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 September 30, ~~2018~~2019


[ ]	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

SB ONE 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,~~95 State Route 17, Paramus, NJ	~~07866~~07652
(Address of principal executive offices)	(Zip Code)

(844) 256-7328

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	SBBX	The NASDAQ Stock Market LLC

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 x No ☐

Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted 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 such files).

Yes x 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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ☐	Accelerated filer x	Non-accelerated filer ☐	Smaller reporting company x	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐ No x

As of November ~~2, 2018~~1, 2019 there were ~~7,959,489~~9,401,694 shares of common stock, no par value, outstanding.

SB ONE BANCORP

FORM 10-Q

INDEX

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 Quarterly Report on Form 10-Q contains “forward-looking statements” which may be identified by the use of such words as “believe,” “project,” “expect,” “anticipate,” “should,” “may,” “will,” “intend,” “planned,” “estimated,” “potential” or similar expressions. 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, which 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~~recent financial crisis;

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

the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Community ~~Merger (as defined herein)~~Bank of Bergen County (“Community”);

failure to complete the proposed Enterprise Merger (as defined herein), the imposition of adverse regulatory conditions in connection with regulatory approval of the proposed Enterprise Merger, disruption to the parties' businesses as a result of the announcement and pendency of the Enterprise Merger, the inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the acquisition of Enterprise ~~Merger;~~Bank, NJ (“Enterprise”); 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.

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

SB ONE BANCORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(Dollars in Thousands)	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018

ASSETS
Cash and due from banks	$	8,394		$	3,270		$	11,561		$	11,768
Interest-bearing deposits with other banks	6,316			8,376			36,380			14,910
Cash and cash equivalents	14,710			11,646			47,941			26,678

Interest bearing time deposits with other banks	200			100			200			200
Securities available for sale, at fair value	172,658			98,730			207,136			182,139
Securities held to maturity, at amortized cost (fair value of $4,963 and $5,430 at September 30, 2018 and December 31, 2017, respectively)	4,889			5,304
Securities held to maturity, at amortized cost (fair value of $4,414 and $4,152 at September 30, 2019 and December 31, 2018, respectively)							4,331			4,078
Other Bank Stock, at cost	8,804			4,925			9,382			11,764

Loans receivable, net of unearned income	1,171,738			820,700			1,563,610			1,474,775
Less: allowance for loan losses	8,594			7,335			9,750			8,775
Net loans receivable	1,163,144			813,365			1,553,860			1,466,000
Foreclosed real estate	2,657			2,275			3,600			4,149
Premises and equipment, net	18,520			8,389			19,663			19,215
Right-of-use assets, net							4,734			—
Accrued interest receivable	5,323			2,472			6,253			6,546
Goodwill and intangibles	25,987			2,820			29,141			29,446
Bank-owned life insurance	30,580			22,054			36,475			35,778
Other assets	12,170			7,303			11,543			9,710

Total Assets	$	1,459,642		$	979,383		$	1,934,259		$	1,795,703

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	231,846		$	146,167		$	275,730		$	259,807
Interest bearing	882,800			616,324			1,251,126			1,094,132
Total deposits	1,114,646			762,491			1,526,856			1,353,939
Short-term borrowings	139,900			55,350			121,000			175,295
Long-term borrowings	20,000			35,000			42,849			44,611
Lease liability							4,870			—
Accrued interest payable and other liabilities	6,018			4,501			14,739			8,555
Subordinated debentures	27,856			27,848			27,866			27,859

Total Liabilities	1,308,420			885,190			1,738,180			1,610,259

Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares authorized; none issued	—			—			—			—
Common stock, no par value, 10,000,000 shares authorized; 7,959,489 and 6,040,564 shares issued and 7,959,489 and 6,040,564 shares outstanding at September 30, 2018 and December 31, 2017, respectively	117,724			65,274
Common stock, no par value, 15,000,000 shares authorized; 9,423,931 and 9,532,943 shares issued and 9,258,347 and 9,532,943 shares outstanding at September 30, 2019 and December 31, 2018, respectively							150,875			150,419
Treasury stock, at cost; 165,898 shares at September 30, 2019							(3,638		)	—
Deferred compensation obligation under Rabbi Trust	1,611			1,399			1,821			1,647
Retained earnings	33,436			27,532			50,175			35,192
Accumulated other comprehensive income	62			1,387
Accumulated other comprehensive (loss)							(1,333		)	(167		)
Stock held by Rabbi Trust	(1,611		)	(1,399		)	(1,821		)	(1,647		)

