100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
844-CLOSE-2-U
844-256-7328
sussexbank.com
LOCATIONS
BRANCHES
Andover
165 Route 206
Andover, NJ 07821
973-786-5150
Augusta
100 Route 206
Augusta, NJ 07822
973-940-7950
Franklin
399 Route 23
Franklin, NJ 07416
973-827-2404
Montague
266 Clove Road
Montague, NJ 07827
973-293-3488
Newton
15 Trinity Street
Newton, NJ 07860
973-383-2211
Astoria
28-21 Astoria Blvd
Astoria, NY 11103
347-472-1727
Maywood
125 W Pleasant Ave
Maywood, NJ 07607
201-587-1221
*For residents only.
Oradell
296 Kinderkamack Road
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
Fair Lawn
12-79 River Road
Fair Lawn, NJ 07410
201-791-0101
Rochelle Park
210 Rochelle Ave
Rochelle Park, NJ 07662
201-843-2300
OFFICES
Regional Offices
& Corporate Centers
15 Boulder Hills Blvd
Wantage, NJ 07461
844-256-7328
100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
844-256-7238
18 Railroad Ave
Rochelle Park, NJ 07662
201-587-1223
Tri-State Insurance
Agency
96 Route 206
Augusta, NJ 07822
973-579-6776
296 Kinderkamack Road
Oradell, NJ 07649
201-490-4695
Regional Lending
Offices
15 Boulder Hills Blvd
Wantage, NJ 07461
100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
296 Kinderkamack Road
Oradell, NJ 07649
201-490-4695
18 Railroad Avenue
Rochelle Park, NJ 07662
201-587-1223
2017
ANNUAL
REPORT
INVESTOR INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
STOCK INFORMATION
Sussex Bancorp’s Common Stock is traded
on the Nasdaq Global Market using the
symbol “SBBX”.
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10007
800-937-5449
www.amstock.com
INDEPENDENT AUDITORS
BDO USA, LLP
100 Park Ave
New York, NY 10017
GENERAL COUNSEL
Windels Marx, Lane and Mittendorf
120 Albany Street Plaza, 6th Floor
New Brunswick, NJ 08901
SEC COUNSEL
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
INVESTOR INFORMATION
Steven M. Fusco, CFO
100 Enterprise Drive, Suite 700
Rockaway, NJ 07866
844-256-7328
Information on Sussex Bancorp, Inc.
can also be found at:
sussexbank.com
BOARD OF DIRECTORS: SUSSEX BANK AND SUSSEX BANCORP
EDWARD J. LEPPERT
ANTHONY LABOZZETTA
PATRICK BRADY
RICHARD BRANCA
KATHERINE H. CARISTIA
DOMINICK D'AGOSTA
Chairman of the Board
President and
Chief Executive Offi cer
MARK J. HONTZ
WALTER E. LOEFFLER
MICHAEL X. MCBRIDE
ROBERT MCNERNEY
PETER MICHELOTTI
EXECUTIVE OFFICERS: SUSSEX BANK
ANTHONY LABOZZETTA
STEVEN M. FUSCO
Senior Executive
PETER MICHELOTTI
Senior Executive
VITO GIANNOLA
Senior Executive
RICHARD GLICINI
Senior Vice
Vice President and
Vice President and
Vice President and
President and Chief
Chief Financial
Chief Operating
Chief Banking
Offi cer
Offi cer
Offi cer
Administrative
Offi cer
President and
Chief Executive
Offi cer
NICOLE BARTUCCELLI
GADA ELKENANI
RENE MIRANDA
TRI-STATE INSURANCE
Market Executive
Market Executive
AGENCY
Senior Vice
President and
Chief Credit Offi cer
GEORGE LISTA
President and
Chief Executive
Offi cer
SENIOR
MANAGEMENT
ADRIANO DUARTE
Senior Vice President/
Assistant Financial Offi cer
RYAN J. PEENE
Senior Vice President/
Government Banking &
Corporate Development
JANET KERR
Senior Vice President/
Morris/Sussex Team Leader
CHRISTIAN SZEGDA
Senior Vice President/
Hudson Team Leader
JUAN OELOFSE
Senior Vice President/
NY Metro Team Leader
JOSEPH LOMORIELLO
Senior Vice President/
Bergen Team Leader
ANTHONY DANDOLA
Senior Vice President/
Risk Management Offi cer
CECELIA
MCMULLEN-JAMES
Senior Vice President/
Operations
FROM THE
CHAIRMAN
OF THE BOARD
“
“
Although traditionally
focused on maximizing
organic growth, we’ve
always kept an open
mind to expanding the
franchise via a strategic
partnership with the
right organization.
”
Dear Fellow Shareholders,
2017 was an outstanding year for our company in many ways. We surpassed our
previous earnings record set in 2016 by 39.4%, our stock price increased 28.5%,
our assets grew by 15.4%, and asset quality and capital ratios remained strong.
Our CEO will provide more details on the 2017 results in his report on the
following pages. As expected, Tony and his management team guided our
organization to another remarkable year. We’ve grown accustomed to this, but
as usual there were many potential distractions along the way. Our team never
lost its focus.
Each year I attempt to provide you with some insight on the state of our company
and take you beyond the fi nancials. Last year I spoke of the like-minded
people in our organization that defi ne our culture and the connection between
organizational success and individual character. Our belief in these guiding
principles led us to an incredible opportunity in 2017.
Although traditionally focused on maximizing organic growth, we’ve always kept
an open mind to expanding the franchise via a strategic partnership with the right
organization. Of all the events that occurred during 2017, the most signifi cant
was reaching an agreement to partner with the people from Community Bank of
Bergen County (CBBC). Simply put, we found a like-minded organization with
attributes that mirrored our own: strong fi nancial metrics, management that we
liked, people that we trusted and leaders that we admired.
We closed the deal in early January 2018, and we welcomed Peter Michelotti
to our team as Chief Operating Offi cer and to the board of directors. We also
welcomed CBBC directors Walter Loeffl er and Dominick D’Agosta to our
board. These gentlemen have a proven track record of protecting shareholder
interests. Their expertise and knowledge of our markets will be invaluable as
we move forward.
Our company is extremely well-positioned to capitalize on the opportunities that
lie ahead. Of equal importance, we’ll stay diligent and seek to avoid pitfalls that
may arise. We’re driven, but also patient. We’ll assess and manage risk while
staying true to our commitment to strategic growth. We’ll continue to invest heavily
in our people, because they are everything.
Rest assured, we are the stewards of your capital.
Thank you for your loyalty to Sussex Bancorp and for the trust you have placed
in me and my fellow directors. I give you my word that we will continue to work
diligently to reward your faith.
Sincerely,
Edward J. Leppert
Chairman of the Board
FROM THE
PRESIDENT
AND CEO
“Continuing to deliver
outstanding returns to
our shareholders would
not be possible without
a dedicated and
engaged workforce.
”
Dear Fellow Shareholders,
It has been eight years since I arrived at Sussex Bank with key executives. What an
amazing journey it has been: resolving the signifi cant credit issues we had to navigate
through, implementing a new culture, developing a new strategic plan and adopting a
new business model. As we evolve, our talented team governed by a strong board of
directors continues to execute our plan. Our capacity to execute has resulted in record
earnings for many years, including 2017. We have strengthened our profi tability
measures, and as a result, you have supported us through an oversubscribed common
stock offering. Our success facilitated our ability to complete a merger, which we
closed in January of 2018. Because of our accomplishments, our shareholders have
realized total returns over the last year, fi ve years and eight years of 30%, 421% and
734%, respectively.
The most exciting part of our journey still lies ahead of us. As a larger Company,
we have more possibilities to attract talent, penetrate new markets and be more
opportunistic with strategic acquisitions as we continue on our journey as a
“higher-performing” Company.
The current operating environment presents many different challenges. Technology,
for example, is driving change at unprecedented levels. While we are cognizant of
the change and continually evaluate our business model and its relationship to our
customers, it is also a time for resiliency. We are reminded of what has propelled our
success: a strong culture that is safeguarded by a set of guiding principles. Rooted in
our principles, we are more focused than ever on deepening the relationships with our
customers and enhancing their experience with our Company.
FINANCIAL PERFORMANCE AND SHAREHOLDER VALUE
In 2017, after adjusting for merger-related expenses and the impact from the
Tax Act on income tax expenses, we again delivered record earnings of $7.7
million or $1.42 per diluted share, up 40% from the prior year. The improvement is
directly linked to the continued success of each of our principal business lines. Due
to our intense focus on deepening the emotional connection with our customers,
our commercial, retail and insurance divisions grew 19.1%, 15.4% and 17.8%,
respectively. As I have mentioned many times, our approach to banking continues to
produce a level of stakeholder advocacy that propels our growth organically. To all of
our employees who live our guiding principles and work hard to execute our vision, I
want to express my gratitude. Thank you for making 2017 another outstanding year
for Sussex Bancorp.
To support our growth, we completed a common stock offering in June of 2017.
We were very pleased with the overwhelming confi dence and support from our
shareholders, which resulted in an oversubscribed and successful common stock
offering of $28.2 million in net proceeds. This additional capital is being used to
support the continued growth of our business. As a result, our capital remains strong.
Our leverage, Common Equity Tier I, Tier I and total risk-based capital ratios are all
well in excess of ratios required to be considered a “well-capitalized” bank. Our year-
over-year (2016 vs. 2017) stock price is up 29%. And over a fi ve year period from
2012 through 2017, our stock price grew an impressive 399%.
FROM THE PRESIDENT AND CEO continued
SUSSEX BANCORP PRICE CHANGE (%)
NASDAQ: SBBX: 399.07%
KBW Nasdaq Bank: 108.09%
SNL U.S. Bank and Thrift: 109.51%
460
410
360
310
260
210
160
110
60
10
-40
DEC
12
JUN
13
DEC
13
JUN
14
DEC
14
JUN
15
DEC
15
JUN
16
DEC
16
JUN
17
DEC
17
GROWTH STRATEGY
Expanding our business remains a key focus for our bank. It can be said that this year was a pivotal year for us. We formed a strategic
partnership through the acquisition of Community Bank of Bergen County, NJ. The partnership has given us more scale in a vibrant
market, and to date we are excited with the progress and momentum.
We have been very successful in expanding into key markets and growing organically. This year we are expanding into Hudson
County, NJ, with the opening of our new banking center in Weehawken, NJ. Attracting and retaining talent continues to be vital to our
success, and the new individuals who will be instrumental to our success in Hudson County are now on staff and beginning to execute
our plan.
In 2018, we will continue to evaluate and invest in technology as we continue our journey to create an integrated digital banking
platform that creates a seamless, unifi ed and consistent customer experience. Our aim is to make banking simple, fast and easy from
anywhere and at any time through the customer’s preferred channel.
Lastly, to grow responsibly, we need to ensure that our infrastructure and risk management capabilities are on par with our growth.
As such, we have made considerable investments to help us manage the increasing scale and complexity of our organization. A part
of that investment includes a new senior risk management offi cer, who will not only oversee regulatory compliance but enhance our
enterprise-wide risk management capabilities.
FROM THE PRESIDENT AND CEO continued
OUR PEOPLE, OUR CUSTOMERS AND OUR COMMUNITIES
Continuing to deliver outstanding returns to our shareholders would not be possible without a dedicated and engaged workforce. We
believe hiring, motivating and rewarding talented people and immersing them in a culture that places an extraordinary premium on
their employee experience leads to a more engaged and results-driven TEAM. This year, we expect to implement the next phase of our
plan, which includes, but is not limited to, improved training, personal development plans and enhanced techniques to measure the
experience of our TEAM.
The customer truly is at the center of everything we do! As our Company grows, we want to ensure that what we consider our
differentiator, our capacity to create advocacy by deepening the emotional connection with our customers, remains strong. As such,
we are taking the next step in our plan and implementing a tool designed to measure our customers' experience and help us determine
what we can do better. Measuring the customer experience will give us a better view on how our customers feel about banking with
us, and once it is benchmarked, we intend to tie these customer experience scores to performance evaluations and reward plans.
We believe that it is our responsibility to support the communities in which we work and live. We do so by volunteering our time, being
members of organizations that serve the needs of our community, contributing money and working hard to raise funds for charitable
causes. Last year, we set new milestones for our program as we led efforts to raise approximately $300,000 in support of local
charitable organizations. We reinforced our commitment by contributing nearly $68,000 to support various local civic and youth
organizations, such as the Boy Scouts of America and the Boys and Girls Club; to aid women and children by supporting Oasis – A
Haven for Women and Children; to foster education through contributions to local high schools and college scholarship programs;
to support our veterans via Homes Fit for Heroes; to help build our communities through Habitat for Humanity; and to support unique
patient care programs like the Karen Ann Quinlan Hospice.
THE ROAD AHEAD
Looking ahead, the financial services industry will face new challenges as well as the rising threat of old risks. Technology and new
disruptors present financial institutions with the challenge to be innovative and rethink their business model. As technology plays an
ever-increasing role in the financial services industry, the growing threat to cyber-security will require more focus.
In addition to the new threats, banks will need to contend with more traditional risks such as liquidity risk and interest rate risk due
to the changing shape of the yield curve and perhaps more pressure on funding. Furthermore, as certain lending markets may have
perceived “bubbles,” it is important to remain disciplined and not loosen underwriting standards.
As we assess these challenges, we again promise to remain focused on delivering exceptional results to all of our stakeholders. Our
guiding principles will ensure that we pay attention to how we achieve our results and maintain a long-term perspective. I am confident
that we have the management team in place that can continue to execute our plan and create long-term shareholder value.
I am grateful for your continued trust and confidence. We look forward to another successful year.
Anthony Labozzetta
President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-29030
SUSSEX BANCORP
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
22-3475473
(I.R.S. Employer Identification No.)
100 Enterprise Drive, Suite 700
Rockaway, New Jersey 07866
(Address of principal executive offices) (Zip Code)
(844) 256-7328
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of exchange on which registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
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
No
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
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
Based upon the closing price of $24.35 on June 30, 2017, the aggregate market value of the voting and non-voting common equity held by non-
affiliates was $147,087,733. The number of shares of the registrant’s common stock, no par value, outstanding as of March 8, 2018 was 7,929,613.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 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, 2017.
FORWARD-LOOKING STATEMENTS
PART I
INDEX
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
ITEM 16.
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
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
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
i
1
1
9
13
14
14
15
16
16
17
17
34
34
35
35
35
36
36
36
36
36
36
37
37
37
[This page intentionally left blank.]
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.
i
[This page intentionally left blank.]
PART I
ITEM 1.
BUSINESS
General
Sussex Bancorp is a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”)
and was incorporated under the laws of the State of New Jersey in January 1996. The Company is the parent company of Sussex
Bank (the “Bank”). The only significant asset of Sussex Bancorp is its investment in the Bank. At December 31, 2017, the
Company had consolidated total assets of $979.4 million, gross loans of $821.7 million, deposits of $762.5 million and stockholders’
equity of $94.2 million.
The Bank is a commercial bank formed under the laws of the State of New Jersey in 1975 and is regulated by the New
Jersey Department of Banking and Insurance (the “Department”) and the Federal Deposit Insurance Corporation (the “FDIC”). The
Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC,
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.
Community Bank of Bergen County, NJ Acquisition
On January 4, 2018, the Company completed the previously announced acquisition of Community Bank of Bergen
County, NJ (“Community”). In connection with the acquisition, Community merged with and into Sussex Bank, with Sussex
Bank continuing as the surviving entity. In connection with the acquisition, the Company also acquired certain subsidiaries of
Community.
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 3 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, and, as of December 31, 2017, 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
1
among the most affluent in the nation. Following the completion of the acquisition of Community Bank of Bergen County, NJ
on January 4, 2018, the Bank has an additional three branches located in Bergen County.
Competition
We operate in a highly competitive environment competing for deposits and loans with commercial banks, thrifts and
other financial institutions, many of which have greater financial resources than us. Many large financial institutions in New York
City and other parts of New Jersey compete for the business of customers located in our service area. Many of these institutions
have significantly higher lending limits than us and provide services to their customers which we do not offer.
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, 2017, we employed 140 full-time employees and 16 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
regulatory agencies. A change in any statute, regulation or policy applicable to the Company and its subsidiaries may have a
material effect on the Company’s operations and financial performance. Financial reform legislation and regulations, including
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), may have adverse implications
on the financial industry, the competitive environment and our ability to conduct business. As a result, we may incur additional
expenses to comply with applicable laws and regulations, which may increase our costs of operations and adversely impact our
earnings.
Overview
The Company is a separate and distinct legal entity from the Bank. As a registered bank holding company, the Company
is regulated under the BHC Act, and is subject to inspection, examination and supervision by the FRB. The Company is also
subject to the jurisdiction of the U.S. Securities and Exchange Commission (“SEC”) and the regulatory requirements of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. The
Company’s common stock is listed on the NASDAQ under the trading symbol, “SBBX,” and the Company is subject to the
NASDAQ rules for listed companies.
The Bank is organized as a state-chartered commercial bank pursuant to the banking laws and regulations of the
Department. The Bank is subject to the supervision of, and to regular examination by, the Department as its primary chartering
authority, as well as by the FDIC as its primary federal regulator and deposit insurer. Financial products and services offered by
the Company and the Bank are subject to federal consumer protection laws and regulations promulgated by the Consumer Financial
Protection Bureau (“CFPB”). The Company, the Bank and certain of its nonbank subsidiaries must also comply with state consumer
protection laws which are enforced by state attorneys general. The Bank`s deposits are insured by the FDIC up to the applicable
deposit insurance limits in accordance with FDIC laws and regulations. The non-bank subsidiaries of the Company and the Bank
are subject to federal and state laws and regulations, including regulations of the FRB, the FDIC and the Department, respectively.
Insurance agencies are licensed by the State of New Jersey and are regulated by the Department under state law.
The Dodd-Frank Act 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.
The BHC Act also generally prohibits a bank holding company, with certain limited exceptions, from (i) acquiring or
retaining direct or indirect ownership or control of more than 5% of the outstanding voting stock of any company which is not a
bank or bank holding company; or (ii) engaging directly or indirectly in activities other than those of banking, managing or
controlling banks, or performing services for its subsidiaries, unless such non banking business is determined by the FRB to be
so closely related to banking or managing or controlling banks “as to be properly incident thereto”. In making such determinations,
the FRB is required to weigh the expected benefits to the public, such as, greater convenience, increased competition or gains in
efficiency, against the possible adverse effects, such as, undue concentration of resources, decreased or unfair competition, conflicts
of interest or unsound banking practices.
Bank holding companies whose subsidiary banks meet certain capital, management and standards under the CRA, that
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.
