2)
16 $
(235)
(219)
2,609
4
(189) $
486
297
(1,104)
(9)
(173)
251
78
1,505
(5)
2,832
(478)
2,354
2,394
(816)
1,578
19
10
(10)
141
160
451
-
24
8
(4)
(64)
(36)
(309)
8
43
18
(14)
77
124
142
8
7
(5)
(20)
84
66
420
-
23
(7)
(35)
(226)
(245)
(143)
(5)
30
(12)
(55)
(142)
(179)
277
(5)
611
2,221 $
(337)
(141) $
274
2,080 $
486
1,908 $
(393)
(423) $
93
1,485
$
(1) Fully taxable equivalent basis, using 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance
(2) Includes loan fee income
29
Provision for Loan Losses. Provision for loan losses decreased $901 thousand to $636 thousand for the
year ended December 31, 2015, as compared to $1.5 million for the same period in 2014. The decrease in the
provision for loan losses for the year-ended December 31, 2015 was largely attributed to a decrease in charge-offs
related to the resolution of problem loans. The provision for loan losses reflects management review, analysis and
judgment of the credit quality of the loan portfolio for 2015 and the effects of current economic environment and
changes in real estate collateral values from the time the loans were originated. Our non-accrual loans decreased
$612 thousand, or 10.3%, to $5.3 million at December 31, 2015 from $5.9 million at December 31, 2014. We
believe these loans are adequately provided for in our loan loss allowance or are sufficiently collateralized at
December 31, 2015. The provision for loan losses reflects management’s judgment concerning the risks inherent in
our existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the
allowance during the periods. Management reviews the adequacy of its allowance on an ongoing basis and will
provide additional provisions, as deemed necessary. Also see Note 6 to our consolidated financial statements herein
for further discussion.
Non-Interest Income. Non-interest income consists of all income other than interest and dividend income
and is principally derived from: service charges on deposits; insurance commission income; commissions on sales of
annuities and mutual funds; ATM and debit card income; BOLI income; and net gains on sale of securities and
loans. We recognize the importance of supplementing net interest income with other sources of income as we
continue to explore new opportunities to generate non-interest income.
Non-interest income increased $492 thousand, or 8.3%, to $6.5 million for the year ended December 31,
2015 as compared to the same period last year. The increase in non-interest income was largely due to increases in
insurance commissions and fees, mostly due to the underwriting of new insurance policies and the retention of
existing policies, and other income of $547 thousand, or 17.4%, and $166 thousand, or 49.6%, respectively, which
were partially offset by a decrease in service fees on deposit accounts of $141 thousand and an increase in loss on
disposal of fixed assets of $125 thousand for the year ended December 31, 2015, as compared to the same period in
2014. Included in the increase for loss on disposal of fixed assets was a one-time $138 thousand pre-tax charge on
disposal of computer hardware as part of outsourcing our core system processing.
Non-Interest Expense. Total non-interest expense increased $1.7 million, or 9.2%, to $20.6 million for the
year ended December 31, 2015 as compared to the same period last year. The increase for the year ended December
31, 2015, as compared to the same period in 2014, was largely due to increases in salaries and employee benefits of
$1.4 million, other expenses of $336 thousand, furniture and equipment expenses of $136 thousand, occupancy
expenses, net of $127 thousand, and expenses and write-downs related to foreclosed real estate of $103 thousand,
which were partially offset by decreases in loan collection costs of $173 thousand, FDIC fees of $161 thousand, and
data processing of $61 thousand. The increases for the twelve months ended December 31, 2015 as compared to
2014 in salaries and employee benefits expense were due in part to an increase in personnel to support our growth
initiative in new markets, including the opening of our Astoria branch in the first quarter of 2015, additional staffing
for business development and a temporary increase in staffing costs related to the development of a digital banking
division. The increases for the twelve months ended December 31, 2015 as compared to 2014 in various categories,
including occupancy, furniture and equipment, and other expenses were mostly related to the opening of our Astoria
branch in the first quarter of 2015 and costs associated with our new core application system, which was
implemented in the third quarter of 2014.
Income Taxes. The provision for income taxes was $1.6 million and $1.0 million for 2015 and 2014,
respectively. Our effective tax rate was 30.7% and 27.8% for 2015 and 2014, respectively. The increase in income
tax expense for the year ended December 31, 2015 was primarily attributable to growth in pre-tax income from
taxable sources. See Notes 1 and 16 to our consolidated financial statements for further discussion on income taxes.
Operational Risk
We are exposed to a variety of operational risks that can affect each of our business activities, particularly
those involving processing and servicing of loans. Operational risk is defined as the risk of loss resulting from
inadequate or failed internal processes, people or systems from external events. The risk of loss also includes losses
that may arise from potential legal actions that could result from operational deficiencies or noncompliance with
contracts, laws or regulations. We monitor and evaluate operational risk on an ongoing basis through systems of
internal control, formal corporate-wide policies and procedures, and an internal audit function.
30
Liquidity, Capital Resources and Off-Balance Sheet Arrangements
Liquidity. A fundamental component of our business strategy is to manage liquidity to ensure the
availability of sufficient resources to meet all financial obligations and to finance prospective business opportunities.
Liquidity management is critical to our stability. Our liquidity position over any given period of time is a product of
our operating, financing and investing activities. The extent of such activities is often shaped by such external
factors as competition for deposits and loan demand.
Traditionally, financing for our loans and investments is derived primarily from deposits, along with
interest and principal payments on loans and investments. At December 31, 2015, total deposits amounted to $517.9
million, an increase of $59.6 million, or 13.0%, over the prior comparable year. At December 31, 2015, advances
from the FHLBNY and subordinated debentures totaled $108.5 million and represented 15.9% of total assets as
compared to $82.4 million and 13.8% of total assets, at December 31, 2014.
Loan production continued to be our principal investing activity. Net loans at December 31, 2015 amounted
to $537.8 million, an increase of $71.5 million, or 15.3%, compared to the same period in 2014.
Our most liquid assets are cash and cash equivalents. At December 31, 2015, the total of such assets
amounted to $6.1 million, or 0.9%, of total assets, compared to $5.9 million, or 1.0%, of total assets at year-end
2014. Another significant liquidity source is our available for sale securities. At December 31, 2015, available for
sale securities amounted to $93.8 million compared to $78.0 million at year-end 2014.
In addition to the aforementioned sources, we have available various other sources of liquidity, including
federal funds purchased from other banks and the Federal Reserve Board discount window. The Bank also has the
capacity to borrow an additional $49.1 million through its membership in the FHLBNY and $10.0 million line of
credit at Atlantic Central Bankers Bank at December 31, 2015. Management believes that our sources of funds are
sufficient to meet our present funding requirements.
Capital Resources. The Bank’s regulators have classified and defined bank capital as consisting of Tier I
capital, which includes tangible stockholders’ equity for common stock and certain preferred stock and other hybrid
instruments, and Total risk based capital. Total risk based capital includes Tier I capital and Tier II capital, which
includes a portion of the allowance for loan losses, certain qualifying long-term debt and preferred stock which does
not qualify for Tier I capital.
The Bank’s regulators have implemented risk-based guidelines which require banks to maintain certain
minimum capital as a percent of such assets and certain off-balance sheet items adjusted for predefined credit risk
factors (risk-adjusted assets). Banks are required to maintain Tier I capital as a percent of risk-adjusted assets of
4.0% and Total risk based capital as of risk-adjusted assets of 8.0% at a minimum. At December 31, 2015, the
Bank’s Tier I and Total risk based capital ratios were 11.74% and 12.79%, respectively.
In addition to the risk-based guidelines discussed above, the Bank’s regulators require that banks, which
meet the regulators’ highest performance and operational standards, maintain a minimum leverage ratio (Tier I
capital as a percent of tangible assets) of 4.0%. For those banks with higher levels of risk or that are experiencing or
anticipating growth, the minimum will be proportionately increased. Minimum leverage ratios for each bank and
bank holding company are established and updated through the ongoing regulatory examination process. As of
December 31, 2015, the Bank had a leverage ratio of 9.45%.
Off-Balance Sheet Arrangements. Our consolidated financial statements do not reflect off-balance sheet
arrangements that are made in the normal course of business. These off-balance sheet arrangements consist of
unfunded loans and letters of credit made under the same standards as on-balance sheet instruments. These unused
commitments at December 31, 2015 totaled $84.6 million, which consisted of $30.6 million in commitments to
grant commercial and residential loans, $53.1 million in unfunded commitments under lines of credit and $990
thousand in outstanding letters of credit. These instruments have fixed maturity dates, and because many of them
will expire without being drawn upon, they do not generally present any significant liquidity risk to us.
Management believes that any amounts actually drawn upon can be funded in the normal course of operations.
31
Market Risk
Market risk is generally described as the sensitivity of income to adverse changes in interest rates, foreign
currency exchange rates, commodity prices, and other relevant market rates or prices. Market rate sensitive
instruments include: financial instruments such as investments, loans, mortgage-backed securities, deposits,
borrowings and other debt obligations; derivative financial instruments, such as futures, forwards, swaps and
options; and derivative commodity instruments, such as commodity futures, forwards, swaps and options that are
permitted to be settled in cash or another financial instrument.
We do not have any material exposure to foreign currency exchange rate risk or commodity price risk. We
did not enter into any market rate sensitive instruments for trading purposes nor did we engage in any trading or
hedging transactions utilizing derivative financial instruments during 2015. Our real estate loan portfolio,
concentrated largely in northern New Jersey, is subject to risks associated with the local and regional economies.
Our primary source of market risk exposure arises from changes in market interest rates (“interest rate risk”).
Interest Rate Risk
Interest rate risk is generally described as the exposure to potentially adverse changes in current and future
net interest income resulting from: fluctuations in interest rates, product spreads, and imbalances in the repricing
opportunities of interest-rate-sensitive assets and liabilities. Therefore, managing our interest rate sensitivity is a
primary objective of our senior management. Our Asset/Liability Committee (“ALCO”) is responsible for managing
the exposure to changes in market interest rates. We review a variety of strategies that project changes in asset or
liability mix and the impact of those changes on projected net interest income and net income.
Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and
income simulation models. The analyses capture changes in net interest income using flat rates as a base, a most
likely rate forecast and rising and declining interest rate forecasts. Changes in net interest income and net income for
the forecast period, generally twelve to twenty-four months, are measured and compared to policy limits for
acceptable change. There are a variety of reasons that may cause actual results to vary considerably from the
predictions presented below which include, but are not limited to, the timing, magnitude, and frequency of changes
in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes. Specific
assumptions used in the simulation model include instantaneous and permanent yield curve shifts for market rates
and current asset and liability spreads to market interest rates are fixed.
The following table sets forth our interest rate risk profile at December 31, 2015 and 2014. The interest rate
sensitivity of our assets and liabilities and the impact on net interest income illustrated in the following table would
vary substantially if different assumptions were used or if actual experience differs from that indicated by the
assumptions.
Net Portfolio Value(2)
Net interest Income
(Dollars in thousands)
Change in Interest Rates
Estimated
Estimated Increase
(Decrease)
NPV(1)
Amount
Percent
Amount
Percent
Estimated
Net Interest
Income (3)
Estimated Increase
(Decrease)
(basis points)
December 31, 2015
+200bp
0bp
-100bp
December 31, 2014
+200bp
0bp
-100bp
$ 58,290
$ 80,872
$ 72,312
$ (22,582)
-
$ (8,560)
(27.9)% $ 19,932
$ 21,466
(10.6)% $ 20,805
-
$ (1,534)
-
$ (661)
$ 65,759
$ 78,478
$ 66,834
$ (12,719)
-
$ (11,644)
(16.2)% $ 19,160
$ 19,304
(14.8)% $ 18,232
-
$ (144)
-
$ (1,072)
(7.1)%
-
(3.1)%
(0.7)%
-
(5.6)%
(1) Assumes an instantaneous and parallel shift in interest rates at all maturities.
(2) NPV, also referred to as economic value of equity, is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet
contracts.
(3) Assumes a gradual change in interest rates over a one year period at all maturities.
32
Certain shortcomings are inherent in the methodologies used in the above interest rate risk measurements.
