SB One Bancorp Annual Report 2016

Plain-text annual report

A N N U A L R E P O R T T O S H A R E H O L D E R S INVESTOR INFORMATION STOCK INFORMATION GENERAL COUNSEL Sussex Bancorp’s Common Stock is Windels Marx, Lane and Mittendorf traded on the Nasdaq Global Market 120 Albany Street Plaza, 6th Floor using the symbol “SBBX”. New Brunswick, NJ 08901 REGISTRAR AND TRANSFER AGENT American Stock Transfer & Trust Co. 6201 15th Avenue Brooklyn, NY 11219 800-937-5449 www.amstock.com INDEPENDENT AUDITORS BDO USA, LLP 100 Park Avenue New York, NY 10017 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 FROM THE CHAIRMAN OF THE BOARD “Financial capital, while critically important, can be acquired through a variety of means. Human capital is infinitely more distinctive, and it remains the key element to organizational success.” Dear Fellow Shareholders, Last year was another historic one for your company. We shattered our pre-existing earnings record by 49%, and our stock price increased 37% from the previous year. In short, our financial performance was outstanding, and cannot and should not be overlooked. Our CEO Anthony Labozzetta leads the remarkable team that is responsible for this performance and his letter to shareholders will share the details of their amazing successes. NET INCOME $5.5 7 . 0 % R 5 G A $3.7 r C a e d 3 y n $2.6 7 . 5 % a R 1 G A $1.4 r C a e 5 y $0.7 FY 12 FY 13 FY 14 FY 15 FY 16 I am proud to say that there were other milestone achievements during the year. The American Bankers Association (ABA) honored your CEO by naming him the 2016 “Community Banker of the Year”. This national recognition was not surprising to the people who work with Tony daily and witness first-hand his commitment and passion for our company as well as the banking profession. The ABA got it right. And although he insists on sharing recognition with his colleagues, I’d like to use this forum to congratulate Tony and to say thank you—from all of us in the Sussex Bancorp family—for the tremendous job that he’s done as our CEO. We all take great pride in his success and recognition, and we look forward to his continued leadership. FROM THE CHAIRMAN OF THE BOARD continued Also in 2016 Sussex Bank was recognized by NJBIZ as one of the 50 fastest growing companies in New Jersey. It was our first year on the list, and we were proud to debut at number 24 as the highest ranked bank in the group. These accolades are a tribute to the abilities, efforts, and dedication of the people that comprise your company. We have always believed strongly in the direct connection between organizational success and individual moral character. Financial capital, while critically important, can be acquired through a variety of means. Human capital is infinitely more distinctive, and it remains the key element to organizational success. The culture of every company evolves from the successes, failures, and overall journey of the organization. Each one is unique. We are extremely proud of the group of like-minded people that define our culture, and we’re grateful that each day they make the conscious decision to come to work in our company. We will never take that decision for granted, and we will continue to find ways to make their employee experience a rewarding and challenging one. Your Board of Directors continues to play an integral role as a strategic resource for me, and a partner to management. I am honored to serve with them, and I am grateful for their dedication and commitment to this company. Their willingness to engage each other and the leadership team on issues facing our company has led us to where we are, and will continue to be critical to our long-term success. I cannot thank you enough for your continued trust and confidence. You have my word that we will keep working hard to make you proud to be an owner of Sussex Bancorp. Sincerely, Edward J. Leppert Chairman of the Board FROM THE PRESIDENT AND CEO “We would like to think that while our financial performance sustains us, it does not define us. What truly defines us is our positive company culture and the remarkable people that live it each day.” Dear Fellow Shareholders, At Sussex Bank we know that our people are the only sustainable differentiator. As such, we are led by a set of guiding principles that preserve our culture and enable us to build our business in a manner that creates long-term shareholder value. This allows us to deliver on our promise to make a meaningful difference to all of our stakeholders. FINANCIAL PERFORMANCE & SHAREHOLDER VALUE In 2016, we delivered record earnings of $5.5 million or $1.19 per diluted share, up 49.3% from the prior year. The improvement is directly linked to the impressive growth rate in each of our principal business lines. Our commercial, retail banking and insurance divisions have each exceeded annual growth rates of 25%, peer-leading in each category. Our approach to banking continues to produce a level of stakeholder advocacy that propels our growth organically. I want to thank all of our employees for their hard work and commitment to our guiding principles, for making 2016 another outstanding year for Sussex Bancorp and most importantly, for helping us build a better bank. Our capital remains strong. Our leverage, Common Equity Tier I, Tier I and Total risk- based capital ratios were 10.41%, 12.87%, 12.87% and 13.86%, respectively; all of which are in excess of ratios required to be considered a “well capitalized” bank. Our year-over-year (2015 vs. 2016) stock price is up 60%. And, over a five year period from 2011 through 2016, our stock price grew an impressive 384%. SUSSEX BANCORP–PRICE CHANGE (%) SSBX SNL U.S. Bank KBW Nasdaq Bank 460 410 360 310 260 210 160 110 60 10 -40 DEC 11 JUN 12 DEC 12 JUN 13 DEC 13 JUN 14 DEC 14 JUN 15 DEC 15 JUN 16 DEC 16 FROM THE PRESIDENT AND CEO continued We continue to evaluate capital strategies to support our current and future growth plans. During the fourth quarter of 2016, we completed a private placement of $15 million in aggregate principal amount of fixed-to-floating rate subordinated notes to an institutional investor. The subordinated debt is a cost effective capital instrument that will support the short-term growth needs of the bank. “extraordinary customer experiences” are employees who feel valued, inspired and fulfilled. One new program highlighting the importance of the Sussex Bank employee experience is the recent launch of the SPIRIT Team. The SPIRIT Team, a group of our colleagues focused on enhancing the employee experience, has introduced fun, employee-centric programs that have improved energy within our workplace. GROWTH STRATEGY Expanding our geographic footprint remains an important component of our growth strategy. We have successfully expanded into key markets with the opening of our Astoria and Oradell banking centers. While we pursue a “branch- lite” approach to banking, we will continue to open new banking centers in strategically important markets where we can compete and win. Our ability to attract and retain talent, particularly in the expansion markets, remains a competitive advantage and a key element of our long-term success. Another key focus in 2017 is to continue to improve the alignment of technology and human interactions into an integrated digital banking platform that creates a seamless, unified and consistent customer experience that better meets the needs of the 21st century customer. As such, we will continue to evaluate best-in-class solutions that improve our customer’s ability to bank with us through their channel of choice. Lastly, we remain true to our “grow responsibly” philosophy and given our rapid growth rate, we have made key additions to our management team that will help ensure that we not only maintain but enhance our credit culture. OUR PEOPLE AND OUR CULTURE By many financial measures, 2016 was a very successful year for our bank. However, we would like to think that while our financial performance sustains us, it does not define us. What truly defines us is our positive company culture and the remarkable people that live it each day. Our Guiding Principles, a set of values and beliefs that create the framework for this culture, are the foundation for everything we do. From there, we focus on attracting talented people, placing them in the right positions, empowering them and letting the magic happen—for both them and our customers. Since people are the only true sustainable differentiator, we continue to invest in them to deliver the best employee experience possible. We believe that at the center of CUSTOMERS AND COMMUNITIES One of our core principles is to be actively involved in the communities where we work and strive to make positive contributions. Building strong community relationships starts by making genuine connections with our customers and local businesses. That is why you will see us volunteering at our local township community days, visiting local schools to improve financial literacy or working with our senior citizens on important issues impacting their daily lives. Through our SB Foundation, we have contributed $50,000 in the past year supporting our communities and the organizations that make them better places to live and work. THE ROAD AHEAD Looking forward, once again we see a changing landscape. Many new enterprises, referred to as disrupters, are entering the banking space and traditional banks are trying to discern which new technologies to deploy and how their business model will change. Financial institutions are also facing the growing threat to cyber-security. While uncertain economic times continue, banks must now also contend with the potential impact of rising rates on core deposits and funding costs. As we consider these challenges, we promise to remain focused on delivering exceptional results to all of our stakeholders. To do so, we will need to become even more agile and adaptable when executing our business plan and we must not waiver from our guiding principles. I remain confident that we have the best management team in place that can continue to build our franchise and create long-term shareholder value. Thank you for your continued trust and confidence. We are looking forward to another successful year in 2017. Anthony Labozzetta President and CEO UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (cid:2) □ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the ﬁscal year ended December 31, 2016 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 Act. Yes (cid:4) No (cid:2) the registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securities Indicate by check mark if the registrant Act. Yes (cid:4) No (cid:2) is not required to ﬁle reports pursuant to Section 13 or Section 15(d) of the Indicate by check mark whether the registrant (1) has ﬁled all reports required to be ﬁled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to ﬁle such reports), and (2) has been subject to such ﬁling requirements for the past 90 days. Yes (cid:2) No (cid:4) Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such ﬁles). Yes (cid:2) No (cid:4) Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in deﬁnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. □ Indicate by check mark whether the registrant is a large accelerated ﬁler, an accelerated ﬁler, 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 □ Smaller reporting company (cid:2) Accelerated ﬁler □ Non-accelerated ﬁler □ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as deﬁned in Rule 12b-2 of the Act). Yes (cid:4) No (cid:2) Based upon the closing price of $13.36 on June 30, 2016, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $63,348,003. The number of shares of the registrant’s common stock, no par value, outstanding as of March 9, 2016 was 4,675,976. Portions of the Proxy Statement for the 2017 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, 2016. DOCUMENTS INCORPORATED BY REFERENCE INDEX FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 2. ITEM 3. ITEM 4. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 5. ITEM 6. ITEM 7. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 8. ITEM 9. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . 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. ITEM 13. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS . . . . . . . . . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . ITEM 16. FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii 1 1 10 14 15 15 15 16 16 17 18 37 37 37 37 38 39 39 39 39 39 39 40 40 40 i 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: • • • • • • 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. ii 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 the Company had consolidated total assets of $848.7 million, gross loans of $696.1 million, deposits of $660.9 million and stockholders’ equity of $60.1 million. in the Bank. At December 31, 2016, 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, 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 and PPD Holding Company, LLC 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 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, Oradell, Sparta, Vernon, and Wantage, New Jersey, and in Astoria, New York, our regional office and corporate center in Wantage, New Jersey and our insurance agency offices in Augusta and Oradell, 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 March 5, 2016 we opened a new branch location which includes a regional lending office in Oradell, NJ in Bergen County. On April 1, 2016 we permanently closed our regional lending and insurance agency offices in Rochelle Park, New Jersey, and transferred such lending and insurance activities to our Oradell branch. On April 29, 2016 we permanently closed our Port Jervis, New York branch location. 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 1 large ﬁnancial institutions in New York City and other parts of New Jersey compete for the business of customers located in our service area. Many of these institutions have signiﬁcantly higher lending limits than us and provide services to their customers which we do not offer. 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, 2016, we employed 131 full-time employees and 17 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 fund (the ‘‘DIF’’) of the FDIC, 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. Set forth below is a summary of the signiﬁcant laws and regulations applicable to the Company and its subsidiaries. The summary that follows is qualiﬁed in its entirety by reference to the full text of the statutes, regulations, and policies that are described. 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 the Company is regulated under the BHC Act, and is subject legal entity from the Bank. As a registered bank holding company, 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 must also comply with state consumer protection laws which are enforced by state attorneys generals. 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 FDIC and the Department, respectively. Insurance agencies are licensed by the State of the FRB, 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. 2 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 or its parent company (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; (iv) banks’ record under the Community Reinvestment Act (‘‘CRA’’); and (v) the effectiveness of the companies and the banks in combatting money laundering. than those of banking, managing or controlling banks, or performing services for 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 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 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, among others, 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. The Company expects to be fully compliant with the Volcker Rule 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. The Company’s ability to pay dividends is subject to the regulatory authority of the FRB. The supervisory concern of the FRB focuses on a bank holding company’s capital position, its ability to meet its ﬁnancial obligations as they come due, and its capacity to act as a source of ﬁnancial strength to its insured depository institution subsidiaries. In addition, FRB policy discourages the payment of dividends by a bank holding company that is not supported by current operating earnings. 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 Rules 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 and otherwise comply with 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 (iii) mandate that most ‘‘Additional Tier 1 capital’’ instruments meeting certain revised requirements; 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 Bank 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 are as follows: • • • • 4.5% CET1 to risk-weighted assets; 6.0% Tier 1 capital (CET1 plus Additional Tier 1 capital) to risk-weighted assets; 8.0% Total capital (Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated ﬁnancial statements (known as the ‘‘leverage ratio’’). 4 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 Bank 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 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 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. investments loss items rules, (‘‘AOCI’’) income or risk-based capital the prior general In addition, under the effects of accumulated other comprehensive example, equity (for 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 Bank were permitted to make a one-time permanent election to continue to exclude these items in January 2015. The Bank elected to make the one-time permanent election to exclude certain AOCI items for regulatory capital ratios. 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. included in shareholders’ 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 began on January 1, 2016 at the 0.625% level and will increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. The Capital Rules prescribe a standardized approach for risk weightings, generally ranging from 0% for U.S. governmental and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes. 