Mergers and Acquisitions
The BHC Act, the Bank Merger Act, and other federal and state statures regulate the direct and indirect acquisition of
depository institutions. The BHC Act requires the prior FRB approval for a bank holding company to acquire, directly or indirectly,
5% or more of any class of voting securities of commercial bank or its parent holding company and fore a company, other than
a bank holding company, to acquire 25% or more of any class of voting securities of a bank or bank holding company. Under the
Change in Bank Control Act, any person, including a company, may not acquire, directly or indirectly, control of a bank without
providing 60 days` prior notice and receiving a non-objection from the appropriate federal banking agency.
Under the Bank Merger Act, the prior approval of the appropriate federal banking agency is required for insured depository
institutions to merge or enter into purchase and assumption transactions. In reviewing applications seeking approval of merger
and purchase and assumption transactions, the federal banking agencies will consider, among other things, the competitive effect
and public benefits of the transactions, the capital position of the combined banking organization, the applicant`s performance
record under the CRA, and the effectiveness of the subject organizations in combating money laundering activities. For further
information relating to the CRA, see the "Community Reinvestment Act of 1977".
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 the Bank. 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.
3
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 is fully compliant with the Volcker
Rule. Given the Company’s size and the scope of its activities, the Company's implementation of the Volcker Rule had no significant
effect on its financial statements.
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 comprehensive 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 “Additional Tier 1 capital” instruments
meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to
CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as
compared to existing regulations. The Capital Rules revised the definitions and the components of regulatory capital and impacted
the calculation of the numerator in banking institutions’ regulatory capital ratios. The Capital Rules became effective for the 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;
4
•
•
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 (the “leverage
ratio”).
The Capital Rules also requires a “capital conservation buffer,” composed entirely of CET1, in addition to 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 investments in non-consolidated financial entities be deducted from CET1 to the
extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. The deduction
and adjustments will be incrementally phased in between January 1, 2015 and January 1, 2019.
In addition, under the prior general risk-based capital rules, the effects of accumulated other comprehensive income or
loss (“AOCI”) items included in shareholders’ equity (for example, marks-to-market of securities held in the available-for-sale
portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to 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.
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 increases 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.
Pursuant to Section 38 of the Federal Deposit Insurance Act (the "FDIA"), federal banking agencies are required to take
"prompt corrective action" should a depository institution fail to meet certain capital adequacy standards. For purposes of prompt
corrective action, to be: (i) well-capitalized, a bank must have a total risk based capital ratio of at least 10%, a Tier 1 risk based
capital ratio of at least 8%, a CET1 risk based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately
capitalized, a bank must have a total risk based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii)
undercapitalized, a bank would have a total risk based capital ratio of less than 8%, a Tier 1 risk based capital ratio of less than
6%, a CET1 risk based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized,
a bank would have a total risk based capital ratio of less than 6%, a Tier 1 risk based capital ratio of less than 4%, a CET1 risk
based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%; and (v) critically undercapitalized, a bank would
have a ratio of tangible equity to total assets that is less than or equal to 2%.
Bank holding companies and insured banks also may be subject to potential enforcement actions of varying levels of
severity by the federal banking agencies 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 prohibition orders against officers, directors, and other institution-affiliated parties; the termination of the 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 insurance assessments, the FDIA provides for additional assessments to be imposed on insured depository
institutions to pay for the cost of Financing Corporation (“FICO”) funding. The FICO is a mixed-ownership government
corporation established by the Competitive Equality Banking Act of 1987, whose sole purpose was to function as a financing
vehicle for the now defunct Federal Savings & Loan Insurance Corporation. The FICO assessments are adjusted quarterly to
reflect changes in the assessment base of the DIF and do not vary depending upon a depository institution’s capitalization or
supervisory evaluation.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that an insured depository institution has
engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable
law, regulation, rule, order or condition imposed by the FDIC. The Company’s management is not aware of any practice, condition
or violation that might lead to the termination of deposit insurance.
Reserve Requirements
FRB regulations require insured depository institutions to maintain non-interest earning reserves against their transaction
accounts (primary interest-bearing and regular checking accounts). The Bank’s required reserves can be in the form of vault
cash. If vault cash does not fully satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank
of New York. In 2017 FRB regulations required that reserves be maintained against aggregate transaction accounts, except for
transaction accounts which are exempt up to $15.5 million. Transaction accounts greater than $15.5 million up to and including
$115.1 million have a reserve requirement of 3%. A 10% reserve ratio will be assessed on transaction accounts in excess of $115.1
million. The FRB makes annual adjustments to the tiered reserves. The Bank was in compliance with these reserve requirements.
Transactions with Affiliates and Insiders
Under federal law, transactions between insured depository institutions and their affiliates are governed by Sections 23A
and 23B of the Federal Reserve Act (“FRA”) and its implementing Regulation W. In a bank holding company context, at a minimum,
the parent holding company of a bank, and any companies which are controlled by such parent holding company, are affiliates of
the bank. Generally, sections 23A and 23B of the FRA are intended to protect insured depository institutions from losses arising
from transactions with non-insured affiliates by limiting the extent to which a bank or its subsidiaries may engage in covered
transactions with any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on
terms consistent with safe and sound banking practices.
Further, Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and
principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with
all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Loans to insiders above
specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h) of the FRA, loans to
directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable
transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation
program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section
22(g) of the FRA places additional limitations on loans to executive officers.
6
Anti-Money-Laundering
The Bank Secrecy Act (“BSA”), as amended by the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), imposes obligations on U.S. financial institutions,
including banks and broker-dealer subsidiaries, to implement policies, procedures and controls which are reasonably designed to
detect and report instances of money laundering and the financing of terrorism. The USA PATRIOT Act requires all financial
institutions, including the Company and the Bank, to identify their customers, adopt formal and comprehensive anti-money
laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries
from U.S. law enforcement agencies concerning their customers and their transactions. The USA PATRIOT Act also encourages
information-sharing among financial institutions, regulators, and law enforcement authorities by providing an exemption from
the privacy provisions of the GLB Act for financial institutions that comply with this provision. The 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, 2017, 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
financial protection 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. The Dodd-Frank Act does not 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.
Community Reinvestment Act of 1977
The Bank has a responsibility under the CRA 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 consistent with the CRA. 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`s failure to comply with the Equal Credit Opportunity
Act of the Fair Housing Act could result in enforcement actions. The Bank received a “Satisfactory” CRA rating in its most recent
examination.
7
Financial Privacy and Data Security
The Company is subject to federal laws, including the Gramm-Leach-Bliley Act (the “GLBA”), and certain state laws
containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to
disclose non-public information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer
information received from non-affiliated institutions. These provision require notice of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties
by means of “opt out” or “opt in” authorizations.
The GLBA requires that financial institutions implement comprehensive written information security programs that
include administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive
guidance issued under the GLBA and certain state laws, financial institutions are required to notify customers of security breaches
that result in unauthorized access to their nonpublic personal information.
The federal banking agencies, including the FRB, through the Federal Financial Institutions Examination Council
(“FFIEC”) have adopted guidelines to encourage financial institutions to address cybersecurity risks and identify, assess, and
mitigate these risks, both internally and at critical third party services providers. FFIEC has provided a Cybersecurity Assessment
Toll for institutions to identity and address cybersecurity risks in their systems.
The Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act of 2003 (“FACT
Act”), Red Flags Rule requires financial institutions with covered accounts (e.g., consumer bank accounts and loans) to develop,
implement, and administer an identity theft prevention program. This program must include reasonable policies and procedures
to detect suspicious patterns or practices that indicate the possibility of identity theft, such as inconsistencies in personal information
or changes in account activity.
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, federal and state legislatures may introduce legislation that will impact the financial services industry.
In addition, the federal banking agencies may introduce regulatory initiatives that are likely to impact the financial services industry.
However, it is not clear whether such changes will be enacted or, if enacted, what effect such changes would have on the Company.
New legislative and regulatory initiatives are introduced by Congress, state legislatures, and financial regulatory agencies. Such
initiatives may include proposals to expand or contract the powers of bank holding companies and/or depository institutions or
proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and
the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or
decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings
associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be
enacted, and, if enacted, the effect that it or any implementing regulations would have on the financial condition or results of
operations of the Company. A change in statutes, regulations, or regulatory policies applicable to the Company or any of its
subsidiaries could have a material effect on the business of the Company.
Available Information
We file annual reports, quarterly reports, proxy statements and other documents with the SEC under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). The public may read and copy any materials that we file with the SEC
at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains
8
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.
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 347% of Bank total risk-based capital at December 31, 2017.
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, 2017, 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 $9.2 million, which was a decrease
of $120 thousand or 1.3% from December 31, 2016. 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
9
value of properties in the other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees
associated with the resolution of problem assets as well as carrying costs, including taxes, insurance and maintenance related to
our other real estate owned. Further, the resolution of NPAs requires the active involvement of management, potentially distracting
them from the overall supervision of our operations and other income-producing activities.
Our earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and exploit
opportunities to generate fee-based income.
We have experienced growth, and our future business strategy is to continue to expand. Historically, the growth of our
loans and deposits has been the principal factor in our increase in net-interest income. In the event that we are unable to execute
our business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. Our ability to continue
to grow depends, in part, upon our ability to expand our market share, to successfully attract core deposits and identify loan and
investment opportunities, as well as opportunities to generate fee-based income. Our ability to manage growth successfully will
also depend on whether we can continue to efficiently fund asset growth and maintain asset quality and cost controls, as well as
on factors beyond our control, such as economic conditions and interest-rate trends.
We do not have any control over the commissions our insurance business expects to earn on the sale of insurance products,
which are based on premiums and commission rates set by insurers and the conditions prevalent in the insurance market.
The revenues of our fee-based insurance business are derived primarily from commissions from the sale of insurance
policies, which commissions are generally calculated as a percentage of the policy premium. Commission rates and premiums
can change based on the prevailing economic and competitive factors that affect insurance underwriters. In addition, the insurance
industry has been characterized by periods of intense price competition due to excessive underwriting capacity and periods of
favorable premium levels due to shortages of capacity. We cannot predict the timing or extent of future changes in commission
rates or premiums or the effect any of these changes will have on the operations of our insurance business.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our profitability, like that of most financial institutions, depends substantially on our net interest income, which is the
difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing
liabilities. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate
loans. In addition, as market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits, which
will result in a decrease of our net interest income.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in interest rates may affect
the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans
and mortgage-related securities as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable
to the rates on existing loans and securities.
Certain of our intangible assets may become impaired in the future.
Intangible assets are tested for impairment on a periodic basis. Impairment testing incorporates the current market price
of our common stock, the estimated fair value of our assets and liabilities, and certain information of similar companies. It is
possible that future impairment testing could result in a decline in value of our intangibles, which may be less than the carrying
value, which may adversely affect our financial condition. If we determine that impairment exists at a given point in time, our
earnings and the book value of the related intangibles will be reduced by the amount of the impairment. Notwithstanding the
foregoing, the results of impairment testing on our intangible assets have no impact on our tangible book value or regulatory capital
levels.
We operate in a highly-regulated environment and are subject to extensive government supervision and regulation that affects
our operations and may adversely impact our business.
We are subject to extensive federal and state supervision and regulation that govern nearly all aspects of our operations
and can have a material impact on our business. Financial regulatory authorities have significant discretion regarding the
supervision, regulation and enforcement of banking laws and regulations.
Banking and insurance laws, regulations and policies are subject to amendment by Congress, the State of New Jersey
and federal and state financial regulatory agencies. Changes to statutes, regulations or policies, including changes in the
10
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 “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. The Dodd-Frank Act, among other laws and regulations, has
increased our costs of doing business and resulted in decreased revenues and net income. Several mandates of the Dodd-Frank
Act are still subject to further rulemaking and could have adverse implications on the financial industry, the competitive environment
and our ability to conduct business. 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 insurance. The Department, as the
supervisory and regulatory authority for state-chartered banks, has similar enforcement powers with respect to our banking business
and insurance agency. The CFPB has the authority to take enforcement actions, including cease-and-desist orders or civil monetary
penalties against us if it finds that we offer consumer financial products and services in violation of federal consumer financial
protection laws.
If we were unable to comply with future regulatory directives, or if we were unable to comply with the terms of any
future supervisory requirements to which we may become subject, then we could become subject to a variety of supervisory actions
and orders, including cease and desist orders, prompt corrective actions, MOUs, and/or other regulatory enforcement actions. If
our financial regulators were to take such supervisory actions, then we could, among other things, become subject to greater
restrictions on our ability to develop any new business, as well as restrictions on our existing business, and we could be required
to raise additional capital, dispose of certain assets and liabilities within a prescribed period of time, or both. Failure to implement
remedial measures as required by financial regulatory agencies could result in additional orders or penalties from federal and state
regulators, which could result in one or more of the remedial actions described above. The terms of any supervisory action and
associated consequences with any failure to comply with any supervisory action could have a material negative effect on our
business, operating flexibility and overall financial condition.
There is a risk that we may not be repaid in a timely manner, or at all, for loans we make.
The risk of non-payment (or deferred or delayed payment) of loans is inherent in commercial banking. Such non-payment,
or delayed or deferred payment of loans to us, if they occur, may have a material adverse effect on our earnings and overall financial
condition. Additionally, in compliance with applicable banking laws and regulations, we maintain an allowance for loan losses
created through charges against earnings. As of December 31, 2017, our allowance for loan losses was $7.3 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.
11
We are in competition with many other financial service providers, including larger commercial banks which have greater
resources than us.
The banking industry within our trade area is highly competitive. Our principal market area is also served by branch
offices of large commercial banks and thrift institutions. In addition, the Gramm-Leach-Bliley Financial Modernization Act of
1999 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.
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 Banking Officer, Market
Executive and Chief Executive Officer of Tri-State, and the loss of the services of one or more of our executive officers and key
personnel could impair our ability to continue to develop our business strategy.
Changes in local economic conditions could adversely affect our loan portfolio.
Our success depends to a great extent upon the general economic conditions of the local markets that we serve. Unlike
larger banks that are more geographically diversified, we provide banking and financial services primarily to customers in the
New Jersey and New York markets in which we have branches, so any decline in the economy of this specific region could have
an adverse impact on us.
The ability of our borrowers to repay their loans, our financial results, the credit quality of our existing loan portfolio,
and the ability to generate new loans with acceptable yield and credit characteristics may be adversely affected by changes in
prevailing economic conditions, including declines in real estate values, changes in interest rates, adverse employment conditions
and the monetary and fiscal policies of the federal government. We cannot assure you that negative trends or developments would
not have a significant adverse effect on us.
We cannot predict how changes in technology will impact our business.
The financial services market, including banking services, is increasingly affected by advances in technology, including
developments in telecommunications, data processing, automation, internet-based banking, telephone banking, and debit cards
and so-called “smart cards.”
Our ability to compete successfully in the future will depend on whether we can anticipate and respond to technological
changes. To develop these and other new technologies, we will likely have to make additional capital investments. Although we
continually invest in new technology, we cannot assure you that we will have sufficient resources or access to the necessary
proprietary technology to remain competitive in the future.
Our information systems may experience an interruption or breach in security.
We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach
in security of these systems could result in failures or disruptions in our customer-relationship management, general ledger, deposit,
loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption
or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches
will not occur, or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security
breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect
on our financial condition and results of operations.
12
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
13
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, 2017. Following the completion of the acquisition of
Community Bank of Bergen County, NJ on January 4, 2018, the Bank has a corporate operation center and three additional
branches located in Bergen County. We believe that our existing facilities are sufficient for our current needs. All properties are
adequately covered by insurance.
LOCATION
YEAR OPENED
LEASED OR OWNED
28-21 Astoria Blvd
Astoria, New York
399 Route 23
Franklin, New Jersey
7 Church Street
Vernon, New Jersey
266 Clove Road
Montague, New Jersey
96 Route 206
Augusta, New Jersey
378 Route 23
Wantage, New Jersey
455 Route 23
Wantage, New Jersey
15 Boulder Hills Blvd.
Wantage, New Jersey
15 Trinity Street
Newton, New Jersey
165 Route 206
Andover, New Jersey
100 Route 206
Augusta, New Jersey
33 Main Street
Sparta, New Jersey
100 Enterprise Drive, Suite 700
Rockaway, New Jersey
430 Schooley's Mtn. Road
Hackettstown, New Jersey
296 Kinderkamack Road
Oradell, New Jersey
2015
1976
1980
1982
1983
2007
1992
2014
1991
1992
2000
2001
2014
2014
2016
Leased
Owned
Owned
Leased
Leased
Owned
Owned (1)
Leased
Owned
Owned
Owned
Owned
Leased
Leased
Leased
(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.
14
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, 2017, we
had approximately 520 holders of record.
The following table shows the high and low sales price during the periods indicated, as well as dividends declared:
2017
Fourth Quarter ended December 31
Third Quarter ended September 30
Second Quarter ended June 30
First Quarter ended March 31
2016
Fourth Quarter ended December 31
Third Quarter ended September 30
Second Quarter ended June 30
First Quarter ended March 31
Dividend Policy
High
$28.00
$25.45
$28.55
$26.45
High
$21.95
$16.95
$14.00
$13.45
Low
$23.60
$19.75
$23.18
$19.55
Low
$16.33
$13.33
$12.20
$11.43
Cash
Dividends
Declared
$0.06
$0.06
$0.06
$0.04
Cash
Dividends
Declared
$0.04
$0.04
$0.04
$0.04
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, 2017.
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 2017.