Modeling changes in net interest income requires the making of certain assumptions regarding prepayment and
deposit decay rates, which may or may not reflect the manner in which actual yields and costs respond to changes in
market interest rates. While management believes such assumptions are reasonable, there can be no assurance that
assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal
activity. Moreover, the net interest income table presented assumes that the composition of interest sensitive assets
and liabilities existing at the beginning of a period remains constant over the period being measured and also
assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the
duration to maturity or repricing of specific assets and liabilities. Accordingly, although the net interest income table
provides an indication of our interest rate risk exposure at a particular point in time, such measurement is not
intended to and does not provide a precise forecast of the effect of changes in market interest rates on net interest
income and will differ from actual results. Furthermore, the simulation does not reflect actions that ALCO might
take in response to anticipated changes in interest rates or competitive conditions in the market place.
Impact of Inflation and Changing Prices
Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, the level of interest rates has a more significant impact on a financial institution’s
performance than general levels of inflation. Interest rates do not necessarily move in the same direction or change
with the same magnitude as the price of goods and services, which are affected by inflation. Accordingly, the
liquidity, interest rate sensitivity and maturity characteristics of our assets and liabilities are more indicative of our
ability to maintain acceptable performance levels. Management monitors and seeks to mitigate the impact of
interest rate changes by attempting to match the maturities of assets and liabilities, thus seeking to minimize the
potential effect of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and related notes thereto may be found beginning on page F-1 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, including our President and Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, our President and
Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were
effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange
Act (i) is recorded, processed, summarized and reported as and when required and (ii) accumulated and
communicated to our management including our President and Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely discussion regarding required disclosure.
We regularly assess the adequacy of our internal control over financial reporting and enhance our controls
in response to internal control assessments and internal and external audit and regulatory requirements. There have
been no changes in our internal control over financial reporting identified in connection with the evaluation that
33
occurred during our last fiscal quarter that has materially affected, or that is reasonably likely to materially affect,
our internal control over financial reporting.
Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13A-15 (f) and 15d-15 (f) of the Exchange Act. Our internal control
system was designed to provide reasonable assurance to our management and Board of Directors as to the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements,
errors or fraud. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management, including our President and Chief Executive Officer and Chief Financial Officer, assessed
the effectiveness of our internal controls over financial reporting as of December 31, 2015. In making this
assessment, management used criteria set forth in 1992 by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management
concluded that as of December 31, 2015, our internal control over financial reporting is operating as designed and is
effective based on the COSO criteria. Currently, our independent public accounting firm is not required to audit our
internal control over financial reporting and therefore do not offer an opinion on its effectiveness.
ITEM 9B. OTHER INFORMATION
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information included in our Definitive Proxy Statement for the 2016 Annual Meeting of Shareholders
(the “Proxy Statement”) under the following captions is incorporated herein by reference: “Proposal 1- Election of
Directors,” “Information About Our Board of Directors,” “Information About Our Executive Officers Who Are Not
Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance – Code of Ethics
and Corporate Governance Guidelines,” “Corporate Governance – Committees of the Board of Directors –
Nominating and Corporate Governance Committee” and “Corporate Governance - Committees of the Board of
Directors – Audit Committee.”
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Proxy Statement under the following captions is incorporated herein by
reference: “Executive Compensation” and “Director Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information included in the Proxy Statement under the following captions is incorporated herein by
reference: “Securities Authorized For Issuance Under Equity Compensation Plans” and “Security Ownership of
Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information included in the Proxy Statement under the following captions is incorporated herein by
reference: “Transactions with Related Persons” and “Corporate Governance – Board of Directors Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information included in the Proxy Statement under the following caption is incorporated herein by
reference: “Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm -
Independent Registered Public Accounting Firm Fees and Services.”
35
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
PART IV
Reference is made to the consolidated financial statements and the notes thereto included in Item 8 of Part
II hereof.
(a)(2) Financial Statement Schedules
Consolidated financial statement schedules have been omitted because the required information is not
present, or not present in amounts sufficient to require submission of the schedules, or because the required
information is provided in the consolidated financial statements or notes thereto.
(a)(3) Exhibits
The exhibits required to be filed as part of this Annual Report on Form 10-K are listed in the Exhibit Index
attached hereto and are incorporated herein by reference.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
SUSSEX BANCORP
/s/ Anthony Labozzetta
Anthony Labozzetta
President and Chief Executive Officer
Dated: March 16, 2016
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Anthony Labozzetta
and Steven M. Fusco, and each of them, with full power of substitution and resubstitution and full power to act
without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead
and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file
any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and
thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or
substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities indicated on March 16, 2016.
Name
/s/ Anthony Labozzetta
Anthony Labozzetta
/s/ Steven M. Fusco
Steven M. Fusco
/s/ Patrick Brady
Patrick Brady
/s/ Richard Branca
Richard Branca
/s/ Katherine H. Caristia
Katherine H. Caristia
/s/ Mark J. Hontz
Mark J. Hontz
/s/ Edward J. Leppert
Edward J. Leppert
/s/ Timothy Marvil
Timothy Marvil
Title
President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer and Senior Executive Vice
President
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
/s/ Robert McNerney
Robert McNerney
/s/ Charles Musilli
Charles Musilli
/s/ John E. Ursin
John E. Ursin
Director
Director
Director
Tel: 732-750-0900
Fax: 732-750-1222
www.bdo.com
90 Woodbridge Center Dr., 4th Floor
Woodbridge, NJ 07095-1163
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sussex Bancorp
We have audited the accompanying consolidated balance sheets of Sussex Bancorp (the
“Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income and
comprehensive income, stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Sussex Bancorp at December 31, 2015 and 2014, and the
results of its operations and cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Woodbridge, New Jersey
March 16, 2016
ll me
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31, 2015
December 31, 2014
$
$
$
ASSETS
Cash and due from banks
Interest-bearing deposits with other banks
Cash and cash equivalents
Interest bearing time deposits with other banks
Securities available for sale, at fair value
Securities held to maturity, at amortized cost (fair value of $7,008 and $6,190 at
December 31, 2015 and December 31, 2014, respectively)
Federal Home Loan Bank Stock, at cost
Loans receivable, net of unearned income
Less: allowance for loan losses
Net loans receivable
Foreclosed real estate
Premises and equipment, net
Accrued interest receivable
Goodwill
Bank-owned life insurance
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Short-term borrowings
Long-term borrowings
Accrued interest payable and other liabilities
Junior subordinated debentures
Total Liabilities
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Common stock, no par value, 10,000,000 shares authorized; 4,705,480 and
4,673,789 shares issued and 4,646,238 and 4,662,606 shares outstanding at
December 31, 2015 and December 31, 2014, respectively
Treasury stock, at cost; 59,242 and 11,183 shares at December 31, 2015 and
December 31, 2014, respectively
Retained earnings
Accumulated other comprehensive income
Total Stockholders' Equity
2,914 $
3,206
6,120
100
93,776
6,834
5,165
543,423
5,590
537,833
3,354
8,879
1,764
2,820
12,524
5,334
2,953
2,906
5,859
100
77,976
6,006
3,908
471,973
5,641
466,332
4,449
8,650
1,796
2,820
12,211
5,808
684,503 $
595,915
87,209 $
430,647
517,856
34,650
61,000
4,169
12,887
70,490
387,780
458,270
23,500
46,000
4,029
12,887
630,562
544,686
-
-
35,927
(592)
18,520
86
53,941
35,553
(59)
15,566
169
51,229
Total Liabilities and Stockholders' Equity
$
684,503 $
595,915
See Notes to Consolidated Financial Statements
F-2
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
SUSSEX BANCORP
Year Ended December 31,
2015
2014
$
21,497 $
19,512
(Dollars in thousands except per share data)
INTEREST INCOME
Loans receivable, including fees
Securities:
Taxable
Tax-exempt
Interest bearing deposits
Total Interest Income
INTEREST EXPENSE
Deposits
Borrowings
Junior subordinated debentures
Total Interest Expense
Net Interest Income
PROVISION FOR LOAN LOSSES
Net Interest Income after Provision for Loan Losses
OTHER INCOME
Service fees on deposit accounts
ATM and debit card fees
Bank-owned life insurance
Insurance commissions and fees
Investment brokerage fees
Net gain on sales of securities
Net loss on sale and disposal of premises and equipment
Other
Total Other Income
OTHER EXPENSES
Salaries and employee benefits
Occupancy, net
Data processing
Furniture and equipment
Advertising and promotion
Professional fees
Director fees
FDIC assessment
Insurance
Stationary and supplies
Loan collection costs
Net expenses and write-downs related to foreclosed real estate
Other
Total Other Expenses
Income before Income Taxes
EXPENSE FOR INCOME TAXES
Net Income
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains on available for sale securities arising during the period
Reclassification adjustment for net gain on securities transactions included in net income
Income tax related to items of other comprehensive income
Other comprehensive income (loss), net of income taxes
Comprehensive income
EARNINGS PER SHARE
Basic
Diluted
$
$
$
See Notes to Consolidated Financial Statements
F-3
1,239
899
9
23,644
1,772
1,576
220
3,568
20,076
636
19,440
906
776
313
3,686
130
271
(130)
501
6,453
11,506
1,751
1,653
865
326
654
544
446
271
197
207
535
1,598
20,553
5,340
1,640
3,700
134
(271)
54
(83)
3,617 $
0.81 $
0.81 $
854
923
11
21,300
1,648
1,434
212
3,294
18,006
1,537
16,469
1,047
726
322
3,139
108
289
(5)
335
5,961
10,079
1,624
1,714
729
281
737
475
607
288
221
380
432
1,262
18,829
3,601
1,001
2,600
4,155
(289)
(1,546)
2,320
4,920
0.57
0.57
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2015 and 2014
(Dollars in Thousands)
Balance December 31, 2013
Net income
Other comprehensive income
Restricted stock granted
Restricted stock forfeited
Compensation expense related to
stock option and restricted stock
grants
Dividends declared on common
stock ($0.09 per share)
Balance December 31, 2014
Balance December 31, 2014
Net income
Other comprehensive loss
Treasury shares purchased
Restricted stock granted
Restricted stock forfeited
Compensation expense related to
stock option and restricted stock
grants
Dividends declared on common
stock ($0.16 per share)
Balance December 31, 2015
Number of
Shares Common Retained Comprehensive Treasury Stockholders'
Outstanding
Income (Loss) Stock
Earnings
Equity
Stock
Total
Accumulated
Other
4,629,113 $ 35,249 $ 13,386 $
(2,151) $
-
-
36,043
(2,550)
-
-
-
-
2,600
-
-
-
-
2,320
-
-
(59) $
-
-
-
-
46,425
2,600
2,320
-
-
-
304
-
-
-
304
4,662,606 $ 35,553 $ 15,566 $
-
(420)
4,662,606 $ 35,553 $ 15,566 $
-
-
-
-
-
3,700
-
-
-
-
-
169 $
169 $
-
(83)
-
-
-
-
(59) $
(59) $
-
-
(533)
-
-
(420)
51,229
51,229
3,700
(83)
(533)
-
-
374
-
-
-
374
-
86 $
-
(592) $
(746)
53,941
-
-
(48,059)
32,692
(1,001)
-
-
-
(746)
4,646,238 $ 35,927 $ 18,520 $
See Notes to Consolidated Financial Statements
F-4
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2014
2015
$
3,700 $
(Dollars in thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation and amortization
Net amortization of securities premiums and discounts
Net realized gain on sale of securities
Net realized loss on sale and disposal of premises and equipment
Net realized gain on sale of foreclosed real estate
Write-downs of and provisions for foreclosed real estate
Deferred income tax expense (benefit)
Earnings on bank-owned life insurance
Compensation expense for stock options and stock awards
Decrease (increase) in assets:
Accrued interest receivable
Other assets
Increase in accrued interest payable and other liabilities
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities
Securities available for sale:
Purchases
Sales
Maturities, calls and principal repayments
Securities held to maturity:
Purchases
Maturities, calls and principal repayments
Net increase in loans
Proceeds from the sale of foreclosed real estate
Purchases of bank premises and equipment
Proceeds from the sale of premises and equipment
Increase in Federal Home Loan Bank stock
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Net increase in deposits
Increase in short-term borrowed funds
Proceeds from long-term borrowings
Repayment of long-term borrowings
Purchase of treasury stock
Dividends paid
Net Cash Provided by Financing Activities
Net Increase (decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning
Cash and Cash Equivalents - Ending
Supplementary Cash Flows Information
Interest paid
Income taxes paid
Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans
$
$
$
$
\
See Notes to Consolidated Financial Statements
F-5
636
998
1,787
(271)
130
(38)
314
187
(313)
374
32
341
140
8,017
(46,704)
20,718
8,559
(2,953)
2,099
(73,585)
2,267
(1,392)
35
(1,257)
(92,213)
59,586
11,150
20,000
(5,000)
(533)
(746)
84,457
261
5,859
6,120 $
3,530 $
1,074 $
1,448 $
2,600
1,537
797
1,711
(289)
5
(10)
222
(925)
(322)
304
(154)
1,531
727
7,734
(24,437)
27,905
11,721
(2,099)
2,122
(83,498)
875
(2,586)
26
(1,203)
(71,174)
27,973
23,500
10,000
(5,000)
-
(420)
56,053
(7,387)
13,246
5,859
3,286
1,064
2,610
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Sussex Bancorp (the “Company”) and its wholly
owned subsidiary, Sussex Bank (the “Bank”). The Bank’s wholly owned subsidiaries are SCB Investment
Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, Wheatsworth Properties Corp., PPD
Holding Company, LLC and Tri-State Insurance Agency, Inc. (“Tri-State”). All intercompany transactions and
balances have been eliminated in consolidation.