Total Stockholders' Equity	151,222			94,193			196,079			185,444

Total Liabilities and Stockholders' Equity	$	1,459,642		$	979,383		$	1,934,259		$	1,795,703

See Notes to Consolidated Financial Statements

SB ONE BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands except per share data)	2018			2017			2018			2017			2019			2018			2019			2018
INTEREST INCOME
Loans receivable, including fees	$	13,009		$	8,556		$	37,471		$	24,030		$	19,135		$	13,009		$	56,354		$	37,471
Securities:
Taxable	936			379			2,476			1,064			1,490			936			3,942			2,476
Tax-exempt	442			314			1,272			943			135			442			920			1,272
Interest bearing deposits	23			6			69			28			97			23			211			69
Total Interest Income	14,410			9,255			41,288			26,065			20,857			14,410			61,427			41,288
INTEREST EXPENSE
Deposits	2,156			963			5,273			2,532			4,755			2,156			13,078			5,273
Borrowings	943			398			2,323			1,358			1,099			943			3,286			2,323
Subordinated debentures	318			320			946			957			318			318			949			946
Total Interest Expense	3,417			1,681			8,542			4,847			6,172			3,417			17,313			8,542
Net Interest Income	10,993			7,574			32,746			21,218			14,685			10,993			44,114			32,746
PROVISION FOR LOAN LOSSES	321			340			1,227			1,127			636			321			1,983			1,227
Net Interest Income after Provision for Loan Losses	10,672			7,234			31,519			20,091			14,049			10,672			42,131			31,519
OTHER INCOME
NON-INTERST INCOME
Service fees on deposit accounts	320			274			959			812			351			320			1,048			959
ATM and debit card fees	254			198			717			578			289			254			798			717
Bank-owned life insurance	190			144			563			378			235			190			697			563
Insurance commissions and fees	1,527			1,263			5,261			4,153			1,824			1,527			6,482			5,261
Investment brokerage fees	29			9			92			12			49			29			126			92
Net gain on sales of securities	—			(26		)	36			51			—			—			1,524			36
Net gain on disposal of premises and equipment	—			—			9			—
Net (loss) gain on disposal of premises and equipment													89			—			(292		)	9
Other	198			167			619			340			266			198			745			619
Total Other Income	2,518			2,029			8,256			6,324
OTHER EXPENSES
Total Non-Interest Income													3,103			2,518			11,128			8,256
NON-INTEREST EXPENSES
Salaries and employee benefits	5,033			3,755			15,502			10,990			6,224			5,033			18,688			15,502
Occupancy, net	757			462			2,086			1,418			840			757			2,604			2,086
Data processing	710			565			2,440			1,643			1,000			710			2,939			2,440
Furniture and equipment	286			231			893			705			343			286			975			893
Advertising and promotion	147			64			488			259			139			147			394			488
Professional fees	383			303			1,002			778			272			383			1,106			1,002
Director fees	121			94			410			290			146			121			471			410
FDIC assessment	183			49			393			193			138			183			585			393
Insurance	35			70			182			202			31			35			94			182
Stationary and supplies	59			42			205			118			73			59			247			205
Merger-related expenses	605			1			4,344			482			—			605			—			4,344
Loan collection costs	53			23			203			75			96			53			233			203
Net expenses and write-downs related to foreclosed real estate	20			221			228			298			172			20			333			228
Amortization of intangible assets	61			—			182			—			102			61			305			182
Other	510			414			1,579			1,346			611			510			1,917			1,579
Total Other Expenses	8,963			6,294			30,137			18,797
Total Non-Interest Expenses													10,187			8,963			30,891			30,137
Income before Income Taxes	4,227			2,969			9,638			7,618			6,965			4,227			22,368			9,638
EXPENSE FOR INCOME TAXES	957			1,006			2,068			2,440			1,820			957			5,156			2,068
Net Income	3,270			1,963			7,570			5,178			5,145			3,270			17,212			7,570
OTHER COMPREHENSIVE INCOME:
Unrealized (loss) gain on available for sale securities arising during the period	(1,383		)	(10		)	(3,903		)	1,810
Unrealized gain (loss) on available for sale securities arising during the period													1,241			(1,383		)	6,683			(3,903		)
Fair value adjustments on derivatives	779			(63		)	2,214			(478		)	(1,540		)	779			(6,975		)	2,214
Reclassification adjustment for net (gain) on securities transactions included in net income	—			26			(36		)	(51		)	—			—			(1,524		)	(36		)
Income tax related to items of other comprehensive (loss) income	106			18			400			(513		)	106			106			650			400
Other comprehensive (loss) income, net of income taxes	(498		)	(29		)	(1,325		)	768
Other comprehensive income (loss), net of income taxes													(193		)	(498		)	(1,166		)	(1,325		)
Comprehensive income	$	2,772		$	1,934		$	6,245		$	5,946		$	4,952		$	2,772		$	16,046		$	6,245
EARNINGS PER SHARE
Basic	$	0.42		$	0.33		$	0.97		$	1.00		$	0.55		$	0.42		$	1.84		$	0.97
Diluted	$	0.41		$	0.33		$	0.96		$	1.00		$	0.55		$	0.41		$	1.83		$	0.96