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))
2017
As of and for the Year Ended December 31,
2014
2015
2016
2013
SUMMARY OF INCOME:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other income
Other expenses
Income before income tax expense (benefit)
Income tax expense (benefit)
Net income
WEIGHTED AVERAGE NUMBER OF SHARES: (1)
Basic
Diluted
$
$
35,699
6,611
29,088
1,586
27,502
8,285
25,617
10,170
4,479
5,691
$
$
29,160
4,762
24,398
1,291
23,107
7,829
22,585
8,351
2,828
5,523
$
$
23,644
3,568
20,076
636
19,440
6,453
20,553
5,340
1,640
3,700
$
$
21,300
3,294
18,006
1,537
16,469
5,961
18,829
3,601
1,001
2,600
$
$
19,642
3,201
16,441
2,745
13,696
6,093
18,228
1,561
133
1,428
5,359,430
5,404,381
4,619,124
4,651,108
4,559,316
4,591,822
4,541,305
4,580,350
3,781,562
3,816,904
$
$
$
$
$
$
$
$
$
$
1.20
1.19
0.16
0.57
0.57
0.09
1.06
1.05
0.22
0.81
0.81
0.16
0.38
0.37
—
386,981
533,911
430,297
46,425
529,152
42,382
537,833
684,503
517,856
53,941
627,298
52,715
466,332
595,915
458,270
51,229
559,885
49,494
813,365
979,383
762,491
94,193
914,747
79,329
688,561
848,728
660,921
60,072
770,470
57,518
PER SHARE DATA:
Basic earnings per share
Diluted earnings per share
Cash dividends (2)
BALANCE SHEET:
Loans, net
Total assets
Total deposits
Total stockholders’ equity
Average assets
Average stockholders’ equity
PERFORMANCE RATIOS:
Return on average assets
Return on average stockholders’ equity
Average equity/average assets
Net interest margin
Efficiency ratio (3)
Other income to net interest income plus other income
Dividend payout ratio
CAPITAL RATIOS: (4)
Tier I capital to average assets
Tier I capital to total risk-weighted assets
Total capital to total risk-weighted assets
Common equity Tier 1 capital to total risk-weighted assets
ASSET QUALITY RATIOS:
Non-accrual loans to total loans
Non-performing assets to total assets (5)
Net loan charge-offs to average total loans
Allowance for loan losses to total loans at period end
Allowance for loan losses to non-performing loans (6)
(1) The weighted average number of shares outstanding was computed based on the average number of shares outstanding during each period as adjusted for
0.72%
9.60%
7.47%
3.37%
70.08%
24.29%
13.45%
0.62%
7.17%
8.67%
3.39%
68.54%
22.17%
20.95%
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%
—
0.73%
0.94%
0.13%
0.89%
105.51%
0.84%
1.10%
0.03%
0.96%
95.93%
1.26%
2.02%
0.33%
1.20%
74.23%
0.98%
1.49%
0.14%
1.03%
81.43%
3.03%
3.10%
0.65%
1.38%
39.73%
10.41%
12.87%
13.86%
12.87%
11.86%
14.26%
15.17%
14.26%
10.19%
12.79%
14.02%
N/A
9.45%
11.74%
12.79%
11.74%
10.38%
14.21%
15.47%
N/A
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.
17
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. The net interest margin increased by 2 basis points to 3.39%
for year ended December 31, 2017 as compared to 3.37% for 2016.
For 2017, our net income increased to $5.7 million, or $1.05 per diluted share, or a 3.0% increase, as compared to net
income of $5.5 million, or $1.19 per diluted share, for the same period last year. For 2017, our core net income (a non-GAAP
measurement) was $7.7 million, or $1.42 per diluted share. The increase in net income for the twelve months ended December
31, 2017 was largely due to an increase in net interest income of $4.7 million, which was partially offset by an increase in non-
interest expenses of $3.0 million and income tax expenses from the Tax Cuts and Jobs Act of 2017 (“Tax Act”) of $942 thousand.
The increase in non-interest expenses was largely due to a $1.7 million increase in salaries and employee benefits and merger-
related expenses of $1.2 million. Excluding expenses related to the acquisition of Community Bank of Bergen County, NJ, of
$1.2 million and the associated income tax benefit of $166 thousand, net income increased $1.2 million, or 21.5%, for the year
ended December 31, 2017.
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 $125.4 million, or 18.0%, to $820.7 million at December 31,
2017, from $695.3 million at year-end 2016. This increase was primarily attributed to growth in the commercial loan portfolio.
Our total deposits increased $101.6 million, or 15.4%, to $762.5 million at December 31, 2017, from $660.9 million at December
31, 2016. The increase in deposits was primarily due to an increase in interest bearing deposits of $87.8 million, or 16.6% for
December 31, 2017, as compared to December 31, 2016.
We continued to make progress in 2017 towards reducing our problem assets. For 2017, we had a 1.3% improvement
in NPAs and our total problem assets, which consists of foreclosed real estate and criticized and classified loans, declined by 7.1%
as compared to 2016. In addition, the ratio of NPAs to total assets improved to 0.9% at December 31, 2017 from 1.1% at December
31, 2016.
At December 31, 2017, our total stockholders’ equity was $94.2 million, an increase of $34.1 million when compared to
December 31, 2016. The increase was largely due to the capital raise of approximately $28.0 million and net income for the year
ended December 31, 2017. At December 31, 2017, the leverage, Tier I risk-based capital, total risk-based capital and common
equity Tier I capital ratios for the Bank were 11.86%, 14.26%, 15.17% and 14.26%, respectively, all in excess of the ratios required
to be deemed “well-capitalized.”
Management Strategy
Our goal is to serve as a community-oriented financial institution serving northern New Jersey and the New York
marketplace. While offering traditional community bank loan and deposit products and services, we obtain significant non-interest
income through Tri-State’s insurance brokerage operations. We report the operations of Tri-State as a separate segment from our
commercial banking operations. See Note 2 to our consolidated financial statements contained elsewhere in this report for additional
information regarding our two segments.
18
Critical Accounting Policies
Our accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition
and Results of Operations. Our accounting policies are more fully described in Note 1 to our consolidated financial statements
included elsewhere in this report. The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and
accompanying notes. Since future events and their effect cannot be determined with absolute certainty, actual results may differ
from those estimates. Management makes adjustments to its assumptions and judgments when facts and circumstances
dictate. The amounts currently estimated by us are subject to change if different assumptions as to the outcome of future events
are subsequently made. We evaluate our estimates and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Management believes the following critical accounting policies encompass
the more significant judgments and estimates used in preparation of our consolidated financial statements.
Allowance for Loan Losses. The allowance for loan losses reflects the amount deemed appropriate by management to
provide for known and inherent losses in the existing loan portfolio. Management’s judgment is based on the evaluation of the
past loss experience of individual loans, the assessment of current economic conditions, and other relevant factors. Loan losses
are charged directly against the allowance for loan losses and recoveries on previously charged-off loans are added to the
allowance. Management uses significant estimates to determine the allowance for loan losses. Consideration is given to a variety
of factors in establishing these estimates, including current economic conditions, diversification of the loan portfolio, delinquency
statistics, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent,
or present value of future cash flows, and other relevant factors. Since the sufficiency of the allowance for loan losses is dependent
to a great extent on conditions that may be beyond our control, it is possible that management’s estimates of the allowance for
loan losses and actual results could differ in the near term. Although we believe that we use the best information available to
establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause
actual results to differ from the assumptions used in making the evaluation. For example, a downturn in the local economy could
cause increases in non-performing loans. Additionally, a decline in real estate values could cause some of our loans to become
inadequately collateralized. In either case, this may require us to increase our provisions for loan losses, which would negatively
impact earnings. Additionally, a large loss could deplete the allowance and require increased provisions to replenish the allowance,
which would negatively impact earnings. Finally, regulatory authorities, as an integral part of their examination, periodically
review the allowance for loan losses. They may require additions to the allowance for loan losses based upon their judgments
about information available to them at the time of examination. Future increases to our allowance for loan losses, whether due
to unexpected changes in economic conditions or otherwise, could adversely affect our future results of operations.
Appraisal Policy. We have a detailed policy covering the real estate appraisal process, including the selection of qualified
appraisers, review of appraisal reports upon receipt, and complying with the federal regulatory standards that govern the minimum
requirements for obtaining appraisals or evaluations to support the determination of the allowance for loan losses. Appraisals and
evaluations are considered to be current when the valuation date is within 12 months of a new loan or 24 months of any renewal
of an existing loan, provided that certain conditions are met. The appraisal is not considered to be current if there has been a
substantial change in value, demand, supply or competitive factors.
The following types of transactions require a real estate appraisal:
• Non-residential transactions when the transaction value exceeds $250,000.
• Loan transactions in which real estate is used as the primary security for the loan, regardless of the type of loan
(commercial, installment or mortgage), including:
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.
19
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 an appraisal
if the orderly liquidation of the collateral is the primary source of repayment. To the extent that an appraisal is not required for a
real estate collateralized transaction, we will obtain for its credit files another acceptable form of valuation (i.e. equalized value
with a reasonable market relevance or evaluation).
Additionally, real estate appraisals are not required on transactions over $250,000 when taking a lien on real property as
collateral solely through an “abundance of caution,” and where the terms of the transaction have not been made more favorable
than would have been in the absence of the mortgage lien. In determining whether an appraisal can be waived due to this reason,
approval must be obtained from our Chief Credit Officer.
Generally, we obtain updated appraisals for real estate loan renewals and modifications or certain classified loans
depending on the age of the last appraisal, volatility of the local market, and other factors. In certain circumstances, if we can
support an appraisal that is greater than one year old with an evaluation, utilizing current information, including, but not limited
to, current comparable sales, independent appraisal, consultant data or tax assessment values, then we may continue to use the
existing appraisal. For classified/criticized loans, when it is determined that a deficiency exists utilizing the above evaluation
methods, a new appraisal will be ordered.
Foreclosed real estate is primarily comprised of property acquired through a foreclosure proceeding or acceptance of a
deed-in-lieu of foreclosure. Foreclosed real estate is initially recorded at fair value, less cost to sell at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of carrying amount or fair value less costs to sell. Revenues and expenses from operations and changes in
the valuation allowance are included in expenses related to foreclosed real estate.
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 affects 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.
20
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.
Goodwill. We have recorded goodwill of $2.8 million at December 31, 2017, 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, 2017 deposits
originated in that branch were $9.2 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
2017 and 2016.
Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management
judgments. Among these are future growth rates, discount rates and earnings capitalization rates. Changes in assumptions and
results due to economic conditions, industry factors and reporting unit performance could result in different assessments of the
fair value and could result in impairment charges in the future.
Investment Securities Impairment Evaluation. The Company periodically evaluates the security portfolio to determine
if a decline in the fair value of any security below its cost basis is other-than-temporary. The Company’s evaluation of other-than-
temporary impairment considers the duration and severity of the impairment, the company’s intent and ability to hold the securities
and our assessments of the reason for the decline in value and the likelihood of a near-term recovery. If a determination is made
that a debt security is other-than-temporarily impaired, the Company will estimate the amount of the unrealized loss that is
attributable to credit and all other non-credit related factors. The credit related component will be recognized as an other-than-
temporary impairment charge in non-interest income. The non-credit related component will be recorded as an adjustment to
AOCI, net of tax. For held to maturity securities, the amount of an other-than-temporary impairment recorded in other
comprehensive income for the noncredit portion of a previous other-than-temporary impairment should be amortized prospectively
over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. No available for
sale and held to maturity securities at December 31, 2017 or December 31, 2016 were deemed to be impaired.
21
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: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly,
for substantially the full term of the asset or liability. Level 2 includes debt securities with quoted prices
that are traded less frequently then exchange-traded instruments. Valuation techniques include matrix
pricing which is a mathematical technique used widely in the industry to value debt securities without
relying exclusively on quoted market prices for the specific securities but rather by relying on the
securities’ relationship to other benchmark quoted prices.
Level 3:
Prices or valuation techniques that require inputs that are both significant to the fair value measurement
and unobservable (i.e., supported with little or no market activity).
Under ASC Topic 820, we base our fair values on the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of
observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the
fair value hierarchy in FASB ASC Topic 820. Fair value measurements for assets where there exists limited or no observable
market data and, therefore, are based primarily upon our or other third-party’s estimates, are often calculated based on the
characteristics of the asset, the economic and competitive environment and other such factors. Management uses its best judgment
in estimating the fair value of our financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of
the amounts we could have realized in sales transaction on the dates indicated. The estimated fair value amounts have been
measured as of their respective period end and have not been re-evaluated or updated for purposes of these financial statements
subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective
reporting dates may be different than the amounts reported at each period-end. Additionally, changes in the underlying assumptions
used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
COMPARISON OF FINANCIAL CONDITION AT YEAR-END DECEMBER 31, 2017 AND 2016
General. At December 31, 2017, we had total assets of $979.4 million compared to total assets of $848.7 million at
December 31, 2016, an increase of $130.7 million, or 15.4%. Gross loans increased $125.4 million, or 18.0%, to $820.7 million
at December 31, 2017, from $695.3 million at December 31, 2016. Total deposits increased 15.4% to $762.5 million at December
31, 2017, from $660.9 million at December 31, 2016.
Cash and Cash Equivalents. Our cash and cash equivalents decreased $3.0 million, or 20.4%, at December 31, 2017
to $11.6 million from $14.6 million at December 31, 2016.
Securities Portfolio. Our securities portfolio is designed to provide interest income, 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.
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, 2017, 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
22
unrealized loss position, and it is more likely than not that we will not have to sell any of our securities before recovery of its cost
basis.
Our available for sale securities are carried at fair value while securities held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts. Unrealized gains and losses on securities available for sale are excluded
from results of operations, and are reported as a separate component of stockholders’ equity net of taxes. Securities classified as
available for sale include securities that may be sold in response to changes in interest rates, changes in prepayment risk, the need
to increase regulatory capital or other similar requirements. Management determines the appropriate classification of securities at
the time of purchase.
The following table shows the carrying value of our available for sale security portfolio as of December 31, 2017, 2016
and 2015.
(Dollars in thousands)
U.S. government agencies
U.S. government sponsored agencies
State and political subdivisions
Mortgage-backed securities
U.S. government-sponsored enterprises
Corporate debt
Total available for sale
December 31,
2017
2016
2015
$
18,861
$
13,087
$
12,788
6,061
41,234
30,544
2,030
—
40,688
32,854
1,982
—
38,149
42,839
—
$
98,730
$
88,611
$
93,776
Our securities available for sale, increased by $10.1 million, or 11.4%, to $98.7 million at December 31, 2017 from
$88.6 million at December 31, 2016. During 2017, we purchased $61.2 million in new securities, $42.6 million in securities were
sold and $8.5 million in securities matured, were called or were repaid. At December 31, 2017, there was an unrealized gain of
$449 thousand in securities available for sale as compared to an unrealized loss of $1.2 million at December 31, 2016. During
2017 there was a net realized loss of $9 thousand on the sale of available for sale securities as compared to a $436 thousand realized
gain in 2016.
We had $5.3 million of our security portfolio classified as held to maturity at December 31, 2017, a decrease of $6.3
million from December 31, 2016. Held to maturity securities, carried at amortized cost, consist of the following at December 31,
2017, 2016 and 2015.
(Dollars in thousands)
State and political subdivisions
Total held to maturity securities
2017
2016
2015
$
$
5,304
5,304
$
$
11,618
11,618
$
$
6,834
6,834
The securities portfolio contained no high-risk securities or derivatives as of December 31, 2017.
23
The contractual maturity distribution and weighted average yield of our available for sale securities at December 31,
2017, 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
Due 1-5 Years
Due 5-10 Years
Due over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
U.S. Government agencies
U.S. Government sponsored agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
Corporate debt
Total Available for Sale
$
$
—
—
—
—
—
—
—% $
—%
—%
—%
—%
—
—
—
—% $
—%
—%
1,524
—
1.68%
—%
—% $
1,524
1.68% $
—
—
2,953
795
2,000
5,748
—% $
18,799
—%
3.04%
6,054
37,517
1.80%
5.13%
28,639
—
3.59% $
91,009
2.11%
2.11%
2.92%
2.35%
—%
2.52%
The contractual maturity distribution and weighted average yield of our securities held to maturity, at cost, at December
31, 2017, are summarized in the following table. Weighted average yield is calculated by dividing income within each maturity
range by the outstanding amount of the related investment and has not been tax-effected on the tax-exempt obligations.
(Dollars in thousands)
Held to maturity:
Due under 1 Year
Due 1-5 Years
Due 5-10 Years
Due over 10 Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
State and political subdivisions
Total held to maturity
$
$
2,477
2,477
1.36% $
1.36% $
254
254
2.00% $
2.00% $
2,040
2,040
3.88% $
3.88% $
533
533
3.17%
3.17%
We held $4.9 million in Federal Home Loan Bank of New York (“FHLBNY”) stock at December 31, 2017 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, 2017, increased $125.4 million, or 18.0%, to $820.7 million from $695.3 million at December 31, 2016.
Loan growth for 2017 occurred primarily in commercial real estate loans (an increase of $72.2 million, or 15.1%) and residential
real estate loans (an increase of $21.6 million, or 14.4%).
The following table summarizes the composition of our loan portfolio by type as of December 31, 2013 through 2017:
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Total gross loans
December 31,
2017
2016
2015
2014
2013
$
54,759
$
40,280
$
20,023
$
20,549
$
42,484
551,445
171,844
1,130
25,360
479,227
150,237
1,038
13,348
382,262
127,204
1,253
12,379
326,370
111,498
1,665
15,205
7,307
260,664
107,992
1,617
$
821,662
$
696,142
$
544,090
$
472,461
$
392,785
The increase in loans was primarily funded during 2017 by an increase in our deposits and capital raise.
24
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, 2017, are presented in the following table.
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total loans
Interest rates:
Fixed or predetermined
Floating or adjustable
Total loans
December 31, 2017
Due Under
1 Year
Due 1-5
Years
Due Over
5 Years
$
23,099
$
14,382
$
24,391
26,398
4,253
381
78,522
74,712
3,810
78,522
$
$
$
2,973
17,709
3,065
257
38,386
28,528
9,858
38,386
$
$
$
$
$
$
17,278
15,120
507,338
164,526
492
704,754
145,429
559,325
704,754
Loan and Asset Quality. NPAs consist of non-accrual loans, loans over 90 days delinquent and still accruing interest,
troubled debt restructured loans still accruing and foreclosed real estate. Total NPAs decreased by $120 thousand, or 1.3%, to
$9.2 million at year-end 2017 from $9.3 million at year-end 2016. The ratio of NPAs to total assets for December 31, 2017 and
December 31, 2016 were 0.9% and 1.1%, respectively.
Our non-accrual loan balance increased $187 thousand, or 3.2%, to 6.0 million at December 31, 2017, from $5.8 million
at December 31, 2016. Troubled debt restructured loans still accruing increased $253 thousand, or 37.3%, to $932 thousand at
December 31, 2017, from $679 thousand at December 31, 2016. Foreclosed assets decreased $92 thousand to $2.3 million at
December 31, 2017, from $2.4 million at December 31, 2016.
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, 2013
through 2017.
(Dollars in thousands)
Non-accrual loans:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total nonaccrual loans
Loans past due 90 days and still accruing
Troubled debt restructured loans still accruing
Total non-performing loans
Foreclosed real estate
Total non-performing assets
Non-accrual loans to total loans
Non-performing assets to total assets
Interest income received on nonaccrual loans
Interest income that would have been recorded
under the original terms of the loans
2017
2016
2015
2014
2013
December 31,
33
—
4,048
1,752
—
5,833
468
679
6,980
2,367
9,347
0.84%
1.10%
165
213
$
$
$
$
$
20
—
4,016
1,138
138
5,312
—
1,553
6,865
3,354
$
94
—
3,936
1,893
1
5,924
85
1,590
7,599
4,449
10,219
$
12,048
$
0.98%
1.49%
138
264
$
$
1.26%
2.02%
138
301
$
$
—
—
9,700
2,192
—
11,892
123
1,628
13,643
2,926
16,569
3.03%
3.10%
122
774
$
$
$
$
20
105
4,313
1,582
—
6,020
—
932
6,952
2,275
9,227
0.73%
0.94%
157
210
$
$
$
$
25
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, 2017,
we had two loans totaling $4.9 million that we deemed potential problem loans. Management is actively monitoring these loans.