Organization and Nature of Operations
The Company’s business is conducted principally through the Bank. The Bank is a New Jersey state chartered bank
and provides full banking services. The Bank generates commercial, mortgage and consumer loans and receives
deposits from customers at its eight branches located in Sussex County, New Jersey, one branch in Warren County,
New Jersey, one in Queens County, New York and one branch in Orange County, New York. As a state bank, the
Bank is subject to regulation by the New Jersey Department of Banking and Insurance and the Federal Deposit
Insurance Corporation. The Company is subject to regulation by the Federal Reserve Board. SCB Investment
Company, Inc. and SCBNY Company, Inc. hold portions of the Bank’s investment portfolio. Tri-State provides
insurance agency services mostly through the sale of property and casualty insurance policies. ClassicLake
Enterprises, LLC, PPD Holding Company, LLC and Wheatsworth Properties Corp. hold certain foreclosed
properties. The Company opened a corporate office in Rockaway, New Jersey during the first quarter of 2014, a
regional office and corporate center in Wantage, New Jersey during the third quarter of 2014, and opened a branch
in Astoria, Queens, New York during the first quarter of 2015.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the other-than-temporary impairment, allowance for loan
losses, valuation of foreclosed real estate, valuation of goodwill, the valuation of deferred tax assets and the fair
value of financial instruments.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within Sussex County, New Jersey and adjacent
counties in the states of New Jersey, New York and Pennsylvania. Notes 3 and 4 discuss the types of securities that
the Company invests in. The types of lending that the Company engages are included in Note 5. Although the
Company has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s
economy. The Company does not have any significant concentrations in any one industry or customer.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include highly liquid
instruments with original maturities of less than 90 days, primarily, balances due from banks, interest bearing
deposits with banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.
Securities
Securities are designated at the time of acquisition as available for sale or held to maturity. Securities that the
Company will hold for indefinite periods of time and that might be sold in the future as part of efforts to manage
interest rate risk or in response to changes in interest rates, changes in prepayment risk, changes in market
conditions or changes in economic factors are classified as available for sale. Securities available for sale are carried
at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive (loss)
income, net of related deferred tax effect. Securities that the Company has the positive intent and ability to hold to
maturity are designated as held to maturity regardless of changes in market conditions, liquidity needs or changes in
general economic conditions and carried at amortized cost.
F-6
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase premiums and discounts are recognized in interest income using the level yield method over the
contractual terms of the securities. Gains and losses realized on sales of securities are determined on the specific
identification method and are reported in non-interest income.
The Company periodically evaluates the security portfolio to determine if a decline in the fair value of any security
below its cost basis is other-than-temporary. The Company’s evaluation of other-than-temporary impairment
considers the duration and severity of the impairment, the company’s intent and ability to hold the securities and our
assessments of the reason for the decline in value and the likelihood of a near-term recovery. If a determination is
made that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the
unrealized loss that is attributable to credit and all other non-credit related factors. The credit related component will
be recognized as an other-than-temporary impairment charge in non-interest income. The non-credit related
component will be recorded as an adjustment to accumulated other comprehensive income (“AOCI”), net of tax.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its
district FHLB according to a predetermined formula. Based on redemption provisions of the FHLB, the stock has
no quoted market value and is carried at cost. The FHLB stock was carried at $5.2 million and $3.9 million for the
years ended December 31, 2015 and 2014, respectively.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred
fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans.
The Bank is generally amortizing these amounts over the contractual life of the loan.
The loans receivable portfolio is segmented into commercial and residential and consumer loans. Commercial loans
consist of the following classes: commercial and industrial, commercial real estate, and construction loans.
Residential and consumer loans consist of the following classes: residential real estate and consumer and other
loans.
For all classes of loans, the accrual of interest is discontinued when the contractual payment of principal or interest
has become 90 days past due or management has serious doubts about further collectability of principal or interest,
even though the loan is currently performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest
credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the
allowance for loan losses. Interest received on nonaccrual loans including impaired loans generally are either
applied against principal or reported as interest income, according to management’s judgment as to the collectability
of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in
accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate
collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of
loans receivable is determined based on contractual due dates for loan payments.
Allowance for Loan Losses
The allowance for loan losses represents the amount, which, in management’s judgment, will be adequate to absorb
credit losses inherent in the loan portfolio as of the balance sheet date. The adequacy of the allowance is determined
by management’s evaluation of the loan portfolio based on such factors as the differing economic risks associated
with each loan category, the current financial condition of specific borrowers, the economic environment in which
borrowers operate, the level of delinquent loans, the value of any collateral and, where applicable, the existence of
any guarantees or indemnifications.
The allowance for loan losses is established through provisions for loan losses charged against income. Loans
deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance for loan losses. The allowance for loan losses consists of specific, general and unallocated
components. The specific component relates to loans that are classified as impaired. For such loans, an allowance
is established when the discounted cash flows, collateral value or observable market price is lower than the carrying
F-7
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value for that loan. The general component covers all other loans and is based on historical loss factors adjusted for
general economic factors and other qualitative risk factors such as changes in delinquency trends, industry
concentrations and local/national economic trends. The allowance contains reserves identified as unallocated. These
reserves reflect management's attempt to ensure that the overall allowance reflects a margin for imprecision and the
uncertainty that is inherent in estimates of probable credit losses.
A loan is considered impaired when, based on current information and events, it is probable that the Company will
be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for commercial and industrial,
commercial real estate and construction loans by either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is
collateral dependent.
Troubled Debt Restructurings (“TDR”)
A modification to the terms of a loan is generally considered a TDR if the Company grants a concession to the
borrower that it would not otherwise consider for economic or legal reasons related to the debtor’s financial
difficulties. A TDR may include, but is not necessarily limited to, the modification of loan terms such as a
temporary or permanent reduction of the loan’s stated interest rate, extension of the maturity date and/or reduction
or deferral of amounts owed under the terms of the loan agreement.
All restructured loans that qualify as TDRs are placed on nonaccrual status for a period of no less than six months
after restructuring, irrespective of the borrower’s adherence to a TDR’s modified repayment terms during which
time TDRs continue to be adversely classified and reported as impaired. TDRs may be returned to accrual status if
(1) the borrower has performed in accordance with the terms of the restructured loan agreement for no less than six
consecutive months after restructuring, and (2) the Company expects to receive all principal and interest owed in
accordance with the terms of the restructured loan agreement. If these conditions are met the loan may also be
returned to a non-adverse classification while retaining its impaired status.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2)
the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Foreclosed Real Estate
Foreclosed real estate is primarily comprised of property acquired through a foreclosure proceeding or acceptance of
a deed-in-lieu of foreclosure. Foreclosed real estate is initially recorded at fair value, less cost to sell at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenues and
expenses from operations and changes in the valuation allowance are included in expenses related to foreclosed real
estate.
We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via
foreclosure on an in-substance repossession. As of December 31, 2015, we hold $130 thousand in foreclosed
residential real estate properties as a result of obtaining physical possession. In addition, as of December 31, 2015,
we had consumer loans with a carrying value of $945 thousand collateralized by residential real estate property for
which formal foreclosure proceedings were in process.
F-8
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the following estimated useful lives of the related assets:
Buildings and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Computer equipment and software
Years
20 – 40
5 – 10
5 – 10
3 – 5
Bank-owned Life Insurance (“BOLI”)
BOLI is carried at the amount that could be realized under the Company’s life insurance contracts as of the date of
the consolidated balance sheets and is classified as a non-interest earning asset. BOLI involves purchasing life
insurance by the Company on a chosen group of employees in order to fund certain employee and director benefits.
The Company is the owner and beneficiary of the policies. Increases in the carrying value are recorded as non-
interest income in the consolidated statements of income and insurance proceeds received are generally recorded as
a reduction of the carrying value. The carrying value consists of cash surrender value of $12.5 million at December
31, 2015 and $12.2 million at December 31, 2014.
Goodwill
Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. At December
31, 2015 and 2014, the Company has recorded goodwill totaling $2.8 million, primarily as a result of the acquisition
of an insurance agency in 2001. In accordance with current accounting standards, goodwill is not amortized, but
evaluated at least annually for impairment. Any impairment of goodwill results in a charge to income. The
Company periodically assesses whether events and changes in circumstances indicate that the carrying amounts of
goodwill and intangible assets may be impaired. The estimated fair value of the reporting segment exceeded its
book value; therefore, no write-down of goodwill was required. The goodwill related to the insurance agency is not
deductible for tax purposes.
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense as incurred.
Income Taxes
The Company accounts for income taxes under the asset/liability method in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification 740, Income Taxes. The income tax guidance results
in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be
paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or
excess of deductions over revenues. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period in which they occur. A valuation allowance is established
against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax
assets will not become available. Because the judgment about the level of future taxable income is dependent to a
great extent on matters that may, at least in part, be beyond the Company’s control, it is at least reasonably possible
that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near
term.
In connection with the accounting guidance related to accounting for uncertainty in income taxes, which sets out a
consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions, the
Company has evaluated its tax positions as of December 31, 2015. A tax position is recognized as a benefit only if
it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of the tax benefit that has more than a 50
percent likelihood of being realized on examination. For tax positions not meeting the “more likely than not” test,
no tax benefit is recorded. Under the “more likely than not” threshold guidelines, the Company believes no
F-9
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-
recognition of an existing tax benefit. As of December 31, 2015 the Company had no material unrecognized tax
benefits or accrued interest or penalties. The Company’s policy is to account for interest as a component of interest
expense and penalties as a component of other expense. The Company and its subsidiaries file a consolidated
federal income tax return as well as income tax returns in the States of New Jersey, New York and Pennsylvania.
The Company’s federal and state income tax returns subsequent to 2012 remain subject to examination by respective
tax authorities.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. Such financial instruments are recorded in the balance sheet
when they are funded.
Stock Compensation Plans
The Company currently has several stock plans in place for employees and directors of the Company.
U.S. GAAP requires that the compensation cost relating to share-based payment transactions be
recognized in financial statements. The share-based compensation accounting guidance requires that
compensation cost for all stock awards be calculated and recognized over a defined vesting period. For awards with
graded-vesting, compensation cost is recognized on a straight-line basis over the requisite vesting period for the
entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of
the Company’s common stock at the date of grant is used for restricted stock awards.
Earnings per Share
Basic earnings per share represents net income available to common stockholders divided by the weighted-average
number of common shares outstanding during the period. The weighted-average common shares outstanding
include the weighted-average number of shares of common stock outstanding less the weighted average number of
unvested shares of restricted stock. Diluted earnings per share reflect additional common shares that would have
been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that
would result from the assumed issuance. Potential common shares that may be issued by the Company relate to
outstanding stock options and non-vested restricted stock grants. Potential common shares related to stock options
are determined using the treasury stock method.
Treasury Stock
Repurchases of shares of Company common stock are recorded at cost as a reduction of stockholders’ equity.
Reissuances of shares of treasury stock are recorded at average cost.
Segment Reporting
The Company acts as an independent community financial services provider and offers traditional banking and
related financial services to individual, business and government customers. Through its branch and automated
teller machine networks, the Bank offers a full array of commercial and retail financial services, including taking of
time, savings and demand deposits; the making of commercial, consumer and mortgage loans; and the providing of
other financial services. Management does not separately allocate expenses, including the cost of funding loan
demand, between the commercial, retail, trust and mortgage banking operations of the Bank. As such, discrete
financial information is not available and segment reporting would not be meaningful. The Company’s insurance
agency is managed separately from the traditional banking and related financial services that the Company offers.