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. Bank holding companies and insured banks also may be subject to potential enforcement actions of varying levels of severity by the federal regulators for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation, condition imposed in writing by the agency or term of a written agreement with the agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and the termination of the prohibition orders against officers, directors, and other institution-affiliated parties; bank’s deposit insurance; the appointment of a conservator or receiver for the bank; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. 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. 5 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 Bank’s deposit accounts are fully insured by the DIF of the FDIC up to the deposit insurance limits of $250,000 per depositor, per insured institution, in accordance with applicable laws and regulations. The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix 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. The base for deposit insurance assessments is 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 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. insurance assessments, 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 2016 that reserves be maintained against aggregate transaction accounts, except for transaction accounts which are exempt up to $15.2 million. Transaction accounts greater than $15.2 million up to and including $110.2 million have a reserve requirement of 3%. A 10% reserve ratio will be assessed on transaction accounts in excess of $110.2 million. The FRB makes annual adjustments to the tiered reserves. The Bank is in compliance with these reserve requirements. Transactions with Affiliates and Insiders law, Under federal 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 to which a bank or its subsidiaries may engage in covered non-insured affiliates by limiting the extent 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 6 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 institutions, including banks and broker-dealer subsidiaries, 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 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 to identify their customers, adopt formal and comprehensive anti-money the Company and the Bank, 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 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, 2016, the Company and the Bank believe that they are in compliance with the BSA and the USA PATRIOT Act, and implementing regulations thereof. 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 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 is part of the Dodd-Frank Act and established the CFPB. Neither the Dodd-Frank Act nor the individual consumer ﬁnancial protection laws prevent states from adopting stricter consumer protection standards. State regulation of ﬁnancial products and potential enforcement actions could also adversely affect the Company’s business, ﬁnancial condition or operations. 7 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. Financial Privacy Laws limit Section V of the customer’s request, 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 the reuse of certain consumer customer data with nonaffiliated parties at information received from nonaffiliated ﬁnancial institutions, 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 requiring ﬁnancial institutions with covered accounts (e.g. consumer bank accounts and loans) to develop, implement, and administer an identity theft protection program, as well as 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 their ﬁrst annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called ‘‘golden parachute’’ payments in connection with approvals of mergers and acquisitions. The Dodd-Frank Act also requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at speciﬁed regulated entities with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or beneﬁts that could lead to material ﬁnancial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been ﬁnalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured. 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 8 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. 9 ITEM 1A. RISK FACTORS If the bank regulators impose limitations on our commercial real estate lending activities, our earnings could be adversely affected. In 2006, the FDIC, the Office of the Comptroller of the Currency and the Board of Governors of the Federal Reserve System (collectively, the ‘‘Agencies’’) issued joint guidance entitled ‘‘Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices’’ (the ‘‘CRE Guidance’’). Although the CRE Guidance did not establish speciﬁc lending limits, it provides that a bank’s commercial real estate lending exposure may receive increased supervisory scrutiny where total non-owner occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate and construction and land loans, represent 300% or more of an institution’s total risk-based capital and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our level of non-owner occupied commercial real estate equaled 379% of Bank total risk-based capital at December 31, 2016. In December 2015, the Agencies released a new statement on prudent risk management for commercial real estate lending (the ‘‘2015 Statement’’). In the 2015 Statement, the Agencies express concerns about easing commercial real estate underwriting standards, direct ﬁnancial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and indicate that the Agencies will continue ‘‘to pay special attention’’ to commercial real estate lending activities and concentrations going forward. If the FDIC, the Bank’s primary federal regulator were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, or require higher capital ratios as a result of the level of commercial real estate loans we hold, our earnings would be adversely affected. 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, 2016, 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 $9.3 million, which was a decrease of $872 thousand or 8.5% from December 31, 2015. 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 10 including taxes, costs, 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. insurance and maintenance related to our other real estate owned. Further, Our earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and exploit opportunities to generate fee-based income. We have experienced growth, and our future business strategy is to continue to expand. Historically, the growth of our loans and deposits has been the principal factor in our increase in net-interest income. In the event that we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. Our ability to continue to grow depends, in part, upon our ability to expand our market share, to successfully attract core deposits and identify loan and investment opportunities, as well as opportunities to generate fee-based income. Our ability to manage growth successfully will also depend on whether we can continue to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our control, such as economic conditions and interest-rate trends. 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 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. 11 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 impact on our business. Financial regulatory authorities have our operations and can have a material 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. 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 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. insurance. The Department, as 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 12 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, 2016, our allowance for loan losses was $6.7 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. large and thrift institutions. commercial banks The banking industry within our trade area is highly competitive. Our principal market area is also served the by branch offices of 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. In addition, in 1999, 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, Bergen Team Leader 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. 13 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, technology, banking, telephone banking, and debit cards and so-called ‘‘smart cards.’’ including developments in telecommunications, data processing, automation, is increasingly affected by advances in internet-based 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 in our these systems could result 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. in failures or disruptions ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. 14 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 insurance agency offices in Augusta, New Jersey, and our eleven branch offices. The following table sets forth certain information regarding our properties as of December 31, 2016. We believe that our existing facilities are sufficient for our current needs. All properties are adequately covered by insurance. LOCATION 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 430 Schooley’s Mtn. Road Hackettstown, New Jersey 296 Kinderkamack Road Oradell, New Jersey LEASED OR OWNED DATE OF LEASE EXPIRATION Leased November, 2019 Owned Owned N/A N/A Leased March, 2017 Leased July, 2017 Owned Owned(1) N/A N/A Leased June, 2020 Owned Owned Owned Owned N/A N/A N/A N/A Leased January, 2020 Leased June, 2017 Leased September, 2027 (1) We own the building housing our former Wantage branch. The land on which the building is located is leased pursuant to a ground lease which runs until December 31, 2020, and contains 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. 15 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, 2016, we had approximately 544 holders of record. The following table shows the high and low sales price during the periods indicated, as well as dividends declared: 2016 Fourth Quarter ended December 31 . . . . . . . . . . . . . . . . Third Quarter ended September 30 . . . . . . . . . . . . . . . . . Second Quarter ended June 30 . . . . . . . . . . . . . . . . . . . First Quarter ended March 31 . . . . . . . . . . . . . . . . . . . . 2015 Fourth Quarter ended December 31 . . . . . . . . . . . . . . . . Third Quarter ended September 30 . . . . . . . . . . . . . . . . . Second Quarter ended June 30 . . . . . . . . . . . . . . . . . . . First Quarter ended March 31 . . . . . . . . . . . . . . . . . . . . High $21.95 $16.95 $14.00 $13.45 High $13.79 $12.87 $12.80 $11.30 Low $16.33 $13.33 $12.20 $11.43 Low $12.30 $11.90 $11.11 $ 9.81 Cash Dividends Declared $0.04 $0.04 $0.04 $0.04 Cash Dividends Declared $0.04 $0.04 $0.04 $0.04 Dividend Policy 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, 2016. 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 2016. 16 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)) SUMMARY OF INCOME: Interest income . . . . . . . . . . . . . . . . . . $ Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . Net interest income after provision for Net interest income loan losses . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . Income before income tax expense (beneﬁt) . . . . . . . . . . . . . . . . . . . Income tax expense (beneﬁt) . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . $ WEIGHTED AVERAGE NUMBER OF SHARES:(1) 2016 29,160 4,762 24,398 1,291 23,107 7,829 22,585 As of and for the Year Ended December 31, 2014 2015 2013 $ $ $ 23,644 3,568 20,076 636 19,440 6,453 20,553 $ 21,300 3,294 18,006 1,537 16,469 5,961 18,829 19,642 3,201 16,441 2,745 13,696 6,093 18,228 2012 19,967 3,800 16,167 4,330 11,837 7,001 18,432 8,351 2,828 5,523 $ 5,340 1,640 3,700 $ 3,601 1,001 2,600 $ 1,561 133 1,428 $ 406 (329) 735 Basic . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . 4,619,124 4,651,108 4,559,316 4,591,822 4,541,305 4,580,350 3,781,562 3,816,904 3,261,809 3,287,017 PER SHARE DATA: Basic earnings per share . . . . . . . . . . . . $ . . . . . . . . . . Diluted earnings per share Cash dividends(2) . . . . . . . . . . . . . . . . . $ 1.20 1.19 0.16 $ 0.81 0.81 0.16 $ 0.57 0.57 0.09 $ 0.38 0.37 — 0.23 0.22 — BALANCE SHEET: Loans, net Total assets . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . Average assets . . . . . . . . . . . . . . . . . . Average stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 688,561 848,728 660,921 60,072 770,470 57,518 $ 537,833 684,503 517,856 53,941 627,298 52,715 $ 466,332 595,915 458,270 51,229 559,885 49,494 $ 386,981 533,911 430,297 46,425 529,152 42,382 $ 342,760 514,734 432,436 40,372 510,565 40,720 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 0.72% 9.60% 7.47% 3.37% 70.08% 24.29% 13.45% 0.59% 7.02% 8.40% 3.45% 77.47% 24.32% 19.75% 0.46% 5.25% 8.84% 3.49% 78.56% 24.87% 15.79% 0.27% 3.37% 8.01% 3.41% 80.89% 27.04% — 0.14% 1.81% 7.98% 3.52% 79.56% 30.22% — 10.41% 9.45% 10.19% 10.38% 9.27% assets . . . . . . . . . . . . . . . . . . . . . . . 12.87% 11.74% 12.79% 14.21% 12.88% Total capital to total risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . 13.86% 12.79% 14.02% 15.47% 14.13% Common equity Tier 1 capital to total risk-weighted assets . . . . . . . . . . . . . 12.87% 11.74% N/A N/A N/A 17 (Dollars in thousands, except per share data)) 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 2016 0.84% 1.10% As of and for the Year Ended December 31, 2014 2015 2013 0.98% 1.49% 1.26% 2.02% 3.03% 3.10% 2012 5.14% 4.61% 0.03% 0.14% 0.33% 0.65% 3.70% 0.96% 1.03% 1.20% 1.38% 1.43% non-performing loans(6) . . . . . . . . . . . 95.93% 81.43% 74.23% 39.73% 26.93% (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. (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, 2016 due to the continued low interest rate environment. The impact resulted in interest earning asset yields decreasing and rates on interest bearing deposits increasing, which decreased our net interest margin by 8 basis points to 3.37% for the year ended 2016 compared to 3.45% for the year ended 2015. For 2016, our net income increased to $5.5 million, or $1.20 per basic and $1.19 per diluted share, as compared to net income of $3.7 million, or $0.81 per basic and diluted share, for the same period last year. The increase in net income for the year ended December 31, 2016 was largely due to an increase in net interest income of $4.3 million and higher non-interest income of $1.4 million, which were partially offset by increases in non-interest expenses of $2.0 million, income tax expense of $1.2 million and provision for loan loss of $655 thousand. 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. Total loans receivable, net of unearned income, increased $151.8 million, or 27.9%, to $695.3 million at December 31, 2014, from $543.4 million at year-end 2015. This increase was primarily attributed to growth in the commercial loan portfolio. Our total deposits increased $143.1 million, or 27.6%, to $660.9 million at December 31, 2016, from $517.9 million at December 31, 2015. The increase in deposits was due to increases in both interest bearing deposits of $97.8 million, or 22.7%, and non-interest bearing deposits of $45.2 million, or 51.9%, for December 31, 2016, as compared to December 31, 2015. 18 We continued to make progress in 2016 towards reducing our problem assets, which was one of our primary goals. For 2016, we had a 8.5% improvement in NPAs and our total problem assets, which consists of foreclosed real estate and criticized and classiﬁed loans, declined by 1.6% as compared to 2015. In addition, the ratio of NPAs to total assets improved to 1.1% at December 31, 2016 from 1.5% at December 31, 2015. At December 31, 2016, our total stockholders’ equity was $60.1 million, an increase of $6.1 million when compared to December 31, 2015. The increase was largely due to net income for the year ended December 31, 2016. At December 31, 2016, the leverage, Tier I risk-based capital, total risk-based capital and common equity Tier I capital ratios for the Bank were 10.41%, 12.87%, 13.86% and 12.87%, 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 the obtain signiﬁcant non-interest 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. income through Tri-State’s insurance brokerage operations. We report 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 the circumstances. Management believes the following critical accounting policies encompass the more signiﬁcant judgments and estimates used in preparation of our consolidated ﬁnancial statements. factors that are believed to be reasonable under 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 including current economic conditions, diversiﬁcation of the loan portfolio, establishing these estimates, 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 19 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: (cid:5) (cid:5) (cid:5) (cid:5) New loans, loan modiﬁcations, loan extensions and renewals, provided that certain conditions are met. The purchase, sale, exchange or investment in real property or an interest in real property where the ‘‘transaction value’’ of the real property interest exceeds $250,000. The long-term lease of real estate, which is the economic equivalent of a purchase or sale where the ‘‘transaction value’’ of the real property interest exceeds $250,000. 