Future increases in the allowance for loan losses may be necessary based on the growth of the loan portfolio, the change
in composition of the loan portfolio, possible future increases in non-performing loans and charge-offs, and the impact of
deterioration of the real estate and economic environments in our lending region. Although we use the best information available,
the level of allowance for loan losses remains an estimate that is subject to significant judgment and short-term change. For
additional information, see Critical Accounting Policies above and as more fully described in Note 1 to our consolidated financial
statements included elsewhere in this report.
Allowance
for Loan Losses.
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
loan
for
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, 2017, the allowance for loan losses was $7.3 million, an increase of $639 thousand, or 9.5%, from
$6.7 million at December 31, 2016. The provision for loan losses was $1.6 million and there were $973 thousand in charge-offs
and $26 thousand in recoveries during 2017. The allowance for loan losses as a percentage of total loans was 0.89% at December
31, 2017 compared to 0.96% at December 31, 2016. The decrease in allowance for loan losses as percentage of total loans is
mostly due to an increase in loans and a decrease in non-performing, classified, and impaired loans as a percentage of total loans
at December 31, 2017 as compared to December 31, 2016.
The table below presents information regarding our provision and allowance for loan losses for each of the periods
presented.
(Dollars in thousands)
Balance at beginning of year
Provision charged to operating expenses
Recoveries of loans previously charged-off:
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 outstanding
Allowance for loan losses total loans at year-end
Year Ended December 31,
2017
2016
2015
2014
2013
$
$
6,696
1,586
$
5,590
1,291
$
5,641
636
$
5,421
1,537
4,976
2,745
2
7
10
7
26
13
—
874
49
37
973
947
268
37
21
7
333
227
—
187
67
37
518
185
17
41
17
7
82
19
—
560
165
25
769
687
$
7,335
$
6,696
$
5,590
$
0.13%
0.89%
26
0.03%
0.96%
0.14%
1.03%
17
39
4
10
70
1
—
1,168
181
37
1,387
1,317
5,641
0.33%
1.20%
$
122
450
112
12
696
55
350
2,317
246
28
2,996
2,300
5,421
0.62%
1.38%
The table below presents details concerning the allocation of the allowance for loan losses to the various categories for
each of the periods presented. The allocation is made for analytical purposes and it is not necessarily indicative of the categories
in which future credit losses may occur. The total allowance is available to absorb losses from any category of loans.
Allowance for Loans Losses at December 31,
2017
2016
2015
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
(Dollars in thousands)
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
Percent
of Loans
in Each
Category
to Total
Amount
Percent
of Loans
in Each
Category
to Total
Amount
$
$
208
336
5,185
1,032
26
548
7,335
6.7% $
5.2%
67.1%
20.9%
0.1%
—
100.0% $
110
359
3,932
899
19
1,377
6,696
Percent
of Loans
in Each
Category
to Total
3.7%
2.5%
70.2%
23.4%
0.2%
—
Amount
85
220
3,646
784
87
768
5.8% $
3.6%
68.9%
21.6%
0.1%
—
100.0% $
5,590
100.0%
Allowance for Loans Losses at December 31,
2014
2013
Percent
of Loans
in Each
Category
to Total
4.3% $
2.6%
69.1%
23.6%
0.4%
—
Amount
222
308
3,399
941
16
535
Percent
of Loans
in Each
Category
to Total
3.9%
1.8%
66.4%
27.5%
0.4%
—
$
Amount
231
383
3,491
903
19
614
$
5,641
100.0% $
5,421
100.0%
Bank-owned Life Insurance. Our BOLI carrying value increased to $22.1 million at December 31, 2017 from $16.5
million at December 31, 2016. The increase was principally the result of the addition of two policies for $2.0 million and $3.0
million during the second quarter of 2017. Additionally there was $522 thousand in net earnings on BOLI policies in 2017.
Deposits. Total deposits increased $101.6 million, or 15.4%, to $762.5 million at December 31, 2017, from $660.9
million at December 31, 2016. The increase in deposits was due to increases in interest bearing demand deposits of $70.9 million,
or 20.5%, mainly attributable to a $43.3 million increase in brokered money market deposits, time deposits of $16.9 million, or
9.3%, and non-interest bearing transaction deposits of $13.7 million, or 10.4%, for December 31, 2017, as compared to December
31, 2016. Our funding mix continued to improve as non-interest deposits increased.
Total average deposits increased $123.7 million from $601.2 million for the year ended December 31, 2016 to $724.9
million for the year ended December 31, 2017, a 20.6% increase. Average NOW accounts increased $37.8 million, or 25.9%,
from $145.7 million for 2016 to $183.5 million for 2017. Average demand accounts increased $21.7 million, or 18.4% from
$117.9 million for 2016 to $139.6 million for 2017. Average time deposits increased $8.3 million, or 5.1%, from $162.9 million
for 2016 to $171.2 million for 2017. Average money market balances increased $56.5 million, or 152.4%, from $37.0 million for
2016 to $93.5 million for 2017. Average savings accounts decreased $576 thousand or 0.4%, from $137.7 million for 2016 to
$137.1 million for 2017. Increases to average NOW accounts, demand, time deposits and money market balances were partly
offset by the aforementioned decrease in savings accounts.
27
The average balances and weighted average rates paid on deposits for 2017, 2016 and 2015 are presented below.
Year Ended December 31,
(Dollars in thousands)
Balance
Rate
Balance
Rate
Balance
Rate
2017 Average
2016 Average
2015 Average
Demand, non-interest bearing
$
NOW
Money market
Savings
Time
Total deposits
$
139,611
183,457
93,505
137,120
171,163
724,856
—% $
0.32%
0.90%
0.21%
1.09%
0.49% $
117,927
145,659
37,046
137,696
162,864
601,192
—% $
0.21%
0.40%
0.21%
1.05%
0.41% $
86,016
130,569
17,287
139,120
119,256
492,248
—%
0.17%
0.20%
0.20%
1.03%
0.36%
The remaining maturity for certificates of deposit accounts of $100,000 or more as of December 31, 2017 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
$
65,798
15,356
12,542
20,802
$
114,498
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, 2017, we had $35.0 million in long-term FHLB advances outstanding
at a weighted average interest rate of 1.67%.
The following table summarizes short-term borrowings and weighted average interest rates paid during the past three
years.
(Dollars in thousands)
Average daily amount of short-term borrowings outstanding during the period
Weighted average interest rate on average daily short-term borrowings
Maximum short-term borrowings outstanding at any month-end
Short-term borrowings outstanding at period end
Weighted average interest rate on short-term borrowings at period end
Year Ended December 31,
2017
2016
2015
$
$
$
$
$
$
19,713
1.21%
60,696
55,350
1.58%
$
$
$
27,304
0.63%
62,535
29,805
0.79%
8,778
0.43%
34,650
34,650
0.52%
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, 2017 was 3.03%. 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.
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 $15 million private placement of fixed-to-
floating rate subordinated notes to an institutional investor. The subordinated notes have a maturity date of December 22, 2026
28
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 $94.2 million at December 31, 2017, an increase
of $34.1 million, from the $60.1 million at year-end 2016. The increase in stockholders’ equity was mostly due to a capital raise
of approximately $28.0 million, used to fund loans, and $5.7 million in net income in 2017, which was offset by $1.2 million in
dividends declared during 2017.
COMPARISON OF OPERATING RESULTS FOR YEAR-END DECEMBER 31, 2017 AND 2016
Results of Operations. Our net income is impacted by five major components and each of them is reviewed in more
detail in the following discussion:
•
•
•
•
net interest income, or the difference between interest income earned on loans and investments and interest expense
paid on deposits and borrowed funds;
provision for loan losses, or the amount added to the allowance for loan losses to provide reserves for inherent losses
on loans;
non-interest income, which is made up primarily of certain loan and deposit fees, insurance commissions and gains
and losses from sales of securities or other transactions;
non-interest expense, which consists primarily of salaries, employee benefits, credit collection and write-off costs,
merger-related expenses and other operating expenses; and
•
income taxes.
For the year ended December 31, 2017, the Company reported net income of $5.7 million, or $1.05 per diluted share, or
a 3.0% increase, as compared to net income of $5.5 million, or $1.19 per diluted share, for the same period last year. For 2017,
our core net income (a non-GAAP measurement) was $7.7 million, or $1.42 per diluted share. The increase in net income for the
year ended December 31, 2017 was largely due to an increase in net interest income of $4.7 million, which was partially offset
by increases in non-interest expenses of $3.0 million and income tax expenses of $1.7 million; $942 thousand of the increase in
income tax expense was the result of remeasuring deferred tax assets based on the reduced corporate tax rate under the newly
enacted Tax Act from 34% to 21%. The increase in non-interest expenses was largely due to an $1.7 million increase in salaries
and employee benefits and merger-related expenses of $1.2 million.
Net Interest Income. Net interest income is the most significant component of our income from operations. Net interest
income is the difference between interest earned on total interest-earning assets (primarily loans and investment securities), on a
fully taxable equivalent basis, where appropriate, and interest paid on total interest-bearing liabilities (primarily deposits and
borrowed funds). Fully taxable equivalent basis represents income on total interest-earning assets that is either tax-exempt or taxed
at a reduced rate, adjusted to give effect to the prevailing incremental federal tax rate, and adjusted for nondeductible carrying
costs and state income taxes, where applicable. Yield calculations, where appropriate, include these adjustments. Net interest
income depends on the volume and interest rate earned on interest-earning assets and the volume and interest rate paid on interest-
bearing liabilities.
29
Comparative Average Balance and Average Interest Rates. The following table presents, on a fully taxable equivalent
basis (a non-GAAP measurement), 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, 2017, 2016 and 2015. The average balances of loans include
non-accrual loans, and associated yields include loan fees, which are considered adjustment to yields.
(Dollars in thousands)
2017
2016
Year Ended December 31,
Average
Balance
Average
Average
Interest
Rate (2)
Balance
Interest
Average
Rate (2)
Average
Balance
2015
Interest
Average
Rate (2)
Earning Assets:
Securities:
Tax exempt (3)
Taxable
Total securities
Total loans receivable (1) (4)
Other interest-earning assets
Total earning assets (3)
Non-interest earning assets
Allowance for loan losses
Total Assets
Sources of Funds:
Interest bearing deposits:
NOW
Money market
Savings
Time
Total interest bearing deposits
Borrowed funds
Subordinated debentures
Total interest bearing liabilities
Non-interest bearing liabilities:
Demand deposits
Other liabilities
Total non-interest bearing
liabilities
Stockholders' equity
1,918
1,437
3,355
32,953
35
36,343
$
46,449
$
64,636
111,085
756,766
8,611
876,462
45,398
(7,113)
1,247
1,443
2,690
26,862
23
29,575
4.13% $
32,359
$
2.22%
3.02%
4.35%
0.41%
4.15%
69,225
101,584
625,399
9,440
736,423
40,106
(6,059)
1,348
1,239
2,587
21,497
9
24,093
3.85% $
33,688
$
2.08%
2.65%
4.30%
0.24%
4.02%
65,402
99,090
488,963
7,109
595,162
37,834
(5,698)
$ 914,747
$ 770,470
$ 627,298
584
843
285
1,872
3,584
1,749
1,278
6,611
$ 183,457
$
93,505
137,120
171,163
585,245
78,551
27,844
691,640
139,611
4,167
143,778
79,329
313
148
286
1,702
2,449
1,922
391
4,762
0.32% $ 145,659
$
0.90%
0.21%
1.09%
0.61%
2.23%
4.59%
0.96%
37,046
137,696
162,864
483,265
93,974
13,256
590,495
117,927
4,530
122,457
57,518
227
35
282
1,228
1,772
1,576
220
3,568
0.21% $ 130,569
$
0.40%
0.21%
1.05%
0.51%
2.05%
2.95%
0.81%
17,287
139,120
119,256
406,232
65,600
12,887
484,719
86,016
3,848
89,864
52,715
4.00%
1.89%
2.61%
4.40%
0.13%
4.05%
0.17%
0.20%
0.20%
1.03%
0.44%
2.40%
1.71%
0.74%
Total Liabilities and Stockholders'
Equity
$ 914,747
$ 770,470
$ 627,298
Net Interest Income and Margin (3)
(5)
Tax-equivalent basis adjustment (3)
Net Interest Income
3.39%
29,732
(644)
$
29,088
24,813
(415)
$
24,398
3.37%
20,525
3.45%
(449)
$
20,076
Includes loan fee income
(1)
(2) Average rates on securities are calculated on amortized costs
(3) Full taxable equivalent basis, using a 34% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense
disallowance
(4) Loans outstanding include non-accrual loans
(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets
Net interest income on a fully tax equivalent basis increased $4.9 million, or 19.8%, to $29.7 million for the year ended December
31, 2017 as compared to $24.8 million for the same period in 2016. Included in the increase in net interest income was $635
thousand in prepayment penalties on $54.9 million of commercial loans, an increase of $544 thousand, or 601.2%, as compared
to the same period in 2016. The net interest margin increased by 2 basis points to 3.39% for the year ended December 31, 2017,
as compared to the same period in 2016.
Interest Income. Total interest income, on a fully taxable equivalent basis, increased $6.8 million, or 22.9%, to $36.3 million
for the year ended December 31, 2017 as compared to $29.6 million for the same period in 2016. The increase in interest income
was largely due to a $140.0 million, or 19.0%, increase in average interest earning assets, principally loans receivable, which
30
increased $131.4 million, or 21.0%. The increase in average balance was partly complimented by an increase in average rate of
13 basis points to 4.15% for the year ended December 31, 2017 as compared to the same period in 2016. The increase in average
rate was mostly attributed to a 37 basis point increase in the average rate earned on securities.
Interest income from securities, on a fully taxable equivalent basis, increased $665 thousand, or 24.7%, for the year ended December
31, 2017 compared to the same period in 2016. The increase was due to an increase in the average balance of the securities
portfolio of $9.5 million, or 9.4%, to $111.1 million for the year ended December 31, 2017 as compared to the same period in
2016. The increase in the average balance of the securities portfolio was complimented by an increase in the average rate of 37
basis points to 3.02% for 2017 from 2.65% for 2016.
Interest income from the loan portfolio increased by $6.1 million, or 22.7%, to $33.0 million for 2017 from $26.9 million for
2016. The improvement was due to an increase in the average balance on loans, which increased $131.4 million, or 21.0%, for
the year ended December 31, 2017 as compared to the same period in 2016. The increase in the average balance on loans was
complimented by an increase of 5 basis points in the average rate on the loan portfolio for the year ended December 31, 2017 as
compared to the same period in 2016.
Interest Expense. Total interest expense increased $1.8 million, or 38.8%, to $6.6 million for the year ended December 31, 2017
from $4.8 million for the same period in 2016. The increase was principally due to growth in the average balance of interest-
bearing deposits of $102.0 million and average balance of subordinated debentures of $14.6 million in 2017 compared to 2016. The
average rate increased 15 basis points for 2017 compared to 2016.
The following table reflects the impact on net interest income from changes in the volume of earning assets and interest bearing
liabilities and changes in rates earned and paid by us on such assets and liabilities. For purposes of this table, nonaccrual loans
have been included in the average loan balance. Changes due to both volume and rate have been allocated in proportion to the
relationship of the dollar amount change in each.
(Dollars in thousands)
Securities:
Tax exempt (1)
Taxable
Total securities
Total loans receivable (2)
Other interest-earning assets
Total net change in income on interest-earning
assets
Interest bearing deposits:
NOW
Money market
Savings
Time
Total interest bearing deposits
Borrowed funds
Subordinated debentures
Total net change in expense on interest-bearing
liabilities
Change in net interest income
December 31, 2017 v. 2016
December 31, 2016 v. 2015
Increase (decrease)
Due to changes in:
Rate
Volume
Total
Volume
Increase (decrease)
Due to changes in:
Rate
Total
$
$
577
(99)
478
5,715
(2)
6,191
95
381
(1)
89
564
(333)
590
94
93
187
376
14
577
176
314
—
81
571
160
297
$
$
671
(6)
665
6,091
12
(52) $
75
23
5,871
4
(49) $
129
80
(506)
10
(101)
204
103
5,365
14
6,768
5,898
(416)
5,482
271
695
(1)
170
1,135
(173)
887
28
61
(3)
456
542
606
6
58
52
7
18
135
(260)
165
86
113
4
474
677
346
171
821
5,370
$
1,028
(451) $
1,849
4,919
$
1,154
4,744
$
$
40
(456) $
1,194
4,288
(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 $295 thousand to $1.6 million for the year ended December 31,
2017, as compared to $1.3 million for the same period in 2016. The increase in the provision for loan losses for the year-ended
December 31, 2017 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 2017 and the effects of current economic environment and
changes in real estate collateral values from the time the loans were originated. Our non-accrual loans increased $187 thousand,
or 3.2%, to $6.0 million at December 31, 2017 from $5.8 million at December 31, 2016. We believe these loans are adequately
provided for in our loan loss allowance or are sufficiently collateralized at December 31, 2017. The provision for loan losses
31
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 7 to our consolidated financial
statements herein for further discussion.
Non-Interest Income. Non-interest income consists of all income other than interest and dividend income and is principally
derived from: service charges on deposits; insurance commission income; commissions on sales of annuities and mutual funds;
ATM and debit card income; BOLI income; and net gains on sale of securities and loans. We recognize the importance of
supplementing net interest income with other sources of income as we continue to explore new opportunities to generate non-
interest income.
Non-interest income increased $456 thousand, or 5.8%, to $8.3 million for the year ended December 31, 2017 as compared to the
same period last year. The increase was principally due to growth of $530 thousand in insurance commissions and fees relating
to Tri-State Insurance Agency and an increase of $214 thousand in bank owned life insurance, due to an increase in investments
in bank owned life insurance. The aforementioned were partly offset by a reduction in gain on sales of securities of approximately
$453 thousand.
Non-Interest Expense. Total non-interest expense increased $3.0 million, or 13.4%, to $25.6 million for the year ended December
31, 2017 as compared to the same period last year. The increase for the year ended December 31, 2017, as compared to the same
period in 2016, was largely due to increases in salaries and employee benefits of $1.7 million, merger-related expenses of $1.2
million associated with the acquisition of Community Bank of Bergen County, NJ, professional fees of $385 thousand, and other
expenses of $270 thousand and was partly offset by decreases of $245 thousand in FDIC assessment fees and $175 in expenses
and write-downs related to foreclosed real estate. The increase in salaries and employee benefits for 2017 as compared to 2016
was largely due to an increase in personnel to support the Company’s growth.