See Notes to Consolidated Financial Statements

SB ONE BANCORP

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Nine Months Ended September 30, ~~2018~~2019 and ~~2017~~2018

(Unaudited)


(Dollars in Thousands)	Number of Shares Outstanding		Common Stock		Deferred Compensation Obligation Under Rabbi Trust			Retained Earnings			Accumulated Other Comprehensive Income			Stock Held by Rabbi Trust			Total Stockholders' Equity			Number of Shares Outstanding		Common Stock			Deferred Compensation Obligation Under Rabbi Trust		Retained Earnings			Accumulated Other Comprehensive Income			Stock Held by Rabbi Trust			Treasury Stock			Total Stockholders' Equity

Balance December 31, 2016	4,741,068		$	36,538	1,383			$	23,291		$	243		(1,383		)	$	60,072
Net income	—		—		—			5,178			—			—			5,178
Other comprehensive income	—		—		—			—			768			—			768
Funding of Supplemental Director Retirement Plan	—		—		(12		)							12			—
Net proceeds of capital raise	1,249,999		28,238		—			—			—			—			28,238
Restricted stock granted	53,170		—		—			—			—			—			—
Restricted stock forfeited	(4,057	)	—		—			—			—			—			—
Compensation expense related to stock option and restricted stock grants	—		528		—			—			—			—			528
Dividends declared on common stock ($0.10 per share)	—		—		—			(840		)	—			—			(840		)
Balance September 30, 2017	6,040,180		$	65,304	$	1,371		$	27,629		$	1,011		$	(1,371	)	$	93,944

Balance December 31, 2017	6,040,564		$	65,274	1,399			$	27,532		$	1,387		(1,399		)	$	94,193		6,040,564		$	65,274		1,399		$	27,532		$	1,387		(1,399		)	$	—		$	94,193
Net income	—		—		—			7,570			—						7,570			—		—			—		7,570			—			—			—			7,570
Other comprehensive loss	—		—		—			—			(1,325		)	—			(1,325		)	—		—			—		—			(1,325		)	—			—			(1,325		)
Shares issued in merger	1,873,028		51,883		—			—			—			—			51,883			1,873,028		51,883			—		—			—			—			—			51,883
Funding of Supplemental Director Retirement Plan	—		—		212			—			—			(212		)	—			—		—			212								(212		)				—
Common stock issued																				—		—			—		—			—			—			—			—
Restricted stock granted	50,045		—		—			—			—						—			50,045		—			—		—			—			—			—			—
Restricted stock forfeited	(4,148	)	—		—			—			—			—			—			(4,148	)	—			—		—			—			—			—			—
Compensation expense related to stock option and restricted stock grants	—		567		—			—			—						567			—		567			—		—			—			—			—			567
Dividends declared on common stock ($0.135 per share)	—		—		—			(1,666		)	—						(1,666		)	—		—			—		(1,666		)	—			—			—			(1,666		)
Balance September 30, 2018	7,959,489		$	117,724	$	1,611		$	33,436		$	62		$	(1,611	)	$	151,222		7,959,489		$	117,724		$	1,611	$	33,436		$	62		$	(1,611	)	$	—		$	151,222

Balance December 31, 2018																				9,532,943		$	150,419		1,647		$	35,192		$	(167	)	(1,647		)	$	—		$	185,444
Net income																				—		—			—		17,212			—						—			17,212
Other comprehensive (loss)																				—		—			—		—			(1,166		)	—			—			(1,166		)
Treasury shares purchased																				(165,898	)	—			—		—			—						(3,952		)	(3,952		)
Funding of Supplemental Director Retirement Plan																				—		—			174		—			��			(174		)	—			—
Treasury shares issued																				—		—			—		—			—			—			314			314
Common stock issued																				—		(314		)	—		—			—			—			—			(314		)
Restricted stock granted																				74,470		—			—		—			—						—			—
Restricted stock forfeited																				(17,584	)	—			—		—			—			—			—			—
Compensation expense related to stock option and restricted stock grants																				—		770			—		—			—						—			770
Dividends declared on common stock ($0.15 per share)																				—		—			—		(2,229		)	—						—			(2,229		)
Balance September 30, 2019																				9,423,931		$	150,875		$	1,821	$	50,175		$	(1,333	)	$	(1,821	)	$	(3,638	)	$	196,079