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 20 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 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. tax assessment values, the date of foreclosure, establishing a new cost basis. Subsequent 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 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. Derivatives. The Company utilizes derivative instruments in the form of interest rate swaps to hedge the variability in its cash ﬂows due to interest rate risk. The variability in cash ﬂows is managed as part of the Company’s asset/liability management process. In accordance with accounting requirements, the Company formally designates all of its hedging relationships as cash ﬂow hedges, intended to offset changes in the cash ﬂows of certain ﬁnancial instruments due to movement in interest rates, and documents the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness. All derivatives are recognized as either assets or liabilities in the Consolidated Financial Statements at their fair values. Should the cash ﬂow hedge become ineffective, the ineffective portion of changes in fair value (i.e. gain or loss) is reported in current period earnings. The effective portion of the change in fair value is initially recorded as a component of other comprehensive income (loss) and subsequently reclassiﬁed into earnings when the hedged transaction effects earnings. Derivative effectiveness and ineffectiveness will be assessed and measured at the date of designation (inception), each reporting date, and whenever a designated hedge period is terminated to ensure that ongoing high effectiveness is expected by regression analysis of the periodic change in fair value of the hedging instrument and the periodic change in fair value of the hypothetical derivative. The Company’s interest rate derivatives are comprised entirely of interest rate swaps hedging ﬂoating-rate and forecasted issuances of ﬁxed-rate liabilities and accounted for as cash ﬂow hedges. The carrying value of interest rate derivatives is included in the balance of other assets or other liabilities. Changes in fair value are offset against accumulated other comprehensive income, net of deferred income tax. 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, securities available for sale and interest rate swaps. 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 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. 21 Goodwill. We have recorded goodwill of $2.8 million at December 31, 2016, primarily related to the acquisition of Tri-State in October of 2001. Our recorded goodwill total also includes $486 thousand related to the 2006 acquisition of $6.3 million in deposits in our Port Jervis branch. During the quarter ended March 31, 2016 we announced the closing of the Port Jervis branch and the deposits from that branch were transferred to our Montague, New Jersey branch. As of December 31, 2016 deposits originated in that branch were $10.1 million. 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 2016 and 2015. 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. industry factors and reporting unit Changes in assumptions and results due to economic conditions, 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, 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 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, 2016 or December 31, 2015 were deemed to be impaired. the Company will estimate the amount of the unrealized loss that to AOCI, net of tax. For held to maturity securities, Fair Value Measurements. We use fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Investment, mortgage-backed securities available for sale, and interest rate swaps 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). 22 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 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 economic and competitive environment and other such factors. Management uses its best the asset, 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, 2016 AND 2015 General. At December 31, 2016, we had total assets of $848.7 million compared to total assets of $684.5 million at December 31, 2015, an increase of $164.3 million, or 24.0%. Gross loans increased $151.8 million, or 27.9%, to $695.3 million at December 31, 2016, from $543.4 million at December 31, 2015. Total deposits increased 27.6% to $660.9 million at December 31, 2016, from $517.9 million at December 31, 2015. Cash and Cash Equivalents. Our cash and cash equivalents increased $8.5 million, or 139.2%, at December 31, 2016 to $14.6 million from $6.1 million at December 31, 2015. Securities Portfolio. Our securities portfolio is designed to provide interest including tax-exempt income, 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. income, 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, 2016, 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. 23 The following table shows the carrying value of our available for sale security portfolio as of December 31, 2016, 2015 and 2014. (Dollars in thousands) U.S. government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State and political subdivisions Mortgage-backed securities U.S. government-sponsored enterprises . . . . . . . . . . . . . . . . . . . Corporate debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities-ﬁnancial services industries and other . . . . . . . . . . Total available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 $13,087 40,688 32,854 1,982 — $88,611 December 31, 2015 $12,788 38,149 42,839 — — $93,776 2014 $ 7,858 26,384 43,724 — 10 $77,976 Our securities available for sale, decreased by $5.2 million, or 5.5%, to $88.6 million at December 31, 2016 from $93.8 million at December 31, 2015. During 2016, we purchased $42.9 million in new securities, $36.0 million in securities were sold and $9.2 million in securities matured, were called or were repaid. At December 31, 2016, there was an unrealized loss of $1.2 million in securities available for sale as compared to an unrealized gain of $144 thousand at December 31, 2015. The decline in market value is mainly attributable to an increase in market rates. During 2016 there was a net realized gain of $436 thousand on the sale of available for sale securities as compared to $271 thousand in 2015. We had $11.6 million of our security portfolio classiﬁed as held to maturity at December 31, 2016, an increase of $4.8 million from December 31, 2015. Held to maturity securities, carried at amortized cost, consist of the following at December 31, 2016, 2015 and 2014. (Dollars in thousands) State and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . Total held to maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 $11,618 $11,618 2015 $6,834 $6,834 2014 $6,006 $6,006 The securities portfolio contained no high-risk securities or derivatives as of December 31, 2016. The contractual maturity distribution and weighted average yield of our available for sale securities at December 31, 2016, 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: Due under 1 Year Yield Amount Due 1 − 5 Years Yield Amount Due 5 − 10 Years Yield Amount Due over 10 Years Yield Amount U.S. Government agencies . . . . . $— State and political subdivisions . . — Mortgage-backed securities − U.S. government-sponsored enterprises . . . . . . . . . . . . — . . . . . . . . . . . — $— Total Available for Sale . . . . . . . . Corporate debt —% $ — 199 —% —% $ — 4.70% 3,567 —% $13,115 3.06% 37,489 1.71% 2.83% — —% —% — —% $199 —% 4,689 —% 2,000 4.70% $10,256 1.90% 28,794 5.13% 2.93% $79,398 1.56% — —% 2.18% 24 The contractual maturity distribution and weighted average yield of our securities held to maturity, at cost, at December 31, 2016, are summarized in the following table. Weighted average yield is calculated by dividing income within each maturity range by the outstanding amount of the related investment and has not been tax-effected on the tax-exempt obligations. (Dollars in thousands) Held to maturity: Due under 1 Year Yield Amount Due 1 − 5 Years Yield Amount Due 5 − 10 Years Yield Amount Due over 10 Years Yield Amount State and political subdivisions . . $8,764 Total held to maturity . . . . . . . . . . $8,764 1.19% $— 1.19% $— —% $1,813 —% $1,813 3.06% $1,041 3.06% $1,041 4.53% 4.53% We held $5.1 million in Federal Home Loan Bank of New York (‘‘FHLBNY’’) stock at December 31, 2016 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, 2016, increased $151.8 million, or 27.9%, to $695.3 million from $543.4 million at December 31, 2015. Loan growth for 2016 occurred primarily in commercial real estate loans (an increase of $97.0 million, or 25.4%) and residential real estate loans (an increase of $23.0 million, or 18.1%). The following table summarizes the composition of our loan portfolio by type as of December 31, 2012 through 2016: (Dollars in thousands) Commercial and industrial . . . . . . Construction . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . Residential real estate . . . . . . . . . . Consumer and other loans . . . . . . . Total gross loans . . . . . . . . . . . . . 2016 $ 40,280 25,360 479,227 150,237 1,038 $696,142 2015 $ 20,023 13,348 382,262 127,204 1,253 $544,090 December 31, 2014 $ 20,549 12,379 326,370 111,498 1,665 $472,461 2013 $ 15,205 7,307 260,664 107,992 1,617 $392,785 2012 $ 16,158 7,004 225,345 98,301 1,255 $348,063 The increase in loans was primarily funded during 2016 by an increase in our 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, 2016, are presented in the following table. (Dollars in thousands) Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due Under 1 Year $14,693 20,374 34,098 2,655 282 $72,102 December 31, 2016 Due 1 − 5 Years $13,343 3,486 21,742 4,614 234 $43,419 Interest rates: Fixed or predetermined . . . . . . . . . . . . . . . . . . . . . . . . . . . Floating or adjustable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,832 16,270 $72,102 $32,898 10,521 $43,419 Due Over 5 Years $ 12,244 1,500 423,387 142,968 522 $580,621 $145,234 435,387 $580,621 Loan and Asset Quality. NPAs consist of non-accrual loans, loans over 90 days delinquent and still troubled debt restructured loans still accruing and foreclosed real estate. Total NPAs accruing interest, 25 decreased by $872 thousand, or 8.5%, to $9.3 million at year-end 2016 from $10.2 million at year-end 2015. The ratio of NPAs to total assets for December 31, 2016 and December 31, 2015 were 1.1% and 1.5%, respectively. Our non-accrual loan balance increased $521 thousand, or 9.8%, to $5.8 million at December 31, 2016, from $5.3 million at December 31, 2015. Troubled debt restructured loans still accruing decreased $874 thousand, or 56.3%, to $679 thousand at December 31, 2016, from $1.6 million at December 31, 2015. Foreclosed assets decreased $987 thousand to $2.4 million at December 31, 2016, from $3.4 million at December 31, 2015. Management continues to monitor our asset quality and believes that the non-accrual loans are adequately collateralized and anticipated material losses have been adequately reserved for in the allowance for loan losses. The following table provides information regarding risk elements in the loan and securities portfolio as of December 31, 2012 through 2016. (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 2016 2015 December 31, 2014 2013 2012 $ 33 — 4,048 1,752 — 5,833 $ 20 — 4,016 1,138 138 5,312 $ 94 — 3,936 1,893 1 5,924 $ — — 9,700 2,192 — 11,892 $ 27 2,462 12,062 3,315 1 17,867 accruing . . . . . . . . . . . . . . . . . . . . . . 468 — 85 123 208 Troubled debt restructured loans still accruing . . . . . . . . . . . . . . . . . . . . . . Total non-performing loans . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . Total non-performing assets . . . . . . . . . . . Non-accrual loans to total loans . . . . . . . . Non-performing assets to total assets . . . . Interest income received on nonaccrual 679 6,980 2,367 $9,347 1,553 6,865 3,354 $10,219 1,590 7,599 4,449 $12,048 1,628 13,643 2,926 $16,569 608 18,683 5,066 $23,749 0.84% 1.10% 0.98% 1.49% 1.26% 2.02% 3.03% 3.10% 5.14% 4.61% loans . . . . . . . . . . . . . . . . . . . . . . . . $ 165 $ 138 $ 138 $ 122 $ 301 Interest income that would have been recorded under the original terms of the loans . . . . . . . . . . . . . . . . . . . . . . . . $ 213 $ 264 $ 301 $ 774 $ 996 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, 2016, we had three loans totaling $1.3 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. 26 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, 2016, the allowance for loan losses was $6.7 million, an increase of $1.1 million, or 19.8%, from $5.6 million at December 31, 2015. The provision for loan losses was $1.3 million and there were $518 thousand in charge-offs and $333 thousand in recoveries during 2016. The allowance for loan losses as a percentage of total loans was 0.96% at December 31, 2016 compared to 1.03% at December 31, 2015. The decrease in allowance for loan losses as percentage of total loans is mostly due to an increase in total loans of $151.8 million at December 31, 2016 as compared to December 31, 2015. 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 . . 2016 $5,590 1,291 Recoveries of loans previously charged-off: Commercial and industrial . . . . . . . . . . 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 268 37 21 7 333 227 — 187 67 37 518 185 $6,696 Year Ended December 31, 2014 $5,421 1,537 2013 $4,976 2,745 2015 $5,641 636 17 41 17 7 82 19 — 560 165 25 769 687 $5,590 17 39 4 10 70 1 — 1,168 181 37 1,387 1,317 $5,641 122 450 112 12 696 55 350 2,317 246 28 2,996 2,300 $5,421 2012 $7,210 4,330 2 78 — 27 107 169 1,538 3,904 998 62 6,671 6,564 $4,976 outstanding . . . . . . . . . . . . . . . . . . . . 0.03% 0.14% 0.33% 0.62% 3.70% Allowance for loan losses total loans at year-end . . . . . . . . . . . . . . . . . . . . . . 0.96% 1.03% 1.20% 1.38% 1.43% 27 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 losses may occur. The total allowance is necessarily indicative of the categories in which future credit available to absorb losses from any category of loans. (Dollars in thousands) . . . . . Commercial and industrial Construction . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . Residential real estate . . . . . . . . . Consumer and other loans . . . . . . Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Amount $ 110 359 3,932 899 19 1,377 $6,696 Allowance for Loans Losses at December 31, 2015 2014 2016 Percent of Loans in Each Category to Total 5.8% 3.6% 68.9% 21.6% 0.1% — 100.0% Amount 85 $ 220 3,646 784 87 768 $5,590 Percent of Loans in Each Category to Total 3.7% 2.5% 70.2% 23.4% 0.2% — 100.0% Amount $ 231 383 3,491 903 19 614 $5,641 Percent of Loans in Each Category to Total 4.3% 2.6% 69.1% 23.6% 0.4% — 100.0% Allowance for Loans Losses at December 31, 2013 2012 (Dollars in thousands) Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer and other loans . . . . . . . . . . . . . . . . . . . . . . . Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Amount $ 222 308 3,399 941 16 535 $5,421 Percent of Loans in Each Category to Total 3.9% 1.8% 66.4% 27.5% 0.4% — 100.0% Amount $ 271 223 3,395 869 38 180 $4,976 Percent of Loans in Each Category to Total 4.6% 2.0% 64.7% 28.3% 0.4% — 100.0% Premises and Equipment. Net premises and equipment decreased by $151 thousand, or 1.7%, from $8.9 million at December 31, 2015 to $8.7 million at December 31, 2016. Bank-owned Life Insurance. Our BOLI carrying value increased to $16.5 million at December 31, 2016 from $12.5 million at December 31, 2015. The increase was principally the result of the addition of a $3.7 million policy during the fourth quarter of 2016. Additionally there was $308 thousand in net earnings on BOLI policies in 2016. Deposits. Total deposits increased $143.1 million, or 27.6%, to $660.9 million at December 31, 2016, from $517.9 million at December 31, 2015. The increase in deposits was due to increases in interest bearing demand deposits of $52.8 million, or 18.0%, non-interest bearing transaction deposits of $45.2 million, or 51.9%, and time deposits of $45.0 million, or 32.9%, for December 31, 2016, as compared to December 31, 2015. Our funding mix continued to improve as non-interest deposits increased. Total average deposits increased $108.9 million from $492.2 million for the year ended December 31, 2015 to $601.2 million for the year ended December 31, 2016, a 22.1% increase. Average NOW accounts increased $15.1 million, or 11.6%, from $130.6 million for 2015 to $145.7 million for 2016. Average demand accounts increased $31.9 million, or 37.1% from $86.0 million for 2015 to $117.9 million for 2016. Average time deposits increased $43.6 million, or 36.6%, from $119.3 million for 2015 to $162.9 million for 2016. Average money market balances increased $19.8 million, or 114.3%, from $17.3 million for 2015 to $37.0 million for 2016. Average savings accounts decreased $1.4 million or 1.0%, from $139.1 million for 2015 to $137.7 million for 2016. Increases to average NOW accounts, demand, time deposits and money market balances were partly offset by the aforementioned decreases in other savings accounts. 28 The average balances and weighted average rates paid on deposits for 2016, 2015 and 2014 are presented below. 2016 Average Year Ended December 31, 2015 Average 2014 Average (Dollars in thousands) Demand, non-interest bearing . . . . NOW . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . Balance $117,927 145,659 37,046 137,696 162,864 $601,192 Rate Balance —% $ 86,016 130,569 0.21% 17,287 0.40% 139,120 0.21% 119,256 1.05% 0.41% $492,248 Rate Balance —% $ 65,720 118,913 0.17% 11,901 0.20% 143,965 0.20% 105,748 1.03% 0.36% $446,247 Rate —% 0.15% 0.14% 0.21% 1.09% 0.37% The remaining maturity for certiﬁcates of deposit accounts of $100,000 or more as of December 31, 2016 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 $ 60,155 12,614 21,235 13,742 $107,746 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, 2016, we had $61.0 million in long-term FHLB advances outstanding at a weighted average interest rate of 2.45%. Additionally, we had a $5.0 million line of credit at Atlantic Community Bankers’ Bank at a rate of ﬂoating prime plus 50 basis points. At December 31, 2016, the line of credit was fully drawn upon. The increase in borrowings for 2016, as compared to 2015, 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) Average daily amount of short-term borrowings outstanding during Year Ended December 31, 2015 2014 2016 the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27,304 $ 8,778 $ 2,657 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 0.63% 0.43% 0.34% $62,535 $29,805 $34,650 $34,650 $23,500 $23,500 end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.79% 0.52% 0.39% Subordinated Debentures. On June 28, 2007, we raised $12.9 million in capital through the issuance of 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, 2016 was 2.40%. The capital securities are currently redeemable by us at par in whole or in part. These trust preferred securities must be redeemed upon ﬁnal maturity on September 15, 2037. The proceeds of these trust preferred securities, which have been contributed to the Bank, are included in the Bank’s capital ratio calculations and treated as Tier I capital. 