Income Taxes. The provision for income taxes was $4.5 million and $2.8 million for 2017 and 2016, respectively. Our effective
tax rate was 44.0% and 33.9% for 2017 and 2016, respectively. The increase in income tax expense and effective rate for the year
ended December 31, 2017 was primarily attributable to growth in pre-tax income from taxable sources and the re-measurement
of deferred tax assets based on the reduced corporate tax rate under the newly enacted Tax Act, which added $942 thousand in tax
expenses and increased the effective tax rate by 9.3%. See Notes 1 and 18 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, 2017, total deposits amounted to $762.5 million, an increase of $101.6 million, or
15.4%, from December 31, 2016 At December 31, 2017, borrowings from the FHLBNY and Atlantic Central Bankers Bank
("ACBB") and subordinated debentures totaled $118.2 million and represented 12.1% of total assets as compared to $123.6 million
and 14.6% of total assets, at December 31, 2016.
Loan production continued to be our principal investing activity. Net loans at December 31, 2017 amounted to $813.4 million, an
increase of $124.8 million, or 18.1%, from December 31, 2016.
Our most liquid assets are cash and cash equivalents. At December 31, 2017, the total of such assets amounted to $11.6 million,
or 1.2%, of total assets, compared to $14.6 million, or 1.7%, of total assets at year-end 2016. Another significant liquidity source
32
is our available for sale securities. At December 31, 2017, available for sale securities amounted to $98.7 million compared to
$88.6 million at year-end 2016.
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 $113.7
million through its membership in the FHLBNY and $10.0 million line of credit at ACBB at December 31, 2017. 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 7.25% and Total risk based capital as of risk-adjusted
assets of 9.25% at a minimum, both including the capital conservation buffer. At December 31, 2017, the Bank’s Tier I and Total
risk based capital ratios were 14.28% and 15.19%, 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, 2017, the Bank had a leverage ratio of 11.87%.
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, 2017 totaled $181.7
million, which consisted of $87.6 million in commitments to grant commercial and residential loans, $93.6 million in unfunded
commitments under lines of credit and $485 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 2017. Our real estate loan portfolio, concentrated largely in northern New Jersey, is subject to risks
associated with the local and regional economies. Our primary source of market risk exposure arises from changes in market
interest rates (“interest rate risk”).
Interest Rate Risk
Interest rate risk is generally described as the exposure to potentially adverse changes in current and future net interest income
resulting from: fluctuations in interest rates, product spreads, and imbalances in the repricing opportunities of interest-rate-sensitive
assets and liabilities. Therefore, managing our interest rate sensitivity is a primary objective of our senior management. Our Asset/
Liability Committee (“ALCO”) is responsible for managing the exposure to changes in market interest rates. We review a variety
of strategies that project changes in asset or liability mix and the impact of those changes on projected net interest income and net
income.
Current and future sensitivity to changes in interest rates are measured through the use of balance sheet and income simulation
models. The analyses capture changes in net interest income using flat rates as a base, a most likely rate forecast and rising and
declining interest rate forecasts. Changes in net interest income and net income for the forecast period, generally twelve to twenty-
33
four months, are measured and compared to policy limits for acceptable change. There are a variety of reasons that may cause
actual results to vary considerably from the predictions presented below which include, but are not limited to, the timing, magnitude,
and frequency of changes in interest rates, interest rate spreads, prepayments, and actions taken in response to such changes.
Specific assumptions used in the simulation model include instantaneous and permanent yield curve shifts for market rates and
current asset and liability spreads to market interest rates are fixed.
The following table sets forth our interest rate risk profile at December 31, 2017 and 2016. 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, 2017
+200bp
0bp
-100bp
December 31, 2016
+200bp
0bp
-100bp
Net Portfolio Value(2)
Net interest Income
Estimated Increase
(Decrease)
Estimated
NPV(1)
Amount
Percent
Estimated
Net Interest
Income (3)
Estimated Increase
(Decrease)
Amount
Percent
$
$
$
$
$
$
88,038
108,285
105,903
84,321
104,340
83,419
$
$
$
$
(20,247)
—
(2,382)
(20,019)
—
(20,921)
(18.7)% $
— $
(2.2)% $
(19.2)% $
— $
(20.1)% $
27,375
31,523
31,860
24,274
26,101
24,880
$
$
$
$
(4,148)
(13.2)%
—
337
(1,827)
—
(1,221)
—
1.1 %
(7.0)%
—
(4.7)%
(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 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.
34
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.
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, 2017. In making this assessment, management
used criteria set forth in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment, management concluded that as of December 31, 2017, our internal
control over financial reporting is operating as designed and is effective based on the COSO criteria.
Our independent registered public accounting firm, BDO USA, LLP, that audited the consolidated financial
statements has issued an audit report on the effectiveness of the Company’s internal controls over financial reporting as of December
31, 2017. The report can be found on F-2.
ITEM 9B. OTHER INFORMATION
None.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information included in our Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders (the “Proxy
Statement”) under the following captions is incorporated herein by reference: “Proposal 1- Election of Directors,” “Information
About Our Board of Directors,” “Information About Our Executive Officers Who Are Not Directors,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Corporate Governance – Code of Ethics and Corporate Governance Guidelines,” “Corporate
Governance – Committees of the Board of Directors – Nominating and Corporate Governance Committee” and “Corporate
Governance - Committees of the Board of Directors – Audit Committee.”
ITEM 11. EXECUTIVE COMPENSATION
The information included in the Proxy Statement under the following captions is incorporated herein by reference:
“Executive Compensation” and “Director Compensation.”
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information included in the Proxy Statement under the following captions is incorporated herein by reference:
“Securities Authorized For Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners
and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information included in the Proxy Statement under the following captions is incorporated herein by reference:
“Transactions with Related Persons” and “Corporate Governance – Board of Directors Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information included in the Proxy Statement under the following caption is incorporated herein by reference: “Proposal
2 – Ratification of Appointment of Independent Registered Public Accounting Firm - Independent Registered Public Accounting
Firm Fees and Services.”
36
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUSSEX BANCORP
/s/ Anthony Labozzetta
Anthony Labozzetta
President and Chief Executive Officer
Dated: March 15, 2018
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and appoints Anthony Labozzetta and Steven M. Fusco,
and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and
lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K, and to
file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act
and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on March 15, 2018.
37
[This page intentionally left blank.]
Name
/s/ Anthony Labozzetta
Anthony Labozzetta
/s/ Steven M. Fusco
Steven M. Fusco
/s/ Peter A. Michelotti
Peter A. Michelotti
/s/ Patrick Brady
Patrick Brady
/s/ Richard Branca
Richard Branca
/s/ Katherine H. Caristia
Katherine H. Caristia
/s/ Dominick D`Agosta
Dominick D`Agosta
/s/ Mark J. Hontz
Mark J. Hontz
/s/ Edward J. Leppert
Edward J. Leppert
/s/ Walter Loeffler
Walter Loeffler
/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)
Chief Operating Officer and Senior Executive Vice President
(Principal Operating Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
[This page intentionally left blank.]
Tel: 732-750-0900
Fax: 732-750-1222
www.bdo.com
90 Woodbridge Center Dr., 4th Floor
Woodbridge, NJ 07095
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Sussex Bancorp
Rockaway, New Jersey
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sussex Bancorp (the “Company”)
and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income
and comprehensive income, stockholders’ equity, and cash flows for the years then ended, and
the related notes (collectively referred to as the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the
results of their operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and
our report dated March 15, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on
our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2013.
Woodbridge, New Jersey
March 15, 2018
F-1
Tel: 732-750-0900
Fax: 732-750-1222
www.bdo.com
90 Woodbridge Center Dr., 4th Floor
Woodbridge, NJ 07095
Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors
Sussex Bancorp
Rockaway, New Jersey
Opinion on Internal Control over Financial Reporting
We have audited Sussex Bancorp’s (the “Company’s”) internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO criteria”). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of Sussex Bancorp (the
“Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements
of income and comprehensive income, stockholders’ equity, and cash flows for the years then ended,
and the related notes, and our report dated March 15, 2018 expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over
Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
F-2
accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation 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.
Woodbridge, New Jersey
March 15, 2018
F-3
SUSSEX BANCORP
CONSOLIDATED BALANCE SHEETS
December 31, 2017 December 31, 2016
(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 $5,430 and $11,739 at
December 31, 2017 and December 31, 2016, respectively)
Federal Home Loan Bank Stock, at cost
Loans receivable, net of unearned income
Less: allowance for loan losses
Net loans receivable
Foreclosed real estate
Premises and equipment, net
Accrued interest receivable
Goodwill
Bank-owned life insurance
Other assets
Total Assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing
Interest bearing
Total deposits
Short-term borrowings
Long-term borrowings
Accrued interest payable and other liabilities
Subordinated debentures
Total Liabilities
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued
Common stock, no par value, 10,000,000 shares authorized; 6,040,564 and
4,741,068 shares issued and outstanding at December 31, 2017 and December 31,
2016, respectively
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
$
$
$
$
$
$
$
3,270
8,376
11,646
100
98,730
5,304
4,925
820,700
7,335
813,365
2,275
8,389
2,472
2,820
22,054
7,303
979,383
146,167
616,324
762,491
55,350
35,000
4,501
27,848
885,190
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
132,434
528,487
660,921
29,805
66,000
4,090
27,840
788,656
—
—
65,274
1,399
27,532
1,387
(1,399)
94,193
979,383
$
36,538
1,383
23,291
243
(1,383)
60,072
848,728
See Notes to Consolidated Financial Statements
F-4
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
SUSSEX BANCORP
(Dollars in thousands except per share data)
INTEREST INCOME
Loans receivable, including fees
Securities:
Taxable
Tax-exempt
Interest bearing deposits
Total Interest Income
INTEREST EXPENSE
Deposits
Borrowings
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 (loss) 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
Merger-related expenses
Loan collection costs
Net expenses and write-downs related to foreclosed real estate
Other
Total Other Expenses
Income before Income Taxes
EXPENSE FOR INCOME TAXES
Net Income
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized gains (losses) on available for sale securities arising during the period
Fair value adjustments on derivatives
Reclassification adjustment for net loss (gain) on securities transactions included in net income
Income tax related to items of other comprehensive income
Other comprehensive income, net of income taxes
Comprehensive income
EARNINGS PER SHARE
Basic
Diluted
See Notes to Consolidated Financial Statements
F-5
Year Ended December 31,
2017
2016
$
32,953
$
1,437
1,274
35
35,699
3,584
1,749
1,278
6,611
29,088
1,586
27,502
1,123
777
522
5,326
24
(9)
7
515
8,285
14,773
1,880
2,173
938
308
1,173
399
263
279
148
1,187
122
283
1,691
25,617
10,170
4,479
5,691
1,682
(196)
9
(598)
897
6,588
1.06
1.05
$
$
$
$
$
$
26,862
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
(950)
1,647
(436)
(104)
157
5,680
1.20
1.19
Treasury shares purchased
(2,127)
(Dollars in Thousands)
Balance December 31,
2015
Net income
Other comprehensive
income
Funding of Supplemental
Director Retirement Plan
Stock issued to fund Rabbi
Trust
Options exercised
Restricted stock granted
Restricted stock forfeited
Compensation expense
related to stock option and
restricted stock grants
Dividends declared on
common stock ($0.16 per
share)
Balance December 31,
2016
Net income
Other comprehensive
income
Reclassification due to the
adoption of ASU 2018-02
Funding of Supplemental
Director Retirement Plan
Net proceeds of common
stock issued
Restricted stock granted
Restricted stock forfeited
Compensation expense
related to stock option and
restricted stock grants
Dividends declared on
common stock ($0.22 per
share)
Balance December 31,
2017
SUSSEX BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2017 and 2016
Number of
Shares
Outstanding
Common
Stock
Deferred
Compensation
Obligation
Under Rabbi
Trust
Accumulated
Other
Comprehensive
Income
Stock
Held by
Rabbi
Trust
Retained
Earnings
Treasury
Stock
Total
Stockholders'
Equity
4,646,238
$
35,927
$
— $ 18,520
$
—
—
—
60,920
449
42,167
(6,579)
—
—
—
—
—
—
198
2
—
—
411
—
—
—
—
1,383
—
—
—
—
5,523
—
—
—
—
—
—
—
—
—
(752)
4,741,068
36,538
1,383
—
—
—
—
—
—
—
—
1,249,999
28,027
53,554
(4,057)
—
—
—
—
709
—
—
—
—
16
—
—
—
23,291
5,691
—
(247)
—
—
—
—
—
—
(1,203)
86
—
157
—
—
—
—
—
—
—
—
243
—
897
247
—
—
—
—
—
—
$
— $
(592) $
—
—
—
(1,383)
—
—
—
—
—
—
(1,383)
—
—
—
(16)
—
—
—
—
—
—
—
(26)
—
616
2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
53,941
5,523
157
(26)
—
814
4
—
—
411
(752)
60,072
5,691
897
—
—
28,027
—
—
709
(1,203)
6,040,564
$
65,274
$
1,399
$ 27,532
$
1,387
$ (1,399) $
— $
94,193
See Notes to Consolidated Financial Statements
F-6
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
Amortization of subordinated debt costs
Net realized loss (gain) on sale of securities
Net realized (gain) loss on sale and disposal of premises and equipment
Net realized (gain) loss on sale of foreclosed real estate
Write-downs of and provisions for foreclosed real estate
Deferred income 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
Cash Flows from Investing Activities
Securities available for sale:
Purchases
Sales
Maturities, calls and principal repayments
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 in Federal Home Loan Bank stock
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Net increase in deposits
Net increase (decrease) 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
Net proceeds from capital raise
Purchase of treasury stock
Proceeds from exercise of stock options
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
Interest paid
Income taxes paid
Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans
Other real estate owned transferred from fixed assets
Treasury stock used to fund deferred compensation liability
\
See Notes to Consolidated Financial Statements
F-7
Year Ended December 31,
2017
2016
$
5,691
$
1,586
1,061
1,656
8
9
(7)
(46)
236
637
(522)
709
(414)
(1,145)
411
9,870
(61,190)
42,594
8,532
(2,478)
—
8,763
(126,885)
834
(1,184)
32
(5,000)
181
(135,801)
101,570
25,545
—
(31,000)
—
28,027
—
—
(1,203)
122,939
(2,992)
14,638
11,646
6,505
4,035
$
$
$
495
437
$
$
— $
$
$
$
$
$
$
5,523
1,291
1,115
1,546
—
(444)
19
7
251
9
(308)
411
(294)
(721)
735
9,140
(42,943)
36,483
9,156
(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
(752)
157,399
8,518
6,120
14,638
4,679
2,755
729
—
814
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 2015, a regional office and corporate center in Wantage, New Jersey during
the third quarter of 2015, 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 2017.
Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near term relate to the determination of the other-than-
temporary impairment, allowance for loan losses, valuation of foreclosed real estate, valuation of goodwill, the valuation of deferred
tax assets and the fair value of financial instruments.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within Sussex County, New Jersey and adjacent counties in the states
of New Jersey, New York and Pennsylvania. Notes 3 and 4 discuss the types of securities that the Company invests in. The types
of lending that the Company engages are included in Note 5. Although the Company has a diversified loan portfolio, its debtors’
ability to honor their contracts is influenced by the region’s economy. The Company does not have any significant concentrations
in any one industry or customer.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include highly liquid instruments with original
maturities of less than 90 days, primarily, balances due from banks, interest bearing deposits with banks and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
Securities
Securities are designated at the time of acquisition as available for sale or held to maturity. Securities that the Company will hold
for indefinite periods of time and that might be sold in the future as part of efforts to manage interest rate risk or in response to
changes in interest rates, changes in prepayment risk, changes in market conditions or changes in economic factors are classified
as available for sale. Securities available for sale are carried at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive (loss) income, net of related deferred tax effect. Securities that the Company has the positive
intent and ability to hold to maturity are designated as held to maturity regardless of changes in market conditions, liquidity needs
or changes in general economic conditions and carried at amortized cost.
Purchase premiums and discounts are recognized in interest income using the level yield method over the contractual terms of the
securities. Gains and losses realized on sales of securities are determined on the specific identification method and are reported
in non-interest income.
F-8
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically evaluates the security portfolio to determine if a decline in the fair value of any security below its cost
basis is other-than-temporary. The Company’s evaluation of other-than-temporary impairment considers the duration and severity
of the impairment, the company’s intent and ability to hold the securities and our assessments of the reason for the decline in value
and the likelihood of a near-term recovery. If a determination is made that a debt security is other-than-temporarily impaired, the
Company will estimate the amount of the unrealized loss that is attributable to credit and all other non-credit related factors. The
credit related component will be recognized as an other-than-temporary impairment charge in non-interest income. The non-credit
related component will be recorded as an adjustment to accumulated other comprehensive income (“AOCI”), net of tax.
Federal Home Loan Bank Stock
Federal law requires a member institution of the Federal Home Loan Bank (“FHLB”) system to hold stock of its district FHLB
according to a predetermined formula. Based on redemption provisions of the FHLB, the stock has no quoted market value and
is carried at cost. The FHLB stock was carried at $4.9 million and $5.1 million for the years ended December 31, 2017 and 2016,
respectively.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated
at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income
is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized
as an adjustment of the yield (interest income) of the related loans. The Bank is generally amortizing these amounts over the
contractual life of the loan.
The loans receivable portfolio is segmented into commercial and residential and consumer loans. Commercial loans consist of the
following classes: commercial and industrial, commercial real estate, and construction loans. Residential and consumer loans
consist of the following classes: residential real estate and consumer and other loans.
For all classes of loans, the accrual of interest is discontinued when the contractual payment of principal or interest has become
90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is
currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well
secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid
interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans including
impaired loans generally are either applied against principal or reported as interest income, according to management’s judgment
as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate
collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable
is determined based on contractual due dates for loan payments.
Allowance for Loan Losses
The allowance for loan losses represents the amount, which, in management’s judgment, will be adequate to absorb credit losses
inherent in the loan portfolio as of the balance sheet date. The adequacy of the allowance is determined by management’s evaluation
of the loan portfolio based on such factors as the differing economic risks associated with each loan category, the current financial
condition of specific borrowers, the economic environment in which borrowers operate, the level of delinquent loans, the value
of any collateral and, where applicable, the existence of any guarantees or indemnifications.