The insurance operations provides primarily property and casualty coverage. See Note 2 for segment reporting of
insurance operations.
Insurance Agency Operations
Tri-State is a retail insurance broker operating in the State of New Jersey. The insurance agency’s primary source of
revenue is commission income, which is earned by placing insurance coverage for its customers with various
insurance underwriters. The insurance agency places basic property and casualty, life and health coverage with
about fifteen different insurance carriers. There are two main billing processes, direct billing (currently accounts for
approximately 90% of revenues) and agency billing.
F-10
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the direct billing arrangement, the insurance carrier bills and collects from the customer directly and remits
the brokers’ commission to Tri-State on a monthly basis. For direct bill policies, Tri-State records commissions as
revenue when the customer is billed. On a monthly basis, Tri-State receives notification from each insurance carrier
of total premiums written and collected during the month, and the broker’s net commission due for their share of
business produced by them.
Under the agency billing arrangement, the broker bills and collects from the customer directly, retains their
commission, and remits the net premium amount to the insurance carrier. Virtually all agency-billed policies are
billed and collected on an installment basis (the number of payments varies by policy). Tri-State records revenues
for the first installment as of the policy effective date. Revenues from subsequent installments are recorded at the
installment due date. Tri-State records its commission as a percentage of each installment due.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31,
2015 for items that should potentially be recognized or disclosed in these financial statements. The evaluation was
conducted through the date these financial statements were issued.
New Accounting Standards
In January 2014, FASB issued Accounting Standards Update ("ASU") 2014-04, Receivables - Troubled Debt
Restructurings by Creditors. This ASU clarifies that an in substance repossession or foreclosure occurs, and a
creditor is considered to have received physical possession of residential real estate property collateralizing a
consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon
completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the
creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement.
Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential
real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized
by residential real estate property that are in the process of foreclosure according to local requirements of the
applicable jurisdiction. For public entities, the guidance is effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2014. The adoption of this guidance did not have a material
impact on our consolidated financial statements.
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers. The ASU’s core principle is
built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict
the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the
consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i)
identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the
transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize
revenue when (or as) the entity satisfies a performance obligation. For public entities, the guidance is effective for
annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption
is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods
within that year. We do not expect the adoption of this guidance to have a material impact on our consolidated
financial statements.
In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award
Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB
Emerging Issues Task Force), to clarify that a performance target in a share-based compensation award that could be
achieved after an employee completes the requisite service period should be treated as a performance condition that
affects the vesting of the award. As such, the performance target should not be reflected in estimating the grant-date
fair value of the award. For all entities, the amendments are effective for annual periods and interim periods within
those annual periods beginning after December 15, 2015. Earlier adoption is permitted. We do not expect the
adoption of this guidance to have a material impact on our consolidated financial statements.
In April 2015, FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-
40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to clarify whether a hosting
arrangement (e.g., cloud computing, software as a service, infrastructure as a service, etc.) contains a software
license, and thus, whether it is to be accounted for by the customer similarly to other internal-use software.
F-11
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specifically, the amendments revise the scope of Subtopic 350-40 to include internal-use software accessed through
a hosting arrangement only if both of the following criteria are met: (1) the customer has the contractual right to take
possession of the software at any time during the hosting period without significant penalty. There is no significant
penalty if the customer has the ability to take delivery of the software without incurring significant cost and the
ability to use the software separately without significant loss of utility or value and (2) it is feasible for the customer
to either run the software on its own hardware or contract with another party unrelated to the vendor to host the
software. If both of the above criteria are present in a hosting arrangement, then the arrangement contains a
software license and the customer should account for that element in accordance with Subtopic 350-40 (i.e.,
generally capitalize and subsequently amortize the cost of the license). If both of the above criteria are not present,
the customer should account for the arrangement as a service contract (i.e., expense fees as incurred). The
amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and
interim periods within those fiscal years. An entity can elect to adopt the amendments either (1) prospectively to all
arrangements entered into or materially modified after the effective date or (2) retrospectively. We do not expect the
adoption of this guidance to have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-1, “No. 2016-01, Financial Instruments – Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-1, among other things; (i)
requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value
recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily
determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the
requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair
value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv)
requires public business entities to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the
total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the
entity has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category
and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii)
clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-
for-sale. The Company is currently evaluating the impact of the pending adoption of the new standard on its
consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be
required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a
discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the
use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Public
business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years. Early application is permitted for all public business entities
upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial statements. The Company is currently
evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.
F-12
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SEGMENT REPORTING
Segment information for 2015 and 2014 is as follows:
(Dollars in thousands)
Banking and
Financial Services
Insurance
Services
Total
Year Ended December 31, 2015:
Net interest income from external sources $
Other income from external sources
Depreciation and amortization
Income before income taxes
Income tax expense (1)
Total assets
Year Ended December 31, 2014:
Net interest income from external sources $
Other income from external sources
Depreciation and amortization
Income before income taxes
Income tax expense (1)
Total assets
(1) Calculated at statutory tax rate of 40%.
20,076 $
2,741
978
4,670
1,372
679,598
18,004 $
2,787
776
3,100
801
591,192
- $
3,712
20
670
268
4,905
2 $
3,174
21
501
200
4,723
20,076
6,453
998
5,340
1,640
684,503
18,006
5,961
797
3,601
1,001
595,915
NOTE 3 – FAIR VALUE OF ASSETS AND LIABILITIES
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however,
there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the
fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale
transaction on the dates indicated. The fair value amounts have been measured as of their respective year-ends, and
have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective
dates. As such, the fair values of these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year-end.
In accordance with U.S. GAAP, the Company uses a hierarchical disclosure framework associated with the level of
pricing observability utilized in measuring assets and liabilities at fair value. The three broad levels defined by the
hierarchy are as follows:
Level I - Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly
observable as of the reported date. The nature of these asset and liabilities include items for which quoted prices
are available but traded less frequently, and items that are fair valued using other financial instruments, the
parameters of which can be directly observed.
Level III - Assets and liabilities that have little to no pricing observability as of reported date. These items do
not have two-way markets and are measured using management’s best estimate of market participants’ estimate
of fair value, where the inputs into the determination of fair value require significant management judgment or
estimation.
The following table summarizes the fair value of the Company’s financial assets measured on a recurring basis by
the above pricing observability levels as of December 31, 2015 and 2014:
F-13
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
December 31, 2015
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
December 31, 2014
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
$
$
U.S. government-sponsored enterprises
Equity securities-financial services industry
and other
Quoted Prices in
Active Markets
for Identical
Assets
(Level I)
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
Fair
Value
Measurements
12,788 $
38,149
42,839
7,858 $
26,384
43,724
- $
-
-
- $
-
-
12,788 $
38,149
42,839
7,858 $
26,384
43,724
10
10
-
-
-
-
-
-
-
-
The Company’s available for sale securities portfolio contains investments which are all rated within the Company’s
investment policy guidelines; and upon review of the entire portfolio, all securities are marketable and have
observable pricing inputs.
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value
hierarchy used at December 31, 2015 and 2014 are as follows:
Fair
Value
Measurements
Quoted Prices in
Active Markets
for Identical
Assets
(Level I)
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
801 $
756
1,087 $
761
- $
-
- $
-
- $
-
- $
-
801
756
1,087
761
(Dollars in thousands)
December 31, 2015
Impaired loans
Foreclosed real estate
December 31, 2014
Impaired loans
Foreclosed real estate
$
$
F-14
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents additional qualitative information about assets measured at fair value on a nonrecurring
basis and for which Level III inputs were used to determine fair value:
(Dollars in thousands)
December 31, 2015
Impaired loans
Foreclosed real estate
December 31, 2014
Impaired loans
$
$
Qualitative Information about Level III Fair Value Measurements
Range
(Weighted
Average)
Unobservable
Input
Fair
Value
Estimate
Valuation
Techniques
801 Appraisal of
collateral
Appraisal
adjustments (1)
0% to -61.8%
(-5.8%)
756 Appraisal of
collateral
Selling
expenses (1)
-7.0% (-7.0%)
1,087 Appraisal of
collateral
Appraisal
adjustments (1)
0% to -66.2%
(-10.6%)
Foreclosed real estate
761 Appraisal of
collateral
Selling
expenses (1)
-7.0% (-7.0%)
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling expenses. The range
and weighted average of selling expenses and other appraisal adjustments are presented as a percentage of the appraisal.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair
value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s
disclosures and those of other companies may not be meaningful. The following methods and assumptions were used
to estimate the fair value of the Company’s financial instruments presented below at December 31, 2015 and 2014:
Cash and Cash Equivalents (Carried at Cost): The carrying amounts reported in the balance sheet for cash and
cash equivalents approximate those assets’ fair value.
Deposits (Carried at Cost): Fair value for fixed-rate time certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits. The Company generally purchases amounts below the
insured limit, limiting the amount of credit risk on these time deposits.
Securities: The fair value of securities, available for sale (carried at fair value) and securities held to maturity
(carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities
exchanges (Level I), or matrix pricing (Level II), which is a mathematical technique used widely in the industry to
value debt securities without relying exclusively on quoted market prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted prices. For certain securities which are not traded
in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-
transferability, and such adjustments are generally based on available market evidence (Level III). In the absence of
such evidence, management’s best estimate of market participants’ estimate is used. Management’s best estimate
consists of both internal and external support on certain Level III measurements. Internal cash flow models using a
present value formula that includes assumptions market participants would use along with indicative exit pricing
obtained from broker/dealers (where available) were used to support fair values of certain Level III investments.
F-15
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Federal Home Loan Bank Stock (Carried at Cost): The carrying amount of restricted investment in bank stock
approximates fair value and considers the limited marketability of such securities.
Loans Receivable (Carried at Cost): The fair values of loans, other than collateral dependent impaired loans, are
estimated using discounted cash flow analyses, using the market rates at the balance sheet date that reflect the credit
and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual
maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying values.
Impaired Loans (Carried at Lower of Cost or Fair Value): Fair value of impaired loans is generally determined
based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected
proceeds. These assets are included in Level III fair values, based upon the lowest level of input that is significant to
the fair value measurements.
Deposit Liabilities (Carried at Cost): The fair values disclosed for demand, savings and money market accounts are,
by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Borrowings (Carried at Cost): Fair values of FHLB advances are estimated using discounted cash flow analysis,
based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining
maturity. These prices obtained from this active market represent a market value that is deemed to represent the
transfer price if the liability were assumed by a third party.
Junior Subordinated Debentures (Carried at Cost): Fair values of junior subordinated debt are estimated using
discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk
characteristics, terms and remaining maturity.
Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost): The carrying amounts of accrued
interest receivable and payable approximate its fair value.
Off-Balance Sheet Instruments (Disclosed at Cost): Fair values for the Company’s off-balance sheet financial
instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter
into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit
standing.
F-16
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s financial instruments at December 31, 2015 and 2014 were as follows:
December 31, 2015
Fair
Value
Carrying
Amount
Quoted Prices in Significant
Active Markets
for Identical
Assets
(Level I)
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
6,120 $
100
93,776
6,834
5,165
6,120 $
100
93,776
7,008
5,165
6,120 $
-
-
-
-
- $
100
93,776
7,008
5,165
-
-
-
-
-
537,833
1,764
528,065
1,764
-
-
-
1,764
528,065
-
380,983
136,873
34,650
61,000
12,887
281
380,983
136,619
34,650
58,685
9,344
281
-
-
34,650
-
-
-
380,983
136,619
-
58,685
9,344
281
-
-
-
-
-
-
December 31, 2014
Fair
Value
Carrying
Amount
Quoted Prices in Significant
Active Markets
for Identical
Assets
(Level I)
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
5,859 $
100
77,976
6,006
3,908
5,859 $
100
77,976
6,190
3,908
5,859 $
-
10
-
-
- $
100
77,966
6,190
3,908
-
-
-
-
-
466,332
1,796
462,984
1,796
-
-
-
1,796
462,984
-
351,653
106,617
23,500
46,000
12,887
243
351,653
107,011
23,500
47,766
9,361
243
-
-
23,500
-
-
-
351,653
107,011
-
47,766
9,361
243
-
-
-
-
-
-
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
$
Time deposits with other banks
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans receivable, net of
allowance
Accrued interest receivable
Financial liabilities:
Non-maturity deposits
Time deposits
Short-term borrowings
Long-term borrowings
Junior subordinated debentures
Accrued interest payable
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
$
Time deposits with other banks
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans receivable, net of
allowance
Accrued interest receivable
Financial liabilities:
Non-maturity deposits
Time deposits
Short-term borrowings
Long-term borrowings
Junior subordinated debentures
Accrued interest payable
F-17
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – SECURITIES
Available for Sale
The amortized cost and fair value of securities available for sale as of December 31, 2015 and 2014 are summarized
as follows:
(Dollars in thousands)
December 31, 2015
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
December 31, 2014
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
Equity securities-financial services industry and
other
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
Fair
Value
$
$
$
$
12,792 $
37,771
43,069
93,632 $
51 $
507
206
764 $
(55) $
(129)
(436)
(620) $
12,788
38,149
42,839
93,776
7,873 $
26,432
17 $
158
(32) $
(206)
7,858
26,384
43,382
500
(158)
43,724
8
77,695 $
2
677 $
-
(396) $
10
77,976
Securities with a carrying value of approximately $33.4 million and $32.8 million at December 31, 2015 and 2014,
respectively, were pledged to secure public deposits and for borrowings at the Federal Reserve Bank as required or
permitted by applicable laws and regulations.
