sbbx-20160331



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

___________________



FORM 10-Q



(Mark One)

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March  31, 2016



[  ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________to ________



Commission File Number 0-29030



SUSSEX BANCORP

(Exact name of registrant as specified in its charter)   







 

New Jersey

22-3475473



 

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)







 

100 Enterprise Drive, Suite 700,  Rockaway, NJ

07866

(Address of principal executive offices)

(Zip Code)



(844) 256-7328

(Registrant’s telephone number, including area code)





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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 



 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company



 

(Do not check if a smaller reporting company)   



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



As of May 6, 2016 there were 4,675,976 shares of common stock, no par value, outstanding.



 

 

 


 







SUSSEX BANCORP

FORM 10-Q



INDEX









 

FORWARD-LOOKING STATEMENTS

i

PART I – FINANCIAL INFORMATION

1

Item 1 - Financial Statements

1

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

24

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

32

Item 4 - Controls and Procedures

32

PART II – OTHER INFORMATION

34

Item 1 - Legal Proceedings

34

Item 1A - Risk Factors

34

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

34

Item 3 - Defaults Upon Senior Securities

34

Item 4 - Mine Safety Disclosures

34

Item 5 - Other Information

34

Item 6 - Exhibits

34











 

 

 


 





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 shareholders and in other communications by us. This Report on Form 10-Q 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 in the interest rate environment that reduce margins;

§

changes in the regulatory environment;

§

the highly competitive industry and market area in which we operate;

§

general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;

§

changes in business conditions and inflation;

§

changes in credit market conditions;

§

changes in the securities markets which affect investment management revenues;

§

increases in Federal Deposit Insurance Corporation (“FDIC”) deposit insurance premiums and assessments could adversely affect our financial condition;

§

changes in technology used in the banking business;

§

the soundness of other financial services institutions which may adversely affect our credit risk;

§

our controls and procedures may fail or be circumvented;

§

new lines of business or new products and services which may subject us to additional risks;

§

changes in key management personnel which may adversely impact our operations;

§

the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the ongoing financial crisis;

§

severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and

§

other factors detailed from time to time in our filings with the SEC.



Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.



 

i

 


 

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements







 

 

 

 

 



 

 

 

 

 

SUSSEX BANCORP

CONSOLIDATED BALANCE SHEETS



 

 

 

 

 

(Dollars in Thousands)

March 31, 2016

 

December 31, 2015



 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

$

3,060 

 

$

2,914 

Interest-bearing deposits with other banks

 

5,979 

 

 

3,206 

Cash and cash equivalents

 

9,039 

 

 

6,120 



 

 

 

 

 

Interest bearing time deposits with other banks

 

100 

 

 

100 

Securities available for sale, at fair value

 

86,523 

 

 

93,776 

Securities held to maturity, at amortized cost (fair value of $7,039 and $7,008 at March 31, 2016 and December 31, 2015, respectively)

 

6,816 

 

 

6,834 

Federal Home Loan Bank Stock, at cost

 

3,839 

 

 

5,165 



 

 

 

 

 

Loans receivable, net of unearned income

 

580,051 

 

 

543,423 

Less:  allowance for loan losses

 

5,812 

 

 

5,590 

Net loans receivable

 

574,239 

 

 

537,833 



 

 

 

 

 

Foreclosed real estate

 

3,328 

 

 

3,354 

Premises and equipment, net

 

9,126 

 

 

8,879 

Accrued interest receivable

 

2,257 

 

 

1,764 

Goodwill

 

2,820 

 

 

2,820 

Bank-owned life insurance

 

12,600 

 

 

12,524 

Other assets

 

6,085 

 

 

5,334 



 

 

 

 

 

Total Assets

$

716,772 

 

$

684,503 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Non-interest bearing

$

109,152 

 

$

87,209 

Interest bearing

 

466,148 

 

 

430,647 

Total deposits

 

575,300 

 

 

517,856 



 

 

 

 

 

Short-term borrowings

 

1,430 

 

 

34,650 

Long-term borrowings

 

66,000 

 

 

61,000 

Accrued interest payable and other liabilities

 

5,473 

 

 

4,169 

Junior subordinated debentures

 

12,887 

 

 

12,887 



 

 

 

 

 

Total Liabilities

 

661,090 

 

 

630,562 



 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

Preferred stock, no par value, 1,000,000 shares authorized; none issued

 

-

 

 

-

Common stock, no par value, 10,000,000 shares authorized; 4,735,218 and 4,705,480 shares issued and 4,675,976 and 4,646,238 shares outstanding at March 31, 2016 and December 31, 2015, respectively

 

36,028 

 

 

35,927 

Treasury stock, at cost; 59,242 shares at March 31, 2016 and December 31, 2015, respectively

 

(592)

 

 

(592)

Retained earnings                          

 

19,909 

 

 

18,520 

Accumulated other comprehensive income

 

337 

 

 

86 



 

 

 

 

 

Total Stockholders' Equity

 

55,682 

 

 

53,941 



 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

716,772 

 

$

684,503 

See Notes to Consolidated Financial Statements





































 

 

 

 

 

1

 


 

SUSSEX BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME 



 

 

 

 

 



Three Months Ended March 31,

(Dollars in thousands except per share data)

 

2016

 

 

2015

INTEREST INCOME

 

 

 

 

 

Loans receivable, including fees

$

6,145 

 

$

5,172 

Securities:

 

 

 

 

 

Taxable

 

376 

 

 

267 

Tax-exempt

 

201 

 

 

208 

Interest bearing deposits

 

 

 

Total Interest Income

 

6,726 

 

 

5,651 

INTEREST EXPENSE

 

 

 

 

 

Deposits

 

575 

 

 

416 

Borrowings

 

437 

 

 

380 

Junior subordinated debentures

 

68 

 

 

53 

Total Interest Expense

 

1,080 

 

 

849 

Net Interest Income

 

5,646 

 

 

4,802 

PROVISION FOR LOAN LOSSES

 

211 

 

 

305 

Net Interest Income after Provision for Loan Losses

 

5,435 

 

 

4,497 

OTHER INCOME

 

 

 

 

 

Service fees on deposit accounts

 

225 

 

 

213 

ATM and debit card fees

 

187 

 

 

174 

Bank-owned life insurance

 

76 

 

 

78 

Insurance commissions and fees

 

1,721 

 

 

1,155 

Investment brokerage fees

 

27 

 

 

22 

Net gain on sales of securities

 

167 

 

 

168 

Net loss on disposal of premises and equipment

 

(13)

 

 

 -

Other

 

134 

 

 

91 

Total Other Income

 

2,524 

 

 

1,901 

OTHER EXPENSES

 

 

 

 

 

Salaries and employee benefits

 

3,353 

 

 

2,780 

Occupancy, net

 

424 

 

 

477 

Data processing

 

549 

 

 

354 

Furniture and equipment

 

233 

 

 

210 

Advertising and promotion

 

105 

 

 

70 

Professional fees

 

174 

 

 

146 

Director fees

 

59 

 

 

166 

FDIC assessment

 

120 

 

 

124 

Insurance

 

73 

 

 

52 

Stationary and supplies

 

52 

 

 

56 

Loan collection costs

 

32 

 

 

97 

Net expenses and write-downs related to foreclosed real estate

 

75 

 

 

164 

Other

 

361 

 

 

374 

Total Other Expenses

 

5,610 

 

 

5,070 

Income before Income Taxes

 

2,349 

 

 

1,328 

EXPENSE FOR INCOME TAXES

 

775 

 

 

376 

Net Income

 

1,574 

 

 

952 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

Unrealized gains on available for sale securities arising during the period

 

985 

 

 

316 

Fair value adjustments on derivatives

 

(400)

 

 

 -

Reclassification adjustment for net gain on securities transactions included in net income

 

(167)

 

 

(168)

Income tax related to items of other comprehensive income 

 

(167)

 

 

(60)

Other comprehensive income, net of income taxes

 

251 

 

 

88 

Comprehensive income

$

1,825 

 

$

1,040 

EARNINGS PER SHARE

 

 

 

 

 

Basic

$

0.34 

 

$

0.21 

Diluted

$

0.34 

 

$

0.21 

See Notes to Consolidated Financial Statements













2

 


 













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUSSEX BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Three Months Ended March 31, 2016 and 2015



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

Number of

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Total



 

Shares

 

 

Common

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Stockholders'

(Dollars in Thousands)

 

Outstanding

 

 

Stock

 

 

Earnings

 

 

Income

 

 

Stock

 

 

Equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2014

 

4,662,606 

 

$

35,553 

 

$

15,566 

 

$

169 

 

$

(59)

 

$

51,229 

Net income

 

 -

 

 

 -

 

 

952 

 

 

                       -

 

 

                     -

 

 

952 

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

88 

 

 

                     -

 

 

88 

Treasury shares purchased

 

(19,450)

 

 

 -

 

 

 -

 

 

                       -

 

 

(204)

 

 

(204)

Restricted stock granted

 

26,441 

 

 

 -

 

 

 -

 

 

                       -

 

 

 -

 

 

 -

Compensation expense related to stock option and restricted stock grants

 

                       -

 

 

91 

 

 

                      -

 

 

 -

 

 

 -

 

 

91 

Dividends declared on common stock ($0.04 per share)

 

                       -

 

 

                      -

 

 

(187)

 

 

 -

 

 

 -

 

 

(187)

Balance March 31, 2015

 

4,669,597 

 

$

35,644 

 

$

16,331 

 

$

257 

 

$

(263)

 

$

51,969 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2015

 

4,646,238 

 

$

35,927 

 

$

18,520 

 

$

86 

 

$

(592)

 

$

53,941 

Net income

 

 -

 

 

 -

 

 

1,574 

 

 

 -

 

 

 -

 

 

1,574 

Other comprehensive loss

 

 -

 

 

 -

 

 

 -

 

 

251 

 

 

 -

 

 

251 

Restricted stock granted

 

30,822 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Restricted stock forfeited

 

(1,084)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Compensation expense related to stock option and restricted stock grants

 

 -

 

 

101 

 

 

 -

 

 

 -

 

 

 -

 

 

101 

Dividends declared on common stock ($0.04 per share)

 

 -

 

 

 -

 

 

(185)

 

 

 -

 

 

 -

 

 

(185)

Balance March 31, 2016

 

4,675,976 

 

$

36,028 

 

$

19,909 

 

$

337 

 

$

(592)

 

$

55,682 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements











3

 


 





 

 

 

 

 

 

SUSSEX BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS



 

Three Months Ended March 31,

(Dollars in thousands)

 

2016

 

2015

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

1,574 

 

$

952 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

211 

 

 

305 

Depreciation and amortization

 

 

258 

 

 

243 

Net amortization of securities premiums and discounts

 

 

412 

 