See Notes to Consolidated Financial Statements

SB ONE BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2018			2017			2019			2018
Cash Flows from Operating Activities
Net income	$	7,570		$	5,178		$	17,212		$	7,570
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,227			1,127			1,983			1,227
Depreciation and amortization	1,366			799			1,560			1,366
Net amortization of securities premiums and discounts	1,577			1,265			1,349			1,577
Amortization of subordinated debt issuance costs	8			6			7			8
Net realized gain on sale of securities	(36		)	(51		)	(1,524		)	(36		)
Net realized loss on disposal of premises and equipment	(9		)	—
Net realized loss (gain) on disposal of premises and equipment							292			(9		)
Net realized gain on sale of foreclosed real estate	(18		)	(13		)	(25		)	(18		)
Write-downs of and provisions for foreclosed real estate	176			236			156			176
Deferred income tax expense (benefit)	457			(546		)
Deferred income tax (benefit) expense							(2,066		)	457
Earnings on bank-owned life insurance	(563		)	(378		)	(697		)	(563		)
Compensation expense for stock options and stock awards	567			528
(Increase) decrease in assets:
Compensation expense for stock options and restricted stock grants							770			567
Decrease (increase) in assets:
Accrued interest receivable	(2,027		)	(504		)	293			(2,027		)
Other assets	(1,121		)	217			(5,085		)	(1,121		)
Increase (decrease) in accrued interest payable and other liabilities	918			284
Increase in accrued interest payable and other liabilities							5,314			918
Net Cash Provided by Operating Activities	10,092			8,148			19,539			10,092
Cash Flows from Investing Activities
Net cash acquired in acquisition	6,693			—			—			6,693
Securities available for sale:
Purchases	(91,170		)	(50,161		)	(85,409		)	(91,170		)
Sales	80,496			31,790			58,471			80,496
Maturities, calls and principal repayments	7,205			6,569			7,294			7,205
Securities held to maturity:
Purchases	(616		)	(1,000		)	(890		)	(616		)
Maturities, calls and principal repayments	1,000			4,523			616			1,000
Net increase in loans	(114,936		)	(100,500		)	(90,904		)	(114,936		)
Proceeds from the sale of foreclosed real estate	836			617			1,479			836
Purchases of bank premises and equipment	(747		)	(190		)	(2,201		)	(747		)
Proceeds from the sale of premises and equipment	53			—			207			53
Purchase of bank owned life insurance	—			(5,000		)
Net increase in Federal Home Loan Bank stock	(2,724		)	25
Net decrease (increase) in other bank stock							2,382			(2,724		)
Net Cash Used in Investing Activities	(113,910		)	(113,327		)	(108,955		)	(113,910		)
Cash Flows from Financing Activities
Net (decrease) increase in deposits	50,998			81,007
Net increase in short-term borrowed funds	72,550			3,905
Net increase in deposits							172,917			50,998
Net (decrease) increase in short-term borrowed funds							(54,295		)	72,550
Proceeds from long-term borrowings							15,112			—
Repayment of long-term borrowings	(15,000		)	(11,000		)	(16,874		)	(15,000		)
Net proceeds from capital raise	—			28,238
Purchase of treasury stock							(3,952		)	—
Dividends paid	(1,666		)	(840		)	(2,229		)	(1,666		)
Net Cash Provided by Financing Activities	106,882			101,310			110,679			106,882
Net increase (decrease) in Cash and Cash Equivalents	3,064			(3,869		)
Net increase in Cash and Cash Equivalents							21,263			3,064
Cash and Cash Equivalents - Beginning	11,646			14,638			26,678			11,646
Cash and Cash Equivalents - Ending	$	14,710		$	10,769		$	47,941		$	14,710

Supplementary Cash Flows Information
Interest paid	$	8,141		$	4,810		$	17,140		$	8,141
Income taxes paid	$	2,601		$	2,695		$	2,606		$	2,601

Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans	$	—		$	312
Other real estate owned transferred from fixed assets	$	—		$	437
Operating Leases
Operating lease right-of-use asset, net							$	4,734		$	—
Operating lease liability							$	4,870		$	—