The amortized cost and fair value of securities available for sale at December 31, 2015 are shown below by
contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call
or prepay obligations with or without call or prepayment penalties. Investments which pay principal on a periodic
basis are not included in the maturity categories.
(Dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total bonds and obligations
U.S. government agencies
Mortgage-backed securities:
U.S. government-sponsored enterprises
Total available for sale securities
Amortized
Cost
Fair
Value
$
$
- $
699
2,834
34,238
37,771
12,792
43,069
93,632 $
-
698
2,832
34,619
38,149
12,788
42,839
93,776
Gross gains on sales of securities available for sale were $372 thousand and $478 thousand and gross losses were
$101 thousand and $189 thousand for the years ended December 31, 2015 and 2014, respectively.
F-18
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporarily Impaired Securities
The following table shows our investments’ gross unrealized losses and fair values with unrealized losses that are
not deemed to be other than temporarily impaired, aggregated by investment category and length of time that
individual available for sale securities have been in a continuous unrealized loss position, at December 31, 2015 and
2014.
(Dollars in thousands)
December 31, 2015
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored
enterprises
Total temporarily impaired
securities
December 31, 2014
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored
enterprises
Total temporarily impaired
securities
Less Than 12 Months
Fair
Value
Gross
Unrealized
Losses
12 Months or More
Gross
Unrealized
Losses
Fair
Value
Total
Gross
Fair Unrealized
Value
Losses
$
5,888 $
5,780
(23) $
(107)
2,473 $
2,998
(32) $
(22)
8,361 $
8,778
(55)
(129)
31,885
(436)
-
-
31,885
(436)
$
43,553 $
(566) $
5,471 $
(54) $ 49,024 $
(620)
$
- $
7,603
- $
(112)
2,905 $
5,713
(32) $
(94)
2,905 $
13,316
(32)
(206)
15,679
(94)
3,432
(64)
19,111
(158)
$
23,282 $
(206) $
12,050 $
(190) $ 35,332 $
(396)
As of December 31, 2015, we reviewed our investment portfolio for indications of impairment. This review includes
analyzing the length of time and the extent to which the fair value has been lower than the cost, the financial
condition and near-term prospects of the issuer, including any specific events which may influence the operations of
the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt securities is
evaluated based upon our investment strategy for the particular type of security and our cash flow needs, liquidity
position, capital adequacy and interest rate risk position. For each security (including but not limited to those whose
fair value is less than their amortized cost basis), a review is conducted to determine if an other-than-temporary
impairment has occurred.
U.S. Government Agencies
At December 31, 2015 and 2014, the decline in fair value and the unrealized losses for our U.S. government
agencies securities were primarily due to changes in spreads and market conditions and not credit quality. At
December 31, 2015, there were six securities with a fair value of $8.4 million that had an unrealized loss that
amounted to $55 thousand. As of December 31, 2015, we did not intend to sell and it was not more-likely-than-not
that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore,
none of the U.S. government agency securities at December 31, 2015, were deemed to be other-than-temporarily
impaired.
At December 31, 2014, there were two securities with a fair value of $2.9 million that had an unrealized loss that
amounted to $32 thousand.
F-19
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
State and Political Subdivisions
At December 31, 2015 and 2014, the decline in fair value and the unrealized losses for our state and political
subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality.
At December 31, 2015, there were 15 securities with a fair value of $8.8 million that had an unrealized loss that
amounted to $129 thousand. These securities typically have maturity dates greater than 10 years and the fair values
are more sensitive to changes in market interest rates. As of December 31, 2015, we did not intend to sell and it was
not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized
cost basis. Therefore, none of our state and political subdivision securities at December 31, 2015, were deemed to
be other-than-temporarily-impaired.
At December 31, 2014, there were 22 securities with a fair value of $13.3 million that had an unrealized loss of $206
thousand.
Mortgage-Backed Securities
At December 31, 2015 and 2014, the decline in fair value and the unrealized losses for our mortgaged-backed
securities guaranteed by U.S. government-sponsored enterprises were primarily due to changes in spreads and
market conditions and not credit quality. At December 31, 2015, there were 18 securities with a fair value of $31.9
million that had an unrealized loss of $436 thousand. As of December 31, 2015, we did not intend to sell and it was
not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized
cost basis. Therefore, none of our mortgage-backed securities at December 31, 2015, were deemed to be other-than-
temporarily impaired.
At December 31, 2014, there were 13 securities with a fair value of $19.1 million that had an unrealized loss of 158
thousand.
Held to Maturity Securities
The amortized cost and fair value of securities held to maturity as of December 31, 2015 and 2014 are summarized
as follows:
(Dollars in thousands)
December 31, 2015
State and political subdivisions
December 31, 2014
State and political subdivisions
$
$
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
6,834 $
174 $
- $
7,008
6,006 $
189 $
(5) $
6,190
The amortized cost and fair value of securities held to maturity at December 31, 2015 are shown below by
contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total held to maturity securities
Amortized
Cost
Fair
Value
$
$
2,953 $
-
2,832
1,049
6,834 $
2,953
-
2,901
1,154
7,008
F-20
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporarily Impaired Securities
The following table shows our held to maturity investments’ gross unrealized losses and fair value with unrealized
losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of
time that individual held to maturity securities have been in a continuous unrealized loss position, at December 31,
2014. At December 31, 2015 we did not have any held to maturity investments with unrealized losses.
(Dollars in thousands)
December 31, 2014
State and political subdivisions
Less Than 12 Months
Gross
Fair Unrealized
Value
Losses
12 Months or More
Gross
Fair Unrealized
Value
Losses
Total
Gross
Fair Unrealized
Value
Losses
$
- $
-
$
811 $
(5)
$
811 $
(5)
As of December 31, 2015, we reviewed our held to maturity investment portfolio for indications of impairment. This
review includes analyzing the length of time and the extent to which the fair value has been lower than the cost, the
financial condition and near-term prospects of the issuer, including any specific events which may influence the
operations of the issuer and the intent and likelihood of selling the security. The intent and likelihood of sale of debt
securities is evaluated based upon our investment strategy for the particular type of security and our cash flow needs,
liquidity position, capital adequacy and interest rate risk position. For each security whose fair value is less than
their amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred.
State and Political Subdivisions
At December 31, 2015, we did not have any securities in an unrealized loss position. At December 31, 2014, there
were two securities with a fair value of $811 thousand that had an unrealized loss of $5 thousand. At December 31,
2014, the decline in fair value and the unrealized losses for our state and political subdivisions securities were
caused by changes in interest rates and spreads and were not the result of credit quality. These securities typically
have maturity dates greater than 10 years and the fair values are more sensitive to changes in market interest rates.
NOTE 5 – LOANS
The composition of net loans receivable at December 31, 2015 and 2014 is as follows:
(Dollars in thousands)
December 31, 2015
December 31, 2014
Commercial and industrial loans
Construction
Commercial real estate
Residential real estate
Consumer and other
Unearned net loan origination fees
Allowance for loan losses
Net loans receivable
$
$
20,023 $
13,348
382,262
127,204
1,253
544,090
(667)
(5,590)
537,833 $
20,549
12,379
326,370
111,498
1,665
472,461
(488)
(5,641)
466,332
Mortgage loans serviced for others are not included in the accompanying balance sheets. The total amount of loans
serviced for the benefit of others was approximately $454 thousand and $475 thousand at December 31, 2015 and
2014, respectively. Mortgage servicing rights were immaterial at December 31, 2015 and 2014.
F-21
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING
RECEIVABLES
The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable
for the years ended December 31, 2015 and 2014:
(Dollars in thousands)
Year Ended:
December 31, 2015
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
December 31, 2014
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
$
$
$
$
Commercial
and
Industrial
Commercial Residential
Real
Estate
Real
Estate
Consumer
and
Other
Construction
Unallocated
Total
231 $
(19)
17
(144)
85 $
222
(1)
17
(7)
231 $
383 $
-
-
(163)
220 $
308 $
-
-
75
383 $
3,491 $
(560)
41
674
3,646 $
3,399 $
(1,168)
39
1,221
3,491 $
903 $
(165)
17
29
784 $
941 $
(181)
4
139
903 $
19 $
(25)
7
86
87 $
16 $
(37)
10
30
19 $
614 $
-
-
154
768 $
535 $
-
-
79
614 $
5,641
(769)
82
636
5,590
5,421
(1,387)
70
1,537
5,641
The following table presents the balance in the allowance of loan losses at December 31, 2015 and 2014
disaggregated on the basis of our impairment method by class of loans receivable along with the balance of loans
receivable by class disaggregated on the basis of our impairment methodology:
Allowance for Loan Losses
Loans Receivable
Balance
Related to
Loans
Balance
Related to
Loans
Individually
Collectively
Evaluated for
Evaluated for
Individually
Collectively
Evaluated for
Evaluated for
(Dollars in thousands)
Balance
Impairment
Impairment
Balance
Impairment
Impairment
December 31, 2015
Commercial and industrial $
85 $
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
220
3,646
784
87
768
383
3,491
903
19
614
December 31, 2014
Commercial and industrial $
231 $
- $
-
112
79
73
-
85
$
20,023 $
220
3,534
705
14
-
13,348
382,262
127,204
1,253
-
20 $
-
5,160
1,546
138
-
20,003
13,348
377,102
125,658
1,115
-
$
5,590 $
264 $
4,558
$
544,090 $
6,864 $
537,226
51 $
-
136
101
-
-
180
$
20,549 $
94 $
383
3,355
802
19
-
12,379
-
326,370
111,498
1,665
-
5,105
2,314
-
-
20,455
12,379
321,265
109,184
1,665
-
$
5,641 $
288 $
4,739
$
472,461 $
7,513 $
464,948
F-22
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An age analysis of loans receivable which were past due as of December 31, 2015 and 2014 is as follows:
Recorded
Investment
(Dollars in thousands)
Past Due
Past Due
90 Days (a)
Due
Current
Receivables Accruing
30-59 Days
60-89 days
Than
Total Past
Financing
and
Greater
Total
> 90 Days
December 31, 2015
Commercial and industrial
$
Construction
Commercial real estate
Residential real estate
Consumer and other
5 $
-
758
335
16
- $
-
1,461
247
1
20 $
-
4,016
1,138
138
25 $
19,998 $
20,023 $
-
13,348
13,348
6,235
1,720
155
376,027
382,262
125,484
127,204
1,098
1,253
Total
$
1,114 $
1,709
$
5,312 $
8,135 $
535,955 $
544,090 $
December 31, 2014
Commercial and industrial
$
9 $
Construction
Commercial real estate
Residential real estate
Consumer and other
1,354
2,395
555
5
- $
-
1,209
108
-
94 $
103 $
20,446 $
20,549 $
-
3,936
1,978
1
1,354
7,540
2,641
6
11,025
12,379
318,830
326,370
108,857
111,498
1,659
1,665
Total
$
4,318 $
1,317
$
6,009 $
11,644 $
460,817 $
472,461 $
-
-
-
-
-
-
-
-
-
85
-
85
(a) includes loans greater than 90 days past due and still accruing and non-accrual loans.