 

428 

Net realized gain on sale of securities

 

 

(167)

 

 

(168)

Net realized loss on disposal of premises and equipment

 

 

13 

 

 

 -

Net realized gain on sale of foreclosed real estate

 

 

(3)

 

 

(27)

Write-downs of and provisions for foreclosed real estate

 

 

 -

 

 

97 

Deferred income tax benefit

 

 

(192)

 

 

(111)

Earnings on bank-owned life insurance

 

 

(76)

 

 

(78)

Compensation expense for stock options and stock awards

 

 

101 

 

 

91 

Increase in assets:

 

 

 

 

 

 

Accrued interest receivable

 

 

(493)

 

 

(112)

Other assets

 

 

(726)

 

 

(563)

Increase in accrued interest payable and other liabilities

 

 

904 

 

 

654 

Net Cash Provided by Operating Activities

 

 

1,816 

 

 

1,711 

Cash Flows from Investing Activities

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

Purchases

 

 

(2,044)

 

 

(21,632)

Sales

 

 

8,088 

 

 

12,767 

Maturities, calls and principal repayments

 

 

1,789 

 

 

2,161 

Securities held to maturity:

 

 

 

 

 

 

Purchases

 

 

(480)

 

 

(491)

Maturities, calls and principal repayments

 

 

491 

 

 

 -

Net increase in loans

 

 

(36,617)

 

 

(1,552)

Proceeds from the sale of foreclosed real estate

 

 

29 

 

 

1,566 

Purchases of bank premises and equipment

 

 

(518)

 

 

(343)

Decrease in Federal Home Loan Bank stock

 

 

1,326 

 

 

369 

Net Cash Used in Investing Activities

 

 

(27,936)

 

 

(7,155)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net increase in deposits

 

 

57,444 

 

 

15,242 

Increase in short-term borrowed funds

 

 

(33,220)

 

 

(18,300)

Proceeds from long-term borrowings

 

 

5,000 

 

 

15,000 

Repayment of long-term borrowings

 

 

 -

 

 

(5,000)

Purchase of treasury stock

 

 

 -

 

 

(204)

Dividends paid

 

 

(185)

 

 

(187)

Net Cash Provided by Financing Activities

 

 

29,039 

 

 

6,551 

Net Increase in Cash and Cash Equivalents

 

 

2,919 

 

 

1,107 

Cash and Cash Equivalents - Beginning

 

 

6,120 

 

 

5,859 

Cash and Cash Equivalents - Ending

 

$

9,039 

 

$

6,966 



 

 

 

 

 

 

Supplementary Cash Flows Information

 

 

 

 

 

 

Interest paid

 

$

975 

 

$

827 

Income taxes paid

 

$

795 

 

$

250 



 

 

 

 

 

 

Supplementary Schedule of Noncash Investing and Financing Activities

 

 

 

 

 

 

Foreclosed real estate acquired in settlement of loans

 

$

 -

 

$

39 



 

 

 

 

 

 

See Notes to Consolidated Financial Statements



 

 

 

 

 

 











4

 


 

NOTE 1    SUMMARY OF SIGNIFICANT ACOUNTING POLICIES

 

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Sussex Bancorp (“we,” “us, “our” or the “company”) and our wholly owned subsidiary Sussex Bank (the “Bank”).  The Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, Wheatsworth Properties Corp., PPD Holding Company, LLC, and Tri-State Insurance Agency, Inc. (“Tri-State”), a full service insurance agency located in Sussex County, New Jersey with a satellite office located in Bergen County, New Jersey.  Tri-State’s operations are considered a separate segment for financial disclosure purposes.  All inter-company transactions and balances have been eliminated in consolidation.  The Bank operates twelve banking offices, eight located in Sussex County, New Jersey,  one located in Bergen County, New Jersey, one located in Warren County, New Jersey,  one in Queens County, New York and one in Orange County, New York.

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for full year financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal, recurring nature.  Operating results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto that are included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  



New Accounting Standards

In May 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The ASU’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.  We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.



In June 2014, FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force), to clarify that a performance target in a share-based compensation award that could be achieved after an employee completes the requisite service period should be treated as a performance condition that affects the vesting of the award.  As such, the performance target should not be reflected in estimating the grant-date fair value of the award. For all entities, the amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this guidance did not have a material impact on our consolidated financial statements.



In April 2015, FASB issued ASU 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, to clarify whether a hosting arrangement (e.g., cloud computing, software as a service, infrastructure as a service, etc.) contains a software license, and thus, whether it is to be accounted for by the customer similarly to other internal-use software.  Specifically, the amendments revise the scope of Subtopic 350-40 to include internal-use software accessed through a hosting arrangement only if both of the following criteria are met: (1) the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.  There is no significant penalty if the customer has the ability to take delivery of the software without incurring significant cost and the ability to use the software separately without significant loss of utility or value and (2) it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.  If both of the above criteria are present in a hosting arrangement, then the arrangement contains a software license and the customer should account for that element in accordance with Subtopic 350-40 (i.e., generally capitalize and subsequently amortize the cost of the license).  If both

5

 


 

of the above criteria are not present, the customer should account for the arrangement as a service contract (i.e., expense fees as incurred).  The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  An entity can elect to adopt the amendments either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements.

 

In January 2016, FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01, among other things; (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.  The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.



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 is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.



In March 2016, FASB issued ASU 2016-09, Compensation  – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. FASB is issuing ASU 2016-09 as part of its initiative to reduce complexity in accounting standards. The areas for simplification in this ASU 2016-09 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. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.



6

 


 

NOTE 2 – SECURITIES



Available for Sale



The amortized cost and approximate fair value of securities available for sale as of March  31, 2016 and December 31, 2015 are summarized as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

Gross

 

 

Gross

 

 

 



 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

(Dollars in thousands)

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

12,485 

 

$

71 

 

$

(28)

 

$

12,528 

State and political subdivisions

 

 

29,611 

 

 

656 

 

 

(23)

 

 

30,244 

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

 

43,466 

 

 

369 

 

 

(84)

 

 

43,751 



 

$

85,562 

 

$

1,096 

 

$

(135)

 

$

86,523 



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

12,792 

 

$

51 

 

$

(55)

 

$

12,788 

State and political subdivisions

 

 

37,771 

 

 

507 

 

 

(129)

 

 

38,149 

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

 

43,069 

 

 

206 

 

 

(436)

 

 

42,839 



 

$

93,632 

 

$

764 

 

$

(620)

 

$

93,776 



Securities with a carrying value of approximately $32.8 million and $33.4 million at March  31, 2016 and December 31, 2015, respectively, were pledged to secure public deposits and for borrowings at the Federal Reserve Bank as required or permitted by applicable laws and regulations.

 

The amortized cost and fair value of securities available for sale at March 31, 2016 are shown below by contractual maturity.  Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.  Investments which pay principal on a periodic basis are not included in the maturity categories.





 

 

 

 

 

 



 

 

 

 

 

 



 

Amortized

 

Fair

(Dollars in thousands)

 

Cost

 

Value



 

 

 

 

 

 

Due in one year or less

 

$

 -

 

$

 -

Due after one year through five years

 

 

699 

 

 

704 

Due after five years through ten years

 

 

3,643 

 

 

3,728 

Due after ten years

 

 

25,269 

 

 

25,812 

Total bonds and obligations

 

 

29,611 

 

 

30,244 

U.S. government agencies

 

 

12,485 

 

 

12,528 

Mortgage-backed securities:

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

 

43,466 

 

 

43,751 

Total available for sale securities

 

$

85,562 

 

$

86,523 



Gross gains on sales of securities available for sale were $167 thousand and $216 thousand and gross losses were less than $1 thousand and $48 thousand for the three months ended March 31, 2016 and 2015, respectively.

7

 


 

Temporarily Impaired Securities

The following table shows gross unrealized losses and fair value of securities with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by category and length of time that individual available for sale securities have been in a continuous unrealized loss position at March  31, 2016 and December 31, 2015.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Less Than 12 Months

 

12 Months or More

 

Total



 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross



Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(Dollars in thousands)

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

4,587 

 

$

(6)

 

$

2,452 

 

$

(22)

 

$

7,039 

 

$

(28)

State and political subdivisions

 

1,414 

 

 

(3)

 

 

1,048 

 

 

(20)

 

 

2,462 

 

 

(23)

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

12,922 

 

 

(79)

 

 

1,512 

 

 

(5)

 

 

14,434 

 

 

(84)

Total temporarily impaired securities

$

18,923 

 

$

(88)

 

$

5,012 

 

$

(47)

 

$

23,935 

 

$

(135)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

5,888 

 

$

(23)

 

$

2,473 

 

$

(32)

 

$

8,361 

 

$

(55)

State and political subdivisions

 

5,780 

 

 

(107)

 

 

2,998 

 

 

(22)

 

 

8,778 

 

 

(129)

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

31,885 

 

 

(436)

 

 

 -

 

 

 -

 

 

31,885 

 

 

(436)

Total temporarily impaired securities

$

43,553 

 

$

(566)

 

$

5,471 

 

$

(54)

 

$

49,024 

 

$

(620)



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. As of March 31, 2016, we reviewed our available for sale securities 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 and equity securities are 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. 

 

U.S. Government Agencies 

At March  31, 2016 and December 31, 2015, the decline in fair value and the unrealized losses for our U.S. government agencies securities were primarily due to changes in spreads and market conditions and not credit quality.  At March  31, 2016, there were five securities with a fair value of $7.0 million that had an unrealized loss that amounted to $28 thousand.  As of March 31, 2016, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of the U.S. government agency securities at March 31, 2016 were deemed to be other-than-temporarily impaired (“OTTI”).



At December 31, 2015, there were six securities with a fair value of $8.4 million that had an unrealized loss that amounted to $55 thousand.



State and Political Subdivisions

At March 31, 2016 and December 31, 2015, the decline in fair value and the unrealized losses for our state and political subdivisions securities were caused by changes in interest rates and spreads and were not the result of credit quality.  At March 31, 2016, there were four securities with a fair value of $2.5 million that had an unrealized loss that amounted to $23 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 March 31, 2016,  we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis.  Therefore, none of our state and political subdivision securities at March 31, 2016 were deemed to be OTTI.  



At December 31, 2015, there were 15 securities with a fair value of $8.8 million that had an unrealized loss that amounted to $129 thousand

 

Mortgage-Backed Securities

At March 31, 2016 and December 31, 2015, the decline in fair value and the unrealized losses for our mortgage-backed securities guaranteed by U.S. government-sponsored enterprises were primarily due to changes in spreads and market conditions and not credit quality.  At March 31, 2016, there were eight securities with a fair value of $14.4 million that had an unrealized loss that amounted to $84 thousand.  As of March 31, 2016,  we did not intend to sell and it was not

8

 


 

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 March 31, 2016 were deemed to be OTTI.  