Supplementary Schedule of Noncash Investing and Financing Activities
Foreclosed real estate acquired in settlement of loans	$	1,061	$	—
Acquisitions of Community:
Non-cash assets acquired:
Other bank stock	—		1,155
Securities available for sale	—		75,909
Loans	—		236,010
Foreclosed real estate	—		1,312
Premises and equipment	—		10,612
Interest receivable	—		824
Bank owned life insurance	—		7,963
Goodwill and intangibles assets	—		23,629
Other assets	—		1,777
Total non-cash assets acquired	—		359,191
Liabilities assumed:
Deposits	—		(301,157		)
Borrowings	—		(12,000		)
Other liabilities	—		(844		)
Total liabilities assumed	—		(314,001		)
Common stock issued for acquisitions	—		(51,883		)

See Notes to Consolidated Financial Statements໿໿

NOTE 1 – SUMMARY OF SIGNIFICANT ACOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of SB One Bancorp, ~~formerly Sussex Bancorp,~~ (“we,” “us,” “our” or the “Company”) and our wholly owned subsidiary SB One Bank ~~formerly Sussex Bank~~ (the “Bank”). The corporate name change was voted and approved during the shareholder meeting on April 25, 2018. The name changes were a part of a larger rebrand effort undertaken by Sussex Bank which merged with Community Bank of Bergen County, NJ earlier this year. The Bank’s wholly owned subsidiaries are SCB Investment Company, Inc., SCBNY Company, Inc., ClassicLake Enterprises, LLC, GFR Maywood, LLC, PPD Holding Company, LLC, Community Investing Company, Inc., 490 Boulevard Realty Corp., and SB One Insurance Agency Inc. ("SB One Insurance Agency")~~, formerly Tri-State Insurance Agency, Inc.~~, a full service insurance agency located in Sussex County, New Jersey with a satellite office located in Bergen County, New Jersey. SB One Insurance Agency’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 ~~fourteen~~eighteen banking offices: ~~eight~~seven located in Sussex County, New Jersey, four located in Bergen County, New Jersey, two located in Essex County, New Jersey, one located in Hudson County, New Jersey, one located in Middlesex County, New Jersey, one located in Union County, New Jersey, one located in Warren County, New Jersey, and one located in Queens 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~~Federal Deposit Insurance Corporation (“FDIC”) up to applicable limits. The operations of the ~~company~~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 SB One Insurance Agency 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 and nine month periods ended September 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2018.~~2019. 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, ~~2017.~~2018.

New Accounting Standards

In May 2014, the FASB issued an Accounting Standard Update (“ASU”) 2014-09 to amend its guidance on “Revenue from Contracts with Customers, (Topic 606). The objective of the ASU is to align the recognition of revenue with the transfer of promised goods or services provided to customers in an amount that reflects the consideration which the entity expects to be entitled in exchange for those goods or services. This ASU will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. In August 2015, the FASB issued an amendment (ASU 2015-14) which defers the effective date of this new guidance by one year. More detailed implementation guidance on Topic 606 was issued in March 2016 (ASU 2016-08), April 2016 (ASU 2016-10), May 2016 (ASU 2016-12), December 2016 (ASU 2016-20), February 2017 (ASU 2017-05) and September 2017 (ASU 2017-13), and the effective date and transition requirements for these ASUs are the same as the effective date and transition requirements of ASU 2014-09. The amendments in Topic 606 are effective for public business entities for annual periods beginning after December 15, 2017. Approximately 83% of the Company’s revenue for the quarter ended September 30, 2018, was comprised of interest income on financial assets, which are explicitly excluded from the scope of Topic 606. With respect to our non-interest income, management has identified revenue streams within the scope of the guidance, primarily service fees on deposits, ATM and debit card fees and insurance commissions and fees which are discussed below.

Topic 606 states that revenue should be recognized when the entity satisfies a performance obligation by transferring goods or services to the customer. An asset is considered transferred when the customer obtains control of the asset and is able to use and obtain substantially all of the benefits of the asset. The entity then has to determine whether the performance obligation was satisfied over time or at a point in time to determine when to recognize revenue. The Company determined based on the criteria presented in Topic 606 that the performance obligations were satisfied at a point in time since the customer obtains immediate control of the deposit accounts, ATM/Debit Card and insurance policy and there are no additional obligations that the Company performs over time; therefore, the revenue would be recognized as received.