The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be
uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance
for loan losses. The allowance for loan losses consists of specific, general and unallocated components. The specific component
relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows, collateral
value or observable market price is lower than the carrying value for that loan. The general component covers all other loans and
is based on historical loss factors adjusted for general economic factors and other qualitative risk factors such as changes in
delinquency trends, industry concentrations and local/national economic trends. The allowance contains reserves identified as
unallocated. These reserves reflect management's attempt to ensure that the overall allowance reflects a margin for imprecision
and the uncertainty that is inherent in estimates of probable credit losses.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to
collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired.
F-9
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the
delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial and industrial, commercial real estate and construction loans by either the
present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or
the fair value of the collateral if the loan is collateral dependent.
Troubled Debt Restructurings (“TDR”)
A modification to the terms of a loan is generally considered a TDR if the Company grants a concession to the borrower that it
would not otherwise consider for economic or legal reasons related to the debtor’s financial difficulties. A TDR may include, but
is not necessarily limited to, the modification of loan terms such as a temporary or permanent reduction of the loan’s stated interest
rate, extension of the maturity date and/or reduction or deferral of amounts owed under the terms of the loan agreement.
All restructured loans that qualify as TDRs are placed on nonaccrual status for a period of no less than six months after restructuring,
irrespective of the borrower’s adherence to a TDR’s modified repayment terms during which time TDRs continue to be adversely
classified and reported as impaired. TDRs may be returned to accrual status if (1) the borrower has performed in accordance with
the terms of the restructured loan agreement for no less than six consecutive months after restructuring, and (2) the Company
expects to receive all principal and interest owed in accordance with the terms of the restructured loan agreement. If these conditions
are met the loan may also be returned to a non-adverse classification while retaining its impaired status.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred
assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the
Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their
maturity.
Foreclosed Real Estate
Foreclosed real estate is primarily comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-
lieu of foreclosure. Foreclosed real estate is initially recorded at fair value, less cost to sell at the date of foreclosure, establishing
a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at
the lower of carrying amount or fair value less costs to sell. Revenues and expenses from operations and changes in the valuation
allowance are included in expenses related to foreclosed real estate.
We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-
substance repossession. As of December 31, 2017, we held $179 thousand in foreclosed residential real estate properties as a result
of obtaining physical possession. As of December 31, 2016, we did not hold foreclosed residential real estate properties as a result
of obtaining physical possession. In addition, as of December 31, 2017 and 2016, we had consumer loans with a carrying value
of $180 thousand and $666 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.
F-10
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017 and $12.5 million at December 31, 2016.
Goodwill
Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. At December 31, 2017 and
2016, the Company has recorded goodwill 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 bank branch in 2006. In accordance with current accounting standards,
goodwill is not amortized, but evaluated at least annually for impairment. Any impairment of goodwill results in a charge to
income. The Company periodically assesses whether events and changes in circumstances indicate that the carrying amounts of
goodwill and intangible assets may be impaired. The estimated fair value of 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, 2017. A tax position is recognized as a benefit only if it is “more likely than not” that the tax
position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the
largest amount of the tax benefit that has more than a 50 percent likelihood of being realized on examination. For tax positions
not meeting the “more likely than not” test, no tax benefit is recorded. Under the “more likely than not” threshold guidelines, the
Company believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the
non-recognition of an existing tax benefit. As of December 31, 2017 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 2014 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 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.
F-11
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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”) 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 and automated teller machine networks, the Bank
offers a full array of commercial and retail financial services, including taking of time, savings and demand deposits; the making
of commercial, consumer and mortgage loans; and the providing of other financial services. Management does not separately
allocate expenses, including the cost of funding loan demand, between the commercial, retail, trust and mortgage banking operations
of the Bank. As such, discrete financial information is not available and segment reporting would not be meaningful. The
F-12
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Revenue Recognition of Tri-State Insurance Agency
Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is
processed into our systems, whichever is later. Commission revenues related to installment billings are recognized on the latter of
effective or invoiced date. Subsequent commission adjustments are recognized upon our receipt of notification from insurance
companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when
determinable, which is generally when such commissions are received from insurance companies, or when we receive formal
notification of the amount of such payments.
Subsequent Events
The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2017 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 U.S.
GAAP when it becomes effective. In August 2015, the FASB issued an amendment (ASU 2015-14) which defers the effective
date of this 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), December 2016 (ASU 2016-20), February 2017 (ASU 2017-05)
and September 2017 (ASU 2017-13), 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 Topic 606 are effective for public business entities for
annual periods beginning after December 15, 2017. Approximately 80% of the Company’s revenue is comprised of interest
income on financial assets, which are explicitly excluded from the scope of Topic 606. In addition, approximately 65% of the
Company’s non-interest income consists of insurance commissions and fees, which are also excluded from the scope of Topic 606.
With respect to the remaining elements of our non-interest income, management has identified revenue streams within the scope
of the guidance, primarily service fees on deposits and ATM and debit card fees. Topic 606 states that revenue should be recognized
when the entity satisfies a performance obligation by transferring goods or services to the customer. An asset is considered
transferred when the customer obtains control of the asset and is able to use and obtain substantially all of the benefits of the asset.
The entity then has to determine whether the performance obligation was satisfied over time or at a point in time to determine
when to recognize revenue. The entity determined based on the criteria presented in Topic 606 that the performance obligation
was satisfied at a point in time since the customer obtains immediate control of the deposit accounts and ATM/Debit Card and
there are no additional obligations that the entity performs over time; therefore, the revenue would be recognized as received. The
Company recognized $1.1 million in income for Service fees on deposit accounts and $777 thousand in ATM and debit card fees
for the year ended December 31, 2017. The Company currently presents the revenue and associated costs on a gross basis. ASU
2014-09 and related amendments were adopted effective January 1, 2018, using the cumulative effect approach. Under this
alternative, the Company will apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at
the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of
retained earnings. That is, prior years will not be restated and additional disclosures will be provided to enable users of the financial
statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented
under legacy U.S. GAAP. The Company`s adoption of the ASU did not significantly change the recognition of revenue on the
Company's 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
F-13
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used
to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet;
(iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure
purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability
at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets
and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to
the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset
related to available-for-sale. For public entities, the guidance is effective for annual periods, and interim periods within those
annual periods, beginning after December 15, 2017. The Company`s adoption of the ASU did not have a significant impact on
the Company's consolidated financial statements.
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 leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a
lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which
is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance,
lessor accounting is largely unchanged. Public business entities should apply the amendments in ASU 2016-02 for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public
business entities upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating
leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements. The Company 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 issued ASU 2016-09 as part of its initiative to reduce complexity in accounting standards. The
areas for simplification in this ASU 2016-09 involve several aspects of the accounting for employee share-based payment
transactions, including the 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. The Company`s adoption of this ASU, effective January 1, 2017, did not have a significant impact on the Company`s
consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment
arrangements issued in ASU 2016-09. The ASU provides guidance on the types of changes to the terms or conditions of share-
based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an
entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same
immediately before and after the modification. The Company`s adoption of the ASU did not have a significant impact on the
Company`s consolidated financial statements.
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 credit losses on certain types of financial instruments. It also modifies
the impairment model for 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. The Company has taken steps to prepare for implementation
when it becomes effective, such as evaluating the potential use of outside professionals for an updated 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 policies, including bank-owned life insurance policies, (vi) distributions received from equity method
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
F-14
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 did 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 annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating
the impact of the pending adoption on its consolidated financial statements.
In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).
The update shortens the amortization period for premiums on purchased callable debt securities to the earliest call date. The
amendment will apply only to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and
on preset dates, apply to all premiums on callable debt securities, regardless of how they were generated, and require companies
to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date.
The ASU does not require an accounting change for securities held at a discount. The discount continues to be amortized to maturity
and does not apply when the investor has already incorporated prepayments into the calculation of its effective yield under other
GAAP. The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2018,
including interim periods within those years.Early adoption is permitted, including adoption in an interim 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. The Company's adoption of the ASU will not have a significant impact on the Company's consolidated financial
statements.
In August 2017, FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815). The objective of the ASU is to improve the
financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its
financial statements and to make improvements to simplify the application of hedge accounting guidance in current GAAP. The
amendments in the ASU will, among other things, 1) permit hedge accounting for risk components in hedging relationships
involving nonfinancial risk and interest rate risks; 2) change the guidance for designating fair value hedges of interest rate risk
and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; 3) modify disclosures to
include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges; and 4) eliminate the
requirement to disclose the ineffective portion of the change in fair value of hedging instruments. These changes will more closely
align the results of cash flow and fair value hedge accounting with risk management activities and the presentation of hedge results
in the financial statements. ASU 2017-12 will be effective for public business entities for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years. For all other entities, the ASU will be effective for fiscal years
beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early application
is permitted in any interim period after issuance of the update with all transition requirements and elections being applied to hedging
relationships existing on the date of adoption. The Company's adoption of the ASU will not have a significant impact on the
Company's consolidated financial statements.
In January 2018, FASB issued ASU 2018-02 Income Statement - Reporting Comprehensive Income (Topic 220) which introduces
guidance for stranded tax effects resulting from the re-measurement of deferred tax assets and liabilities due to the newly enacted
Tax Act. The amendments in ASU 2018-02 would require a reclassification from accumulated other comprehensive income
(“AOCI”) to retained earnings for tax effects resulting from the re-measurement. The amount of the reclassification would be the
difference between the amount initially charged or credited to other comprehensive income at the previous U.S. federal corporate
income tax rate (34 percent) that remains in AOCI and the amount that would’ve been charged or credited directly to other
comprehensive income using the newly enacted U.S. federal corporate income tax rate (21 percent). ASU 2018-02 is effective
for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities
F-15
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
should apply the amendments in this ASU using a retrospective transition method to each period in which the effect of the change
in U.S. federal corporate income tax rate in the “Tax Act” is recognized. Early application is permitted, including adoption in
interim periods, for public business entities in which financial statements have not yet been issued and for all other entities in
which financial statements have not been made available for issuance. As a result of the “Tax Act” the Company re-measured
their deferred tax assets and liabilities utilizing the newly enacted federal corporate income tax rate which resulted in a reduction
of $247 thousand in deferred tax liabilities related to elements of accumulated other comprehensive income and a related reduction
of federal income tax of $247 thousand for the year ended December 31, 2017. The Company elected to early adopt this ASU
and, accordingly, has reclassified the $247 thousand from accumulated other comprehensive income to retained earnings effective
December 31, 2017. Such reclassification is reflected in the Company`s consolidated statements of stockholders' equity.
NOTE 2 – STOCK OFFERING
On June 21, 2017, we announced the closing of an underwritten public offering of 1,136,363 shares of the Company’s common
stock at a public offering price of $24.00 per share. The Company granted the underwriters a 30-day option to purchase up to an
additional 113,636 shares of its common stock, which was exercised in full by the Underwriters on June 16, 2017. The net proceeds
to the Company (including the proceeds from the exercise of the Underwriters’ option) after deducting underwriting discounts
and commissions was $28.0 million, which will be used for general corporate purposes. The Company incurred $470 thousand in
offering expenses which reduced net proceeds.
NOTE 3 – SEGMENT REPORTING
Segment information for 2017 and 2016 is as follows:
(Dollars in thousands)
Year Ended December 31, 2017:
Net interest income from external sources
Other income from external sources
Depreciation and amortization
Income before income taxes
Income tax expense
Total assets
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
Total assets
$
$
Banking and
Financial Services
Insurance
Services
Total
$
$
29,088
2,864
1,037
8,757
3,914
975,123
24,398
3,033
1,089
7,152
2,348
843,703
— $
$
$
$
$
$
5,421
24
1,413
565
4,260
— $
$
$
$
$
$
4,796
26
1,199
480
5,025
29,088
8,285
1,061
10,170
4,479
979,383
24,398
7,829
1,115
8,351
2,828
848,728
NOTE 4 – FAIR VALUE OF ASSETS AND LIABILITIES
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent
weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are
not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The fair
value amounts have been measured as of their respective year-ends, and have not been re-evaluated or updated for purposes of
these financial statements subsequent to those respective dates. As such, the fair values of these financial instruments subsequent
to the respective reporting dates may be different than the amounts reported at each year-end.
F-16
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017 and 2016:
(Dollars in thousands)
December 31, 2017
U.S. government agencies
U.S. government sponsored agency
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
Corporate debt
Derivative instruments
Interest rate swaps
December 31, 2016
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
Corporate debt
Derivative instruments
Interest rate swaps
Quoted Prices
in
Active
Markets
for Identical
Assets
(Level I)
Fair
Value
Measurements
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
$
18,861
$
— $
18,861
$
6,061
41,234
30,544
2,030
1,451
—
—
—
—
—
6,061
41,234
30,544
2,030
1,451
$
13,087
$
— $
13,087
$
40,688
32,854
1,982
1,647
—
—
—
—
40,688
32,854
1,982
1,647
—
—
—
—
—
—
—
—
—
—
—
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-17
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017 and 2016 are as follows:
(Dollars in thousands)
December 31, 2017
Impaired loans
Foreclosed real estate
December 31, 2016
Impaired loans
Foreclosed real estate
Quoted Prices
in
Active
Markets
for Identical
Assets
(Level I)
Fair
Value
Measurements
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
$
$
1,794
$
568
1,001
$
1,716
— $
—
— $
—
— $
— $
— $
— $
1,794
568
1,001
1,716
The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for
which Level III inputs were used to determine fair value:
(Dollars in thousands)
December 31, 2017
Impaired loans
Foreclosed real estate
December 31, 2016
Impaired loans
Foreclosed real estate
Qualitative Information about Level III Fair Value Measurements
Fair
Value
Estimate
Valuation
Techniques
Unobservable
Input
Range
(Weighted
Average)
$
$
1,794 Appraisal of
collateral
568 Appraisal of
Appraisal
0% to -8.2%
adjustments (1)
(-0.2%)
Selling
collateral
expenses (1)
-7.0%(-7.0%)
1,001 Appraisal of
collateral
1,716 Appraisal of
Appraisal
0% to -27.3%
adjustments (1)
(-2.5%)
Selling
collateral
expenses (1)
-7.0%(-7.0%)
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated selling expenses. The range and weighted
average of selling expenses and other appraisal adjustments are presented as a percentage of the appraisal.
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value
calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques
and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Company’s
financial instruments presented below at December 31, 2017 and 2016:
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-18
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-19
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s financial instruments at December 31, 2017 and 2016 were as follows:
December 31, 2017
Carrying
Amount
Fair
Value
Quoted Prices
in
Active
Markets
for Identical
Assets
(Level I)
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
$
11,646
100
98,730
5,304
4,925
813,365
2,472
1,451
563,694
198,797
55,350
35,000
27,848
470
11,646
100
98,730
5,430
4,925
788,119
2,472
1,451
563,694
197,549
55,335
34,761
25,259
470
$
$
11,646
—
—
—
—
— $
100
98,730
5,430
4,925
—
—
—
—
—
55,335
—
—
—
—
2,472
1,451
563,694
197,549
—
34,761
25,259
470
—
—
—
—
—
788,119
—
—
—
—
—
—
—
—
December 31, 2016
Carrying
Amount
Fair
Value
Quoted Prices
in
Active Markets
for Identical
Assets
(Level I)
Significant
Other
Observable
Inputs
(Level II)
Significant
Unobservable
Inputs
(Level III)
$
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
F-20
$
$
14,638
—
—
—
—
— $
100
88,611
11,739
5,106
—
—
—
—
—
29,805
—
—
—
—
2,058
1,647
479,025
181,346
—
66,388
24,519
364
—
—
—
—
—
672,912
—
—
—
—
—
—
—
—
$
(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:
$
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
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – SECURITIES
Available for Sale
The amortized cost and fair value of securities available for sale as of December 31, 2017 and 2016 are summarized as follows:
(Dollars in thousands)
December 31, 2017
U.S. government agencies
U.S. government sponsored agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
Corporate debt
December 31, 2016
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored enterprises
Corporate debt
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
18,799
6,054
40,470
30,958
2,000
98,281
13,115
41,255
33,483
2,000
89,853
$
$
$
$
90
8
896
65
30
1,089
29
203
126
—
358
$
$
$
$
(28) $
(1)
(132)
(479)
—
(640) $
18,861
6,061
41,234
30,544
2,030
98,730
(57) $
(770)
13,087
40,688
(755)
(18)
(1,600) $
32,854
1,982
88,611
Securities with a carrying value of approximately $17.3 million and $34.3 million at December 31, 2017 and 2016, 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, 2017 are shown below by contractual
maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with
or without call or prepayment penalties. Investments which pay principal on a periodic basis are not included in the maturity
categories.
(Dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total bonds and obligations
U.S. government agencies
U.S. government sponsored agencies
Mortgage-backed securities:
U.S. government-sponsored enterprises
Total available for sale securities
Amortized
Cost
Fair
Value
$
— $
—
4,953
37,517
42,470
18,799
6,054
—
—
4,957
38,307
43,264
18,861
6,061
30,958
98,281
$
30,544
98,730
$
Gross gains on sales of securities available for sale were $339 thousand and $476 thousand and gross losses were $348 thousand
and $40 thousand for the years ended December 31, 2017 and 2016, respectively.
F-21
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporarily Impaired Securities
The following table shows our investments’ gross unrealized losses and fair values with unrealized losses that are not deemed to
be other than temporarily impaired, aggregated by investment category and length of time that individual available for sale securities
have been in a continuous unrealized loss position, at December 31, 2017 and 2016.
(Dollars in thousands)
December 31, 2017
U.S. government agencies
U.S. government sponsored agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored
enterprises
Total temporarily impaired securities
December 31, 2016
U.S. government agencies
State and political subdivisions
Mortgage-backed securities -
U.S. government-sponsored
enterprises
Corporate debt
$
$
$
Total temporarily impaired securities
$
Less Than 12 Months
12 Months or More
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
5,280
3,469
5,212
8,403
22,364
4,952
23,989
23,299
1,982
54,222
$
$
$
$
(28) $
(1)
(42)
— $
—
3,701
— $
—
(90)
5,280
3,469
8,913
(212)
(283) $
12,935
16,636
(15) $
(770)
2,126
—
(752)
(18)
(1,555) $
639
—
2,765
$
$
$
(267)
(357) $
21,338
39,000
(42) $
—
7,078
23,989
(3)
—
(45) $
23,938
1,982
56,987
$
$
$
$
(28)
(1)
(132)
(479)
(640)
(57)
(770)
(755)
(18)
(1,600)
As of December 31, 2017, 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, 2017 and 2016, 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, 2017, there were three
securities with a fair value of $5.3 million that had an unrealized loss that amounted to $28 thousand. As of December 31, 2017,
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, 2017, were deemed to
be other-than-temporarily impaired.
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.