At December 31, 2015, there were 18 securities with a fair value of $31.9 million that had an unrealized loss that amounted to $436 thousand. 

 

Held to Maturity Securities

 

The amortized cost and approximate fair value of securities held to maturity as of March 31, 2016 and December 31, 2015 are summarized as follows:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross

 

 

Gross

 

 

 



 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

(Dollars in thousands)

 

Cost

 

 

Gains

 

 

Losses

 

 

Value



 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

$

6,816 

 

$

223 

 

$

 -

 

$

7,039 



 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

$

6,834 

 

$

174 

 

$

 -

 

$

7,008 



The amortized cost and carrying value of securities held to maturity at March 31, 2016 are shown below by contractual maturity.  Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.



 

 

 

 

 



 

 

 

 

 



 

Amortized

 

 

Fair

(Dollars in thousands)

 

Cost

 

 

Value



 

 

 

 

 

Due in one year or less

$

2,942 

 

$

2,942 

Due after one year through five years

 

1,000 

 

 

1,003 

Due after five years through ten years

 

1,827 

 

 

1,926 

Due after ten years

 

1,047 

 

 

1,168 

Total held to maturity securities

$

6,816 

 

$

7,039 



Temporarily Impaired Securities

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. As of March 31, 2016, we did not have any held to maturity investments with unrealized losses. 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.



At December 31, 2015,  we did not have any held to maturity securities in an unrealized loss position





9

 


 

NOTE 3 – LOANS



The composition of net loans receivable at March 31, 2016 and December 31, 2015 is as follows:



 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

December 31, 2015



 

 

 

 

 

Commercial and industrial

$

24,278 

 

$

20,023 

Construction

 

15,827 

 

 

13,348 

Commercial real estate

 

409,358 

 

 

382,262 

Residential real estate

 

130,189 

 

 

127,204 

Consumer and other

 

1,172 

 

 

1,253 

Total loans receivable

 

580,824 

 

 

544,090 

Unearned net loan origination fees

 

(773)

 

 

(667)

Allowance for loan losses

 

(5,812)

 

 

(5,590)

Net loans receivable

$

574,239 

 

$

537,833 



Mortgage loans serviced for others are not included in the accompanying balance sheets.  The total amount of loans serviced for the benefit of others was approximately $448 thousand and $454 thousand at March 31, 2016 and December 31, 2015, respectively. Mortgage servicing rights were immaterial at March 31, 2016 and December 31, 2015.



NOTE 4 – 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 three  months ended March 31, 2016 and 2015:  







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Commercial

 

 

 

Commercial

 

Residential

 

Consumer

 

 

 

 



and

 

 

 

 

Real

 

Real

 

and

 

 

 

 

(Dollars in thousands)

Industrial

 

Construction

 

Estate

 

Estate

 

Other

 

Unallocated

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

85 

 

$

220 

 

$

3,646 

 

$

784 

 

$

87 

 

$

768 

 

$

5,590 

Charge-offs

 

 -

 

 

 -

 

 

 -

 

 

(9)

 

 

(19)

 

 

 -

 

 

(28)

Recoveries

 

 

 

 -

 

 

31 

 

 

 -

 

 

 

 

 -

 

 

39 

Provision

 

 

 

47 

 

 

170 

 

 

133 

 

 

52 

 

 

(197)

 

 

211 

Ending balance

$

98 

 

$

267 

 

$

3,847 

 

$

908 

 

$

121 

 

$

571 

 

$

5,812 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

231 

 

 

383 

 

$

3,491 

 

$

903 

 

$

19 

 

$

614 

 

$

5,641 

Charge-offs

 

(19)

 

 

 -

 

 

(188)

 

 

 -

 

 

(7)

 

 

 -

 

 

(214)

Recoveries

 

 

 

 -

 

 

12 

 

 

12 

 

 

 

 

 -

 

 

31 

Provision

 

(78)

 

 

 

 

472 

 

 

(74)

 

 

73 

 

 

(93)

 

 

305 

Ending balance

$

138 

 

$

388 

 

$

3,787 

 

$

841 

 

$

88 

 

$

521 

 

$

5,763 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



10

 


 

The following table presents the balance of the allowance of loan losses and loans receivable by class at March 31, 2016 and December 31, 2015 disaggregated on the basis of our impairment methodology.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Allowance for Loan Losses

 

Loans Receivable



 

 

 

Balance

 

Balance

 

 

 

 

 

 

 

 

 



 

 

 

Related to

 

Related to

 

 

 

 

 

 

 

 

 



 

 

 

Loans

 

Loans

 

 

 

 

 

 

 

 

 



 

 

 

Individually

 

Collectively

 

 

 

 

Individually

 

Collectively



 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

Evaluated for

 

Evaluated for

(Dollars in thousands)

Balance

 

Impairment

 

Impairment

 

Balance

 

Impairment

 

Impairment



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

98 

 

$

 -

 

$

98 

 

$

24,278 

 

$

20 

 

$

24,258 

Construction

 

267 

 

 

 -

 

 

267 

 

 

15,827 

 

 

 -

 

 

15,827 

Commercial real estate

 

3,847 

 

 

249 

 

 

3,598 

 

 

409,358 

 

 

5,130 

 

 

404,228 

Residential real estate

 

908 

 

 

68 

 

 

840 

 

 

130,189 

 

 

1,333 

 

 

128,856 

Consumer and other loans

 

121 

 

 

107 

 

 

14 

 

 

1,172 

 

 

138 

 

 

1,034 

Unallocated

 

571 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Total

$

5,812 

 

$

424 

 

$

4,817 

 

$

580,824 

 

$

6,621 

 

$

574,203 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

85 

 

$

 -

 

$

85 

 

$

20,023 

 

$

20 

 

$

20,003 

Construction

 

220 

 

 

 -

 

 

220 

 

 

13,348 

 

 

 -

 

 

13,348 

Commercial real estate

 

3,646 

 

 

112 

 

 

3,534 

 

 

382,262 

 

 

5,160 

 

 

377,102 

Residential real estate

 

784 

 

 

79 

 

 

705 

 

 

127,204 

 

 

1,546 

 

 

125,658 

Consumer and other loans

 

87 

 

 

73 

 

 

14 

 

 

1,253 

 

 

138 

 

 

1,115 

Unallocated

 

768 

 

 

-

 

 

 -

 

 

 -

 

 

-

 

 

 -

Total

$

5,590 

 

$

264 

 

$

4,558 

 

$

544,090 

 

$

6,864 

 

$

537,226 



An age analysis of loans receivable, which were past due as of March 31, 2016 and December 31, 2015, is as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment



 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

Total

 

> 90 Days



30-59 Days

 

60-89 days

 

Than

 

Total Past

 

 

 

 

Financing

 

and

(Dollars in thousands)

Past Due

 

Past Due

 

90 Days (a)

 

Due

 

Current

 

Receivables

 

Accruing



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

 -

 

$

 

$

20 

 

$

24 

 

$

24,254 

 

$

24,278 

 

$

 -

Construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

15,827 

 

 

15,827 

 

 

 -

Commercial real estate

 

2,306 

 

 

1,280 

 

 

3,993 

 

 

7,579 

 

 

401,779 

 

 

409,358 

 

 

 -

Residential real estate

 

1,001 

 

 

247 

 

 

1,202 

 

 

2,450 

 

 

127,739 

 

 

130,189 

 

 

 -

Consumer and other

 

 

 

 -

 

 

138 

 

 

142 

 

 

1,030 

 

 

1,172 

 

 

 -

Total

$

3,311 

 

$

1,531 

 

$

5,353 

 

$

10,195 

 

$

570,629 

 

$

580,824 

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

 

$

 -

 

$

20 

 

$

25 

 

$

19,998 

 

$

20,023 

 

$

 -

Construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

13,348 

 

 

13,348 

 

 

 -

Commercial real estate

 

758 

 

 

1,461 

 

 

4,016 

 

 

6,235 

 

 

376,027 

 

 

382,262 

 

 

 -

Residential real estate

 

335 

 

 

247 

 

 

1,138 

 

 

1,720 

 

 

125,484 

 

 

127,204 

 

 

 -

Consumer and other

 

16 

 

 

 

 

138 

 

 

155 

 

 

1,098 

 

 

1,253 

 

 

 -

Total

$

1,114 

 

$

1,709 

 

$

5,312 

 

$

8,135 

 

$

535,955 

 

$

544,090 

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) includes loans greater than 90 days past due and still accruing and non-accrual loans.



11

 


 

Loans for which the accrual of interest has been discontinued at March 31, 2016 and December 31, 2015 were:

 







 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

December 31, 2015



 

 

 

 

 

Commercial and industrial

$

20 

 

$

20 

Commercial real estate

 

3,993 

 

 

4,016 

Residential real estate

 

1,202 

 

 

1,138 

Consumer and other

 

138 

 

 

138 

Total

$

5,353 

 

$

5,312 



In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate 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 our 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 and payment status; 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.



Our risk-rating system is consistent with the classification system used by regulatory agencies and with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets.  The classification system is as follows:    



·

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation.  We have 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 management and there is a distinct possibility that we could sustain some loss if the deficiencies are not corrected.  Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due.  Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.



·

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured.  The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.



·

Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets is not warranted.  Such loans are fully charged off.