The Company recognized $959 thousand in income for Service fees on deposit accounts and $5.3 million in insurance commissions and fees for the nine months ended September 30, 2018. The Company currently presents the revenue and associated costs on a gross basis. ASU 2014-09 and related amendments were adopted effective January 1, 2018, using the cumulative effect approach. Under this alternative, the Company applied the new revenue standard only to contracts that were incomplete under legacy U.S. GAAP at the date of initial application and evaluated the cumulative effect of the new standard as a potential adjustment to the opening balance of retained earnings. The Company`s adoption of the ASU on January 1, 2018 did not significantly change the

~~recognition of revenue on the Company's consolidated financial statements and, as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.~~

Service fees on deposit accounts represent account analysis fees, monthly service fees, check ordering fees and other deposit related fees. Revenue is recognized when the performance obligation is completed, which is generally monthly for account maintenance services or when a transaction has been completed.

Insurance commissions and fees represent insurance policies that our insurance agency, SB One Insurance Agency, arranges between the policy holder and the related insurance agency. SB One Insurance Agency acts solely as an insurance broker that provides the service of connection between a policy holder and carrier. SB One Insurance Agency’s performance obligation is satisfied once the policy becomes active therefore no other performance obligation is required. Revenues for the commissions to SB One Insurance Agency’s insurance contracts will generally be recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into our systems, whichever is later. Commission revenues related to installment billings are recognized on the latter of effective or invoiced date. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is generally when such commissions are received from insurance companies, or when we receive formal notification of the amount of such payments.

The Company recognized $717 thousand in ATM and debit card fees for the nine months ended September 30, 2018. ATM and debit card fees are primarily comprised of debit and credit card income (interchange fees), ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through our card payment network. The Company currently presents the revenue and associated costs with debit and credit card income on a net basis. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, agency fee income, and other services. The Company’s performance obligation for fees and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or within one month.

Under Topic 606, a contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2018 and December 31, 2017, the Company did not have any significant contract balances.

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

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. In addition, the amendments in this ASU require an entity to disclose the fair value of its financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability

in an orderly transaction between market participants at the measurement date. For public entities, the guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company has updated the fair value disclosure on Note 12 Fair Value of Financial Instruments in this report to reflect adoption of this standard, to include using the exit price notion in the fair value disclosure of financial instruments. The Company`s adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.

In February 2016, FASB issued ~~ASU~~Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). Under the new guidance, lessees ~~will be~~are 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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases which was issued to clarify and correct untended application of the guidance in ASU 2016-02 (Topic 842). The amendments in this ASU affect aspects of the guidance issued in ASU 2016-02 and provide clarification to related ~~topics;~~topics, such as 1) Rate implicit in the lease; 2) Reassessment of leases; 3) Transition guidance; and 4) Impairment of net investment in the lease. In July 2018, the FASB also issued ASU 2018-11 Leases (Topic 842) Targeted Improvements, which provides guidance related to comparative reporting requirements for initial adoption and separating lease and non-lease components. Currently, entities are required to adopt the new standard utilizing the modified retrospective approach. This amendment provides entities with an additional transition method which allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Currently, ASU 2016-02 provides a practical expedient to lessees to allow them to not separate non-lease components from lease components; however, it does not provide a similar practical expedient to lessors. This amendment provides a practical expedient to lessors which allows them the option to not separate non-lease components from the associated lease components. However, the ~~Lessor~~lessor practical expedient is limited to circumstances in which the non-lease components would otherwise be account for under the new revenue guidance (Topic 606). In addition, both of the following conditions must be met: 1) the timing and pattern of transfer are the same for non-lease components and associated lease components 2) the lease component, if accounted for separately, would be classified as an operating lease. An entity that elects the lessor practical expedient is also required to provide certain disclosures. For entities that early adopted Topic 842 the amendments in these ASUs are effective upon issuance. ~~For~~The Company adopted both ASU No. 2016-02 and ASU No. 2018-11 effective January 1, 2019 and elected to apply the guidance as of the beginning of the period of adoption (January 1, 2019) and not restate comparative periods. The

Company also elected certain optional practical expedients, which allow the Company to forego a reassessment of (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) the initial direct costs for any existing leases. Additionally, the Company elected to adopt the practical expedient use of hindsight to determine right of use asset and lease liability for each lease with a renewal option through their first option date. Adoption of the standard did not result in material changes to the Company's consolidated results of operations. The Company's adoption of the ASU resulted in a right of use asset and lease liability of approximately $2.7 million at January 1, 2019. The impact of the adoption on the Company's operating results was not significant.

In March 2019, FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements, which amends certain aspects of FASB's leasing standard, ASU 2016-02.1 ASU 2019-01 is the result of a proposed ASU issued in December 2018. The ASU addresses the following issues:

Determining the fair value of the underlying asset by lessors that are not manufacturers or dealers.