Loans for which the accrual of interest has been discontinued at December 31, 2015 and 2014 were:
(Dollars in thousands)
December 31, 2015
December 31, 2014
Commercial and industrial
Commercial real estate
Residential real estate
Consumer and other
Total
$
$
20 $
4,016
1,138
138
5,312 $
94
3,936
1,893
1
5,924
Loans are made to individuals as well as commercial entities. Specific loan terms vary as to interest rate, repayment,
and collateral requirements based on the type of loan requested and the credit worthiness of the prospective
borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in
the markets serviced by the Company. Loan performance may be adversely affected by factors impacting the general
economy or conditions specific to the real estate market such as geographic location and/or property type. A
description of the Company's different loan segments follows:
Commercial Loans: Commercial credit is extended primarily to middle market and small business customers.
Commercial loans are generally made in the Company's market place for the purpose of providing working capital,
financing the purchase of equipment, inventory or commercial real estate and for other business purposes. Loans
will generally be guaranteed in full or for a meaningful amount by the businesses' major owners. Underwriting of
commercial loans is based primarily on the historical and projected cash flow of the business and secondarily on the
underlying collateral provided.
F-23
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential Mortgage and Consumer Loans: The Company originates mortgage and consumer loans including
principally residential real estate and home equity lines and loans. Each loan type is evaluated on debt to income,
type of collateral and loan to collateral value, credit history and Company relationship with the borrower.
In determining the adequacy of the allowance for loan losses, the Company estimates losses based on the
identification of specific problem loans through its credit review process and also estimates losses inherent in other
loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan
officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are
assigned loss component factors that reflect the Company’s loss estimate for each group of loans. It is
management’s and the board of directors’ responsibility to oversee the lending process to ensure that all credit risks
are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-
performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-
rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific
information related to expected future cash flows and operating results, collateral values, financial condition,
payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio
delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative
measurements.
The Company’s risk-rating system as defined below is consistent with the system used by regulatory agencies and
consistent with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the
regulatory definitions of classified assets.
Pass: This category represents loans performing to contractual terms and conditions and the primary source
of repayment is adequate to meet the obligation. The Company has five categories within the Pass
classification depending on strength of repayment sources, collateral values and financial condition of the
borrower.
Special Mention: This category represents loans performing to contractual terms and conditions; however
the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in
financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal
and interest or fees due.
Substandard: This category represents loans that the primary source of repayment has significantly
deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments.
The weaknesses require close supervision by the Company’s management and there is a distinct possibility
that the Company could sustain some loss if the deficiencies are not corrected. Such weaknesses could
jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be
expected or evident, however, loan repayment is inadequately supported by current financial information or
pledged collateral.
Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added
provision that collection or liquidation in full is highly questionable and not reasonably assured. The
probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss.
The validity of the extraneous factors must be continuously monitored. Once these factors are questionable
the loan should be considered for full or partial charge-off.
Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as
active assets of the Company is not warranted. Such loans are fully charged off.
F-24
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables illustrate the Company’s corporate credit risk profile by creditworthiness category as of
December 31, 2015 and 2014:
(Dollars in thousands)
December 31, 2015
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
December 31, 2014
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Pass
Special
Mention
Substandard
Doubtful
Total
$
$
$
$
19,983 $
13,348
367,305
124,915
1,115
526,666 $
20,446 $
12,379
312,172
108,587
1,527
455,111 $
5 $
-
8,957
743
-
9,705 $
9 $
-
8,257
457
138
8,861 $
35 $
-
6,000
1,546
138
7,719 $
94 $
-
5,941
2,454
-
8,489 $
- $
-
-
-
-
- $
- $
-
-
-
-
- $
20,023
13,348
382,262
127,204
1,253
544,090
20,549
12,379
326,370
111,498
1,665
472,461
F-25
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects information regarding the Company’s impaired loans as of December 31, 2015 and
2014 and for the years then ended:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
December 31, 2015
With no related allowance recorded:
Commercial and industrial
Commercial real estate
Residential real estate
$
20 $
2,684
1,123
20 $
2,684
1,152
- $
-
-
16 $
2,488
1,239
With an allowance recorded:
Commercial and industrial
Commercial real estate
Residential real estate
Consumer and other
Total:
Commercial and industrial
Commercial real estate
Residential real estate
Consumer and other
(Dollars in thousands)
December 31, 2014
With no related allowance recorded:
Commercial real estate
Residential real estate
With an allowance recorded:
Commercial and industrial
Commercial real estate
Residential real estate
Total:
Commercial and industrial
Commercial real estate
Residential real estate
$
$
$
-
2,476
423
138
20
5,160
1,546
138
6,864 $
-
2,476
423
138
20
5,160
1,575
138
6,893 $
-
112
79
73
-
112
79
73
264 $
19
2,706
687
-
35
5,194
1,926
-
7,155 $
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
3,167 $
1,829
3,736 $
1,835
- $
-
3,923 $
1,786
94
1,938
485
94
1,938
489
94
5,105
2,314
7,513 $
94
5,674
2,324
8,092 $
51
136
101
51
136
101
288 $
39
3,968
567
39
7,891
2,353
10,283 $
41
53
2
37
10
2
78
63
143
-
32
6
-
33
11
-
-
65
17
-
82
The average recorded investment in impaired loans is calculated using the average of impaired loans over the past
five quarter-end periods. The Company recognizes income on impaired loans by recording all payments as a
reduction of principal on such loans.
F-26
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans include loans modified in TDRs where concessions have been granted to borrowers experiencing
financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment
extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection.
The following table presents the recorded investment in troubled debt restructured loans as of December 31, 2015
and 2014 based on payment performance status:
(Dollars in thousands)
Commercial Real Estate Residential Real Estate
Total
December 31, 2015
Performing
Non-performing
Total
December 31, 2014
Performing
Non-performing
Total
$
$
$
$
1,144 $
1,831
2,975 $
1,169 $
2,730
3,899 $
409 $
194
603 $
421 $
224
645 $
1,553
2,025
3,578
1,590
2,954
4,544
Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures
in this footnote. As of December 31, 2015, we have not committed to lend additional amounts to customers with
outstanding loans that are classified as TDRs.
There were no TDRs that occurred during the year ended December 31, 2015 and 2014.
The TDRs described above did not require an allocation of the allowance for credit losses, nor were any charge-offs
recorded subsequent to modification during the years ended December 31, 2015 and 2014.
There were no TDRs for which there was a payment default within twelve months following the date of the
restructuring for the years ended December 31, 2015 and 2014.
Loans are considered to be in payment default once they are greater than 30 days contractually past due under the
modified terms. There were no charge-offs on defaulted TDRs during the year ended December 31, 2015 and 2014.
NOTE 7 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2015 and 2014 are as follows:
(Dollars in thousands)
2015
2014
Land and land improvements
Building and building improvements
Leasehold improvements
Furniture, fixtures and equipment
Assets in progress
Accumulated depreciation
Premises and equipment, net
$
$
2,049 $
5,953
1,430
5,458
420
15,310
(6,431)
8,879 $
2,049
5,953
771
5,089
175
14,037
(5,387)
8,650
F-27
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2015 and 2014, depreciation expense totaled $998 thousand and $797
thousand, respectively.
NOTE 8 – DEPOSITS
The components of deposits at December 31, 2015 and 2014 are as follows:
(Dollars in thousands)
2015
2014
Demand, non-interest bearing
Savings, money market and interest-bearing demand
Time deposits less than $100 thousand
Time deposits $100 thousand and over
Total deposits
$
$
87,209 $
293,774
86,343
50,530
517,856 $
70,490
281,163
68,712
37,905
458,270
Included in time deposits at December 31, 2015 and 2014, were brokered deposits of $33.8 million and $12.2
million, respectively.
At December 31, 2015, the scheduled maturities of time deposits are as follows:
(Dollars in thousands)
Within one year
One to two years
Two to three years
Three to four years
After four years
$
$
96,505
11,966
20,122
4,787
3,493
136,873
Certificates of deposits with balances of $250 thousand or more at December 31, 2015 and 2014, totaled
approximately $21.7 million and $13.3 million, respectively.
NOTE 9 – BORROWINGS
At December 31, 2015, the Bank had secured borrowing potential with the Federal Home Loan Bank of New York
(“FHLBNY”) for borrowings of up to $125.1 million and a $10.0 million line of credit at Atlantic Central Bankers
Bank (“ACBB”). The borrowings at the FHLBNY are secured by a pledge of qualifying residential and commercial
mortgage loans, having an aggregate unpaid principal balance of approximately $125.1 million. At December 31,
2015, the Bank had the ability to borrow up to $49.1 million at FHLBNY and $10.0 million at ACBB.
At December 31, 2015 and 2014, the Company had $34.7 million and $23.5 million, respectively, in overnight
advances at the FHLBNY, having weighted average interest rates of 0.52% and 0.39%, respectively. These
advances are priced at the federal funds rate plus a spread (generally between 20 and 30 basis points) and re-price
daily.
F-28
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2015 and 2014 the Bank had the following long-term borrowings from the FHLBNY:
(Dollars in thousands)
Maturity Date
December 7, 2016
June 21, 2017
November 3, 2017
December 7, 2017
December 26, 2017
December 26, 2017
January 16, 2018
July 17, 2018
September 19, 2018
January 31, 2019
February 4, 2019
January 15, 2020
October 5, 2020
Interest
Rate
4.00%
4.60%
1.31%
3.97%
3.66%
3.79%
1.18%
1.65%
1.83%
2.02%
1.53%
1.66%
1.78%
$
$
Balance at December 31,
2015
2014
5,000 $
6,000
5,000
5,000
5,000
5,000
5,000
5,000
5,000
-
5,000
5,000
5,000
61,000 $
Maturities of long-term debt in years subsequent to December 31, 2015 are as follows:
(Dollars in thousands)
Within one year
One to two years
Two to three years
Three to four years
Four to five years
After five years
$
$
5,000
6,000
5,000
5,000
5,000
5,000
-
5,000
5,000
5,000
-
-
-
46,000
5,000
26,000
15,000
5,000
10,000
-
61,000
At December 31, 2015 the Company had $61.0 million in long-term fixed rate advances, of which, $11.0 million
were convertible notes that contain an option which allows the FHLBNY, at quarterly intervals, to convert the fixed
convertible advance into replacement funding for the same or lesser principal amount based on any advance then
offered by the FHLBNY at their current market rates.
NOTE 10 – JUNIOR SUBORDINATED DEBENTURES AND MANDATORY REDEEMABLE CAPITAL
DEBENTURES
On June 28, 2007, Sussex Capital Trust II, a Delaware statutory business trust and a non-consolidated wholly-owned
subsidiary of the Company, issued $12.5 million of variable rate capital trust pass-through securities to investors.
Sussex Capital Trust II purchased $12.9 million of variable rate junior subordinated deferrable interest debentures
from the Company. The debentures are the sole asset of the Trust. The terms of the junior subordinated debentures
are the same as the terms of the capital securities. The Company has also fully and unconditionally guaranteed the
obligations of the Trust under the capital securities. The variable interest rate reprices quarterly at the three month
LIBOR plus 1.44% and was 1.95% and 1.68% at December 31, 2015 and 2014, respectively. The capital securities
are currently redeemable by the Company at par in whole or in part. The capital securities must be redeemed upon
final maturity of the subordinated debentures on September 15, 2037.
F-29
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
The Company has operating lease agreements expiring in various years through 2028. The Company has the option
to extend the lease agreements for additional lease terms. The Company is responsible to pay all real estate taxes,
insurance, utilities and maintenance and repairs on its leased facilities.
Future minimum payments under non-cancellable leases by year are as follows as of December 31, 2015:
(Dollars in thousands)
2016
2017
2018
2019
2020
Thereafter
$
$
732
660
577
577
171
682
3,399
Rent expense was $649 thousand and $530 thousand for the years ended December 31, 2015 and 2014, respectively.
NOTE 12 – EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan and Trust (the “401(k) Plan”) for its employees. Non-highly compensated
employees may contribute up to the statutory limit of 75% of their salary to the 401(k) Plan. Highly compensated
employees are restricted to a contribution up to 7% of their salary. The Company provides a 50% match of the
employee's contribution up to 6% of the employee's annual salary. The amount charged to expense related to the
401(k) Plan for the years ended December 31, 2015 and 2014 was $135 thousand and $130 thousand, respectively.