12

 


 

The following tables illustrate our corporate credit risk profile by creditworthiness category as of March 31, 2016 and December 31, 2015

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

Special

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

24,224 

 

$

19 

 

$

35 

 

$

 -

 

$

24,278 

Construction

 

15,827 

 

 

 -

 

 

 -

 

 

 -

 

 

15,827 

Commercial real estate

 

394,515 

 

 

8,887 

 

 

5,956 

 

 

 -

 

 

409,358 

Residential real estate

 

128,119 

 

 

737 

 

 

1,333 

 

 

 -

 

 

130,189 

Consumer and other

 

1,034 

 

 

 -

 

 

138 

 

 

 -

 

 

1,172 



$

563,719 

 

$

9,643 

 

$

7,462 

 

$

 -

 

$

580,824 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

19,983 

 

$

 

$

35 

 

$

 -

 

$

20,023 

Construction

 

13,348 

 

 

 -

 

 

 -

 

 

 -

 

 

13,348 

Commercial real estate

 

367,305 

 

 

8,957 

 

 

6,000 

 

 

 -

 

 

382,262 

Residential real estate

 

124,915 

 

 

743 

 

 

1,546 

 

 

 -

 

 

127,204 

Consumer and other

 

1,115 

 

 

 -

 

 

138 

 

 

 -

 

 

1,253 



$

526,666 

 

$

9,705 

 

$

7,719 

 

$

 -

 

$

544,090 



The following table reflects information about our impaired loans by class as of March 31, 2016 and December 31, 2015:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016

 

 

 

December 31, 2015



 

 

 

Unpaid

 

 

 

 

 

 

 

 

Unpaid

 

 

 



Recorded

 

Principal

 

Related

 

 

Recorded

 

Principal

 

Related

(Dollars in thousands)

Investment

 

Balance

 

Allowance

 

 

Investment

 

Balance

 

Allowance



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

20 

 

$

20 

 

$

 -

 

 

$

20 

 

$

20 

 

$

 -

Commercial real estate

 

2,207 

 

 

2,218 

 

 

 -

 

 

 

2,684 

 

 

2,684 

 

 

 -

Residential real estate

 

999 

 

 

999 

 

 

 -

 

 

 

1,123 

 

 

1,152 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

2,923 

 

 

2,923 

 

 

249 

 

 

 

2,476 

 

 

2,476 

 

 

112 

Residential real estate

 

334 

 

 

364 

 

 

68 

 

 

 

423 

 

 

423 

 

 

79 

Consumer and other

 

138 

 

 

138 

 

 

107 

 

 

 

138 

 

 

138 

 

 

73 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

20 

 

 

20 

 

 

 -

 

 

 

20 

 

 

20 

 

 

 -

Commercial real estate

 

5,130 

 

 

5,141 

 

 

249 

 

 

 

5,160 

 

 

5,160 

 

 

112 

Residential real estate

 

1,333 

 

 

1,363 

 

 

68 

 

 

 

1,546 

 

 

1,575 

 

 

79 

Consumer and other

 

138 

 

 

138 

 

 

107 

 

 

 

138 

 

 

138 

 

 

73 



$

6,621 

 

$

6,662 

 

$

424 

 

 

$

6,864 

 

$

6,893 

 

$

264 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





 

13

 


 



The following table presents the average recorded investment and income recognized for the three months ended March 31, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 



For the Three Months Ended March 31, 2016

 

For the Three Months Ended March 31, 2015



Average

 

Interest

 

Average

 

Interest



Recorded

 

Income

 

Recorded

 

Income

(Dollars in thousands)

Investment

 

Recognized

 

Investment

 

Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

20 

 

$

 -

 

$

10 

 

$

 -

Commercial real estate

 

2,446 

 

 

 

 

2,759 

 

 

Residential real estate

 

1,061 

 

 

 

 

1,631 

 

 

Total impaired loans without a related allowance

 

3,527 

 

 

 

 

4,400 

 

 



 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

2,699 

 

 

 

 

2,766 

 

 

Residential real estate

 

379 

 

 

 -

 

 

513 

 

 

Consumer and other

 

138 

 

 

 -

 

 

69 

 

 

 -

Total impaired loans with an allowance

 

3,216 

 

 

 

 

3,395 

 

 

11 

Total impaired loans

$

6,743 

 

$

17 

 

$

7,795 

 

$

17 



 

 

 

 

 

 

 

 

 

 

 







We recognize interest income on performing impaired loans as payments are received.  On non-performing impaired loans we do not recognize interest income as all payments are recorded as a reduction of principal on such loans.    



Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection.  The concessions rarely result in the forgiveness of principal or accrued interest.  In addition, we attempt to obtain additional collateral or guarantor support when modifying such loans.  Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.



The following table presents the recorded investment in troubled debt restructured loans, based on payment performance status:



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Commercial Real Estate

 

Residential Real Estate

 

Total



 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

Performing

$

1,137 

 

$

131 

 

$

1,268 

Non-performing

 

1,828 

 

 

194 

 

 

2,022 

Total

$

2,965 

 

$

325 

 

$

3,290 



 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

Performing

$

1,144 

 

$

409 

 

$

1,553 

Non-performing

 

1,831 

 

 

194 

 

 

2,025 

Total

$

2,975 

 

$

603 

 

$

3,578 



Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote.  As of March 31, 2016, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.



There were no troubled debt restructurings that occurred during the three months ended March 31, 2016  and 2015





There were no troubled debt restructurings for which there was a payment default within twelve months following the date of the restructuring for the three months ended March 31, 2016 and 2015.



14

 


 

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. As of both March 31, 2016 and December 31, 2015, we held $130 thousand in foreclosed residential real estate properties as a result of obtaining physical possession. In addition, as of March 31, 2016 and December 31, 2015,respectively, we had consumer loans with a carrying value of $878 thousand and $945 thousand collateralized by residential real estate property for which formal foreclosure proceedings were in process.



NOTE 5 – EARNINGS PER SHARE 

 

Basic earnings per share are calculated by dividing net income by the weighted average number of shares of common stock outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares (unvested restricted stock grants and stock options) had been issued, as well as any adjustment to income that would result from the assumed issuance of potential common shares that may be issued by us. Potential common shares related to stock options are determined using the treasury stock method.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31, 2016

 

Three Months Ended March 31, 2015

(In thousands, except share and

Income

 

Shares

 

Per Share

 

Income

 

Shares

 

Per Share

per share data)

(Numerator)

 

(Denominator)

 

Amount

 

(Numerator)

 

(Denominator)

 

Amount

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings applicable to common stockholders

$

1,574 

 

4,578,598 

 

$

0.34 

 

$

952 

 

4,571,142 

 

$

0.21 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested stock awards

 

-

 

27,828 

 

 

 

 

 

-

 

31,768 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income applicable to common stockholders and assumed conversions

$

1,574 

 

4,606,426 

 

$

0.34 

 

$

952 

 

4,602,910 

 

$

0.21 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





There were 57,038 and 21,244 shares of unvested restricted stock awards and options outstanding during the quarter ended March 31,  2016 and 2015, respectively, which were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.  .



NOTE 6OTHER COMPREHENSIVE  INCOME 

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.



The components of other comprehensive income, both before tax and net of tax, are as follows:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31, 2016

 

Three Months Ended March 31, 2015



Before Tax

 

Tax Effect

 

Net of Tax

 

Before Tax

 

Tax Effect

 

Net of Tax

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains on available for sale securities

$

985 

 

$

394 

 

$

591 

 

$

316 

 

$

127 

 

$

189 

   Fair value adjustments on derivatives

 

(400)

 

 

(160)

 

 

(240)

 

 

 -

 

 

 -

 

 

 -

Reclassification adjustment for net gains on securities transactions included in net income

 

(167)

 

 

(67)

 

 

(100)

 

 

(168)

 

 

(67)

 

 

(101)

Total other comprehensive income

$

418 

 

$

167 

 

$

251 

 

$

148 

 

$

60 

 

$

88 













15

 


 















NOTE 7 – SEGMENT INFORMATION



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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31, 2016

 

Three Months Ended March 31, 2015



Banking and

 

 

 

 

 

 

 

Banking and

 

 

 

 

 

 



Financial

 

Insurance

 

 

 

 

Financial

 

Insurance

 

 

 



Services

 

Services

 

Total

 

Services

 

Services

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income from external sources

$

5,646 

 

$

 -

 

$

5,646 

 

$

4,802 

 

$

 -

 

$

4,802 

Other income from external sources

 

786 

 

 

1,738 

 

 

2,524 

 

 

743 

 

 

1,158 

 

 

1,901 

Depreciation and amortization

 

252 

 

 

 

 

258 

 

 

239 

 

 

 

 

243 

Income before income taxes

 

1,514 

 

 

835 

 

 

2,349 

 

 

928 

 

 

400 

 

 

1,328 

Income tax expense (1)

 

441 

 

 

334 

 

 

775 

 

 

216 

 

 

160 

 

 

376 

Total assets

 

709,893 

 

 

6,879 

 

 

716,772 

 

 

598,265 

 

 

5,986 

 

 

604,251 



(1) Insurance Services calculated at statutory tax rate of 40%



NOTE 8   STOCK-BASED COMPENSATION 

 

We currently have stock-based compensation plans in place for our directors, officers, employees, consultants and advisors.  Under the terms of these plans we may grant restricted shares and stock options for the purchase of our common stock.  The stock-based compensation is granted under terms determined by our Compensation Committee.  Our standard stock option grants have a maximum term of 10 years, generally vest over periods ranging between one and four years, and are granted with an exercise price equal to the fair market value of the common stock on the date of grant.  Restricted stock is valued at the market value of the common stock on the date of grant and generally vests over periods of two to seven years.  All dividends paid on restricted stock, whether vested or unvested, are paid to the shareholder.



Information regarding our stock option plans for the three months ended March 31, 2016 is as follows:





 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

 

 

Weighted

 

 

 

 

 



 

 

 

 

Average

 

Weighted

 

 

 



 

 

 

 

Exercise

 

Average

 

 

Aggregate



 

Number of

 

 

Price per

 

Contractual

 

 

Intrinsic



 

Shares

 

 

Share

 

Term

 

 

Value



 

 

 

 

 

 

 

 

 

 

Options outstanding, beginning of year

 

51,985 

 

$

10.06 

 

 

 

 

 

Options granted

 

26,216 

 

 

12.83 

 

 

 

 

 

Options outstanding, end of quarter

 

78,201 

 

$

10.99 

 

9.1 

 

$

127,046 

Options exercisable, end of quarter

 

10,396 

 

$

10.06 

 

8.7 

 

$

25,407 

Option price range at end of quarter

 

$9.97 to $12.83

 

 

 

 

 

 

 

 

Option price of exercisable shares

 

$9.97 to $10.25

 

 

 

 

 

 

 

 



The following table summarizes information about stock option assumptions:







 

 

 

 



2016

2015



 

 

 

 

Expected dividend yield

 

1.25% 

 

1.56% 

Expected volatility

 

22.72% 

 

34.32% 

Risk-free interest rate

 

1.71% 

 

1.37% 

Expected option life

 

7.5 Years

 

7.5 Years



During the three months ended March 31, 2016 and 2015, we  expensed $11 thousand and $9 thousand, respectively, in stock-based compensation under stock option awards. 



16

 


 

The weighted average grant date fair values of options granted during the three months ended March 31, 2016 and 2015, were $3.37 per share and $3.56 per share, respectively. Expected future expense relating to the unvested options outstanding as of March 31, 2016 is $227 thousand over a weighted average period of 4.1 years. Upon exercise of vested options, management expects to draw on treasury stock as the source of the shares.



The summary of changes in unvested restricted stock awards for the three months ended March 31, 2016, is as follows:



 

 

 

 

 



 

 

 

 

Weighted



 

 

 

 

Average



 

Number of

 

 

Grant Date



 

Shares

 

 

Fair Value



 

 

 

 

 

Unvested restricted stock, beginning of year

 

93,570 

 

$

7.67 

Granted

 

30,822 

 

 

12.68 

Forfeited

 

(1,084)

 

 

9.58 

Vested

 

(35,362)

 

 

7.00 

Unvested restricted stock, end of period

 

87,946 

 

$

9.67 



During the three months ended March 31, 2016 and 2015, we expensed $90 thousand and $82 thousand, respectively, in stock-based compensation under restricted stock awards. 