Statement of cash flows presentation for sales-type and direct financing leases by lessors within the scope of ASC 942.3

Clarification of interim disclosure requirements during transition.

ASU 2019-01 will be effective for public business entities ~~that haven’t adopted Topic 842 the effective date and transition requirement are the same as Topic 842.~~for fiscal years ending after December 15, 2019. The Company is currently ~~assessing~~evaluating the impact of the ~~new guidance~~pending adoption on its consolidated financial statements by reviewing its existing lease contracts and service contracts that may include embedded leases. The Company expects to record an increase in assets and liabilities as a result of recognizing a right-of-use asset and a lease liability for its operating lease commitments. As such, no final conclusions have been reached regarding the potential impact of adoption on the Company’s consolidated financial statements and regulatory capital and risk-weighted assets; however, at this time the Company does not expect the amendment to have a material impact on its results of operations.statements.

In June, 2016, ~~the~~ FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. In April, 2019, FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-04 made amendments to the following categories in ASU 2016-13 which include Accrued interest, transfers between classifications or categories for loans and debt securities, recoveries, reinsurance recoverables, projections of interest rate environments for variable-rate financial instruments, costs to sell when foreclosure is probable, consideration of expected prepayments when determining the effective interest rate, vintage disclosures and extension and renewal options.In May, 2019, FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief, ASU 2019-05 allows the Company to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of Topic 326 if the instruments are eligible for the fair value option under authoritative guidance for fair value. The fair value option election does not apply to held-to-maturity debt securities. We are required to make this election on an instrument-by-instrument basis. This ASU will be effective for public business entities that are SEC filers and considered smaller reporting companies in fiscal years beginning after December 15, ~~2019,~~2022, including interim periods within those fiscal years. All other entities will have one additional year. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company elected not to adopt ASU 2016-13 early. The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements. The Company has ~~taken steps~~determined that a third-party vendor will assist with model development, data governance and operational controls to ~~prepare for~~support the adoption of this ASU. Model implementation, ~~when it becomes effective, such~~including development and validation, began in the second quarter of 2019, as ~~evaluating~~did the ~~potential use of outside professionals for an updated model.~~

~~In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus~~establishment of the ~~FASB Emerging Issues Task Force), which addresses eight classification issues related~~control activities required to support the statement of cash flows: (i) debt prepayment or debt extinguishment costs, (ii) settlement of zero-coupon bonds, (iii) contingent consideration payments made after a business combination, (iv) proceeds from the settlement of insurance claims, (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (vi) distributions received from equity method investees, (vii) beneficial interests in securitization transactions, and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the ASU in an interim period, adjustments should be reflected as of the beginning of the fiscal year that includes that interim

period. An entity that elects early adoption must adopt all of the amendments in the same period. Entities should apply this ASU using a retrospective transition method to each period presented. If it is impracticable for an entity to apply the ASU retrospectively for some of the issues, it may apply the amendments for those issues prospectively as of the earliest date practicable. The Company`s adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.models.

In January 2017, FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). The main objective of this ASU is to simplify the accounting for goodwill impairment by requiring impairment charges be based upon the first step in the current two-step impairment test under Accounting Standards Codification (ASC) 350. Currently, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). This ASU’s objective is to simplify how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In March 2017, FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20). The update shortens the amortization period for premiums on purchased callable debt securities to the earliest call date. The amendment will apply only to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates, apply to all premiums on callable debt securities, regardless of how they were generated, and require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. The ASU does not require an accounting change for securities held at a discount. The discount continues to be amortized to maturity and does not apply when the investor has already incorporated prepayments into the calculation of its effective yield under other

GAAP. The amendments in the ASU are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company's adoption of the ASU ~~will~~did not have a significant impact on the Company's consolidated financial statements.

In August 2017, FASB issued ASU 2017-12 Derivatives and Hedging (Topic 815). The objective of the ASU is to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to make improvements to simplify the application of hedge accounting guidance in current GAAP. The amendments in the ASU will, among other things, 1) permit hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risks; 2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; 3) modify disclosures to include a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges; and 4) eliminate the requirement to disclose the ineffective portion of the change in fair value of hedging instruments. These changes will more closely align the results of cash flow and fair value hedge accounting with risk management activities and the presentation of hedge results in the financial statements. ASU 2017-12 ~~will be~~is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the ASU will be effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the update with all transition requirements and elections being applied to hedging relationships existing on the date of adoption. The Company's adoption of the ASU ~~will~~did not have a significant impact on the Company's consolidated financial statements.