U.S. Government Sponsored Agencies
At December 31, 2017, the decline in fair value and the unrealized losses for our U.S. government sponsored agencies securities
were primarily due to changes in spreads and market conditions and not credit quality. At December 31, 2017, there were two
securities with a fair value of $3.5 million that had an unrealized loss that amounted to $1 thousand. As of December 31, 2017,
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 sponsored agency securities at December 31, 2017, were
deemed to be other-than-temporarily impaired.
F-22
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
State and Political Subdivisions
At December 31, 2017 and 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. At December 31, 2017, there were
9 securities with a fair value of $8.9 million that had an unrealized loss that amounted to $132 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, 2017, 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, 2017, were deemed to be other-than-temporarily-impaired.
At December 31, 2016, there were 31 securities with a fair value of $24.0 million that had an unrealized loss of $770 thousand.
Mortgage-Backed Securities
At December 31, 2017 and 2016, 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, 2017, there were 16 securities with a fair value of $21.3 million that had an unrealized loss of $479 thousand. As
of December 31, 2017, 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, 2017,
were deemed to be other-than-temporarily impaired.
At December 31, 2016, there were 16 securities with a fair value of $23.9 million that had an unrealized loss of $755 thousand.
Corporate Debt
At December 31, 2017, the change in fair value and the unrealized gains for our corporate debt was caused by changes in interest
rates and spreads and were not the result of credit quality. At December 31, 2017, there were no securities with an unrealized
loss. These securities typically have maturity dates greater than five years and the fair values are more sensitive to changes in
market interest rates. As of December 31, 2017, we did not intend to sell and it was 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 corporate debt at December
31, 2017, were deemed to be other-than-temporarily-impaired.
At December 31, 2016, there was one security with a fair value $2.0 million that had an unrealized loss of $18 thousand.
Held to Maturity Securities
The amortized cost and fair value of securities held to maturity as of December 31, 2017 and 2016 are summarized as follows:
(Dollars in thousands)
December 31, 2017
State and political subdivisions
December 31, 2016
State and political subdivisions
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
5,304
11,618
$
$
127
123
$
$
(1) $
5,430
(2) $
11,739
During the twelve months ended December 31, 2017, the Company did not sell any securities out of its held to maturity portfolio.
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-23
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of securities held to maturity at December 31, 2017 are shown below by contractual
maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
(Dollars in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total held to maturity securities
Amortized
Cost
Fair
Value
$
$
2,477
254
2,040
533
5,304
$
$
2,478
254
2,136
562
5,430
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, 2017 and 2016.
(Dollars in thousands)
December 31, 2017
State and political subdivisions
December 31, 2016
State and political subdivisions
$
$
Less Than 12 Months
12 Months or More
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
254
$
(1) $
— $
— $
254
$
(1)
789
$
(2) $
— $
— $
789
$
(2)
As of December 31, 2017, 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, 2017, there was one security with a fair value of $254 thousand that had an unrealized loss of $1 thousand. At
December 31, 2017, 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.
At December 31, 2016, there were two securities with a fair value $789 thousand that had an unrealized loss of $2 thousand.
F-24
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOANS
The composition of net loans receivable at December 31, 2017 and 2016 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,
2017
December 31,
2016
$
54,759
$
42,484
551,445
171,844
1,130
821,662
(962)
(7,335)
813,365
$
$
40,280
25,360
479,227
150,237
1,038
696,142
(885)
(6,696)
688,561
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 $239 thousand and $249 thousand at December 31, 2017 and 2016, respectively. Mortgage
servicing rights were immaterial at December 31, 2017 and 2016.
NOTE 7 – 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, 2017 and 2016:
(Dollars in thousands)
Year Ended:
December 31, 2017
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
December 31, 2016
Beginning balance
Charge-offs
Recoveries
Provision
Ending balance
Commercial
and
Industrial
Construction
Commercial
Real
Estate
Residential
Real
Estate
Consumer
and
Other
Unallocated
Total
$
$
$
$
110
$
359
$
3,932
$
899
$
$
(13)
2
109
208
85
(227)
268
(16)
110
$
—
—
(23)
336
220
—
—
139
359
$
$
$
(874)
7
2,120
5,185
3,646
(187)
37
436
$
$
3,932
$
(49)
10
172
1,032
784
(67)
21
161
899
$
$
$
19
$
(37)
$
$
7
37
26
87
(37)
7
(38)
1,377
$
—
—
(829)
548
768
—
—
609
$
$
19
$
1,377
$
6,696
(973)
26
1,586
7,335
5,590
(518)
333
1,291
6,696
F-25
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the balance in the allowance of loan losses at December 31, 2017 and 2016 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:
(Dollars in thousands)
December 31, 2017
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
December 31, 2016
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other loans
Unallocated
Total
Allowance for Loan Losses
Loans Receivable
Balance
Related to
Loans
Individually
Evaluated for
Impairment
Balance
Related to
Loans
Collectively
Evaluated for
Impairment
Balance
Balance
Individually
Evaluated for
Impairment
Collectively
Evaluated for
Impairment
$
$
$
$
208
336
5,185
1,032
26
548
7,335
110
359
3,932
899
19
1,377
6,696
$
$
$
— $
— $
28
10
$
$
— $
—
38
14
$
$
— $
135
6
$
$
— $
—
208
336
5,157
1,022
26
—
6,749
96
359
3,797
893
19
—
$
54,759
$
$
$
42,484
551,445
171,844
1,130
—
821,662
40,280
25,360
479,227
150,237
1,038
—
$
$
20
$
— $
4,763
2,064
—
—
6,847
33
$
$
$
$
— $
4,597
1,967
$
$
— $
—
54,739
42,484
546,682
169,780
1,130
—
814,815
40,247
25,360
474,630
148,270
1,038
—
$
155
$
5,164
$
696,142
$
6,597
$
689,545
An age analysis of loans receivable which were past due as of December 31, 2017 and 2016 is as follows:
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
(Dollars in thousands)
December 31, 2017
Commercial and industrial
$
— $
— $
20
$
20
$
Construction
Commercial real estate
Residential real estate
Consumer and other
Total
December 31, 2016
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
Total
$
$
$
—
4,935
1,304
8
—
126
122
1
6,247
$
249
$
— $
— $
—
84
786
4
—
719
247
—
105
4,314
1,581
—
6,020
137
309
4,103
1,752
—
$
$
105
9,374
3,007
9
12,515
137
309
4,906
2,785
4
$
$
874
$
966
$
6,301
$
8,141
$
688,001
54,739
42,379
542,071
168,837
1,121
809,147
40,143
25,051
474,321
147,452
1,034
$
$
$
$
$
$
$
$
$
$
$
$
54,759
$
42,484
551,445
171,844
1,130
821,662
40,280
25,360
479,227
150,237
1,038
$
$
696,142
$
—
—
—
—
—
—
104
309
55
—
—
468
(a) includes loans greater than 90 days past due and still accruing and non-accrual loans.
F-26
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans for which the accrual of interest has been discontinued at December 31, 2017 and 2016 were:
(Dollars in thousands)
Commercial and industrial
Commercial real estate
Residential real estate
Consumer and other
Total
December 31,
2017
December 31,
2016
$
$
20
$
105
4,314
1,581
6,020
$
33
4,048
1,752
—
5,833
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.
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.
F-27
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2017
and 2016:
(Dollars in thousands)
December 31, 2017
Pass
Special
Mention
Substandard
Doubtful
Total
Commercial and industrial
$
54,405
$
Construction
Commercial real estate
Residential real estate
Consumer and other
December 31, 2016
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer and other
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
54,759
42,484
551,445
171,844
1,130
821,662
40,280
25,360
479,227
150,237
1,038
696,142
42,379
537,636
169,395
1,130
189
105
3,508
228
—
$
165
$
—
10,301
2,221
—
$
$
$
804,945
$
4,030
$
12,687
$
40,247
25,360
463,889
147,526
1,038
678,060
$
$
— $
—
7,461
584
—
8,045
$
33
—
7,877
2,127
—
10,037
$
$
F-28
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects information regarding the Company’s impaired loans as of December 31, 2017 and 2016 and for the
years then ended:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
December 31, 2017
With no related allowance recorded:
Commercial and industrial
Commercial real estate
Residential real estate
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, 2016
With no related allowance recorded:
Commercial and industrial
Commercial real estate
Residential real estate
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
$
6,847
$
7,670
$
$
6,719
$
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
$
20
3,834
1,844
—
929
220
—
20
4,763
2,064
—
20
4,158
1,877
—
1,392
223
—
20
5,550
2,100
—
$
$
19
2,324
1,604
14
2,273
363
—
33
4,597
1,967
—
19
2,324
1,629
14
2,364
363
—
33
4,688
1,992
—
$
— $
—
—
$
— $
—
—
—
28
10
—
—
28
10
—
38
14
135
6
—
14
135
6
—
155
$
20
3,217
1,731
3
1,557
191
—
23
4,774
1,922
—
$
19
2,244
1,271
3
2,492
298
55
22
4,736
1,569
55
—
31
20
—
8
1
—
—
39
21
—
60
—
16
9
—
32
—
—
—
48
9
—
57
$
6,597
$
6,713
$
$
6,382
$
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.
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.
F-29
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the recorded investment in troubled debt restructured loans as of December 31, 2017 and 2016 based
on payment performance status:
(Dollars in thousands)
December 31, 2017
Performing
Non-performing
Total
December 31, 2016
Performing
Non-performing
Total
Commercial
Real Estate
Residential
Real Estate
Total
$
$
$
$
449
1,594
2,043
550
2,258
2,808
$
$
$
$
483
242
725
129
—
129
$
$
$
$
932
1,836
2,768
679
2,258
2,937
Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this
footnote. As of December 31, 2017, we have not committed to lend additional amounts to customers with outstanding loans that
are classified as TDRs.
There were three TDRs with an outstanding balance of $615 thousand that occurred during the year ended December 31, 2017.
There were no TDRs that occurred during the year ended December 31, 2016. The following tables summarize TDRs that occurred
during the year ended December 31, 2017.
(Dollars in thousands)
December 31, 2017
Residential real estate
Number of Loans
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
3
$
637
$
615
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, 2017 and 2016.
There was one TDRs with an outstanding balance of $242 thousand for which there were payment defaults within twelve months
following the date of the restructuring for the year ended December 31, 2017.
There were two TDRs for which there was a payment default within twelve months following the date of the restructuring for the
year ended December 31, 2016.
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, 2017 and 2016.
F-30
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2017 and 2016 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
2017
2016
$
$
1,740
6,744
2,182
6,048
172
16,886
(8,497)
8,389
$
$
2,054
5,953
2,182
5,887
125
16,201
(7,473)
8,728
During the years ended December 31, 2017 and 2016, depreciation expense totaled $1.1 million and $1.1 million, respectively.
NOTE 9 – DEPOSITS
The components of deposits at December 31, 2017 and 2016 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
2017
146,167
417,527
84,299
114,498
762,491
$
$
2016
132,434
346,591
74,150
107,746
660,921
$
$
Included in time deposits at December 31, 2017 and 2016, were brokered deposits of $130.6 million and $84.6 million, respectively.
At December 31, 2017, 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
$
$
151,437
19,510
5,026
14,847
7,977
198,797
Certificates of deposits with balances of $250 thousand or more at December 31, 2017 and 2016, totaled approximately $41.0
million and $48.6 million, respectively.
NOTE 10 – BORROWINGS
At December 31, 2017, the Bank had secured borrowing potential with the Federal Home Loan Bank of New York (“FHLBNY”)
for borrowings of up to $189.7 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 $189.7 million. At December 31, 2017, the Bank had the ability to borrow up to $113.7
million at FHLBNY and $10.0 million at ACBB.
F-31
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2017 and 2016, the Company had $55.4 million and $29.8 million, respectively, in short term advances at the
FHLBNY, having weighted average interest rates of 1.58% and 0.79%, 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 Bank that bears interest at
the rate of floating prime plus 50 basis points with a maturity date of September 28, 2017. This line of credit is included in
long term borrowings.
At December 31, 2017 and 2016 the Bank had the following long-term borrowings:
(Dollars in thousands)
Maturity Date
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
ACBB
FHLBNY
FHLBNY
FHLBNY
FHLBNY
FHLBNY
FHLBNY
FHLBNY
FHLBNY
FHLBNY
FHLBNY
FHLBNY
Interest
Rate
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,
2017
2016
$
— $
—
—
—
—
—
5,000
5,000
5,000
5,000
5,000
5,000
5,000
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
$
35,000
$
66,000
Maturities of long-term debt in years subsequent to December 31, 2017 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
$
$
15,000
5,000
10,000
5,000
—
—
35,000
At December 31, 2017 the Company had $35.0 million in long-term fixed rate advances.
NOTE 11 – 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, 2017 such derivatives were used to hedge the variable cash
outflows associated with four FHLB borrowings totaling $26.0 million. In addition, during the quarter ended March 31, 2016,
the Company entered into an interest rate swap agreement to hedge 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
F-32
of 3.10%. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company
implemented this program during the quarter ended March 31, 2016.
During the twelve months ended December 31, 2017 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, 2017 and 2016:
Notional/
Contract
Amount
December 31, 2017
Balance
Sheet
Location
Fair
Value
Expiration
Date
(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
$
$
12,500
5,000
6,000
10,000
5,000
610 Other Assets
161 Other Assets
170 Other Assets
352 Other Assets
158 Other Assets
2026-03-15
2026-12-15
2027-06-15
2027-12-15
2027-12-15
Total
$
38,500
$
1,451
Notional/
Contract
Amount
December 31, 2016
Balance
Sheet
Location
Fair
Value
Expiration
Date
(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
$
12,500
$
5,000
6,000
10,000
5,000
629 Other Assets
163 Other Assets
201 Other Assets
448 Other Assets
206 Other Assets
2026-03-15
2026-12-15
2027-06-15
2027-12-15
2027-12-15
Total
$
38,500
$
1,647
F-33
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 years ended December 31,
2017 and 2016: ?
Year Ended December 31, 2017
Amount of Gain
Recognized in OCI
on
Derivatives, net of
Tax
(Effective Portion)
Location of Gain
(Loss) Recognized in
Income of
Derivatives
(Ineffective Portion)
Amount of Gain (Loss)
Recognized in Income of
Derivatives
(Ineffective Portion)
(11) Not applicable
(1) Not applicable
(19) Not applicable
(57) Not applicable
(29) Not applicable
(117)
$
$
—
—
—
—
—
—
Year Ended December 31, 2016
Amount of Gain
Recognized in OCI
on
Derivatives, net of
Tax
(Effective Portion)
Location of Gain
(Loss) Recognized in
Income of
Derivatives
(Ineffective Portion)
Amount of Gain (Loss)
Recognized in Income of
Derivatives
(Ineffective Portion)
377 Not applicable
98 Not applicable
120 Not applicable
269 Not applicable
124 Not applicable
988
$
$
—
—
—
—
—
—
(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
(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
$
$
$
$
As required under the master netting arrangement with its derivatives counterparties, the Company received financial collateral
in the amount of $1.2 million and $2.2 million at December 31, 2017 and 2016.
Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest expense as
interest payments are made on the Company’s variable rate borrowing positions. During the years ended December 31, 2017
and 2016, the Company had $124 thousand and $69 thousand, respectively, of reclassifications to interest expense. During the
next twelve months, the Company estimates that $111 thousand will be reclassified to interest expense.
F-34
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – 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
reprices quarterly at the three month LIBOR plus 1.44% and was 3.03% and 2.4% at December 31, 2017 and 2016, respectively.
The capital securities are currently redeemable by the Company at par in whole or in part. The capital securities must be redeemed
upon final maturity of the subordinated debentures on September 15, 2037.
During the quarter ended December 31, 2016, the Company completed a $15 million private placement of 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. 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 13 – 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, 2017:
(Dollars in thousands)
2018
2019
2020
2021
2022
Thereafter
$
$
739
577
171
76
45
452
2,060
Rent expense was $630 thousand and $663 thousand for the years ended December 31, 2017 and 2016, respectively.
NOTE 14 – EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan and Trust (the “401(k) Plan”) for its employees. Non-highly compensated employees may
contribute up to the statutory limit of 75% of their salary to the 401(k) Plan. Highly compensated employees are restricted to a
contribution up to 7% of their salary. The Company provides a 50% match of the employee's contribution up to 6% of the employee's
annual salary. The amount charged to expense related to the 401(k) Plan for the years ended December 31, 2017 and 2016 was
$153 thousand and $141 thousand, respectively.
The Company also maintains nonqualified Supplemental Salary Continuation Plans (the “Supplemental Plans”) covering the
Company’s former Chairman and a former executive officer of the Company. Under the provisions of the Supplemental Plans,
the Company has executed agreements providing the officers a retirement benefit. Payments from the Supplemental Plans for the
Chairman began in May of 2008 and the other executive started in April of 2010. For the years ended December 31, 2017 and
F-35
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2016, $46 thousand and $52 thousand, respectively, were charged to expense in connection with the Plans. At December 31, 2017
and 2016, the carrying value of the Supplemental Plans was $632 thousand and $716 thousand, respectively.
In March of 2005, the Board of Directors approved an Executive Incentive and Deferred Compensation Plan (the “Incentive
Plan”). The purpose of the Incentive Plan is to motivate and reward participants for achieving bank financial and strategic goals
as well as to provide specified benefits to a select group of management or highly compensated employees who contribute materially
to the continued growth, development and future business success of the Company. Participants may elect to receive their award
or defer compensation in a deferral account which will earn interest at the average interest rate earned by the Company in its
investment portfolio, compounded monthly. At December 31, 2017 and 2016, the carrying value of deferred compensation was
$218 thousand and $199 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. Distributions 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, 2017 and 2016, the liability for the DCA was $24 thousand and $36 thousand, respectively. The DCA liability of
$24 thousand at December 31, 2017, consisted entirely of amounts deferred under the interest rate earnings election; the liability
of $36 thousand at December 31, 2016, consisted entirely of amounts deferred under the interest rate earnings 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, 2017, 93,977 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 retirement income for the Company’s Chief Executive Officer. The SERP
was effective as of January 1, 2011. Based on the attainment of certain annual performance targets, the Company will make annual
contributions to the SERP. Any amounts credited to the SERP will accrue interest equal to that paid by U.S. 10-year Treasury
Notes for each applicable year. The SERP provides for the benefits to be paid monthly over a 5-year period commencing the first
day of the month following the later of the participant’s 65th birthday, or normal retirement age, or termination of employment.
At December 31, 2017 and 2016, the carrying value of the SERP was $426 thousand and $329 thousand, respectively.
NOTE 15 – 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.