At March 31, 2016, unrecognized compensation expense for unvested restricted stock was $722 thousand, which is expected to be recognized over an average period of 1.9 years.    



NOTE 9 – GUARANTEES

 

We do not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit.  Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party.  Generally, all letters of credit, when issued, have expiration dates within one year.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  Generally, we hold collateral and/or personal guarantees supporting these commitments.  As of March 31, 2016, we  had $729 thousand of outstanding letters of credit.  Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees.  The amount of the liability as of March 31, 2016, for guarantees under standby letters of credit issued is not material.



NOTE 10   FAIR VALUE OF FINANCIAL INSTRUMENTS



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 a sale transaction on the dates indicated.  The fair value amounts have been measured as of their respective period 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 period end.



In accordance with U.S. GAAP, we use 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 fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

17

 


 

The following table summarizes the fair value of our financial assets measured on a recurring basis by the above pricing observability levels as of March 31, 2016 and December 31, 2015:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Quoted Prices in

 

Significant

 

 

 



 

 

 

Active Markets

 

Other

 

Significant



Fair

 

for Identical

 

Observable

 

Unobservable



Value

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Measurements

 

(Level I)

 

(Level II)

 

(Level III)



 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

12,528 

 

$

 -

 

$

12,528 

 

$

 -

State and political subdivisions

 

30,244 

 

 

 -

 

 

30,244 

 

 

 -

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

43,751 

 

 

 -

 

 

43,751 

 

 

 -

Derivative instruments

 

 

 

 

 

 

 

 

 

 

 

    Interest rate swaps

 

(400)

 

 

 -

 

 

(400)

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

$

12,788 

 

$

 -

 

$

12,788 

 

$

 -

State and political subdivisions

 

38,149 

 

 

 -

 

 

38,149 

 

 

 -

Mortgage-backed securities -

 

 

 

 

 

 

 

 

 

 

 

U.S. government-sponsored enterprises

 

42,839 

 

 

 -

 

 

42,839 

 

 

 -



Our available for sale and held to maturity securities portfolios contain investments, which were all rated within our investment policy guidelines at time of purchase, and upon review of the entire portfolio all securities are marketable and have observable pricing inputs.

 

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2016 and December 31, 2015 are as follows:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

Quoted Prices in

 

Significant

 

 

 



 

 

 

Active Markets

 

Other

 

Significant



Fair

 

for Identical

 

Observable

 

Unobservable



Value

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Measurements

 

(Level I)

 

(Level II)

 

(Level III)



 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

  Impaired loans

$

1,051 

 

$

 -

 

$

 -

 

$

1,051 



 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

  Impaired loans

$

801 

 

$

 -

 

$

 -

 

$

801 

  Foreclosed real estate

 

756 

 

 

 -

 

 

 -

 

 

756 



18

 


 

The following table presents additional qualitative information about assets measured at fair value on a nonrecurring basis and for which Level III inputs were used to determine fair value:







 

 

 

 

 

 

 

 



Qualitative Information about Level III Fair Value Measurements



Fair

 

 

 

 

 

Range



Value

 

Valuation

 

Unobservable

 

(Weighted

(Dollars in thousands)

Estimate

 

Techniques

 

Input

 

Average)



 

 

 

 

 

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

Impaired loans

$

1,051 

 

Appraisal of

 

Appraisal

 

0% to -27.30% 



 

 

 

collateral 

 

adjustments (1)

 

(-2.5%)



 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

Impaired loans

$

801 

 

Appraisal of

 

Appraisal

 

0% to -61.8% 



 

 

 

collateral 

 

adjustments (1)

 

(-5.8%)



 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Foreclosed real estate

 

756 

 

Appraisal of

 

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 our assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between our disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair value of our financial instruments at March 31, 2016 and December 31, 2015:  



Cash and Cash Equivalents (Carried at Cost): The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets’ fair value.



Deposits (Carried at Cost): Fair value for fixed-rate time certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.  We generally purchase amounts below the insured limit, limiting the amount of credit risk on these time deposits.  



Securities: The fair value of securities, available for sale (carried at fair value) and securities held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level I), or matrix pricing (Level II), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level III).  In the absence of such evidence, management’s best estimate is used. 

 

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 non-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.  The fair value of impaired loans totaled  $1.1 million and $801 thousand at March 31, 2016 and

19

 


 

December 31, 2015,  respectively.  These balances consist of loans that were written down or required additional reserves during the periods ended March 31, 2016 and December 31, 2015, respectively

 

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 Federal Home Loan Bank (“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 Company also uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges, and which satisfy hedge accounting requirements, 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 the exchange of the underlying notional amount.  These derivatives were used to hedge the variable cash outflows associated with FHLB borrowings along with our junior subordinated debenture at U.S. Capital Trust. The effective portion of changes in the fair value of these derivatives are recorded in accumulated other comprehensive income, and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of these derivatives are recognized directly in earnings.



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.



Junior Subordinated Debentures (Carried at Cost): Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. 



Accrued Interest Receivable and Accrued Interest Payable (Carried at Cost): The carrying amounts of accrued interest receivable and payable approximate its fair value.



Off-Balance Sheet Instruments (Disclosed at Cost): Fair values for our 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. 



20

 


 

The fair values of our financial instruments at March 31, 2016 and December 31, 2015, were as follows: 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 



 

 

 

 

 

 

Active Markets

 

Other

 

Significant



March 31, 2016

 

for Identical

 

Observable

 

Unobservable



Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Amount

 

Value

 

(Level I)

 

(Level II)

 

(Level III)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,039 

 

$

9,039 

 

$

9,039 

 

$

 -

 

$

 -

Time deposits with other banks

 

100 

 

 

100 

 

 

 -

 

 

100 

 

 

 -

Securities available for sale

 

86,523 

 

 

86,523 

 

 

 -

 

 

86,523 

 

 

 -

Securities held to maturity

 

6,816 

 

 

7,039 

 

 

 -

 

 

7,039 

 

 

 -

Federal Home Loan Bank stock

 

3,839 

 

 

3,839 

 

 

 -

 

 

3,839 

 

 

 -

Loans receivable, net of allowance

 

574,239 

 

 

572,914 

 

 

 -

 

 

 -

 

 

572,914 

Accrued interest receivable

 

2,257 

 

 

2,257 

 

 

 -

 

 

2,257 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

419,030 

 

 

419,030 

 

 

 -

 

 

419,030 

 

 

 -

Time deposits

 

156,270 

 

 

156,175 

 

 

 -

 

 

156,175 

 

 

 -

Short-term borrowings

 

1,430 

 

 

1,430 

 

 

1,430 

 

 

 -

 

 

 -

Long-term borrowings

 

66,000 

 

 

67,358 

 

 

 -

 

 

67,358 

 

 

 -

Junior subordinated debentures

 

12,887 

 

 

10,374 

 

 

 -

 

 

10,374 

 

 

 -

Accrued interest payable

 

386 

 

 

386 

 

 

 -

 

 

386 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest rate swaps

 

(400)

 

 

(400)

 

 

 -

 

 

(400)

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

Quoted Prices in

 

Significant

 

 

 



 

 

 

 

 

 

Active Markets

 

Other

 

Significant



December 31, 2015

 

for Identical

 

Observable

 

Unobservable



Carrying

 

Fair

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

Amount

 

Value

 

(Level I)

 

(Level II)

 

(Level III)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

6,120 

 

$

6,120 

 

$

6,120 

 

$

 -

 

$

 -

Time deposits with other banks

 

100 

 

 

100 

 

 

 -

 

 

100 

 

 

 -

Securities available for sale

 

93,776 

 

 

93,776 

 

 

 -

 

 

93,776 

 

 

 -

Securities held to maturity

 

6,834 

 

 

7,008 

 

 

 -

 

 

7,008 

 

 

 -

Federal Home Loan Bank stock

 

5,165 

 

 

5,165 

 

 

 -

 

 

5,165 

 

 

 -

Loans receivable, net of allowance

 

537,833 

 

 

528,065 

 

 

 -

 

 

 -

 

 

528,065 

Accrued interest receivable

 

1,764 

 

 

1,764 

 

 

 -

 

 

1,764 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

380,983 

 

 

380,983 

 

 

 -

 

 

380,983 

 

 

 -

Time deposits

 

136,873 

 

 

136,619 

 

 

 -

 

 

136,619 

 

 

 -

Short-term borrowings

 

34,650 

 

 

34,650 

 

 

34,650 

 

 

 -

 

 

 -

Long-term borrowings

 

61,000 

 

 

58,685 

 

 

 -

 

 

58,685 

 

 

 -

Junior subordinated debentures

 

12,887 

 

 

9,344 

 

 

 -

 

 

9,344 

 

 

 -

Accrued interest payable

 

281 

 

 

281 

 

 

 -

 

 

281 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 











21

 


 



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 three months ended March 31, 2016 such derivatives were used to hedge the variable cash outflows associated with four FHLB borrowings totaling $26.0 million.  The Company entered into an interest rate swap agreement to hedge its $12.5 million variable rate (3 Mo Libor +1.44%) junior subordinated debt issued by Sussex Capital Trust II, a non-consolidated wholly-owned subsidiary of the Company, for 10 years at a fixed rate of 3.10%.  The ineffective portion of the change in fair value of the derivatives are recognized directly in earnings. The Company implemented this program during the quarter ended March 31, 2016. During the three months ended March 31, 2016 the Company’s 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 March 31, 2016:



 

 

 

 

 

 

 



March 31, 2016



Notional/

 

 

 

Balance

 

 



Contract

 

Fair

 

Sheet

 

Expiration



Amount

 

Value

 

Location

 

Date

(Dollars in thousands)

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

Interest rate swaps by effective date:

 

 

 

 

 

 

 

March 15, 2016

$          12,500

 

$                (64)

 

Other Liabilities

 

March 15, 2026

December 15, 2016

5,000 

 

(97)

 

Other Liabilities

 

December 15, 2026

June 15, 2017

6,000 

 

(114)

 

Other Liabilities

 

June 15, 2027

December 15, 2017

10,000 

 

(71)

 

Other Liabilities

 

December 15, 2027

December 15, 2017

5,000 

 

(54)

 

Other Liabilities

 

December 15, 2027



 

 

 

 

 

 

 

Total

$          38,500

 

$              (400)

 

 

 

 



 

 

 

 

 

 

 





22

 


 

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 three months ended March 31, 2016:





 

 

 

 

 



Three Months Ended March 31, 2016



Amount of Loss

 

 

 

 



Recognized in OCI

 

Location of Gain

 

 



on

 

(Loss) Recognized in

 

Amount of Gain (Loss)



Derivatives, net of

 

Income of

 

Recognized in Income of



Tax

 

Derivatives

 

Derivatives



(Effective Portion)

 

(Ineffective Portion)

 

(Ineffective Portion)

(Dollars in thousands)

 

 

 

 

 

Derivatives in cash flow hedges
Interest rate swaps by effective

 

 

 

 

 

date:

 

 

 

 

 

March 15, 2016

$                               (38)

 

Not applicable

 

$                                    -

December 15, 2016

(58)

 

Not applicable

 

 -

June 15, 2017

(68)

 

Not applicable

 

 -

December 15, 2017

(43)

 

Not applicable

 

 -

December 15, 2017

(32)

 

Not applicable

 

 -



 

 

 

 

 

Total

$                             (240)

 

 

 

$                                    -









23

 


 













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



MANAGEMENT STRATEGY



We are a community-oriented financial institution serving northern New Jersey, northeastern Pennsylvania, New York City, New York and Orange County, New York.  During the first quarter of 2016 our presence in northern New Jersey continued to grow to new markets in Bergen County, NJ, with the opening of a new branch in Oradell, NJ.  On April 29, 2016 we closed a branch location in Port Jervis, NY in Orange County.  While offering traditional community bank loan and deposit products and services, we obtain non-interest income through our insurance brokerage operations and the sale of non-deposit products.    