29 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. During the quarter ended December 31, 2016, the Company completed a private placement of $15 million in ﬁxed-to-ﬂoating rate subordinated notes to an institutional investor. The subordinated notes have a maturity date of December 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the ﬁrst ﬁve years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3-month LIBOR plus 350 basis points over the remainder of the term. During the quarter ended March 31, 2016, the Company entered into an interest rate swap agreement related to the subordinated notes where the Company pays a ﬁxed rate of 3.10% and receives the three-month LIBOR plus 144 basis points. The Company utilizes the interest rate swap to hedge the risk of variability in its future cash ﬂows attributable to changes in the three-month LIBOR rate. Equity. Stockholders’ equity inclusive of AOCI, net of income taxes, was $60.1 million at December 31, 2016, an increase of $6.1 million, from the $53.9 million at year-end 2015. The increase in stockholders’ equity was mostly due to $5.5 million in net income in 2016, which was offset by $752 thousand in dividends declared during 2016 as compared to 2015. COMPARISON OF OPERATING RESULTS FOR YEAR-END DECEMBER 31, 2016 AND 2015 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 commissions and gains and losses from sales of securities or other transactions; income, which is made up primarily of certain loan and deposit fees, insurance 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, 2016, the Company reported net income of $5.5 million, or $1.20 per basic and $1.19 per diluted share, as compared to net income of $3.7 million, or $0.81 per basic and diluted share, for the same period last year. The increase in net income for the year ended December 31, 2016 was primarily attributed to an increase in net interest income of $4.3 million, mostly driven by a 27.9% increase in loans, which was partially offset by increases in certain non-interest expenses. interest interest Net Interest Income. Net income is the most signiﬁcant component of our income from operations. Net interest-earning assets income is the difference between interest earned on total (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. 30 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, 2016, 2015 and 2014. The average balances of loans include non-accrual loans, and associated yields include loan fees, which are considered adjustment to yields. Average Balance 2016 Interest Year Ended December 31, 2015 2014 Average Rate(2) Average Balance Interest Average Rate(2) Average Balance Interest Average Rate(2) (Dollars in thousands) Earning Assets: Securities: Tax exempt(3) . . . . . . . . $ 32,359 69,225 Taxable . . . . . . . . . . . . 101,584 Total securities . . . . . . . . . Total loans receivable(1)(4) . . . 625,399 9,440 Other interest-earning assets . . 736,423 . . . . . . Total earning assets 40,106 Non-interest earning assets . . (6,059) Allowance for loan losses . . . Total Assets . . . . . . . . . . . $770,470 $ 1,247 1,443 2,690 26,862 23 29,575 $ 1,348 1,239 2,587 21,497 9 24,093 3.85% $ 33,688 65,402 2.08% 2.65% 99,090 4.30% 488,963 0.24% 7,109 4.02% 595,162 37,834 (5,698) $627,298 4.00% $ 31,079 59,774 1.89% 2.61% 90,853 4.40% 429,320 0.13% 8,519 4.05% 528,692 36,881 (5,688) $559,885 $ 1,362 854 2,216 19,512 11 21,739 4.38% 1.43% 2.44% 4.54% 0.13% 4.11% Sources of Funds: Interest bearing deposits: NOW . . . . . . . . . . . . . $145,659 Money market 37,046 . . . . . . . . 137,696 Savings . . . . . . . . . . . . 162,864 . . . . . . . . . . . . . Time $ 313 148 286 1,702 2,449 1,922 391 $ 0.21% $130,569 0.40% 17,287 0.21% 139,120 1.05% 119,256 0.51% 406,232 65,600 2.05% 12,887 2.95% 227 35 282 1,228 1,772 1,576 220 $ 0.17% $118,913 0.20% 11,901 0.20% 143,965 1.03% 105,748 0.44% 380,527 48,246 2.40% 12,887 1.71% 184 17 296 1,151 1,648 1,434 212 0.15% 0.14% 0.21% 1.09% 0.43% 2.97% 1.65% 483,265 93,974 13,256 590,495 4,762 0.81% 484,719 3,568 0.74% 441,660 3,294 0.75% 117,927 4,530 122,457 57,518 86,016 3,848 89,864 52,715 65,720 3,011 68,731 49,494 $627,298 $559,885 24,813 3.37% 20,525 3.45% 18,445 3.49% (415) $24,398 (449) $20,076 (439) $18,006 Total interest bearing deposits . . . . . . . . . . . . Borrowed funds . . . . . . . . . Subordinated debentures Total interest bearing liabilities . . . . . . . . . . . Non-interest bearing liabilities: . . . . . . . . . . . . . Demand deposits Other liabilities Total non-interest bearing liabilities . . . . . . . . . . . Stockholders’ equity . . . . . . Total Liabilities and Net Interest Income and Margin(5) . . . . . . . . . . . Tax-equivalent basis adjustment Net Interest Income . . . . . . . . . . . . . . . . Stockholders’ Equity . . . . $770,470 Includes loan fee income (1) (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 31 Net interest income on a fully tax equivalent basis increased $4.3 million, or 20.9%, to $24.8 million for the year ended December 31, 2016 as compared to $20.5 million for same period in 2015. The increase in net interest income was largely due to an increase in average interest earning assets of $141.3 million or 23.7%, partly offset by the net interest margin decreasing 8 basis points to 3.37% for the year ended December 31, 2016 compared to the same period last year. The increase in average interest earning assets was driven by growth in average total loans receivable of $136.4 million. The decrease in the net interest margin was mostly attributed to a 10 basis point decrease in the average rate earned on loans, and a 7 basis point increase in the average rate paid on interest bearing liabilities compared to 2015. Interest Income. Total interest income, on a fully taxable equivalent basis, increased $5.5 million, or 22.8%, to $29.6 million for the year ended December 31, 2016 as compared to $24.1 million for the same period in 2015. The increase in interest income was largely due to a $141.3 million, or 23.7%, increase in average interest earning assets, principally loans receivable, which increased $136.4 million, or 27.9%. The increase in interest income was partly offset by a decline in average rate of 3 basis points to 4.02% for the year ended December 31, 2016 as compared to the same period in 2015. The decline in average rate was mostly attributed to a 10 basis point decrease in the average rate earned on loans. Interest income from securities, on a fully taxable equivalent basis, increased $103 thousand, or 4.0%, for the year ended December 31, 2016 compared to the same period in 2015. The increase was due to an increase in the average balance of the securities portfolio of $2.5 million, or 2.5%, to $101.6 million for the year ended December 31, 2016 as compared to the same period in 2015. The increase in the average balance of the securities portfolio was complimented by an increase in the average rate of 4 basis points to 2.65% for 2016 from 2.61% for 2015. Interest income from the loan portfolio increased by $5.4 million, or 25.0%, to $26.9 million for 2015 from $21.5 million for 2015. The improvement was due to an increase in the average balance on loans, which increased $136.4 million, or 27.9%, for the year ended December 31, 2016 as compared to the same period in 2015. The increase in the average balance on loans was partially offset by a decrease of 10 basis points in the average rate on the loan portfolio for the year ended December 31, 2016 as compared to the same period in 2015. Interest Expense. Total interest expense increased $1.2 million, or 33.5%, to $4.8 million for the year ended December 31, 2016 from $3.6 million for the same period in 2015. The increase was principally due to growth in the average balance of interest-bearing deposits of $77.0 million and average balance of borrowings of $28.4 million in 2016 compared to 2015. The increase in the average balance of borrowings was partially offset by a decrease in rates paid on borrowings of 35 basis points for 2016 compared to 2015. 32 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 December 31, 2016 v. 2015 Increase (decrease) Due to changes in: Rate Volume December 31, 2015 v. 2014 Increase (decrease) Due to changes in: Rate Total Total Volume $ (52) 75 23 5,871 4 $ (49) 129 80 (506) 10 $ (101) 204 103 5,365 14 $ 109 86 195 2,639 (2) $(123) 299 176 (654) — $ (14) 385 371 1,985 (2) interest-earning assets . . . . . . . . . . 5,898 (416) 5,482 2,832 (478) 2,354 Interest bearing deposits: NOW . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . Total interest bearing deposits . . . . . . Borrowed funds . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . Total net change in expense on interest-bearing liabilities . . . . . . . . Change in net interest income . . . . . . 28 61 (3) 456 542 606 6 58 52 7 18 135 (260) 165 86 113 4 474 677 346 171 19 10 (10) 141 160 451 — 24 8 (4) (64) (36) (309) 8 43 18 (14) 77 124 142 8 1,154 $4,744 40 $(456) 1,194 $4,288 611 $2,221 (337) $(141) 274 $2,080 (1) Fully taxable equivalent basis, using 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance Includes loan fee income (2) Provision for Loan Losses. Provision for loan losses increased $655 thousand to $1.3 million for the year ended December 31, 2016, as compared to $636 thousand for the same period in 2015. The increase in the provision for loan losses for the year-ended December 31, 2016 was largely attributed to an increase in loan growth. The provision for loan losses reﬂects management review, analysis and judgment of the credit quality of the loan portfolio for 2016 and the effects of current economic environment and changes in real estate collateral values increased $521 thousand, or 9.8%, to $5.8 million at December 31, 2016 from $5.3 million at December 31, 2015. We believe these loans are adequately provided for in our loan loss allowance or are sufficiently collateralized at December 31, 2016. 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. from the time the loans were originated. Our non-accrual loans Non-Interest Income. Non-interest 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. income consists of all 33 Non-interest income increased $1.4 million, or 21.3%, to $7.8 million for the year ended December 31, 2016 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, contingent fee income and the retention of existing policies, and gain on sale of securities of $1.1 million, or 30.1%, and $173 thousand, or 63.8%, respectively, along with a decrease of $111 thousand in losses from disposals of premises and equipment for the year ended December 31, 2016, as compared to the same period in 2015. Non-Interest Expense. Total non-interest expense increased $2.0 million, or 9.9%, to $22.6 million for the year ended December 31, 2016 as compared to the same period last year. The increase for the year ended December 31, 2016, as compared to the same period in 2015, was largely due to increases in salaries and employee beneﬁts of $1.6 million, data processing of $455 thousand, professional fees of $134 thousand, furniture and equipment of $128 thousand, and occupancy, net of $108 thousand, which were partially offset by decreases in other expenses of $177 thousand, director fees of $94 thousand, and expenses and write-downs related to foreclosed real estate of $77 thousand. The increases for the twelve months ended December 31, 2016 as compared to 2015 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 Oradell branch in the ﬁrst quarter of 2016 and additional staffing for business development. The increases for the twelve months ended December 31, 2016 as compared to 2015 in various categories, including occupancy, furniture and equipment, and data processing were mostly related to the opening of our Oradell branch and costs associated with outsourcing our core application system. The decrease in other expenses is due to a 2015 legal settlement of approximately $150 thousand. Income Taxes. The provision for income taxes was $2.8 million and $1.6 million for 2016 and 2015, respectively. Our effective tax rate was 33.9% and 30.7% for 2016 and 2015, respectively. The increase in income tax expense for the year ended December 31, 2016 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. 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, 2016, total deposits amounted to $660.9 million, an increase of $143.1 million, or 27.6%, over the prior comparable year. At December 31, 2016, borrowings from the FHLBNY and ACBB and subordinated debentures totaled $123.6 million and represented 14.6% of total assets, at December 31, 2015. total assets as compared to $108.5 million and 15.9% of Loan production continued to be our principal loans at December 31, 2016 amounted to $688.6 million, an increase of $150.7 million, or 28.0%, compared to the same period in 2015. investing activity. Net 34 Our most liquid assets are cash and cash equivalents. At December 31, 2016, the total of such assets amounted to $14.6 million, or 1.7%, of total assets, compared to $6.1 million, or 0.9%, of total assets at year-end 2015. Another signiﬁcant liquidity source is our available for sale securities. At December 31, 2016, available for sale securities amounted to $88.6 million compared to $93.8 million at year-end 2015. 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 $63.3 million through its membership in the FHLBNY and $10.0 million line of credit at Atlantic Central Bankers Bank at December 31, 2016. 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 6.63% and Total risk based capital as of risk-adjusted assets of 8.63% at a minimum, both including the capital conservation buffer. At December 31, 2016, the Bank’s Tier I and Total risk based capital ratios were 12.87% and 13.86%, 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, 2016, the Bank had a leverage ratio of 10.41%. 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, 2016 totaled $141.3 million, which consisted of $70.5 million in commitments to grant commercial and residential loans, $69.8 million in unfunded commitments under lines of credit and $998 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. 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 2016. Our real estate loan portfolio, concentrated largely in northern New Jersey, 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’’). is subject 35 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 the timing, considerably from the predictions presented below which include, but are not 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. limited to, The following table sets forth our interest rate risk proﬁle at December 31, 2016 and 2015. 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. (Dollars in thousands) Change in Interest Rates (basis points) December 31, 2016 Net Portfolio Value(2) Net interest Income Estimated NPV(1) Estimated Increase (Decrease) Amount Percent Estimated Net Interest Income(3) Estimated Increase (Decrease) Amount Percent +200bp . . . . . . . . . . . . . 0bp . . . . . . . . . . . . . . -100bp . . . . . . . . . . . . . $ 84,321 $104,340 $ 83,419 December 31, 2015 +200bp . . . . . . . . . . . . . 0bp . . . . . . . . . . . . . . -100bp . . . . . . . . . . . . . $ 58,290 $ 80,872 $ 72,312 $(20,019) — $(20,921) $(22,582) — $ (8,560) (19.2)% — (20.1)% (27.9)% — (10.6)% $24,274 $26,101 $24,880 $19,932 $21,466 $20,805 $(1,827) — $(1,221) $(1,534) — $ (661) (7.0)% — (4.7)% (7.1)% — (3.1)% (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. 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 36 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 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. 37 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, 2016. In making this assessment, management used criteria set forth in 1992 by the Committee of Sponsoring Organizations of the in Internal Control-Integrated Framework. Based on this assessment, Treadway Commission (COSO) management concluded that as of December 31, 2016, 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. 38 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE PART III under ‘‘Proxy Statement’’) The information included in our Deﬁnitive Proxy Statement for the 2017 Annual Meeting of Shareholders (the 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 ‘‘Corporate Governance — Committees of the Board of Directors — Nominating and Corporate Governance Committee’’ and ‘‘Corporate Governance — Committees of the Board of Directors — Audit Committee.’’ and Corporate Governance Guidelines,’’ incorporated of Ethics following captions herein the by is 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 ‘‘Transactions with Related Persons’’ and ‘‘Corporate Governance — Board of Directors reference: Independence.’’ ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information included in the Proxy Statement under the following caption is incorporated herein by Independent Registered Public Accounting reference: ‘‘Proposal 2 — Ratiﬁcation of Appointment of Firm — Independent Registered Public Accounting Firm Fees and Services.’’ 39 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial Statements 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. ITEM 16. FORM 10-K SUMMARY None. 40 SIGNATURES Pursuant the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SUSSEX BANCORP /s/ Anthony Labozzetta Anthony Labozzetta President and Chief Executive Officer Dated: March 15, 2017 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, 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. ratifying and conﬁrming all 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 15, 2017. 