F-36
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of other comprehensive income (loss), both before tax and net of tax, are as follows:
Year Ended December 31, 2017
Net of
Tax
Before
Tax
Effect
Tax
Year Ended December 31, 2016
Net of
Tax
Before
Tax
Effect
Tax
(Dollars in thousands)
Other comprehensive (loss) income:
Fair value adjustments on derivatives
$
(196) $
(78) $
(118) $
1,647
$
659
$
988
1,682
672
1,010
(950)
(380)
(570)
Unrealized gains on available for sale
securities
Reclassification adjustment for net loss
(gains) on securities transactions included
in net income
Total other comprehensive income
$
1,495
$
598
$
897
$
9
4
5
(436)
261
$
(175)
104
$
(261)
157
Reclassification adjustments for loss (gains) on securities transactions of $9 thousand and $(436) thousand for the years ended
December 31, 2017 and 2016, 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, 2017 and
2016 are as follows:
2017
2016
$
(745)
270
870
247
1,387
$
988
—
243
(Dollars in thousands)
Unrealized gain (loss) on available for sale investments
Unrealized gain on derivative instruments
Reclassification due to the adoption of ASU 2018-02
Accumulated other comprehensive income
$
$
F-37
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – 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, 2017:
Shares Outstanding (weighted average)
Shares held by Rabbi Trust
Share liability under deferred compensation agreement
Basic earnings per share:
Net earnings applicable to common stockholders
Effect of dilutive securities:
Unvested stock awards
Diluted earnings per share:
Net income applicable to common stockholders and assumed
conversions
Year Ended December 31, 2016:
Shares Outstanding (weighted average)
Shares held by Rabbi Trust
Share liability under deferred compensation agreement
Basic earnings per share:
Net earnings applicable to common stockholders
Effect of dilutive securities:
Unvested stock awards
Diluted earnings per share:
Net income applicable to common stockholders and assumed
conversions
Income
(Numerator)
Shares
(Denominator)
Per Share
Amount
5,359,430
93,977
(93,977)
5,691
5,359,430
$
1.06
—
44,951
5,691
5,404,381
$
1.05
4,619,124
96,736
(96,736)
5,523
4,619,124
$
1.20
—
31,984
5,523
4,651,108
$
1.19
$
$
$
$
There were 13,317 and 36,761 shares of unvested restricted stock awards and options outstanding during December 31, 2017 and
2016, 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 17 – 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, 2017, 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, 2017, there were 82,229 shares available for future grants
under the 2013 Plan.
F-38
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding the Company's restricted stock grants activity for the years ended December 31, 2017 and 2016 are as
follows:
Unvested restricted stock, beginning of year
Granted
Forfeited
Vested
Unvested restricted stock, end of period
2017
2016
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Weighted
Average
Grant Date
Fair Value
80,743
$
53,554
(4,057)
(44,479)
85,761
$
10.51
22.02
12.58
9.09
18.34
93,570
$
42,167
(6,579)
(48,415)
80,743
$
7.67
12.92
10.99
7.05
10.51
Total stock-based compensation related to restricted stock awards was $660 thousand and $365 thousand for the years ended
December 31, 2017 and December 31, 2016, respectively. As of December 31, 2017 and 2016, there were $918 thousand and
$571 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 2.2 years and 1.5 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, 2015
Options granted
Options expired
Options exercised
Outstanding, December 31, 2016
Options granted
Options expired
Options exercised
Outstanding, December 31, 2017
Exercisable, December 31, 2017
Weighted
Average
Exercise
Price per
Share
Weighted
Average
Contractual
Term
Aggregate
Intrinsic
Value
10.06
12.83
10.12
10.25
11.10
—
—
—
11.10
10.53
7.4
7.1
$
$
1,088,765
470,012
Number of
Shares
51,985
$
26,216
(8,629)
(449)
69,123
—
—
—
69,123
28,805
$
$
The following table summarizes information about stock options outstanding and exercisable at December 31, 2017:
Exercise
Price
Number
Outstanding
Weighted
Average Remaining
Life (Years)
Number
Exercisable
9.97
10.25
12.83
32,000
10,907
26,216
69,123
6.9
7.1
8.2
8.4
19,200
4,362
5,243
28,805
There were no options exercised in 2017. The aggregate intrinsic value of options exercised in 2016 was $1 thousand.
F-39
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 $49 thousand and $46 thousand for the year ended December 31,
2017 and 2016, respectively.
There were no options granted during the year ended December 31, 2017. The weighted average grant date fair value of options
granted during the year ended December 31, 2016 was $3.35 per share. The weighted average expected life of stock options
represents the period of time that the stock options are expected to be outstanding and is estimated using historical data of stock
option exercises and estimated forfeiture rates. Expected future expense relating to the non-vested options outstanding as of
December 31, 2017 is $116 thousand over a weighted average period of 2.4 years. Upon exercise of vested options, management
expects to draw on authorized unissued stock as the source of the shares.
NOTE 18 – 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, 2017 and 2016 are as follows:
(Dollars in thousands)
Current:
Federal
State
Deferred:
Federal
State
2017
2016
$
$
2,859
983
3,842
741
(104)
637
2,175
644
2,819
(40)
49
9
$
4,479
$
2,828
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, 2017 and 2016 is as follows:
(Dollars in thousands)
Federal income tax at statutory rate
Tax exempt interest
State income tax, net of federal income tax effect
Rate change impact
Bank owned life insurance
M&A expenses
Other
2017
2016
3,458
(438)
580
942
(178)
263
(148)
4,479
$
$
F-40
34% $
(4)
6
9
(2)
3
(2)
44% $
2,840
(288)
457
—
(105)
—
(76)
2,828
34%
(3)
5
—
(1)
—
(1)
34%
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset at December 31, 2017 and 2016 are as follows:
(Dollars in thousands)
Deferred tax assets:
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
2017
2016
2,016
357
3
186
188
—
468
3,218
(448)
(32)
(122)
(391)
(993)
2,225
$
$
2,646
506
402
223
122
497
223
4,619
(537)
(210)
—
(659)
(1,406)
3,213
$
$
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act contains
several changes in existing law impacting businesses, including the reduction of the Federal Corporate income tax rate from 34%
to 21%, effective January 1, 2018. As a result of the rate reduction, the Company re-measured its deferred tax assets using the
newly enacted corporate tax rate through income tax expense in the period of enactment. The Company’s re-measurement of its
net deferred tax asset resulted in additional income tax expense of $942 thousand at December 31, 2017.
NOTE 19 – 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, 2017 and 2016 is summarized as follows:
(Dollars in thousands)
Balance, beginning
Disbursements
Repayments and other
Balance, ending
2017
2016
10,332
12,306
(1,074)
21,564
$
$
6,647
5,068
(1,383)
10,332
$
$
Deposits from certain executive officers, directors and their affiliates at December 31, 2017 and 2016 totaled $9.6 million and
$9.3 million, respectively.
Certain related parties of the Company provided legal services and appraisal services to the Company. Legal services provided
by related parties totaled $19 thousand and $10 thousand for the years ended December 31, 2017 and 2016, respectively. Appraisal
services provided by related parties totaled $0 thousand and $2 thousand for the years ended December 31, 2017 and 2016,
respectively. The Company also paid rent to related parties for an office location in the amount of $148 thousand and $148 thousand
for the years ended December 31, 2017 and 2016, respectively.
F-41
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those instruments
involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet.
The Company`s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet instruments.
A summary of the Company's financial instrument commitments at December 31, 2017 and 2016 is as follows:
(Dollars in thousands)
Commitments to grant loans
Unfunded commitments under lines of credit
Outstanding standby letters of credit
$
2017
2016
$
87,630
93,555
485
70,463
69,811
998
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and
equipment.
Outstanding letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to
a third party. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument
for standby letters of credit is represented by the contractual amount of those instruments. These standby letters of credit expire
within twelve months, although many have automatic renewal provisions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending other loan commitments. The Company requires collateral and personal
guarantees supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a
liquidation of such collateral and enforcement of personal guarantees would be sufficient to cover the maximum potential amount
of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2017 and
2016 for guarantees under standby letters of credit issued is not material.
NOTE 21 – 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, 2017.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures
of the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings
and other factors.
The federal banking agencies have substantially amended the regulatory risk-based capital rules applicable to the Bank. The
amendments implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The new rules
apply regulatory capital requirements to the Bank. The amended rules included new minimum risk-based capital and leverage
ratios, which became effective in January 2017, with certain requirements to be phased in beginning in 2018, and refined the
definition of what constitutes “capital” for purposes of calculating those ratios.
F-42
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The new minimum capital level requirements applicable to the Bank include: (i) a new common equity Tier 1 capital ratio of 5.75%
(increased from 4.5% ; (ii) a Tier 1 capital ratio of 7.25% (increased from 6%); (iii) a total capital ratio of 9.25% (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 phased in beginning in January 2016
at 0.625% of risk-weighted assets and will increase each year until fully implemented in January 2019. An institution will be
subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls
below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that could be utilized
for such actions.
As of December 31, 2017, 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, 2017 and 2016 are presented below:
(Dollars in thousands)
As of December 31, 2017
Total capital (to risk-weighted assets):
Tier I capital (to risk-weighted assets):
Common equity tier I capital (to average
assets):
Tier I capital (to average assets):
As of December 31, 2016
Total capital (to risk-weighted assets):
Tier I capital (to risk-weighted assets):
Common equity tier I capital (to average
assets):
Tier I capital (to average assets):
Actual
For Capital Adequacy
Purposes plus Capital
Conservation Buffer
To be Well Capitalized
under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
$
121,141
113,806
113,806
113,806
93,579
86,883
86,883
86,883
15.17%
14.26%
14.26%
11.86%
13.86%
12.87%
12.87%
10.41%
>$73,847
>57,880
>45,905
>38,391
>$58,279
>44,773
>34,643
>33,380
>9.25%
>7.25
>$79,835
>63,868
>10.00%
>8.00
>5.75
>4.00
>51,893
>47,989
>6.50
>5.00
>8.63%
>6.63
>$67,531
>54,025
>10.00%
>8.00
>5.13
>4.00
>43,895
>41,725
>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.
At December 31, 2017, the Bank’s funds available for payment of dividends were $110.8 million. Accordingly, $7.5 million of
the Company’s equity in the net assets of the Bank was restricted as of December 31, 2017.
In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital
to be reduced below applicable minimum capital requirements.
F-43
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22 – PARENT COMPANY ONLY FINANCIAL
Condensed financial information pertaining only to the parent company, Sussex Bancorp, is as follows:
BALANCE SHEETS
(Dollars in thousands)
Assets
Cash
Interest-bearing deposits with other banks
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
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 of subsidiaries
Income tax benefit
Loss before equity in undistributed net
income of subsidiaries
Equity in undistributed net income of subsidiaries
Net Income
Comprehensive income
December 31,
2017
2016
347
249
117,953
3,555
122,104
63
—
27,848
94,193
122,104
$
$
$
$
129
—
89,956
2,919
93,004
92
5,000
27,840
60,072
93,004
Year Ended December 31,
2017
2016
(109) $
(1,278)
(217)
(1,604)
623
(981)
6,672
5,691
6,588
$
(52)
(391)
(203)
(646)
243
(403)
5,926
5,523
5,680
$
$
$
$
$
$
F-44
SUSSEX BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash Flows from Operating Activities:
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of subordinated debenture
Net change in other assets and liabilities
Equity in undistributed net income of subsidiaries
Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
Capital contribution to subsidiaries
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Cash dividends paid
Net proceeds from issuance of common stock
Proceeds from long-term borrowings
Repayment of 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
NOTE 23 – CONTINGENCIES
Year Ended December 31,
2017
2016
$
5,691
$
5,523
8
607
(6,672)
(366)
(21,240)
(21,240)
(1,203)
28,027
—
(5,000)
—
—
—
21,824
218
129
347
$
—
852
(5,926)
449
(19,568)
(19,568)
(752)
—
5,000
—
14,953
4
(26)
19,179
60
69
129
$
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.
NOTE 24 – SUBSEQUENT EVENTS
On January 4, 2018 the Company announced the successful closing of the merger with Community Bank of Bergen County, NJ,
a New Jersey-chartered bank (“Community”) in an all-stock transaction (the “Merger”). Under the terms of the agreement,
Community will be merged with and into Sussex Bank, with Sussex Bank being the surviving entity and each outstanding share
of Community common stock will be exchanged for 0.97 shares of Sussex Bancorp's common stock. The Company issued
1,873,028 shares of its common stock, having an aggregate fair value of $51.9 million in the merger and paid approximately $2
thousand for fractional shares issued. Outstanding Community stock options were paid out in cash for a total payment of $140
thousand.
With the combination of the two companies, the Company, on a consolidated basis, will have approximately $1.3 billion in total
assets, approximately $1.1 billion in total deposits, and approximately $1.1 billion in total loans. In addition, the merger expands
the Company’s presence in Bergen County, New Jersey with the addition of three full service branch locations. During the year
ended December 31, 2017, the Company incurred $1.2 million in merger-related expenses for this acquisition.
The merger transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities
assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary
and subject to refinement for up to one year after the closing date of the acquisition. Management is in the process of assessing
the assets purchased and liabilities assumed in connection with the merger.
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*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
21.1
23.1
31.1
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).
Amendment #1 to the Salary Continuation Agreement with Donald L. Kovach, dated June 11, 2002 (incorporated
by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed with the SEC on March 16, 2011).
Amendment #2 to the Salary Continuation Agreement with Donald L. Kovach, dated January 7, 2004 (incorporated
by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the SEC on March 23, 2004).
Amendment #3 to the Salary Continuation Agreement with Donald L. Kovach, dated October 17, 2007 (incorporated
by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed with the SEC on November 14, 2007).
Employment Agreement by and between Tri-State Insurance Agency, Inc. and George Lista, dated September 1,
2006 (incorporated by reference to Exhibit 10.A to the Current Report on Form 8-K filed with the SEC on September
7, 2006).
Employment Agreement by and between the Company, the Bank and Anthony Labozzetta, dated January 20, 2010
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on January 26,
2010).
Supplemental Executive Retirement Agreement by and between the Company and Anthony J. Labozzetta, dated
July 20, 2011 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on
July 26, 2011).
Employment Agreement by and between the Company, the Bank and Steven M. Fusco, dated June 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.
31.2
32.1**
101**
Certification of Principal Financial and Accounting Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Stockholders’
Equity, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements.
_______________
*
Management contract or compensatory plan or arrangement.
**
Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), and shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Exchange Act.
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INVESTOR INFORMATION
DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS: SUSSEX BANK AND SUSSEX BANCORP
EDWARD J. LEPPERT
Chairman of the Board
ANTHONY LABOZZETTA
President and
Chief Executive Offi cer
PATRICK BRADY
RICHARD BRANCA
KATHERINE H. CARISTIA
DOMINICK D'AGOSTA
MARK J. HONTZ
WALTER E. LOEFFLER
MICHAEL X. MCBRIDE
ROBERT MCNERNEY
PETER MICHELOTTI
EXECUTIVE OFFICERS: SUSSEX BANK
ANTHONY LABOZZETTA
President and
Chief Executive
Offi cer
STEVEN M. FUSCO
Senior Executive
Vice President and
Chief Financial
Offi cer
PETER MICHELOTTI
Senior Executive
Vice President and
Chief Operating
Offi cer
VITO GIANNOLA
Senior Executive
Vice President and
Chief Banking
Offi cer
RICHARD GLICINI
Senior Vice
President and Chief
Administrative
Offi cer
NICOLE BARTUCCELLI
Senior Vice
President and
Chief Credit Offi cer
GADA ELKENANI
Market Executive
RENE MIRANDA
Market Executive
TRI-STATE INSURANCE
AGENCY
GEORGE LISTA
President and
Chief Executive
Offi cer
SENIOR
MANAGEMENT
ADRIANO DUARTE
Senior Vice President/
Assistant Financial Offi cer
RYAN J. PEENE
Senior Vice President/
Government Banking &
Corporate Development
JANET KERR
Senior Vice President/
Morris/Sussex Team Leader
CHRISTIAN SZEGDA
Senior Vice President/
Hudson Team Leader
JUAN OELOFSE
Senior Vice President/
NY Metro Team Leader
JOSEPH LOMORIELLO
Senior Vice President/
Bergen Team Leader
ANTHONY DANDOLA
Senior Vice President/
Risk Management Offi cer
CECELIA
MCMULLEN-JAMES
Senior Vice President/
Operations
STOCK INFORMATION
Sussex Bancorp’s Common Stock is traded
on the Nasdaq Global Market using the
symbol “SBBX”.
REGISTRAR AND TRANSFER AGENT
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10007
800-937-5449
www.amstock.com
INDEPENDENT AUDITORS
BDO USA, LLP
100 Park Ave
New York, NY 10017
GENERAL COUNSEL
Windels Marx, Lane and Mittendorf
120 Albany Street Plaza, 6th Floor
New Brunswick, NJ 08901
SEC COUNSEL
Hogan Lovells US LLP
Columbia Square
555 Thirteenth Street, NW
Washington, DC 20004
INVESTOR INFORMATION
Steven M. Fusco, CFO
100 Enterprise Drive, Suite 700
Rockaway, NJ 07866
844-256-7328
Information on Sussex Bancorp, Inc.
can also be found at:
sussexbank.com
100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
844-CLOSE-2-U
844-256-7328
sussexbank.com
LOCATIONS
BRANCHES
Andover
165 Route 206
Andover, NJ 07821
973-786-5150
Augusta
100 Route 206
Augusta, NJ 07822
973-940-7950
Franklin
399 Route 23
Franklin, NJ 07416
973-827-2404
Montague
266 Clove Road
Montague, NJ 07827
973-293-3488
Newton
15 Trinity Street
Newton, NJ 07860
973-383-2211
Astoria
28-21 Astoria Blvd
Astoria, NY 11103
347-472-1727
Maywood
125 W Pleasant Ave
Maywood, NJ 07607
201-587-1221
*For residents only.
Oradell
296 Kinderkamack Road
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
Fair Lawn
12-79 River Road
Fair Lawn, NJ 07410
201-791-0101
Rochelle Park
210 Rochelle Ave
Rochelle Park, NJ 07662
201-843-2300
OFFICES
Regional Offices
& Corporate Centers
15 Boulder Hills Blvd
Wantage, NJ 07461
844-256-7328
100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
844-256-7238
18 Railroad Ave
Rochelle Park, NJ 07662
201-587-1223
Tri-State Insurance
Agency
96 Route 206
Augusta, NJ 07822
973-579-6776
296 Kinderkamack Road
Oradell, NJ 07649
201-490-4695
Regional Lending
Offices
15 Boulder Hills Blvd
Wantage, NJ 07461
100 Enterprise Drive
Suite 700
Rockaway, NJ 07866
296 Kinderkamack Road
Oradell, NJ 07649
201-490-4695
18 Railroad Avenue
Rochelle Park, NJ 07662
201-587-1223
2017
ANNUAL
REPORT