SB One Bancorp Annual Report 2016

FY2016 Annual Report · SB One Bancorp
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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

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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.

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DIRECTORS AND EXECUTIVE OFFICERS

BOARD OF DIRECTORS: SUSSEX BANK AND SUSSEX BANCORP

EDWARD J. LEPPERT  
Chairman of the Board

PATRICK BRADY

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