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 /s/ Michael McBride Michael McBride /s/ Robert McNerney Robert McNerney 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 Director Director 41 [This page intentionally left blank.] ® REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Sussex Bancorp Rockaway, New Jersey We have audited the accompanying consolidated balance sheets of Sussex Bancorp (the ‘‘Company’’) as of December 31, 2016 and 2015, 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, 2016 and 2015, and the results of its in conformity with accounting principles generally operations and cash ﬂows for the years then ended, accepted in the United States of America. Woodbridge, New Jersey March 17, 2017 F-1 December 31, 2016 December 31, 2015 SUSSEX BANCORP CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) 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 $11,739 and $7,008 at December 31, 2016 and December 31, 2015, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,847 11,791 14,638 100 88,611 11,618 5,106 695,257 6,696 688,561 2,367 8,728 2,058 2,820 16,532 7,589 $848,728 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 Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,434 528,487 660,921 29,805 66,000 4,090 27,840 788,656 $ 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 $684,503 $ 87,209 430,647 517,856 34,650 61,000 4,169 12,887 630,562 Stockholders’ Equity: Preferred stock, no par value, 1,000,000 shares authorized; none issued . . . . Common stock, no par value, 10,000,000 shares authorized; 4,741,068 and 4,705,480 shares issued and 4,741,068 and 4,646,238 shares outstanding at December 31, 2016 and December 31, 2015, respectively . . . . . . . . . . . . Treasury stock, at cost; 59,242 shares at December 31, 2015 . . . . . . . . . . . . Deferred Compensation obligation under Rabbi Trust . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock held by Rabbi Trust Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . — — 36,538 — (1,383) 23,291 243 1,383 60,072 $848,728 35,927 (592) — 18,520 86 — 53,941 $684,503 See Notes to Consolidated Financial Statements F-2 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME SUSSEX BANCORP (Dollars in thousands except per share data) INTEREST INCOME Year Ended December 31, 2016 2015 Loans receivable, including fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,862 $21,497 Securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits INTEREST EXPENSE Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See Notes to Consolidated Financial Statements F-3 1,443 832 23 29,160 2,449 1,922 391 4,762 24,398 1,291 23,107 975 767 308 4,796 75 444 (19) 483 7,829 13,078 1,859 2,108 993 311 788 450 508 280 191 140 458 1,421 22,585 8,351 2,828 5,523 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 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME − (continued) SUSSEX BANCORP (Dollars in thousands except per share data) OTHER COMPREHENSIVE INCOME (LOSS): Year Ended December 31, 2016 2015 Unrealized losses (gains) on available for sale securities arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value adjustments on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (950) 1,647 (436) (104) 157 $5,680 $ 134 — (271) 54 (83) $3,617 EARNINGS PER SHARE Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.20 $ 1.19 $ 0.81 $ 0.81 See Notes to Consolidated Financial Statements F-4 SUSSEX BANCORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2016 and 2015 . . . . . (Dollars in Thousands) Balance December 31, 2014 . . Net income . . . . . Other comprehensive loss . . Treasury shares purchased . . Restricted stock granted . . Restricted stock forfeited . . Compensation expense related to . . . . . Number of Shares Outstanding . . . . . . . . . . . . . 4,662,606 — . — . (48,059) . 32,692 . (1,001) . Common Stock $35,553 — — — — — . . . . . . . . . . . . . . . . . . stock option and restricted stock . . grants stock ($0.16 per share) . . . Dividends declared on common . . Balance December 31, 2015 . . . Net income . . . . . Other comprehensive income . Treasury shares purchased . . . Funding of Supplemental Director . . Stock issued to fund Rabbi Trust . . . . Options exercised . . . Common stock issued . . . Restricted stock granted . . Restricted stock forfeited . . Compensation expense related to Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . stock option and restricted stock . . grants . . . Dividends declared on common . Balance December 31, 2016 . stock ($0.16 per share) . . . . . . . . . — 374 . — . 4,646,238 — . — . (2,127) . — 35,927 — — — . . . . . . . — 60,920 449 — 42,167 (6,579) — 198 2 — — — — 411 Deferred Compensation Obligation Under Rabbi Trust $ — — — — — — — — — — — — 1,383 — — — — — Retained Earnings $15,566 3,700 — — — — — (746) 18,520 5,523 — — — — — — — — — Accumulated Other Comprehensive Income (Loss) Stock Held by Rabbi Trust Treasury Stock Total Stockholders’ Equity $169 — (83) — — — $ — $ (59) — — (533) — — — — — — — $51,229 3,700 (83) (533) — — — — 86 — 157 — — — — — — — — — 374 — — — — — — (1,383) — — — — — — (592) — — (26) — 616 2 — — — — — (746) 53,941 5,523 157 (26) — 814 4 — — — 411 . . . . . — . 4,741,068 — $36,538 — $1,383 (752) $23,291 — $243 — $(1,383) — $ — (752) $60,072 See Notes to Consolidated Financial Statements F-5 Year Ended December 31, 2016 2015 $ 5,523 $ 3,700 SUSSEX BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Cash Flows from Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: 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 loss (gain) on sale of foreclosed real estate . . . . . . . . . . . . . . . . Write-downs of and provisions for foreclosed real estate . . . . . . . . . . . . . . . Deferred income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings on bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation expense for stock options and stock awards . . . . . . . . . . . . . . (Increase) decrease in assets: Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in accrued interest payable and other liabilities . . . . . . . . . . . . . . . . Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . . . . . . 1,291 1,115 1,546 (444) 19 7 251 9 (308) 411 (294) (721) 735 9,140 Cash Flows from Investing Activities Securities available for sale: Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities, calls and principal repayments . . . . . . . . . . . . . . . . . . . . . . . . (42,943) 36,483 9,156 Securities held to maturity: Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 Purchases of bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease (increase) in Federal Home Loan Bank stock . . . . . . . . . . . . . . Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . Cash Flows from Financing Activities Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in short-term borrowed funds . . . . . . . . . . . . . . . . . Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from subordinated debt, net of issuance cost of $47 . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,763) 1,008 2,952 (152,748) 1,458 (988) 5 (3,700) 59 (158,021) 143,065 (4,845) 10,000 (5,000) 14,953 (26) 4 See Notes to Consolidated Financial Statements F-6 636 998 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) — SUSSEX BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS − (continued) Year Ended December 31, (Dollars in thousands) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash Provided by Financing Activities . . . . . . . . . . . . . . . . . . . . Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents − Beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents − Ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplementary Cash Flows Information 2016 $ (752) 157,399 8,518 6,120 $ 14,638 Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,679 Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,755 2015 $ (746) 84,457 261 5,859 $ 6,120 $ 3,530 $ 1,074 Supplementary Schedule of Noncash Investing and Financing Activities Foreclosed real estate acquired in settlement of loans . . . . . . . . . . . . . . . . . . Treasury stock used to fund deferred compensation liability . . . . . . . . . . . . . $ $ 729 814 $ 1,448 $ — See Notes to Consolidated Financial Statements F-7 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, 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 branch in Bergen County, New Jersey and one in Queens 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, and PPD Holding Company, LLC 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, a branch in Astoria, Queens, New York during the ﬁrst quarter of 2015 and a branch in Oradell, New Jersey during the ﬁrst quarter of 2016. 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 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. term relate to the determination of 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 F-8 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) 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. 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 to accumulated other related component will be recorded as an adjustment 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 the stock has no quoted market value and is carried at cost. The FHLB stock was carried at FHLB, $5.1 million and $5.2 million for the years ended December 31, 2016 and 2015, 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. F-9 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) 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 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 in determining impairment contractual 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. terms of the loan agreement. Factors considered by management 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. F-10 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) 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 the date of foreclosure, establishing a new cost basis. Subsequent 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 to foreclosure, valuations are sell at 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, 2016, we did not hold foreclosed residential real estate properties as a result of obtaining physical possession. As of December 31, 2015, we held $130 thousand in foreclosed residential real estate properties as a result of obtaining physical possession. In addition, as of December 31, 2016 and 2015, we had consumer loans with a carrying value of $666 thousand and $945 thousand, respectively, collateralized by residential real estate property for which formal foreclosure proceedings were in process. 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 The Company periodically evaluates impairment of long-lived assets to be held and used or to be disposed of by sale. There was no impairment of long-lived assets at any of the reported periods. 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 $16.5 million at December 31, 2016 and $12.5 million at December 31, 2015. Goodwill Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. At December 31, 2016 and 2015, totaling $2.8 million, consisting of $2.3 million from the acquisition of an insurance agency in 2001 and $486 thousand from the acquisition of a is not amortized, but bank branch in 2006. In accordance with current accounting standards, goodwill the Company has recorded goodwill F-11 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) 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 each 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 carry forwards. 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, 2016. 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 is recorded. Under the ‘‘more likely than not’’ meeting the ‘‘more likely than not’’ test, no tax beneﬁt threshold guidelines, the Company believes no signiﬁcant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax beneﬁt. As of December 31, 2016 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 2013 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. Derivatives The Company utilizes derivative instruments in the form of interest rate swaps to hedge the variability in its cash ﬂows due to interest rate risk. The variability in cash ﬂows is managed as part of the Company’s the Company formally asset/liability management process. In accordance with accounting requirements, designates all of its hedging relationships as cash ﬂow hedges, intended to offset changes in the cash ﬂows of F-12 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) certain ﬁnancial instruments due to movement in interest rates, and documents the strategy for undertaking the hedge transactions and its method of assessing ongoing effectiveness. All derivatives are recognized as either assets or liabilities in the Consolidated Financial Statements at their fair values. Should the cash ﬂow hedge become ineffective, the ineffective portion of changes in fair value (i.e. gain or loss) is reported in current period earnings. The effective portion of the change in fair value is initially recorded as a component of other comprehensive income (loss) and subsequently reclassiﬁed into earnings when the hedged transaction effects earnings. Derivative effectiveness and ineffectiveness will be assessed and measured at the date of designation (inception), each reporting date, and whenever a designated hedge period is terminated to ensure that ongoing high effectiveness is expected by regression analysis of the periodic change in fair value of the hedging instrument and the periodic change in fair value of the hypothetical derivative. The Company’s interest rate derivatives are comprised entirely of interest rate swaps hedging ﬂoating-rate and forecasted issuances of ﬁxed-rate liabilities and accounted for as cash ﬂow hedges. The carrying value of interest rate derivatives is included in the balance of other assets or other liabilities. Changes in fair value are offset against accumulated other comprehensive income, net of deferred income tax. Stock Compensation Plans The Company currently has multiple 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. Effective in 2016, the Company and Bank amended the Directors’ Deferred Compensation Agreement (‘‘DCA’’) to permit directors of the Company and Bank to defer their board fees in the form of shares of to be held in Rabbi Trust. Fees deferred in the form of shares placed in the Rabbi Trust are accounted for and disclosed in accordance with the applicable guidance speciﬁc to deferred compensation plans involving Rabbi Trusts contained within Accounting Standards Codiﬁcation (‘‘ASC’’) section 710. 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. Shares held by the Rabbi Trust are treated as treasury stock for purposes of basic and diluted earnings per share calculations while the related share obligations are reﬂection in the denominator of the earnings per share calculations in accordance with the provisions of ASC 260-10-45. Comprehensive Income Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income (‘‘AOCI’’) F-13 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) are reported net of related income taxes. AOCI for the Company consists of unrealized holding gains or losses on securities available for sale and fair value adjustments on derivatives. 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 the Bank offers a full array of commercial and retail ﬁnancial and automated teller machine networks, 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 twenty different insurance carriers. There are two main billing processes, direct billing (currently accounts for approximately 80% of revenues) and agency billing. Under the direct billing arrangement, the insurance carrier bills and collects from the customer directly and remits the brokers’ commission to Tri-State on a monthly basis. For direct bill policies, Tri-State records commissions as revenue when the 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 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. installment as of the ﬁrst Subsequent Events The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2016 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 May 2014, the FASB issued an Accounting Standard Update (‘‘ASU’’) 2014-09 to amend its guidance on ‘‘Revenue from Contracts with Customers (Topic 606). The objective of the ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reﬂects the consideration which the entity expects to be entitled in exchange for those goods or services. This ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. In August 2015, the FASB issued an amendment (ASU 2015-14) which defers the effective date of this F-14 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) new guidance by one year. More detailed implementation guidance on Topic 606 was issued in March 2016 (ASU 2016-08), April 2016 (ASU 2016-10) May 2016 (ASU 2016-12) and December 2016 (ASU 2016-20), and the effective date and transition requirements for these ASUs are the same as the effective date and transition requirements of ASU 2014-09. The amendments in ASU 2014-09 are effective for public business entities for annual periods beginning after December 15, 2017. The Company currently believes the impact of adopting the standard, as modiﬁed and augmented by subsequently issued pronouncements, will not be material to either past or future periods as it relates to the Company’s core banking revenue streams, but is still evaluating the potential impact the new standard will have on noninterest income components. 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. The adoption of this guidance did not 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. 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. The adoption of this guidance did not have a material impact on our consolidated ﬁnancial statements. In January 2016, FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, 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 F-15 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) 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. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated ﬁnancial statements. leases (with the exception of short-term leases) at In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all 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 currently expects that upon adoption of ASU 2016-02, right-of-use assets and lease liabilities will be recognized in the consolidated balance sheet in amounts that will be material; however, there will be no material impact on operations. In March 2016, FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. FASB is issuing ASU 2016-09 as part of its initiative to reduce complexity in accounting standards. The areas for simpliﬁcation in this ASU 2016-09 including the involve several aspects of the accounting for employee share-based payment income tax consequences, classiﬁcation of awards as either equity or liabilities, and classiﬁcation on the statement of cash ﬂows. Some of the areas for simpliﬁcation apply only to nonpublic entities. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reﬂected as of the beginning of the ﬁscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company’s adoption of the ASU will not have a signiﬁcant impact on the Company’s consolidated ﬁnancial statements. transactions, losses on certain types of ﬁnancial In June, 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments — Credit Losses (Topic 326) (the ‘‘ASU’’), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate for instruments. credit available-for-sale (AFS) debt securities and provides for a simpliﬁed accounting model for purchased ﬁnancial assets with credit deterioration since their origination. The ASU will be effective for Public business entities that are SEC ﬁlers in ﬁscal years beginning after December 15, 2019, including interim periods within those ﬁscal years. All other entities will have one additional year. Early application of the guidance will be permitted for all entities for ﬁscal years beginning after December 15, 2018, including interim periods within those ﬁscal years. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated ﬁnancial statements. It also modiﬁes the impairment model In August 2016, FASB issued ASU No. 2016-15, Classiﬁcation of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), which addresses eight classiﬁcation issues related to the statement of cash ﬂows; (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance (vi) distributions received from equity method policies, including bank-owned life insurance policies, F-16 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued) investees, (vii) beneﬁcial interests in securitization transactions, and (viii) separately identiﬁable cash ﬂows and application of the predominance principle. ASU 2016-15 is effective for public business entities for annual and interim periods in ﬁscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the ASU in an interim period, adjustments should be reﬂected as of the beginning of the ﬁscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Entities should apply this ASU using a retrospective transition method to each period presented. If it is impracticable for an entity to apply the ASU retrospectively for some of the issues, it may apply the amendments for those issues prospectively as of the earliest date practicable. The Company’s adoption of the ASU will not have a signiﬁcant impact on the Company’s consolidated ﬁnancial statements. In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the accounting for goodwill impairment by requiring impairment charges be based upon the ﬁrst step in the current two-step impairment test under Accounting Standards Codiﬁcation (ASC) 350. Currently, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). This ASU’s objective is to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for testing dates after January 1, 2017. The Company is currently annual and interim goodwill evaluating the impact of the pending adoption on its consolidated ﬁnancial statements. impairment NOTE 2 — SEGMENT REPORTING Segment information for 2016 and 2015 is as follows: (Dollars in thousands) Year Ended December 31, 2016: 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, 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 Banking and Financial Services Insurance Services Total $ 24,398 3,033 1,089 7,152 2,348 843,703 $ 20,076 2,741 978 4,670 1,372 679,598 $ — 4,796 26 1,199 480 5,025 $ — 3,712 20 670 268 4,905 $ 24,398 7,829 $ 1,115 $ 8,351 $ $ 2,828 $848,728 $ 20,076 6,453 $ 998 $ 5,340 $ $ 1,640 $684,503 (1) Calculated at statutory tax rate of 40%. F-17 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 instruments statements subsequent subsequent to the respective reporting dates may be different than the amounts reported at each year-end. to those respective dates. As such, the fair values of these ﬁnancial 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, 2016 and 2015: (Dollars in thousands) December 31, 2016 U.S. government agencies . . . . . . . . . . . . . State and political subdivisions . . . . . . . . . . Mortgage-backed securities − U.S. government-sponsored enterprises . . . Corporate debt . . . . . . . . . . . . . . . . . . . . . Derivative instruments Fair Value Measurements $13,087 40,688 32,854 1,982 Interest rate swaps . . . . . . . . . . . . . . . . . 1,647 December 31, 2015 U.S. government agencies . . . . . . . . . . . . . State and political subdivisions . . . . . . . . . . Mortgage-backed securities − $12,788 38,149 U.S. government-sponsored enterprises . . . 42,839 Quoted Prices in Active Markets for Identical Assets (Level I) Signiﬁcant Other Observable Inputs (Level II) Signiﬁcant Unobservable Inputs (Level III) $— — — — — $— — — $13,087 40,688 32,854 1,982 1,647 $12,788 38,149 42,839 $— — — — — $— — — 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. F-18 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 — FAIR VALUE OF ASSETS AND LIABILITIES − (continued) 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, 2016 and 2015 are as follows: (Dollars in thousands) December 31, 2016 Quoted Prices in Active Markets for Identical Assets (Level I) Signiﬁcant Other Observable Inputs (Level II) Signiﬁcant Unobservable Inputs (Level III) Fair Value Measurements Impaired loans . . . . . . . . . . . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . . $1,001 1,716 December 31, 2015 Impaired loans . . . . . . . . . . . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . . $ 801 756 $— — $— — $— — $— — $1,001 $1,716 $ 801 $ 756 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: Qualitative Information about Level III Fair Value Measurements Range (Weighted Average) Unobservable Input Valuation Techniques Fair Value Estimate (Dollars in thousands) December 31, 2016 Impaired loans . . . . . . . . . . . . . . . . $1,001 Foreclosed real estate . . . . . . . . . . . . 1,716 December 31, 2015 Impaired loans . . . . . . . . . . . . . . . . $ 801 Foreclosed real estate . . . . . . . . . . . . 756 Appraisal of collateral Appraisal of collateral Appraisal of collateral Appraisal of collateral Appraisal adjustments(1) Selling expenses(1) 0% to -27.3% (-2.5)% -7.0% (-7.0)% Appraisal adjustments(1) Selling expenses(1) 0% to -61.8% (-5.8)% -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, 2016 and 2015: 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. F-19 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 — FAIR VALUE OF ASSETS AND LIABILITIES − (continued) 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. 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. Derivatives (Carried at Fair Value): The fair value of the Company’s derivatives are determined using discounted cash ﬂow analysis using observable market-based inputs, which are considered Level 2 inputs. Subordinated Debentures (Carried at Cost): Fair values of 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-20 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 — FAIR VALUE OF ASSETS AND LIABILITIES − (continued) The fair values of the Company’s ﬁnancial instruments at December 31, 2016 and 2015 were as follows: December 31, 2016 Fair Value Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level I) Signiﬁcant Other Observable Inputs (Level II) Signiﬁcant Unobservable Inputs (Level III) (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 . . . . . . . Interest rate swaps . . . . . . . . . . . . . Financial liabilities: Non-maturity deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits Short-term borrowings . . . . . . . . . . Long-term borrowings . . . . . . . . . . . Subordinated debentures . . . . . . . . . Accrued interest payable . . . . . . . . . (Dollars in thousands) Financial assets: $ 14,638 100 88,611 11,618 5,106 688,561 2,058 1,647 479,025 181,896 29,805 66,000 27,840 364 $ 14,638 100 88,611 11,739 5,106 672,912 2,058 1,647 479,025 181,346 29,805 66,388 24,519 364 $14,638 — — — — — — — — — 29,805 — — — December 31, 2015 Fair Value Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level I) 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 . . . . . . . $ 6,120 100 93,776 6,834 5,165 537,833 1,764 Financial liabilities: Non-maturity deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits Short-term borrowings . . . . . . . . . . Long-term borrowings . . . . . . . . . . . Subordinated debentures . . . . . . . . . Accrued interest payable . . . . . . . . . 380,983 136,873 34,650 61,000 12,887 281 $ 6,120 100 93,776 7,008 5,165 528,065 1,764 380,983 136,619 34,650 58,685 9,344 281 $ 6,120 — — — — — — — — 34,650 — — — F-21 $ — 100 88,611 11,739 5,106 — 2,058 1,647 479,025 181,346 — 66,388 24,519 364 Signiﬁcant Other Observable Inputs (Level II) $ — 100 93,776 7,008 5,165 — 1,764 380,983 136,619 — 58,685 9,344 281 $ — — — — — 672,912 — — — — — — — — Signiﬁcant Unobservable Inputs (Level III) $ — — — — — 528,065 — — — — — — — 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, 2016 and 2015 are summarized as follows: (Dollars in thousands) December 31, 2016 U.S. government agencies . . . . . . . . . . . . . . . . . . . . State and political subdivisions . . . . . . . . . . . . . . . . . Mortgage-backed securities − U.S. government-sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Debt December 31, 2015 U.S. government agencies . . . . . . . . . . . . . . . . . . . . State and political subdivisions . . . . . . . . . . . . . . . . . Mortgage-backed securities − U.S. government-sponsored enterprises . . . . . . . . . . Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $13,115 41,255 33,483 2,000 $89,853 $12,792 37,771 43,069 $93,632 $ 29 203 126 — $358 $ 51 507 206 $764 $ (57) (770) $13,087 40,688 (755) (18) $(1,600) 32,854 1,982 $88,611 $ (55) (129) $12,788 38,149 (436) $ (620) 42,839 $93,776 Securities with a carrying value of approximately $34.3 million and $33.4 million at December 31, 2016 and 2015, 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, 2016 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. government agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total bonds and obligations Amortized Cost $ — 199 5,567 37,489 43,255 13,115 Fair Value $ — 200 5,527 36,943 42,670 13,087 Mortgage-backed securities: U.S. government-sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,483 $89,853 32,854 $88,611 Gross gains on sales of securities available for sale were $476 thousand and $372 thousand and gross losses were $40 thousand and $101 thousand for the years ended December 31, 2016 and 2015, respectively. F-22 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 — SECURITIES − (continued) 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, 2016 and 2015. (Dollars in thousands) December 31, 2016 Less Than 12 Months Fair Value Gross Unrealized Losses 12 Months or More Gross Unrealized Losses Fair Value Total Fair Value Gross Unrealized Losses U.S. government agencies . . . . . . . . . . . . . $ 4,952 State and political subdivisions 23,989 Mortgage-backed securities − . . . . . . . . . $ (15) (770) $2,126 — $(42) — $ 7,078 23,989 $ (57) (770) U.S. government-sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . Corporate debt Total temporarily impaired securities 23,299 1,982 . . . . . $54,222 December 31, 2015 U.S. government agencies . . . . . . . . . . . . . $ 5,888 State and political subdivisions 5,780 Mortgage-backed securities − . . . . . . . . . U.S. government-sponsored enterprises . . Total temporarily impaired securities 31,885 . . . . . $43,553 (752) (18) $(1,555) 639 — $2,765 (3) — $(45) 23,938 1,982 $56,987 (755) (18) $(1,600) $ (23) (107) $2,473 2,998 $(32) (22) $ 8,361 8,778 $ (55) (129) (436) $ (566) — $5,471 — $(54) 31,885 $49,024 (436) $ (620) As of December 31, 2016, 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, 2016 and 2015, 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, 2016, there were ﬁve securities with a fair value of $7.1 million that had an unrealized loss that amounted to $57 thousand. As of December 31, 2016, 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, 2016, were deemed to be other-than-temporarily impaired. 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. F-23 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 — SECURITIES − (continued) State and Political Subdivisions At December 31, 2016 and 2015, 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, 2016, there were 31 securities with a fair value of $24.0 million that had an unrealized loss that amounted to $770 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, 2016, 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, 2016, were deemed to be other-than-temporarily-impaired. At December 31, 2015, there were 15 securities with a fair value of $8.8 million that had an unrealized loss of $129 thousand. Mortgage-Backed Securities At December 31, 2016 and 2015, 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, 2016, there were 16 securities with a fair value of $23.9 million that had an unrealized loss of $755 thousand. As of December 31, 2016, 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, 2016, were deemed to be other-than-temporarily impaired. At December 31, 2015, there were 18 securities with a fair value of $31.9 million that had an unrealized loss of $436 thousand. Corporate Debt At December 31, 2016, the decline in fair value and the unrealized losses for our corporate debt was caused by changes in interest rates and spreads and were not the result of credit quality. At December 31, 2016, there was one security with a fair value of $2.0 million that had an unrealized loss of $18 thousand. These securities typically have maturity dates greater than ﬁve years and the fair values are more sensitive to changes in market intend to sell and it was rates. As of December 31, 2016, we did not interest that we would be required to sell any of these securities before recovery of their more-likely-than-not amortized cost basis. Therefore, none of our corporate debt at December 31, 2016, were deemed to be other-than-temporarily-impaired. Held to Maturity Securities The amortized cost and fair value of securities held to maturity as of December 31, 2016 and 2015 are summarized as follows: (Dollars in thousands) December 31, 2016 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and political subdivisions . . . . . . . . . . . . . . . . . $11,618 $123 $ (2) $11,739 December 31, 2015 State and political subdivisions . . . . . . . . . . . . . . . . . $ 6,834 $174 $— $ 7,008 During the twelve months ended December 31, 2016, the Company sold a security out of its held to maturity portfolio due to continued credit deterioration. The gross realized gain on the sale of the security was $8 thousand for the twelve months ended December 31, 2016. F-24 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 — SECURITIES − (continued) The amortized cost and fair value of securities held to maturity at December 31, 2016 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. The gross realized gain on the sale of the security was $8 thousand for the twelve months ended December 31, 2016. (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 $ 8,764 — 1,813 1,041 $11,618 Fair Value $ 8,763 — 1,854 1,122 $11,739 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, 2016. At December 31, 2015 we did not have any held to maturity investments with unrealized losses. (Dollars in thousands) December 31, 2016 Less Than 12 Months Fair Value Gross Unrealized Losses 12 Months or More Gross Unrealized Losses Fair Value Total Fair Value Gross Unrealized Losses State and political subdivisions . . . . . . . . . $789 $(2) $— $— $789 $(2) As of December 31, 2016, 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, 2016, there were two securities with a fair value of $789 thousand that had an unrealized loss of $2 thousand. At December 31, 2015, there were no securities in an unrealized loss position. At December 31, 2016, 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. F-25 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 — LOANS The composition of net loans receivable at December 31, 2016 and 2015 is as follows: (Dollars in thousands) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2016 $ 40,280 25,360 479,227 150,237 1,038 696,142 (885) (6,696) $688,561 December 31, 2015 $ 20,023 13,348 382,262 127,204 1,253 544,090 (667) (5,590) $537,833 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 $249 thousand and $454 thousand at December 31, 2016 and 2015, respectively. Mortgage servicing rights were immaterial at December 31, 2016 and 2015. 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, 2016 and 2015: (Dollars in thousands) Year Ended: December 31, 2016 Beginning balance . . . . . . Charge-offs . . . . . . . . . . . Recoveries . . . . . . . . . . . . Provision . . . . . . . . . . . . . Ending balance . . . . . . . . . December 31, 2015 Beginning balance . . . . . . Charge-offs . . . . . . . . . . . Recoveries . . . . . . . . . . . . Provision . . . . . . . . . . . . . Ending balance . . . . . . . . . Commercial and Industrial Construction Commercial Real Estate Residential Real Estate Consumer and Other Unallocated Total $ 85 (227) 268 (16) $ 110 $ 231 (19) 17 (144) $ 85 $ 220 — — 139 $ 359 $ 383 — — (163) $ 220 $3,646 (187) 37 436 $3,932 $3,491 (560) 41 674 $3,646 $ 784 (67) 21 161 $ 899 $ 903 (165) 17 29 $ 784 $ 87 (37) 7 (38) $ 19 $ 19 (25) 7 86 $ 87 $ 768 — — 609 $1,377 $ 614 — — 154 $ 768 $5,590 (518) 333 1,291 $6,696 $5,641 (769) 82 636 $5,590 F-26 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 — ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES − (continued) The following table presents the balance in the allowance of loan losses at December 31, 2016 and 2015 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 Balance Related to Loans Individually Evaluated for Impairment Balance Related to Loans Collectively Evaluated for Impairment Balance $ 110 359 3,932 899 19 1,377 $6,696 $ 85 220 3,646 784 87 768 $5,590 $ 14 — 135 6 — — $155 $ — — 112 79 73 — $264 $ 96 $ 359 $3,797 $ 893 19 $ — $5,164 $ 85 $ 220 $3,534 $ 705 14 $ — $4,558 Loans Receivable Individually Evaluated for Impairment Collectively Evaluated for Impairment $ 33 — 4,597 1,967 — — $6,597 $ 20 — 5,160 1,546 138 — $6,864 $ 40,247 $ 25,360 $474,630 $148,270 1,038 $ — $689,545 $ 20,003 $ 13,348 $377,102 $125,658 1,115 $ — $537,226 Balance $ 40,280 25,360 479,227 150,237 1,038 — $696,142 $ 20,023 13,348 382,262 127,204 1,253 — $544,090 (Dollars in thousands) December 31, 2016 Commercial and industrial . . . . Construction . . . . . . . . . . . . . . Commercial real estate . . . . . . Residential real estate . . . . . . . . . . . Consumer and other loans Unallocated . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . December 31, 2015 Commercial and industrial . . . . Construction . . . . . . . . . . . . . . Commercial real estate . . . . . . Residential real estate . . . . . . . Consumer and other loans . . . . Unallocated . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . An age analysis of loans receivable which were past due as of December 31, 2016 and 2015 is as follows: (Dollars in thousands) December 31, 2016 Commercial and industrial . . Construction . . . . . . . . . . . Commercial real estate . . . . Residential real estate . . . . . Consumer and other . . . . . . . . . . . . . . . . . . . . . . Total December 31, 2015 Commercial and industrial . . Construction . . . . . . . . . . . Commercial real estate . . . . Residential real estate . . . . . Consumer and other . . . . . . . . . . . . . . . . . . . . . . Total 30 − 59 Days Past Due 60 − 89 days Past Due Greater Than 90 Days(a) Total Past Due Current Total Financing Receivables Recorded Investment > 90 Days and Accruing $ — — 84 786 4 $ 874 $ 5 — 758 335 16 $1,114 $ — — 719 247 — $ 966 $ — — 1,461 247 1 $1,709 $ 137 309 4,103 1,752 — $6,301 $ 20 — 4,016 1,138 138 $5,312 $ 137 309 4,906 2,785 4 $8,141 $ 25 — 6,235 1,720 155 $8,135 $ 40,143 $ 40,280 25,051 $ 25,360 474,321 $479,227 147,452 $150,237 1,038 $688,001 $696,142 1,034 $ $ 19,998 $ 20,023 13,348 $ 13,348 376,027 $382,262 125,484 $127,204 1,253 $535,955 $544,090 1,098 $ $104 309 55 — — $468 $ — — — — — $ — (a) includes loans greater than 90 days past due and still accruing and non-accrual loans. F-27 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 — ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES − (continued) Loans for which the accrual of interest has been discontinued at December 31, 2016 and 2015 were: (Dollars in thousands) Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total December 31, 2016 December 31, 2015 $ 33 4,048 1,752 — $5,833 $ 20 4,016 1,138 138 $5,312 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. 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. F-28 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 — ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES − (continued) 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. The following tables illustrate the Company’s corporate credit risk proﬁle by creditworthiness category as of December 31, 2016 and 2015: (Dollars in thousands) December 31, 2016 Commercial and industrial . . . . . . . Construction . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . Residential real estate . . . . . . . . . . . Consumer and other . . . . . . . . . . . . December 31, 2015 Commercial and industrial . . . . . . . Construction . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . Residential real estate . . . . . . . . . . . Consumer and other . . . . . . . . . . . . Pass $ 40,247 25,360 463,889 147,526 1,038 $678,060 $ 19,983 13,348 367,305 124,915 1,115 $526,666 Special Mention $ — — 7,461 584 — $8,045 $ 5 — 8,957 743 — $9,705 Substandard Doubtful Total $ 33 — 7,877 2,127 — $10,037 $ 35 — 6,000 1,546 138 $ 7,719 $— — — — — $— $— — — — — $— $ 40,280 $ 25,360 $479,227 $150,237 $ 1,038 $696,142 $ 20,023 $ 13,348 $382,262 $127,204 $ 1,253 $544,090 F-29 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 — ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES − (continued) The following table reﬂects information regarding the Company’s impaired loans as of December 31, 2016 and 2015 and for the years then ended: (Dollars in thousands) December 31, 2016 With no related allowance recorded: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized Commercial and industrial . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . $ 19 2,324 1,604 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, 2015 With no related allowance recorded: 14 2,273 363 — 33 4,597 1,967 — $6,597 Recorded Investment Commercial and industrial . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . $ 20 2,684 1,123 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 . . . . . . . . . . . . . . . — 2,476 423 138 20 5,160 1,546 138 $6,864 $ 19 2,324 1,629 14 2,364 363 — 33 4,688 1,992 — $6,713 Unpaid Principal Balance $ 20 2,684 1,152 — 2,476 423 138 20 5,160 1,575 138 $6,893 $ — — — 14 135 6 — 14 135 6 — $155 $ 19 2,244 1,271 3 2,492 298 55 22 4,736 1,569 55 $6,382 $— 16 9 — 32 — — — 48 9 — $57 Related Allowance Average Recorded Investment Interest Income Recognized $ — — — — 112 79 73 — 112 79 73 $264 $ 16 2,488 1,239 19 2,706 687 — 35 5,194 1,926 — $7,155 $— 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-30 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 — ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES − (continued) 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 December 31, 2016 and 2015 based on payment performance status: in troubled debt restructured loans as of (Dollars in thousands) December 31, 2016 Performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2015 Performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Real Estate Residential Real Estate $ 550 2,258 $2,808 $1,144 1,831 $2,975 $129 — $129 $409 194 $603 Total $ 679 2,258 $2,937 $1,553 2,025 $3,578 Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of December 31, 2016, 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 years ended December 31, 2016 and 2015. 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, 2016 and 2015. There were two TDRs with an outstanding balance of $568 thousand for which there were payment defaults within twelve months following the date of the restructuring for the year ended December 31, 2016. There were no TDRs for which there was a payment default within twelve months following the date of the restructuring for the year ended December 31, 2015. 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 years ended December 31, 2016 and 2015. NOTE 7 — PREMISES AND EQUIPMENT The components of premises and equipment at December 31, 2016 and 2015 are as follows: (Dollars in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and land improvements Building and building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements Furniture, ﬁxtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 $ 2,054 5,953 2,182 5,887 125 16,201 (7,473) $ 8,728 2015 $ 2,049 5,953 1,430 5,458 420 15,310 (6,431) $ 8,879 During the years ended December 31, 2016 and 2015, depreciation expense totaled $1.1 million and $998 thousand, respectively. F-31 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 — DEPOSITS The components of deposits at December 31, 2016 and 2015 are as follows: (Dollars in thousands) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 $132,434 346,591 74,150 107,746 $660,921 2015 $ 87,209 293,774 86,343 50,530 $517,856 Included in time deposits at December 31, 2016 and 2015, were brokered deposits of $84.6 million and $33.8 million, respectively. At December 31, 2016, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $127,999 28,038 6,521 4,394 14,944 $181,896 Certiﬁcates of deposits with balances of $250 thousand or more at December 31, 2016 and 2015, totaled approximately $48.6 million and $21.7 million, respectively. NOTE 9 — BORROWINGS At December 31, 2016, the Bank had secured borrowing potential with the Federal Home Loan Bank of New York (‘‘FHLBNY’’) for borrowings of up to $149.3 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 $149.3 million. At December 31, 2016, the Bank had the ability to borrow up to $63.3 million at FHLBNY and $10.0 million at ACBB. At December 31, 2016 and 2015, the Company had $29.8 million and $34.7 million, respectively, in short term advances at the FHLBNY, having weighted average interest rates of 0.79% and 0.52%, respectively. These advances are priced at the federal funds rate plus a spread (generally between 20 and 30 basis points), re-price daily and mature within three months. At December 31, 2016, the Company had $5.0 million line of credit at Atlantic Community Bankers the rate of ﬂoating prime plus 50 basis points with a maturity date of Bank that bears interest at September 28, 2017. This line of credit is included in long term borrowings. F-32 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 — BORROWINGS − (continued) At December 31, 2016 and 2015 the Bank had the following long-term borrowings: (Dollars in thousands) Maturity Date December 7, 2016 . . . . . . . . . . . . . . . . . . . . . June 21, 2017 . . . . . . . . . . . . . . . . . . . . . . . . October 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . November 3, 2017 . . . . . . . . . . . . . . . . . . . . . December 7, 2017 . . . . . . . . . . . . . . . . . . . . . December 26, 2017 . . . . . . . . . . . . . . . . . . . . December 26, 2017 . . . . . . . . . . . . . . . . . . . . January 16, 2018 . . . . . . . . . . . . . . . . . . . . . . July 17, 2018 . . . . . . . . . . . . . . . . . . . . . . . . September 19, 2018 . . . . . . . . . . . . . . . . . . . . January 20, 2021 . . . . . . . . . . . . . . . . . . . . . . February 4, 2019 . . . . . . . . . . . . . . . . . . . . . . January 15, 2020 . . . . . . . . . . . . . . . . . . . . . . October 5, 2020 . . . . . . . . . . . . . . . . . . . . . . Borrowing Institution FHLBNY FHLBNY ACBB FHLBNY FHLBNY FHLBNY FHLBNY FHLBNY FHLBNY FHLBNY FHLBNY FHLBNY FHLBNY FHLBNY Interest Rate 4.00% 4.60% Prime + 50bps (4.25%) 1.31% 3.97% 3.66% 3.79% 1.18% 1.65% 1.83% 2.07% 1.53% 1.66% 1.78% Balance at December 31, 2016 2015 $ — $ 5,000 6,000 — 6,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 5,000 $66,000 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, 2016 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,000 15,000 5,000 10,000 5,000 — $66,000 At December 31, 2016 the Company had $61.0 million in long-term ﬁxed rate advances, of which, $6.0 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 — DERIVATIVES The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash ﬂow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making ﬁxed-rate payments over the life of the agreements without exchange of the underlying notional amount. The effective portion of changes in the fair value of derivatives designated and that qualify as cash ﬂow hedges are recorded in accumulated other comprehensive income and are subsequently reclassiﬁed into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended December 31, 2016 such derivatives were used to hedge the variable cash outﬂows associated with four FHLB borrowings totaling $26.0 million. The Company entered into an interest rate swap agreement to hedge F-33 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 — DERIVATIVES − (continued) its $12.5 million variable rate (3 Mo Libor +1.44%) subordinated debt issued by Sussex Capital Trust II, a non-consolidated wholly-owned subsidiary of the Company, for 10 years at a ﬁxed rate of 3.10%. The ineffective portion of the change in fair value of the derivatives are recognized directly in earnings. The Company implemented this program during the quarter ended March 31, 2016. During the twelve months ended December 31, 2016 the Company did not record any hedge ineffectiveness. The table below presents the fair value of the Company’s derivative ﬁnancial instruments as well as their classiﬁcation on the Consolidated Statements of Financial Condition at December 31, 2016: (Dollars in thousands) Derivatives designated as hedging instruments Interest rate swaps by effective date: March 15, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . December 15, 2016 . . . . . . . . . . . . . . . . . . . . . . . June 15, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . December 15, 2017 . . . . . . . . . . . . . . . . . . . . . . . December 15, 2017 . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notional/ Contract Amount $12,500 5,000 6,000 10,000 5,000 $38,500 December 31, 2016 Balance Sheet Location Fair Value Expiration Date $ 629 163 201 448 206 $1,647 Other Assets Other Assets Other Assets Other Assets Other Assets 2026-03-15 2026-12-15 2027-06-15 2027-12-15 2027-12-15 The table below presents the Company’s derivative ﬁnancial instruments that are designated as cash ﬂow hedgers of interest rate risk and their effect on the Company’s Consolidated Statements of Financial Conditions during the year ended December 31, 2016: (Dollars in thousands) Derivatives in cash ﬂow hedges Interest rate swaps by effective date: March 15, 2016 . . . . . . . . . . . . . . . . . . . . . December 15, 2016 . . . . . . . . . . . . . . . . . . June 15, 2017 . . . . . . . . . . . . . . . . . . . . . . December 15, 2017 . . . . . . . . . . . . . . . . . . December 15, 2017 . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2016 Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion) Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion) Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion) $377 98 120 269 124 $988 Not applicable Not applicable Not applicable Not applicable Not applicable $— — — — — $— NOTE 11 — 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 subordinated deferrable interest debentures from the Company. The debentures are the sole asset of the Trust. The terms of the 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 F-34 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 — SUBORDINATED DEBENTURES AND MANDATORY REDEEMABLE CAPITAL DEBENTURES − (continued) reprices quarterly at the three month LIBOR plus 1.44% and was 2.4% and 1.95% at December 31, 2016 and 2015, respectively. The capital securities are currently redeemable by the Company at par in whole or in part. The capital the subordinated debentures on September 15, 2037. securities must be redeemed upon ﬁnal maturity of the company completed a private placement During the quarter ended December 31, 2016, to an institutional investor of $15 million in ﬁxed-to-ﬂoating rate subordinated notes. The subordinated notes have a maturity date of December 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the ﬁrst ﬁve years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3-month LIBOR plus 350 basis points over the remainder of the term. The notes are redeemable after ﬁve years subject to satisfaction of certain conditions. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior to general and secured creditors and depositors. NOTE 12 — 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, 2016: (Dollars in thousands) 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 735 728 577 171 76 531 $2,818 Rent expense was $663 thousand and $649 thousand for the years ended December 31, 2016 and 2015, respectively. NOTE 13 — EMPLOYEE BENEFIT PLANS The Company has a 401(k) Plan and Trust 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, 2016 and 2015 was $141 thousand and $135 thousand, respectively. (the ‘‘401(k) Plan’’) for 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, 2016 and 2015, $52 thousand and $57 thousand, respectively, was charged to expense in connection with the Plans. At December 31, 2016 and 2015, the carrying value of the Supplemental Plans was $716 thousand and $795 thousand, respectively. F-35 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 — EMPLOYEE BENEFIT PLANS − (continued) 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, 2016 and 2015, the carrying value of deferred compensation was $199 thousand and $173 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 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. In June 2016, the Board of Directors adopted an amendment to the DCA which supersedes the prior amendment from September 2015. The amendment, effective July 1, 2016, allows the Company’s Directors to elect to defer part or all of their fees into a stock account, consisting of the Company’s common stock, which is administered through a rabbi trust. The Company is responsible for submitting each Director’s deferral to the trustee of the rabbi trust to be used for the purchase of the Company’s common stock. Distribution’s from the Director’s stock account shall be made in the same medium, the Company’s common stock. The participant’s beneﬁt will be distributed to the participant or his beneﬁciary upon a change in control of the Company, the termination of the DCA, the occurrence of an unforeseeable emergency, the termination of service or the participant’s death or disability. Upon distribution, a participant’s beneﬁt will be paid in monthly installments over a period of ten years. At December 31, 2016 and 2015, the liability for the DCA was $36 thousand and $1.2 million, respectively. The DCA liability of $36 thousand at December 31, 2016, consisted entirely of amounts deferred under the interest rate earnings election; the liability of $1.2 million at December 31, 2015, consisted of $22 thousand of amounts deferred under the interest rate earnings election and $1.16 million amounts deferred under the common stock performance election. During 2016, the amounts deferred under the common stock performance election were transferred into the stock account administered through the Rabbi Trust. In conjunction with the DCA, at December 31, 2016, 96,736 shares of Company common stock were held in the Rabbi Trust. In July 2011, the Company entered into a Supplemental Executive Retirement Agreement (‘‘SERP’’), a non-qualiﬁed deﬁned contribution pension plan that provides supplemental 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 the SERP was termination of employment. At December 31, 2016 and 2015, $329 thousand and $239 thousand, respectively. the carrying value of income for retirement F-36 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 — COMPREHENSIVE INCOME AND ACCUMULATED OTHER 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: (Dollars in thousands) Other comprehensive (loss) income: Fair value adjustments on derivatives Unrealized gains on available for sale Year Ended December 31, 2016 Net of Tax Before Tax Effect Tax Year Ended December 31, 2015 Net of Tax Before Tax Effect Tax . . . $1,647 $ 659 $ 988 $ — $ — $ — securities . . . . . . . . . . . . . . . . . . . . . (950) (380) (570) 134 54 80 Reclassiﬁcation adjustment for net gains on securities transactions included in net income . . . . . . . . . . . . . . . . . . . . Total other comprehensive (loss) (436) (175) (261) (271) (108) (163) income . . . . . . . . . . . . . . . . . . . . . $ 261 $ 104 $ 157 $(137) $ (54) $ (83) Reclassiﬁcation adjustments for gains on securities transactions of $436 thousand and $271 thousand for the years ended December 31, 2016 and 2015, respectively, are presented in the income statement within the line item for net gain on securities transactions. The other components of accumulated other comprehensive income included in stockholders’ equity at December 31, 2016 and 2015 are as follows: (Dollars in thousands) Unrealized gain (loss) on available for sale investments . . . . . . . . . . . . . . Unrealized gain on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . 2016 $(745) 988 $ 243 2015 $86 — $86 F-37 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 — EARNINGS PER SHARE The following table sets forth the computations of basic and diluted earnings per share: (In thousands, except share and per share data) Year Ended December 31, 2016: Shares Outstanding (weighted average) . . . . . . . . . . . . . . . Shares held by Rabbi Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . Share liability under deferred compensation agreement Basic earnings per share: Income (Numerator) Shares (Denominator) Per Share Amount 4,619,124 96,736 (96,736) Net earnings applicable to common stockholders . . . . . . $5,523 4,619,124 $1.20 Effect of dilutive securities: Unvested stock awards . . . . . . . . . . . . . . . . . . . . . . . . — 31,984 Diluted earnings per share: Net income applicable to common stockholders and assumed conversions . . . . . . . . . . . . . . . . . . . . . . . . $5,523 4,651,108 $1.19 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 . . . . . . . . . . . . . . . . . . . . . . . . — 32,506 Diluted earnings per share: Net income applicable to common stockholders and assumed conversions . . . . . . . . . . . . . . . . . . . . . . . . $3,700 4,591,822 $0.81 There were 36,761 and 58,274 shares of unvested restricted stock awards and options outstanding during December 31, 2016 and 2015, 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 16 — 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, 2016, 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, 2016, there were 131,726 shares available for future grants under the 2013 Plan. F-38 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 — STOCK INCENTIVE PLANS − (continued) Information regarding the Company’s restricted stock grants activity for the years ended December 31, 2016 and 2015 are as follows: Unvested restricted stock, beginning of year . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested restricted stock, end of period . . . . . . . . . . 2016 2015 Number of Shares 93,570 42,167 (6,579) (48,415) 80,743 Weighted Average Grant Date Fair Value $ 7.67 12.92 10.99 7.05 $10.51 Number of Shares 112,545 32,692 (1,001) (50,666) 93,570 Weighted Average Grant Date Fair Value $ 6.06 10.54 9.19 5.93 $ 7.67 Total stock-based compensation related to restricted stock awards was $365 thousand and $337 thousand for the years ended December 31, 2016 and December 31, 2015, respectively. As of December 31, 2016 and 2015, there were $571 thousand and $433 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 1.5 years and 1.4 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: Outstanding, December 31, 2014 . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding, December 31, 2015 . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding, December 31, 2016 . . . . . . . . . . . . . . . . Number of Shares 46,525 15,985 (10,525) 51,985 26,216 (8,629) (449) 69,123 Exercisable, December 31, 2016 . . . . . . . . . . . . . . . . . 14,981 Weighted Average Exercise Price per Share $10.63 10.25 12.91 10.06 12.83 10.12 10.25 $11.10 $10.01 Weighted Average Contractual Term Aggregate Intrinsic Value 8.4 7.9 $677,483 $163,132 The following table summarizes information about stock options outstanding and exercisable at December 31, 2016: Exercise Price 9.97 12.83 Number Outstanding 32,000 26,216 58,216 Weighted Average Remaining Life (Years) 7.9 9.2 8.4 Number Exercisable 12,800 — 12,800 F-39 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 — STOCK INCENTIVE PLANS − (continued) The aggregate intrinsic value of options exercised in 2016 was $1 thousand. The following table summarizes information about stock option assumptions: Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected option life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 1.25% 22.72% 1.71% 7.50 2015 1.56% 34.32% 1.37% 7.50 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 $46 thousand and $37 thousand for the year ended December 31, 2016 and 2015, respectively. The weighted average grant date fair value of options granted during the years ended December 31, 2016 and 2015 was $3.35 and $3.56, respectively, per share. Expected future expense relating to the non-vested options outstanding as of December 31, 2016 is $166 thousand over a weighted average period of 3.4 years. Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares. NOTE 17 — 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, 2016 and 2015 are as follows: (Dollars in thousands) Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 2015 $2,175 644 2,819 (40) 49 9 $2,828 $1,014 439 1,453 117 70 187 $1,640 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, 2016 and 2015 is as follows: (Dollars in thousands) Federal income tax at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax exempt interest State income tax, net of federal income tax effect . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other 2016 2015 $2,840 (288) 457 (105) (76) $2,828 34% (3) 5 (1) (1) 34% $1,816 (312) 336 (106) (94) $1,640 34% (6) 6 (2) (1) 31% F-40 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 — INCOME TAXES − (continued) The components of the net deferred tax asset at December 31, 2016 and 2015 are as follows: (Dollars in thousands) Deferred tax assets: 2016 2015 Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets Deferred tax liabilities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on securities, available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on interest rate swaps Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset, included in other assets $ 2,646 506 402 223 122 497 223 4,619 (537) (210) — (659) (1,406) $ 3,213 $2,233 953 347 219 115 — 214 4,081 (441) (254) (58) — (753) $3,328 NOTE 18 — 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, 2016 and 2015 is summarized as follows: (Dollars in thousands) Balance, beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 $ 6,647 5,068 (1,383) $10,332 2015 $ 6,136 2,664 (2,153) $ 6,647 Deposits from certain executive officers, directors and their affiliates at December 31, 2016 and 2015 totaled $9.3 million and $7.0 million, respectively. Certain related parties of the Company provided legal services and appraisal services to the Company. Legal services provided by related parties totaled $10 thousand and $14 thousand for the years ended December 31, 2016 and 2015, respectively. Appraisal services provided by related parties totaled $2 thousand and $12 thousand for the years ended December 31, 2016 and 2015, respectively. There were no engineering services provided by related parties for the year ended December 31, 2016. Engineering services provided by related parties totaled $6 thousand for the year ended December 31, 2015. The Company also paid rent to related parties for an office location in the amount of $148 thousand and $147 thousand for the years ended December 31, 2016 and 2015, respectively. F-41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK SUSSEX BANCORP 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, 2016 and 2015 is as follows: (Dollars in thousands) Commitments to grant loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unfunded commitments under lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding standby letters of credit 2016 $70,463 69,811 998 2015 $30,561 53,087 990 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 loss in the event of performance of a customer to a third party. The Company’s exposure to credit 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, 2016 and 2015 for guarantees under standby letters of credit issued is not material. NOTE 20 — 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 $7.6 million at December 31, 2016. to various regulatory capital requirements administered by the federal banking The Bank is subject 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, items as calculated under regulatory accounting practices. The Bank’s capital amounts and classiﬁcation are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. liabilities and certain off-balance sheet F-42 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 — CAPITAL AND REGULATORY MATTERS − (continued) 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 2016, with certain requirements to be phased in beginning in 2017, 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 5.13% (increased from 4.5%; (ii) a Tier 1 capital ratio of 6.63% (increased from 6%); (iii) a total capital ratio of 8.63% (increased from 8%); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The amended rules establish a ‘‘capital conservation buffer’’ of 2.5% (phased in over four years at 0.625% per year) above the new regulatory minimum capital ratios, and would result in the following phased-in minimum ratios when fully implemented: (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 2020. 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, 2016, 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, 2016 and 2015 are presented below: (Dollars in thousands) As of December 31, 2016 Actual Amount Ratio For Capital Adequacy Purposes plus Capital Conservation Buffer Amount Ratio To be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Total capital (to risk-weighted assets): . . $93,579 Tier I capital (to risk-weighted assets): . . 86,883 Common equity tier I capital (to average . . . . . . . . . . . . . . . . . . . . . . . . . . Tier I capital (to average assets): 86,883 86,883 assets): As of December 31, 2015 Total capital (to risk-weighted assets): . . $68,283 62,693 Tier I capital (to risk-weighted assets): . . Common equity tier I capital (to average . . . . . . . . . . . . . . . . . . . . . . . . . . Tier I capital (to average assets): 62,693 62,693 assets): 13.86% >$58,279 12.87% >44,773 >8.63% >$67,531 >54,025 >6.63 >10.00% >8.00 12.87% >34,643 10.41% >33,380 >5.13 >4.00 >43,895 >41,725 >6.50 >5.00 12.79% >$42,722 11.74% >32,041 >8.00% >$53,402 >42,722 >6.00 >10.00% >8.00 11.74% >24,031 9.45% >26,548 >4.50 >4.00 >34,711 >33,184 >6.50 >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. F-43 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 — CAPITAL AND REGULATORY MATTERS − (continued) At December 31, 2016, the Bank’s funds available for payment of dividends were $81.9 million. Accordingly, $7.5 million of the Company’s equity in the net assets of the Bank was restricted as of December 31, 2016. 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 21 — PARENT COMPANY ONLY FINANCIAL Condensed ﬁnancial information pertaining only to the parent company, Sussex Bancorp, is as follows: BALANCE SHEETS (Dollars in thousands) Assets December 31, 2016 2015 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets Liabilities and Stockholders’ Equity Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . $ 129 89,956 2,919 $93,004 $ 92 5,000 27,840 60,072 $93,004 $ 69 65,986 1,466 $67,521 $ 693 — 12,887 53,941 $67,521 STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Dollars in thousands) Interest expense on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses Loss before income tax beneﬁt and equity in undistributed net Income tax beneﬁt income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before equity in undistributed net income of subsidiaries . . . . Equity in undistributed net income of subsidiaries . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2016 $ (52) (391) (203) (646) 243 (403) 5,926 5,523 $5,680 2015 $ — (220) (311) (531) 179 (352) 4,052 3,700 $3,617 F-44 SUSSEX BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 — PARENT COMPANY ONLY FINANCIAL − (continued) STATEMENTS OF CASH FLOWS (Dollars in thousands) Cash Flows from Operating Activities: Year Ended December 31, 2016 2015 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,523 $ 3,700 Adjustments to reconcile net income to net cash provided by operating activities: Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in undistributed net income of subsidiaries Net Cash Provided by Operating Activities . . . . . . . . . . . . . . 852 (5,926) 449 1,699 (4,052) 1,347 Cash Flows from Investing Activities: Capital contribution to subsidiaries . . . . . . . . . . . . . . . . . . . Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . (19,568) (19,568) Cash Flows from Financing Activities: Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . Proceeds from subordinated debenture, net of issuance costs of $47 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash Provided by (Used in) Financing Activities . . . . . . . . . . . . . . . . . . . . Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents − Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents − End of Year (752) 5,000 14,953 4 (26) 19,179 60 69 129 $ — — (746) — — — (533) (1,279) 68 1 69 $ NOTE 22 — CONTINGENCIES In the normal course of business, the Company is subject to various lawsuits involving matters generally incidental to its business. Management is of the opinion that the ultimate liability, if any, resulting from any pending actions or proceedings will not have a material effect on the ﬁnancial condition or results of operations of the Company. F-45 Exhibit Number 3.1 3.2 4.1 4.2 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* EXHIBIT LIST 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). Form of Subordinated Note Certiﬁcate (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K ﬁled with the SEC on December 22, 2016). 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). 10.12* 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). 10.13* 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). 10.14* 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). Exhibit Number 10.15* 10.16* 10.17* 10.18* 21.1 23.1 31.1 31.2 32.1** 101** Description 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 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 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended. Certiﬁcations of Chief Executive Officer and Chief Financial Officer pursuant 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. to Rules 13a-14(a) and to 18 U.S.C. * 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. [This page intentionally left blank.] [This page intentionally left blank.] [This page intentionally left blank.] DIRECTORS AND EXECUTIVE OFFICERS BOARD OF DIRECTORS: SUSSEX BANK AND SUSSEX BANCORP EDWARD J. LEPPERT Chairman of the Board PATRICK BRADY RICHARD BRANCA KATHERINE H. CARISTIA MARK J. HONTZ ANTHONY LABOZZETTA President and Chief Executive Officer REV. TIMOTHY MARVIL MICHAEL X. MCBRIDE ROBERT MCNERNEY EXECUTIVE OFFICERS: SUSSEX BANK ANTHONY LABOZZETTA President and Chief Executive Officer STEVEN M. FUSCO Senior Executive Vice President and Chief Financial Officer VITO GIANNOLA Executive Vice President and Chief Retail Officer SERGIO MUSACCHIO Executive Vice President and Chief Lending Officer NICOLE BARTUCCELLI Senior Vice President and Chief Credit Officer RICHARD GLICINI Senior Vice President and Chief Administrative Officer TRI-STATE INSURANCE AGENCY GEORGE LISTA President and Chief Executive Officer SENIOR OFFICERS ADRIANO DUARTE Senior Vice President/ Assistant Financial Officer RYAN PEENE Senior Vice President/ Government Banking & Corporate Development JANET KERR Senior Vice President/ Sussex & Morris Team Leader RENE MIRANDA Senior Vice President/ Bergen Team Leader CHRISTIAN SZEGDA Senior Vice President/ Hudson Team Leader JUAN OELOFSE Senior Vice President/ NY Metro Team Leader LOCATIONS BANKING CENTERS NEW JERSEY: Andover 165 Main Street Andover, NJ 07821 973-786-5150 Augusta 100 Route 206 Augusta, NJ 07822 973-940-7950 Franklin 399 Route 23 Franklin, NJ 07416 973-827-2404 Montague 266 Clove Road Montague, NJ 07827 973-293-3488 Newton 15 Trinity Street Newton, NJ 07860 973-383-2211 NEW YORK: Astoria 28-21 Astoria Blvd Astoria, NY 11102 347-472-1727 OFFICES Regional Office & Corporate Center 100 Enterprise Drive Suite 700 Rockaway, NJ 07866 844-256-7238 Tri-State Insurance Agency 96 Route 206 Augusta, NJ 07822 973-579-6776 296 Kinderkamack Road Oradell, NJ 07649 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 Wantage 378 Route 23 Wantage, NJ 07461 973-875-9957 Heath Village* 430 Schooley’s Mtn. Rd. Hackettstown, NJ 07840 908-645-0398 *For residents only. Regional Lending Offices 100 Enterprise Drive Suite 700 Rockaway, NJ 07866 15 Boulder Hills Blvd Wantage, NJ 07461 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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