We continue to focus on strengthening our core operating performance by improving our net interest income and margin by closely monitoring our yield on earning assets and adjusting the rates offered on deposit products.  We have been focused on building for the future and strengthening our core operating results within our risk management framework. 



CRITICAL ACCOUNTING POLICIES



Our consolidated financial statements are prepared in accordance with U.S. GAAP and practices within the banking industry.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Actual results could differ from those estimates.



Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions.  There have been no material changes to our critical accounting policies during the three months ended March 31, 2016.  For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our 2015 Annual Report on Form 10-K.

24

 


 

COMPARISION OF OPERATING RESULTS FOR THREE MONTHS ENDED MARCH 31, 2016 AND 2015



OverviewFor the quarter ended March 31, 2016, we reported net income of $1.6 million as compared to net income of $952 thousand for the same period last year.  The improvement for the first quarter of 2016 as compared to the same period last year was driven by a 17.6% increase in net interest income as a result of strong growth in average loans and deposits, which increased $89.0 million, or 18.9%, and $86.2 million, or 18.5%, respectively, and a $435 thousand, or 108.9%, increase in income before taxes from our insurance agency, Tri-State Insurance Agency.  For the first quarter of the 2016, return on average assets and equity were 0.90% and 11.4%, respectively, as compared to the same period last year of 0.64% and 7.3%, respectively. 

Comparative Average Balances and Average Interest RatesThe following table presents, on a fully tax equivalent basis, a summary of our interest-earning assets and their average yields, and interest-bearing liabilities and their average costs for the three month periods ended March 31, 2016 and 2015:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Three Months Ended March 31,

(Dollars in thousands)

2016

 

2015



 

 Average

 

 

 

 

Average

 

 

 Average

 

 

 

 

Average

Earning Assets:

 

Balance

 

 

Interest

 

Rate (2)

 

 

Balance

 

 

Interest

 

Rate (2)

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax exempt (3)

$

30,236 

 

$

300 

 

3.99% 

 

$

31,339 

 

$

312 

 

4.04% 

Taxable

 

69,870 

 

 

376 

 

2.16% 

 

 

54,267 

 

 

267 

 

2.00% 

Total securities

 

100,106 

 

 

676 

 

2.72% 

 

 

85,606 

 

 

579 

 

2.74% 

Total loans receivable (1) (4)

 

559,879 

 

 

6,145 

 

4.41% 

 

 

470,870 

 

 

5,172 

 

4.45% 

Other interest-earning assets

 

8,638 

 

 

 

0.19% 

 

 

7,118 

 

 

 

0.23% 

Total earning assets

 

668,623 

 

$

6,825 

 

4.11% 

 

$

563,594 

 

$

5,755 

 

4.14% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest earning assets

 

38,701 

 

 

 

 

 

 

 

41,353 

 

 

 

 

 

Allowance for loan losses

 

(5,659)

 

 

 

 

 

 

 

(5,742)

 

 

 

 

 

Total Assets

$

701,665 

 

 

 

 

 

 

 

599,205 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sources of Funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW

$

140,031 

 

$

71 

 

0.20% 

 

$

128,160 

 

$

50 

 

0.16% 

Money market

 

29,951 

 

 

28 

 

0.38% 

 

 

14,511 

 

 

 

0.14% 

Savings

 

138,528 

 

 

70 

 

0.20% 

 

 

140,497 

 

 

71 

 

0.20% 

Time

 

146,344 

 

 

406 

 

1.12% 

 

 

112,067 

 

 

290 

 

1.05% 

Total interest bearing deposits

 

454,854 

 

 

575 

 

0.51% 

 

 

395,235 

 

 

416 

 

0.43% 

Borrowed funds

 

75,965 

 

 

437 

 

2.31% 

 

 

63,715 

 

 

380 

 

2.42% 

Junior subordinated debentures

 

12,887 

 

 

68 

 

2.12% 

 

 

12,887 

 

 

53 

 

1.67% 

Total interest bearing liabilities

 

543,706 

 

$

1,080 

 

0.80% 

 

$

471,837 

 

$

849 

 

0.73% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand deposits

 

98,264 

 

 

 

 

 

 

 

71,695 

 

 

 

 

 

Other liabilities

 

4,381 

 

 

 

 

 

 

 

3,595 

 

 

 

 

 

Total non-interest bearing liabilities

 

102,645 

 

 

 

 

 

 

 

75,290 

 

 

 

 

 

Stockholders' equity

 

55,314 

 

 

 

 

 

 

 

52,078 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

$

701,665 

 

 

 

 

 

 

$

599,205 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income and Margin(5)

 

 

 

 

5,745 

 

3.46% 

 

 

 

 

 

4,906 

 

3.53% 

Tax-equivalent basis adjustment            

 

 

 

 

(99)

 

 

 

 

 

 

 

(104)

 

 

Net Interest Income

 

 

 

$

5,646 

 

 

 

 

 

 

$

4,802 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes loan fee income.

(2) Average rates on securities are calculated on amortized costs.

(3) Full tax equivalent basis, using a 39% effective tax rate and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance.

(4) Loans outstanding include non-accrual loans.

(5) Represents the difference between interest earned and interest paid, divided by average total interest-earning assets.







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



25

 


 

Net interest income on a fully tax equivalent basis increased $839 thousand, or 17.1%, to $5.7 million for the first quarter of 2016, as compared to $4.9 million for the same period in 2015.  The increase in net interest income was largely due to a $105.0 million, or 18.6%, increase in average interest earning assets, principally loans receivable, which increased $89.0 million, or 18.9%.  The improvement in net interest income was partly offset by a decline in the net interest margin of 7 basis points to 3.46% for the first quarter of 2016 as compared to the same period in 2015.  The decline in the net interest margin was mostly attributed to an 8 basis point increase in the average rate on interest bearing deposits, which was primarily driven by market competition and the Company’s strategy to use longer term wholesale deposit funding to manage interest rate risk. Included in the net interest margin decrease is a 4 basis point decline in the average rate earned on loans, which is mostly due to loan growth and loan repricing in a low rate environment.



Interest Income – Our total interest income, on a fully tax equivalent basis, increased $1.1 million, or 18.6%, to $6.8 million for the quarter ended March 31, 2016, as compared to the same period last year.  The increase was due to higher average earning assets, which increased $105.0 million for the quarter ended March 31, 2016, as compared to the same period in 2015



Our total interest income earned on loans receivable increased $973 thousand, or 18.8%, to $6.1 million for the first quarter of 2016, as compared to the same period in 2015.  The increase was driven by an increase in average balance of loans receivable of $89.0 million, or 18.9%, for the three months ended March 31, 2016, as compared to the same period last year.  The increase in interest income earned on loans receivable was partially offset by a 4 basis point decline in the average yield to 4.41% for the quarter ended March 31, 2016, as compared to the same period in 2015



Our total interest income earned on securities, on a fully tax equivalent basis, increased $97 thousand, to $676 thousand for the quarter ended March 31, 2016 from $579 thousand for the same period in 2015.  This  increase was largely due to an increase in the average balance of securities of $14.5 million, or 16.9%, for the quarter ended March 31, 2016, as compared to the same period last year. 



Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets remained flat at  $4 thousand for the first quarter of 2016, as compared to the same period in 2015The average balances in other interest-earning assets increased $1.5 million to $8.6 million in the first quarter of 2016 from $7.1 million during the first quarter a year earlier.  The increase in average balance was partially offset by a 4 basis point decline in the average yield to 0.19% as compared to 0.23% in the same period in 2015.    



Interest Expense – Our interest expense for the three months ended March 31, 2016 increased $231 thousand, or 27.2%, to $1.1 million from $849 thousand for the same period in 2015.  The increase was principally due to higher average balances in interest-bearing liabilities, which increased $71.9 million, or 15.2%, to $543.7 million for the first quarter of 2016 from $471.8 million for the same period in 2015.    



Our interest expense on deposits increased $159 thousand, or 38.2%, for the quarter ended March 31, 2016, as compared to the same period last year.  The increase was largely attributed to the increase in the average balance of total interest bearing deposits, which increased $59.6 million during the first quarter of 2016, as compared to the same period in 2015.  The increase in interest expense was attributable to an eight basis point increase in the average rate on interest bearing deposits.    



Our interest expense on borrowed funds increased $72 thousand, or 16.6%, for the quarter ended March 31, 2016, as compared to the same period last year.  The increase was largely attributed to the average balance of borrowed funds increasing  $12.3 million during the first quarter of 2016, as compared to the same period in 2015.    



Provision for Loan Losses – Provision for loan losses decreased $94 thousand, or 30.8%, to $211 thousand for the first quarter of 2016, as compared to $305 thousand for the same period in 2015.  The decrease in the provision for loan losses for the quarter ended March 31, 2016 was largely attributed to the resolution of problem loans.  The provision for loan losses reflects management’s judgment concerning the risks inherent in our existing loan portfolio and the size of the allowance necessary to absorb the risks, as well as the activity in the allowance during the periods.  Management reviews the adequacy of its allowance on an ongoing basis and will provide additional provisions, as management may deem necessary. 



Non-Interest Income – Our non-interest income increased $623 thousand, or 32.8%, to $2.5 million for the first quarter of 2016, as compared to the same period last year.  The increase was primarily due to higher insurance commissions and fees, which increased $566 thousand, or 49.0%, for the first quarter of 2016 as compared to the same period in 2015.   The growth in Tri-State Insurance Agency’s commissions and fees was principally due to an increase in contingency fee income of $405 thousand or 127.7% for the quarter ended March 31, 2016 as compared to the same period last year.    