The Company also maintains nonqualified Supplemental Salary Continuation Plans (the “Supplemental Plans”)
covering the Company’s former Chairman and a former executive officer of the Company. Under the provisions of
the Supplemental Plans, the Company has executed agreements providing the officers a retirement benefit.
Payments from the Supplemental Plans for the Chairman began in May of 2008 and the other executive started in
April of 2010. For the years ended December 31, 2015 and 2014, $57 thousand and $62 thousand, respectively, was
charged to expense in connection with the Plans. At December 31, 2015 and 2014, the carrying value of the
Supplemental Plans was $795 thousand and $868 thousand, respectively.
In March of 2005, the Board of Directors approved an Executive Incentive and Deferred Compensation Plan (the
“Incentive Plan”). The purpose of the Incentive Plan is to motivate and reward participants for achieving bank
financial and strategic goals as well as to provide specified benefits to a select group of management or highly
compensated employees who contribute materially to the continued growth, development and future business
success of the Company. Participants may elect to receive their award or defer compensation in a deferral account
which will earn interest at the average interest rate earned by the Company in its investment portfolio, compounded
monthly. At December 31, 2015 and 2014, the carrying value of deferred compensation was $173 thousand and
$148 thousand, respectively.
In July 2006, the Board of Directors adopted a Director Deferred Compensation Agreement for both the Bank and
the Company (the “DCA”). Under the terms of the DCA, a director may elect to defer all or a portion of his retainer
and fees for the coming year. Under the DCA, only the payment of the compensation earned is deferred, and there
is no deferral of the expense in the Company’s financial statements related to the participant’s deferred
compensation, which will be charged to the Company’s income statement as an expense in the period in which the
participant earned the compensation. The deferred amounts are credited with earnings at a rate equal to the average
interest rate earned by the Company on its investment portfolio or at a rate that tracks the performance of the
Company’s common stock. In September 2015, the Board of Directors adopted an amendment under the DCA.
The amendment, which is effective October 1, 2015, specifies that participants are no longer eligible to be credited
earnings based on a rate that tracks the performance of the Company’s common stock on new amounts deferred after
such date. Additionally, effective January 1, 2016, the maximum earnings on deferred compensation amounts that
F-30
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are eligible to be credited with an earnings rate that tracks the performance of the Company’s common stock is
limited to 10% of the stock price at end of the previous plan year. The participant’s benefit will be distributed to the
participant or his beneficiary upon a change in control of the Company, the termination of the DCA, the occurrence
of an unforeseeable emergency, the termination of service or the participant’s death or disability. Upon distribution,
a participant’s benefit will be paid in monthly installments over a period of ten years. At December 31, 2015 and
2014, the carrying value of the DCA was $1.2 million and $833 thousand, respectively.
In July 2011, the Company entered into a Supplemental Executive Retirement Agreement (“SERP”), a non-qualified
defined contribution pension plan that provides supplemental retirement income for the Company’s Chief Executive
Officer. The SERP was effective as of January 1, 2011. Based on the attainment of certain annual performance
targets, the Company will make annual contributions to the SERP. Any amounts credited to the SERP will accrue
interest equal to that paid by U.S. 10-year Treasury Notes for each applicable year. The SERP provides for the
benefits to be paid monthly over a 5-year period commencing the first day of the month following the later of the
participant’s 65th birthday, or normal retirement age, or termination of employment. At December 31, 2015 and
2014, the carrying value of the SERP was $239 thousand and $179 thousand, respectively.
NOTE 13 – COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
The components of other comprehensive income (loss), both before tax and net of tax, are as follows:
Year Ended December 31, 2015 Year Ended December 31, 2014
Net of
Before
Tax
Tax
Before
Tax
Net of
Tax
Tax
Effect
Tax
Effect
(Dollars in thousands)
Other comprehensive (loss) income:
Unrealized gains on available for sale
securities
Reclassification adjustment for net gains
on securities transactions included in net
income
Total other comprehensive (loss)
income
$
134 $
54 $
80 $
4,155 $
1,662 $
2,493
(271)
(108)
(163)
(289)
(116)
(173)
$
(137) $
(54) $
(83) $
3,866 $
1,546 $
2,320
Reclassification adjustments for gains on securities transactions of $271 thousand and $289 thousand for the years
ended December 31, 2015 and 2014, respectively, are presented in the income statement on the line item for net gain
on securities transactions.
F-31
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings per share:
(In thousands, except share and per share data)
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
Year Ended December 31, 2015:
Basic earnings per share:
Net earnings applicable to common stockholders
$
3,700
4,559,316
$
0.81
Effect of dilutive securities:
Unvested stock awards
Diluted earnings per share:
-
32,506
Net income applicable to common stockholders and
assumed conversions
$
3,700
4,591,822
$
0.81
Year Ended December 31, 2014:
Basic earnings per share:
Net earnings applicable to common stockholders
$
2,600
4,541,305
$
0.57
Effect of dilutive securities:
Unvested stock awards
Diluted earnings per share:
-
39,045
Net income applicable to common stockholders and
assumed conversions
$
2,600
4,580,350
$
0.57
There were 58,274 and 9,381 shares of unvested restricted stock awards and options outstanding during December
31, 2015 and 2014, respectively, that were not included in the computation of diluted EPS because to do so would
have been anti-dilutive for the periods presented.
NOTE 15 – STOCK INCENTIVE PLANS
During 2005, the stockholders approved the 2004 Equity Incentive Plan (the “2004 Plan”) to provide equity
incentives to selected persons. Awards may be granted to employees, officers, directors, consultants and advisors of
the Company or subsidiary. Awards granted under the 2004 Plan may be either stock options or restricted stock
awards and are designated at the time of grant. Options granted under the 2004 Plan to directors, consultants and
advisors are non-qualified stock options. Options granted to officers and other employees may be incentive stock
options or non-qualified stock options. Restricted stock awards may be made to any plan participant. As of
December 31, 2014, there were no authorized shares available for future grants under the 2004 Plan.
During 2013, the stockholders approved the 2013 Equity Incentive Plan (the “2013 Plan”) to provide equity
incentives to selected persons. Awards may be granted to employees, officers, directors, consultants and advisors of
the Company or subsidiary. Awards granted under the 2013 Plan may be either stock options or restricted stock
awards and are designated at the time of grant. Restricted stock awards may be made to any plan participant. As of
December 31, 2015, there were 185,335 shares available for future grants under the 2013 Plan.
F-32
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Company's restricted stock grants activity for the years ended December 31, 2015 and
2014 are as follows:
2015
2014
Weighted
Average
Weighted
Average
Grant Date Number of Grant Date
Fair Value
Fair Value
Shares
Number of
Shares
Unvested restricted stock, beginning of year
Granted
Forfeited
Vested
Unvested restricted stock, end of period
112,545 $
32,692
(1,001)
(50,666)
93,570 $
6.06
10.54
9.19
5.93
7.67
125,922
$
36,043
(2,550)
(46,870)
112,545 $
4.98
8.81
7.20
5.21
6.06
Total stock-based compensation related to restricted stock awards was $337 thousand and $300 thousand for the
years ended December 31, 2015 and December 31, 2014, respectively. As of December 31, 2015 and 2014, there
were $433 thousand and $439 thousand, respectively, of unrecognized compensation cost related to non-vested
restricted stock awards which is expected to be recognized over a weighted average period of 1.4 years and 1.7
years.
Options granted to officers and other employees and which are incentive stock options, are subject to limitations
under Section 422 of the Internal Revenue Code. The option price under each such grant shall not be less than the
fair market value on the date of the grant. No option will be granted for a term in excess of ten years. The Company
established a vesting schedule that must be satisfied before the options may be exercised.
Stock option transactions under all plans are summarized as follows:
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Contractual
Term
Aggregate
Intrinsic
Value
Number of
Shares
Outstanding, December 31, 2013
Options granted
Options expired
Outstanding, December 31, 2014
Options granted
Options expired
Outstanding, December 31, 2015
Exercisable, December 31, 2015
32,749 $
36,000
(22,224)
46,525
15,985
(10,525)
51,985 $
7,200 $
14.31
9.97
14.97
10.63
10.25
12.91
10.06
9.97
8.9 $
8.9 $
157,717
21,844
F-33
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options outstanding and exercisable at December 31, 2015:
Exercise
Price
Number
Outstanding
Weighted
Average Remaining
Life (Years)
Number
Exercisable
9.97
10.25
36,000
15,985
51,985
8.9
9.1
8.9
7,200
-
7,200
At December 31, 2015, the aggregated intrinsic value of all outstanding option and exercisable options was $158
thousand and $22 thousand, respectively.
The following table summarizes information about stock option assumptions:
2015
2014
Expected dividend yield
Expected volatility
Risk-free interest rate
Expected option life
1.56%
34.32%
1.37%
7.5 Years
1.20%
34.47%
1.55%
7.5 Years
The expected dividend yield is based on the Company’s current common stock dividend rate divided by the closing
price of the Company shares at the grant date. The expected volatility is based on the closing common stock price of
the Company shares over a 5 year period. The assumed risk-free interest rate is based on the US Treasury note rate
for a term equivalent to the expected option life at the time of the option grant. The expected life of options amount
is estimated as the mid-point between the vesting period and the expiration date of the options granted.
Total stock-based compensation related to stock options was $37 thousand and $4 thousand for the year ended
December 31, 2015 and 2014, respectively.
The weighted average grant date fair value of options granted during the year ended December 31, 2015 was $3.56
per share. Expected future expense relating to the non-vested options outstanding as of December 31, 2015 is $150
thousand over a weighted average period of 3.9 years. Upon exercise of vested options, management expects to
draw on treasury stock as the source of the shares.
NOTE 16 – INCOME TAXES
The Company and its subsidiary are subject to U.S. federal and state income tax. The components of income tax
expense for the years ended December 31, 2015 and 2014 are as follows:
(Dollars in thousands)
2015
2014
Current:
Federal
State
Deferred:
Federal
State
1,014 $
439
1,453
117
70
187
1,640 $
1,402
524
1,926
(689)
(236)
(925)
1,001
$
$
F-34
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of the statutory federal income tax at a rate of 34% to the income tax expense included in the
statements of income and comprehensive income for the years ended December 31, 2015 and 2014 is as follows:
(Dollars in thousands)
2015
2014
Federal income tax at statutory rate
Tax exempt interest
State income tax, net of federal income tax
effect
Bank owned life insurance
Other
$
$
1,816
(312)
336
(106)
(94)
1,640
34 % $
(6)
6
(2)
(1)
31 % $
1,224
(327)
190
(110)
24
1,001
The components of the net deferred tax asset at December 31, 2015 and 2014 are as follows:
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses
Deferred compensation
Deferred Fees
Foreclosed real estate
Restricted stock
AMT credit
Other
Total deferred tax assets
Deferred tax liabilities:
Depreciation
Prepaid expenses
Unrealized gain on securities, available for sale
Total deferred tax liabilities
Net deferred tax asset
2015
2014
$
$
2,233 $
953
347
219
115
-
214
4,081
(441)
(254)
(58)
(753)
3,328 $
34 %
(9)
5
(3)
1
28 %
2,253
679
138
204
55
391
281
4,001
(285)
(143)
(113)
(541)
3,460
NOTE 17 – TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS
The Company has had, and may be expected to have in the future, banking transactions in the ordinary course of
business with its executive officers, directors, principal stockholders, their immediate families and affiliated
companies (commonly referred to as related parties), on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with others.
The related party loan activity for the years ended December 31, 2015 and 2014 is summarized as follows:
(Dollars in thousands)
Balance, beginning
Disbursements
Repayments and other
Balance, ending
2015
2014
$
$
6,136 $
2,664
(2,153)
6,647 $
6,431
349
(644)
6,136
Certain related parties of the Company provided legal services and appraisal services to the Company. Legal
services provided by related parties totaled $14 thousand and $73 thousand for the years ended December 31, 2015
and 2014, respectively. Appraisal services provided by related parties totaled $12 thousand and $18 thousand for
F-35
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the years ended December 31, 2015 and 2014, respectively. Engineering services provided by related parties totaled
$6 thousand and $26 thousand for the year ended December 31, 2015 and 2014, respectively. The Company also
paid rent to related parties for an office location in the amount of $147 thousand and $146 thousand for the years
ended December 31, 2015 and 2014, respectively.
NOTE 18 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include commitments to extend credit and letters
of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized
in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as it does for on-balance sheet
instruments.