Non-Interest Expense – Our non-interest expenses increased $540 thousand, or 10.7%, to $5.6 million for the first quarter of 2016, as compared to the same period last year.  The increase for the first quarter of 2016, as compared to the

26

 


 

same period in 2015, was largely due to increases in salaries and employee benefits of $573 thousand and in data processing expenses of $195 thousand, which were partially offset by decreases in director fees and expenses and write-downs related to foreclosed real estate of $107 thousand and $89 thousand, respectively.  The increase in salaries and employee benefits expense was partially due to an increase in personnel to support our growth initiative in new markets, including the opening of our Oradell branch in the first quarter of 2016.    The increase in data processing is related to the reinvestment of the Company’s infrastructure due to continued growth.  The decrease in director fees was principally related to a deferred compensation plan that is tied to the performance of the Company’s stock. The decrease in expenses related to foreclosed real estate was attributable to the stabilization of the market value of other real estate owned.

Income Taxes –  Our income tax expense, which includes both federal and state tax expenses, was $775 thousand for the three months ended March 31, 2016, compared to $376 thousand for the three months ended March 31, 2015.  Our effective tax rate was 33.0% and 28.3% for the quarter ended March 31, 2016 and 2015, respectively.  The increased effective tax rate was the result of a smaller percentage of our pre-tax income resulting from tax exempt sources.



27

 


 

COMPARISION OF FINANCIAL CONDITION AT MARCH 31, 2016 TO DECEMBER 31, 2015



Total Assets – At March 31, 2016, our total assets were $716.8 million, an increase of $32.3 million, or 4.7%, as compared to total assets of $684.5 million at December 31, 2015.  The increase in total assets was largely driven by growth in loans receivable of $36.6 million, or 6.7%, which was partially offset by a decline in the securities portfolio of $7.3 million, or 7.2%.    



Cash and Cash Equivalents – Our cash and cash equivalents increased by $2.9 million to $9.0 million at March 31, 2016, or 1.3% of total assets, from $6.1 million, or 0.9%,  of total assets, at December 31, 2015.    



Securities Portfolio – At March 31, 2016, the securities portfolio, which includes available for sale and held to maturity securities, was $93.3 million, compared to $100.6 million at December 31, 2015. Available for sale securities were $86.5 million at March 31, 2016, compared to $93.8 million at December 31, 2015. The available for sale securities are held primarily for liquidity, interest rate risk management and profitability. Accordingly, our investment policy is to invest in securities with low credit risk, such as U.S. government agency obligations, state and political obligations and mortgage-backed securities. Held to maturity securities were $6.8 million at March 31, 2016 and December 31, 2015.



Net unrealized gains in the available for sale securities portfolio were $961 thousand at March 31, 2016. Net unrealized gains in the available for sale securities portfolio were $144 thousand at December 31, 2015. 

 

We conduct a regular assessment of our investment securities to determine whether any securities are OTTI.  Further detail of the composition of the securities portfolio and discussion of the results of the most recent OTTI assessment are in Note 2 –  Securities to our unaudited consolidated financial statements.



The unrealized losses in our securities portfolio are mostly driven by changes in spreads and market interest rates.  All of our securities in an unrealized loss position have been evaluated for other-than-temporary impairment as of March 31, 2016 and we do not consider any security OTTI.  We evaluated the prospects of the issuers in relation to the severity and the duration of the unrealized losses.  In addition, we do not intend to sell, and it is more likely than not that we will not have to sell any of our securities before recovery of their cost basis. 



Other investments totaled $3.8 million at March 31, 2016, as compared to $5.2 million at December 31, 2015,  which consisted primarily of FHLB stock. We also held $100 thousand in time deposits with other financial institutions at March 31, 2016 and December 31, 2015



LoansThe loan portfolio comprises our largest class of earning assets.    Total loans receivable, net of unearned income, increased $36.6 million, or 6.7%, to $580.1 million at March 31, 2016, as compared to $543.4 million at December 31, 2015.  During the three months ended March 31, 2016, the Company had $50.6 million in commercial loan production, which was partly offset by $2.4 million in commercial loan payoffs.



The following table summarizes the composition of our gross loan portfolio by type:





 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

December 31, 2015



 

 

 

 

 

Commercial and industrial loans

$

24,278 

 

$

20,023 

Construction

 

15,827 

 

 

13,348 

Commercial real estate

 

409,358 

 

 

382,262 

Residential real estate

 

130,189 

 

 

127,204 

Consumer and other

 

1,172 

 

 

1,253 

Total gross loans

$

580,824 

 

$

544,090 



Loan and Asset Quality – The ratio of NPAs, which include non-accrual loans, loans 90 days past due and still accruing, troubled debt restructured loans currently performing in accordance with renegotiated terms and foreclosed real estate, to total assets improved to 1.39% at March 31, 2016 from 1.49% at December 31, 2015.  NPAs decreased $270 thousand, or 2.6%, to $9.9 million at March 31, 2016, as compared to $10.2 million at December 31, 2015.  Non-accrual loans increased $41 thousand, or 0.8%, to $5.4 million at March 31, 2016, as compared to $5.3 million at December 31, 2015.  The top five non-accrual loan relationships total $3.4 million, which equates to 63.1% of total nonaccrual loans and 33.9% of total NPAs at March 31, 2016.  The remaining non-accrual loans at March 31, 2016 have an average loan balance of $94 thousand.  Loans past due 30 to 89 days increased $2.0 million, or 71.5%, to approximately $4.8 million at March 31, 2016, as compared to $2.8 million at December 31, 2015.  The increase was largely due to four loans.  Loans that make up approximately half of the balance increase have made payments to bring their status current in April.    

We continue to actively market our foreclosed real estate properties, which decreased $26 thousand to $3.3 million at March 31, 2016, as compared to $3.4 million at December 31, 2015.  The decrease was primarily due to the sale of $26

28

 


 

thousand in foreclosed real estate properties.  At March 31, 2016, the Company’s foreclosed real estate properties had an average carrying value of approximately $303 thousand per property.

The allowance for loan losses increased by $222 thousand, or 4.0%, to $5.8 million, or 1.00% of total loans, at March 31, 2016, compared to $5.6 million, or 1.03% of total loans, at December 31, 2015. The Company recorded $211 thousand in provision for loan losses for the quarter ended March 31, 2016.  Additionally, the Company recorded net recoveries of $11 thousand for the quarter ended March 31, 2016, as compared to $183 thousand in net charge-offs for the quarter ended March 31, 2015. The allowance for loan losses as a percentage of non-accrual loans increased to 108.6% at March 31, 2016 from 105.2% at December 31, 2015. 



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







 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

December 31, 2015



 

 

 

 

 

Non-accrual loans

$

5,353 

 

$

$5,312 

Non-accrual loans to total loans

 

0.92% 

 

 

0.98% 

Non-performing assets

$

9,949 

 

$

$10,219 

Non-performing assets to total assets

 

1.39% 

 

 

1.49% 

Allowance for loan losses as a % of non-accrual loans

 

108.57% 

 

 

105.23% 

Allowance for loan losses to total loans

 

1.00% 

 

 

1.03% 

A loan is considered impaired, in accordance with the impairment accounting guidance, when based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Total impaired loans at March 31, 2016 were $6.6 million and at December 31, 2015 were $6.9 million.  Impaired loans measured at fair value on a non-recurring basis increased to $1.1 million on March 31, 2016 from $801 thousand at December 31, 2015.   These balances consist of loans that were written down or required additional reserves during the periods ended March 31, 2016 and December 31, 2015, respectively.  Impaired loans include loans modified in troubled debt restructurings 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, forgiveness of principal, forbearance or other actions intended to maximize collection.  Not all impaired loans and restructured loans are on non-accrual, and therefore not all are considered non-performing loans.  Restructured loans still accruing totaled $1.3 million and $1.6 million at March 31, 2016 and December 31, 2015, respectively.



We also 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 March 31, 2016,  we had six loan relationships totaling $1.4 million that we deemed potential problem loans. Management is actively monitoring these loans.



Further detail of the credit quality of the loan portfolio is included in Note 4 –  Allowance for Loan Losses and Credit Quality of Financing Receivables to our unaudited consolidated financial statements.



Allowance for Loan Losses – The allowance for loan losses consists of general, allocated and unallocated components.  The allocated 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 non-impaired loans and is based on historical charge-off experience and expected losses derived from our internal risk rating process.  The unallocated component covers the potential for other adjustments that 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. 



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 March 31, 2016, the total allowance for loan losses increased by $222 thousand, or 4.0%, to $5.8 million, or 1.00% of total loans as compared to $5.6 million, or 1.03% of total loans, at December 31, 2015. The Company recorded $211 thousand in provision for loan losses for the quarter ended March 31, 2016.  Additionally, the Company recorded net recoveries of $11 thousand for the quarter ended March 31, 2016, as compared to $183 thousand in net charge-offs for

29

 


 

the quarter ended March 31, 2015. The allowance for loan losses as a percentage of non-accrual loans increased to 108.6% at March 31, 2016 from 105.3% at December 31, 2015.  The provision also reflects the continued weakness in current real estate values in our market area and reduced cash flows to support the repayment of loans.    



The table below presents information regarding our provision and allowance for loan losses for the three months ended March 31, 2016 and 2015:





 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

March 31, 2015



 

 

 

 

 

Balance, beginning of period

$

5,590 

 

$

5,641 

Provision

 

211 

 

 

305 

Charge-offs

 

(28)

 

 

(214)

Recoveries

 

39 

 

 

31 

Balance, end of period

$

5,812 

 

$

5,763 



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.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



March 31, 2016

 

December 31, 2015



 

 

 

Percentage of

 

 

 

 

Percentage of



 

 

 

Loans In Each

 

 

 

 

Loans In Each



 

 

 

Category To

 

 

 

 

Category To

(Dollars in thousands)

Amount

 

Gross Loans

 

 

Amount

 

Gross Loans

Commercial and industrial

$

98 

 

4.2% 

 

$

85 

 

3.7% 

Construction

 

267 

 

2.7% 

 

 

220 

 

2.5% 

Commercial real estate

 

3,847 

 

70.5% 

 

 

3,646 

 

70.2% 

Residential real estate

 

908 

 

22.4% 

 

 

784 

 

23.4% 

Consumer and other loans

 

121 

 

0.2% 

 

 

87 

 

0.2% 

Unallocated

 

571 

 

0.0% 

 

 

768 

 

-

Total

$

5,812 

 

100.0% 

 

$

5,590 

 

100.0% 



Bank-Owned Life Insurance (BOLI)  –  Our BOLI carrying value amounted to $12.6 million at March  31, 2016 and $12.5 million at December 31, 2015.



Goodwill and Other Intangibles – Goodwill represents the excess of the purchase price over the fair market value of net assets acquired.  At March  31, 2016 and December 31, 2015, we had recorded goodwill totaling $2.8 million, primarily as a result of the acquisition of Tri-State in 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.  As of March 31, 2016 deposits in that branch were $19 million.  During the quarter ended March 31, 2016 we announced the closing of this branch, as a result we will monitor the outflow of these deposits and evaluate the related goodwill for impairment.  In accordance with U.S. GAAP, goodwill is not amortized, but evaluated at least annually for impairment.  Any impairment of goodwill results in a charge to income.  We periodically assess whether events and changes in circumstances indicate that the carrying amounts of goodwill and intangible assets may be impaired.  The estimated fair value of the reporting segment exceeded its book value; therefore, no write-down of goodwill was required.  The goodwill related to the insurance agency is not deductible for tax purposes.



Deposits – Our total deposits increased $57.4 million, or 11.1%, to $575.3 million at March 31, 2016, from $517.9 million at December 31, 2015.  The increase in deposits was due to increases in both interest bearing deposits of $35.5 million, or 8.2%, and non-interest bearing deposits of $21.9 million, or 25.2%, at March 31, 2016, as compared to December 31, 2015.  Included in total deposits at March 31, 2016, were $35.9 million in deposit balances with an average cost of 0.56% attributed to our newest branch in Oradell, New Jersey, which opened in the beginning of March 2016, and $51.8 million in deposit balances with an average cost of 0.47% attributed to our branch in Astoria, New York, which opened in Mid-March of 2015.

 

Borrowings – Borrowings consist of short-term and long-term advances from the FHLB.  The advances are secured under terms of a blanket collateral agreement by a pledge of qualifying mortgage loans.  We had $67.4 million and $95.7 million in borrowings, at a weighted average interest rate of 2.57% at March  31, 2016 and 2.61% at December 31, 2015.  The long-term borrowings at March 31, 2016 consisted of $50.0 million of fixed rate advances, $5.0 million of advances with quarterly convertible puts that allow us to put the advance back to the FHLB quarterly after one year

30

 


 

from issuance and $11.0 million of advances with quarterly convertible options that allow the FHLB to change the note rate to a then current market rate.  During the quarter ended March 31, 2016, the Company entered into forward starting interest rate swap agreements related to four of its FHLB borrowings.  Please refer to Liquidity and Capital Resources section Off-Balance Sheet Arrangements.    



Junior Subordinated Debentures – On June 28, 2007, Sussex Capital Trust II (the “Trust”), a Delaware statutory business trust and our non-consolidated wholly owned subsidiary, issued $12.5 million of variable rate capital trust pass-through securities to investors.  The Trust purchased $12.9 million of variable rate junior subordinated deferrable interest debentures from us.  The debentures are the sole asset of the Trust.  The terms of the junior subordinated debentures are the same as the terms of the capital securities.  We have also fully and unconditionally guaranteed the obligations of the Trust under the capital securities.  The interest rate is based on the three-month LIBOR plus 144 basis points and adjusts quarterly.  The rate at March 31, 2016,  was 2.07%.  The capital securities are currently redeemable by us at par in whole or in part.  The capital securities must be redeemed upon final maturity of the subordinated debentures 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.



During the quarter ended March 31, 2016, the Company entered into an interest rate swap agreement related to the junior subordinated debentures.   Please refer to Liquidity and Capital Resources section Off-Balance Sheet Arrangements



In accordance with FASB ASC 810, Consolidations, our wholly owned subsidiary, the Trust, is not included in our consolidated financial statements.



Equity  Stockholders’ equity, inclusive of accumulated other comprehensive income, net of income taxes, was $55.7 million at March 31, 2016, an increase of $1.7 million when compared to December 31, 2015.  The increase was largely due to net income for the quarter ended March  31, 2016



LIQUIDITY AND CAPITAL RESOURCES



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 March 31, 2016, total deposits amounted to $575.3 million, an increase of $57.4 million, or 11.1%, from December 31, 2015. At March 31, 2016 and December 31, 2015, advances from FHLB and subordinated debentures totaled $80.3 million and $108.5 million, respectively, and represented 11.2% and 15.9% of total assets, respectively. 



Loan production continued to be our principal investing activity. Total loans receivable, net of unearned income, at March 31, 2016, amounted to $580.1 million, an increase of $36.6 million, or 6.7%, compared to December 31, 2015.



Our most liquid assets are cash and due from banks and federal funds sold.  At March 31, 2016, the total of such assets amounted to $9.0 million, or 1.3%, of total assets, compared to $6.1 million, or 0.9%, of total assets at December 31, 2015. Another significant liquidity source is our available for sale securities portfolio.  At March 31, 2016, available for sale securities amounted to $86.5 million, compared to $93.8 million at December 31, 2015.



In addition to the aforementioned sources of liquidity, we have available various other sources of liquidity, including federal funds purchased from other banks and the FRB discount window.  The Bank also has the capacity to borrow an additional $49.5 million through its membership in the FHLB and $10.0 million at Atlantic Community Bankers Bank at March  31, 2016.  Management believes that our sources of funds are sufficient to meet our present funding requirements.



In July 2013, the FRB, the Office of the Comptroller of the Currency (the “OCC”) and the FDIC approved final rules (the “Capital Rules”) that established a new capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies’ rules.  



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At March 31, 2016, the Bank’s Tier I,  Tier II and Common Equity Tier I capital ratios were 11.29%, 12.31% and 11.29%, respectively.  In addition to the risk-based guidelines, 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 percentage of tangible assets) of 4.0%.  As of March 31, 2016, the Bank had a leverage ratio of 9.18%.  The Bank’s risk based and leverage ratios are in excess of those required to be considered “well-capitalized” under FDIC regulations.

The Capital Rules also requires a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. Beginning January 1, 2016, the capital standards applicable to the Company will include an additional capital conservation buffer of 0.625%, increasing 0.625% each year thereafter. When fully phased-in on January 1, 2019, the Company will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at 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%. As of March 31, 2016, the Bank had a capital conservation buffer of 4.32%.  



The Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The risk-based capital guidelines are designed to make regulatory capital requirements sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposures and to minimize disincentives for holding liquid, low-risk assets. The capital guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $1 billion or more, and to certain bank holding companies with less than $1 billion in assets if they are engaged in substantial non-banking activity or meet certain other criteria.  Under FRB reporting requirements, a bank holding company that reaches $1 billion or more in total consolidated assets as of June 30 of the preceding year must begin reporting its consolidated capital beginning in March of the following year.  The threshold for capital consolidation was raised from $500 million to $1 billion effective May 15, 2015, As a result, the Company is  no longer required to report its consolidated capital.  The Bank, however, must continue to meet minimum capital requirements under the Capital Rules.

 

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



Off-Balance Sheet Arrangements – 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 March 31, 2016,  totaled $113.6 million and consisted of $53.4 million in commitments to grant commercial real estate, construction and land development loans, $22.6 million in home equity lines of credit, $36.9 million in other unused commitments and $729 thousand in 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.



During the first quarter of 2016, the Company entered into interest rate swap agreements with notional amounts totaling $38.5 million, of which all are designated as cash flow hedges. The Company entered into $26.0 million in forward starting interest rate swap agreements to coincide with the maturity of five FHLB Advances over the next 21 months that have an average rate of 4.03%.  The forward interest rate swaps have a term of 10 years at an average fixed rate of 1.97% and will hedge short term wholesale funding.  Additionally, the Company entered into a $12.5 million interest rate swap agreement to coincide with a junior subordinated debt issued by Sussex Capital Trust II, for a term of 10 years at a fixed rate of 3.10%.



Item 3 - Quantitative and Qualitative Disclosures about Market Risk 



Not applicable.



Item 4 - Controls and Procedures



Evaluation of Disclosure Controls and Procedures



Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were

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effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.



Changes in Internal Control over Financial Reporting



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 have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION



Item 1 - Legal Proceedings 



We are not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business.   Management believes that such proceedings are, in the aggregate, immaterial to our financial condition and results of operations.



Item 1A - Risk Factors



For a summary of risk factors relevant to our operations, see Part 1, Item 1A, “Risk Factors” in our 2015 Annual Report on Form 10-K.  There are no material changes in the risk factors relevant to our operations.



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



The following table provides information with respect to any purchase of shares of our common stock made by or on behalf of us or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Exchange Act, during the three months ended March 31, 2016:







 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Maximum



 

 

 

 

 

 

Total Number

 

Number of



 

 

 

 

 

 

of Shares

 

Shares that



 

 

 

 

 

 

Purchased as

 

May Yet Be



 

Total Number

 

 

 

 

Part of Publicly

 

Purchased



 

of Shares

 

 

Average Price

 

Announced

 

Under the

Period

 

Purchased

 

 

Paid per Share

 

Program

 

Program(1)



 

 

 

 

 

 

 

 

 

January 1, 2016 through January 31, 2016

 

 -

 

$

 -

 

 -

 

185,073 

February 1, 2016 through February 29, 2016

 

 -

 

 

 -

 

 -

 

185,073 

March 1, 2016 through March 31, 2016

 

 -

 

 

 -

 

 -

 

185,073 

Total

 

 -

 

$

 -

 

 -

 

 



 

 

 

 

 

 

 

 

 



(1) On February 26, 2016, the Board of Directors authorized a continuation of the stock repurchase program, under which we may repurchase up to 184,000 shares.  The stock repurchase program expires on February 25, 2017, unless completed sooner or otherwise extended.



There were no sales by us of unregistered securities during the three months ended March 31, 2016.





Item 3 - Defaults Upon Senior Securities



Not applicable.



Item 4 - Mine Safety Disclosures



Not applicable.



Item 5 - Other Information



Not applicable.



Item 6 - Exhibits 



The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.



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SIGNATURES



In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





 

 

Date: May  13, 2016

 

SUSSEX BANCORP



 

 



 

 



By:

/s/ Steven M. Fusco



 

Steven M. Fusco



 

Chief Financial Officer and Senior Executive Vice President



 

(Principal Financial and Accounting Officer)



 

 



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EXHIBIT INDEX





 

Exhibit

Number 

Description

*

 

3.1

Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on 10-Q filed with the SEC on August 15, 2011).

3.2

Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on June 3, 2014).

4.1

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).

31.1

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.

31.2

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.

32.1*      

Section 1350 Certifications of the Chief Executive Officer and Chief Financial Officer.

101

Financial statements from the Quarterly Report on Form 10-Q of Sussex Bancorp for the quarter ended March 31, 2016, 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 Unaudited Consolidated Financial Statements.

_______________________________

*  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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