A summary of the Company's financial instrument commitments at December 31, 2015 and 2014 is as follows:
(Dollars in thousands)
2015
2014
Commitments to grant loans
Unfunded commitments under lines of credit
Outstanding standby letters of credit
$
30,561 $
53,087
990
20,199
39,968
910
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Since many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation. Collateral held varies but may
include personal or commercial real estate, accounts receivable, inventory and equipment.
Outstanding letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments.
These standby letters of credit expire within twelve months, although many have automatic renewal provisions. The
credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan
commitments. The Company requires collateral and personal guarantees supporting these letters of credit as deemed
necessary. Management believes that the proceeds obtained through a liquidation of such collateral and
enforcement of personal guarantees would be sufficient to cover the maximum potential amount of future payments
required under the corresponding guarantees. The current amount of the liability as of December 31, 2015 and 2014
for guarantees under standby letters of credit issued is not material.
NOTE 19 – CAPITAL AND REGULATORY MATTERS
The Company is required to maintain cash reserve balances either in vault cash or with the Federal Reserve Bank.
The total of those reserve balances was approximately $2.3 million at December 31, 2015.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to
meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance sheet items as
F-36
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk-weightings and other factors.
The federal banking agencies have substantially amended the regulatory risk-based capital rules applicable to the Bank.
The amendments implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.
The new rules apply regulatory capital requirements to the Bank. The amended rules included new minimum risk-
based capital and leverage ratios, which became effective in January 2015, with certain requirements to be phased in
beginning in 2016, and refined the definition of what constitutes “capital” for purposes of calculating those ratios.
The new minimum capital level requirements applicable to the Bank include: (i) a new common equity Tier 1 capital
ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from
current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The amended rules also establish a “capital
conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following
minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 capital ratio of 8.5%; and (iii) a total
capital ratio of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at
0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will
be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its
capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible
retained income that could be utilized for such actions.
As of December 31, 2015, the most recent notification from the Federal Deposit Insurance Corporation categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios at December 31, 2015 and 2014 are presented below:
Actual
For Capital Adequacy
Purposes
under Prompt
Corrective Action
Provisions
To be Well Capitalized
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2015
Total capital (to risk-weighted assets): $
Tier I capital (to risk-weighted assets):
Common equity tier I capital (to
average assets):
Tier I capital (to average assets):
As of December 31, 2014
Total capital (to risk-weighted assets): $
Tier I capital (to risk-weighted assets):
Common equity tier I capital (to
average assets):
Tier I capital (to average assets):
68,283
62,693
62,693
62,693
64,283
58,640
N/A
58,640
12.79% $
11.74
>42,722
>32,041
>8.00% $
>6.00
>53,402
>42,722
>10.00%
>8.00
11.74
9.45
>24,031
>26,548
>4.50
>4.00
>34,711
>33,184
>6.50
>5.00
14.02% $
12.79
>36,674
>18,337
>8.00% $
>4.00
>45,843
>27,506
>10.00%
>6.00
N/A
10.19
N/A
>23,022
N/A
>4.00
N/A
>28,778
N/A
>5.00
The Bank is subject to certain restrictions on the amount of dividends that it may declare due to regulatory
considerations. The State of New Jersey banking laws specify that no dividend shall be paid by the Bank on its
capital stock unless, following the payment of such dividend, the capital stock of the Bank will be unimpaired and
the Bank will have a surplus of not less than 50% of its capital stock or, if not, the payment of such dividend will not
reduce the surplus of the Bank.
At December 31, 2015, the Bank’s funds available for payment of dividends were $58.2 million. Accordingly, $7.5
million of the Company’s equity in the net assets of the Bank was restricted as of December 31, 2015.
F-37
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the
Bank’s capital to be reduced below applicable minimum capital requirements.
NOTE 20 – PARENT COMPANY ONLY FINANCIAL
Condensed financial information pertaining only to the parent company, Sussex Bancorp, is as follows:
BALANCE SHEETS
(Dollars in thousands)
Assets
Cash
Investment in subsidiary
Accrued interest and other assets
Total Assets
Liabilities and Stockholders' Equity
Other liabilities
Junior subordinated debentures
Stockholders' equity
Total Liabilities and Stockholders' Equity
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands)
Interest on investments
Net realized gain loss on sale of securities
Interest expense on debentures
Other expenses
Loss before income tax benefit and equity in
undistributed net income of subsidiaries
Income tax benefit
Loss before equity in undistributed net
income of subsidiaries
Equity in undistributed net income of subsidiaries
Net Income
Comprehensive income
$
$
$
$
December 31,
2015
2014
69 $
65,986
1,466
67,521 $
693 $
12,887
53,941
67,521 $
1
62,016
2,635
64,652
536
12,887
51,229
64,652
Year Ended December 31,
2015
2014
$
- $
-
(220)
(311)
(531)
179
(352)
4,052
3,700
8
(1)
(212)
(266)
(471)
159
(312)
2,912
2,600
$
3,617 $
4,920
F-38
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Net change in other assets and liabilities
Equity in undistributed net income of subsidiaries
Net Cash Provided by (Used in) Operating Activities
Cash Flows from Investing Activities:
Securities available for sale:
Sales
Net Cash Provided by Investing Activities
Cash Flows from Financing Activities:
Cash dividends paid
Purchase of treasury stock
Net Cash (Used in) Provided by Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents - Beginning of Year
Cash and Cash Equivalents - End of Year
$
NOTE 21 – CONTINGENCIES
Year Ended December 31,
2014
2015
$
3,700 $
2,600
1,699
(4,052)
1,347
-
-
(746)
(533)
(1,279)
68
1
69 $
(718)
(2,912)
(1,030)
320
320
(420)
-
(420)
(1,130)
1,131
1
In the normal course of business, the Company is subject to various lawsuits involving matters generally incidental
to its business. Management is of the opinion that the ultimate liability, if any, resulting from any pending actions or
proceedings will not have a material effect on the financial condition or results of operations of the Company.
F-39
EXHIBIT LIST
Exhibit
Number
3.1
3.2
4.1
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
Description
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report
on Form 10-Q filed with the SEC on August 15, 2011).
Amended and Restated By-laws (incorporated by reference to Exhibit 3.II to the Current Report on
Form 8-K filed with the SEC on June 3, 2014).
Specimen common stock certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 1 to
the Registration Statement on Form S-1 filed with the SEC on June 3, 2013).
1995 Incentive Stock Option Plan (incorporated by reference to Exhibit 99.6 to the Registration
Statement on Form 8-B filed with the SEC on December 13, 1996).
2001 Stock Option Plan (incorporated by reference to Exhibit B to the Definitive Proxy Statement on
Schedule 14-A filed with the SEC on March 19, 2001.)
2004 Equity Incentive Plan (incorporated by reference to Exhibit 10 to the Current Report on Form 8-
K filed with the SEC on April 29, 2005).
2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement
on Form S-8 filed with the SEC on May 28, 2014).
Form of Incentive Stock Option Agreement under 2013 Equity Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form S-8 filed with the SEC on May 28,
2014).
Form of Nonqualified Stock Option Agreement under 2013 Equity Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Registration Statement on Form S-8 filed with the SEC on May 28,
2014).
Form of Restricted Stock Agreement under 2013 Equity Incentive Plan (incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-8 filed with the SEC on May 28, 2014).
Amended and Restated Director Deferred Compensation Agreement (incorporated by reference to
Exhibit 10 to the Current Report on Form 8-K filed with the SEC on December 19, 2008).
Amended and Restated Executive Incentive and Deferred Compensation Plan (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC on January 26, 2010).
Employment Agreement by and between the Company, the Bank and Donald L. Kovach, dated July
15, 2009 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on July 20, 2009).
Salary Continuation Agreement by and between the Company and Donald L. Kovach, dated March
15, 2000 (incorporated by reference to Exhibit 10.8 to the Annual Report on Form 10-K filed with the
SEC on March 16, 2011).
Amendment #1 to the Salary Continuation Agreement with Donald L. Kovach, dated June 11, 2002
(incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed with the SEC on
March 16, 2011).
Amendment #2 to the Salary Continuation Agreement with Donald L. Kovach, dated January 7, 2004
(incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on
March 23, 2004).
Amendment #3 to the Salary Continuation Agreement with Donald L. Kovach, dated October 17,
2007 (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the
SEC on November 14, 2007).
Employment Agreement by and between Tri-State Insurance Agency, Inc. and George Lista, dated
September 1, 2006 (incorporated by reference to Exhibit 10.A to the Current Report on Form 8-K
filed with the SEC on September 7, 2006).
Employment Agreement by and between the Company, the Bank and Anthony Labozzetta, dated
January 20, 2010 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
with the SEC on January 26, 2010).
Supplemental Executive Retirement Agreement by and between the Company and Anthony J.
Labozzetta, dated July 20, 2011 (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed with the SEC on July 26, 2011).
Employment Agreement by and between the Company, the Bank and Steven M. Fusco, dated June
21.1
23.1
31.1
31.2
32.1**
101**
23, 2010 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the
SEC on June 29, 2010).
List of Subsidiaries.
Consent of BDO USA, LLP.
Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated
under the Securities Exchange Act of 1934, as amended.
Certification of Principal Financial and Accounting Officer pursuant to Rules 13a-14(a) and 15d-
14(a) promulgated under the Securities Exchange Act of 1934, as amended.
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Financial statements from the Annual Report on Form 10-K of Sussex Bancorp for the year ended
December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive
Income, (iii) the Consolidated Statements of Stockholders’ Equity, (iv) the Consolidated Statements
of Cash Flows and (v) Notes to Consolidated Financial Statements.
_________
* Management contract or compensatory plan or arrangement.
** Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), and shall not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933, as amended, or the Exchange Act.
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DIRECTORS AND EXECUTIVE OFFICERS
Board of Directors: SUSSEX BANK and SUSSEX BANCORP
EDWARD J. LEPPERT
Chairman of the Board
PATRICK BRADY
REV. TIMOTHY MARVIL
ANTHONY LABOZZETTA
President and
Chief Executive Officer
RICHARD BRANCA
ROBERT MCNERNEY
KATHERINE H. CARISTIA
CHARLES A. MUSILLI
MARK J. HONTZ
JOHN E. URSIN
Executive Officers: SUSSEX BANK
ANTHONY LABOZZETTA
President and
Chief Executive Officer
VITO GIANNOLA
Executive Vice President
and Chief Retail Officer
NEILL SCHREYER
Executive Vice President
and Chief Credit Officer
STEVEN M. FUSCO
Senior Executive Vice President
and Chief Financial Officer
ADITYA KISHORE
Executive Vice President and
Chief Operations & Technology Officer
KURT BREITENSTEIN
Executive Vice President
and Chief Lending Officer
TRI-STATE INSURANCE AGENCY
GEORGE LISTA
President and
Chief Executive Officer
Sussex Bank AR 2016_PRESS_PMS_single pages.indd 7
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LOCATIONS
Banking Centers
NEW JERSEY:
Andover
165 Route 206
Andover, NJ 07821
973-786-5150
Augusta
100 Route 206
Augusta, NJ 07822
973-940-7950
Franklin
399 Route 23
Franklin, NJ 07416
973-827-2404
Oradell
296 Kinderkamack Rd.
Oradell, NJ 07649
201-225-8650
Sparta
33 Main Street
Sparta, NJ 07871
973-729-7223
Vernon
7 Church Street
Vernon, NJ 07462
973-764-6175
Montague
266 Clove Road
Montague, NJ 07827
973-293-3488
Wantage
378 Route 23
Wantage, NJ 07461
973-875-9957
Newton
15 Trinity Street
Newton, NJ 07860
973-383-2211
Heath Village*
430 Schooley’s Mtn. Rd.
Hackettstown, NJ 07840
908-645-0398
NEW YORK:
Astoria
28-21 Astoria Blvd
Astoria, NY 11102
347-472-1727
*For residents only.
Offices
Regional Offices & Corporate Centers
100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
844-256-7238
15 Boulder Hills Blvd
Wantage, NJ 07416
844-256-7328
Tri-State Insurance Agency
96 Route 206
Augusta, NJ 07822
973-579-6776
296 Kinderkamack Road
Oradell, NJ 07649
Regional Lending Offices
100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
15 Boulder Hills Blvd
Wantage, NJ 07416
296 Kinderkamack Road
Oradell, NJ 07649
100 Enterprise Drive | Suite 700 | Rockaway, NJ 07866
844-CLOSE-2-U | 844-256-7238 | Sussexbank.com
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