In June 2018, FASB issued ASU 2018-07 Compensation - Stock Compensation (Topic 718). The main objective of this ASU is to simplify the accounting for share-based payment transactions in current GAAP by expanding the scope to include nonemployee share-based payment transactions. This ASU will apply to all share-based payment transactions in which a grantor acquires goods or services to be used in their own operations by issuing share-based payments. This ASU does not apply to share-based payments used to provide financing to the issuer or awards issued in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in the ASU will require an entity to, among other things, 1) measure nonemployee share-based payment awards at the fair value of the equity instruments that an entity is obligated to issue when the good has been delivered or the service has been rendered; 2) measure equity classified nonemployee share-based payment awards at the grant date; and 3) take into consideration the probability of satisfying performance conditions when accounting for nonemployee share-based payment awards with such conditions. ASU 2018-07 ~~will be~~is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted; however, an entity’s adoption date shall not be earlier than the entity’s adoption date of Topic 606.

Per review of the ASU, the Company determined that it does not pertain to ~~our~~its current operations; therefore, no evaluation regarding adoption is required.

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The updates in this ASU are part of the disclosure framework project and modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The modifications include removal ~~modification,~~ and ~~removal~~modification of disclosure requirements. The ASU removed the following disclosure requirements: a) ~~The~~the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, b) ~~The~~the policy for timing of transfers between levels, c) ~~The~~the valuation process for Level 3 fair value measurements, ~~c) For~~and d) for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU added the following disclosure requirements: a) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and b) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The ASU also modified the following disclosure requirements: a)In in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; b) ~~For~~for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee's assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and c) ~~Clarifies~~clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 will be effective for public business entities for fiscal years and interim periods within those years beginning after December 15, 2019. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The updates in this ASU are part of the disclosure framework project ASU 2018-14 and modify the disclosure requirements under ASC 715-201 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal, addition, and of disclosure requirements as well as clarifying specific disclosure requirements. The ASU removed the following disclosures: a) the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; b) the amount and timing of plan assets expected to be returned to the employer; c) the disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law; d) related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan; ~~and~~ e) for nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value ~~hierarchy. However,~~hierarchy; however, nonpublic entities will be required to disclose separately the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan ~~assets.~~assets and f) ~~For~~for public entities, the effects of a one-percentage-point change in assumed health care cost trend rates on the ~~(a)~~(i) aggregate of the service and interest cost components of net periodic benefit costs and ~~(b)~~(ii) benefit obligation for postretirement health care benefits. The ASU added the following disclosures: ~~a) The~~x) the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting ~~rates. b) An~~rates and y) an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The ASU then clarified the following disclosures: a)1) the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs more than plan assets; and b)2) the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs more than plan assets. ASU 2018-14 will be effective for public business entities for fiscal years ending after December 15, 2020. The Company is currently evaluating the impact of the pending adoption on its consolidated financial statements.

In October 2018, FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815)-Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The ASU permits the use of the Overnight Index Swap (OIS) Rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes. ASU 2018-16 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Early adoption is permitted in any interim period upon issuance of this ASU if an entity already has adopted ASU 2017-12. The amendments in this update should be applied prospectively for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The Company's adoption of the ASU did not have a significant impact on the Company's consolidated financial statements.

NOTE 2 – ACQUISITIONS

On June 20, 2018, the Company announced the signing of a definitive agreement and plan of merger pursuant to which the Company will acquire Enterprise Bank N.J. (“Enterprise Bank”) in an all-stock transaction valued at approximately $48.2 million (the “Enterprise Merger”). Subject to the terms of the merger agreement, Enterprise Bank will merge with and into SB One Bank and each outstanding share of Enterprise Bank common stock will be exchanged for 0.4538 shares of the Company’s common stock. The Enterprise Merger is expected to enhance and expand the Company's presence in Union, Middlesex and Essex Counties, New Jersey with the addition of 4 full service branch locations in those counties. The Enterprise Merger has been unanimously approved by the Board of Directors of both companies and is expected to be completed in the fourth quarter of 2018. The

consummation of the Enterprise Merger is subject to receipt of the requisite approval of Enterprise Bank’s shareholders, receipt of all required regulatory approvals, and other customary closing conditions.

On January 4, 2018, the Company announced the successful closing of the merger with Community Bank of Bergen County, NJ, a New Jersey-chartered bank (“Community”) in an all-stock transaction (the “Community Merger”). The Community Merger ~~enhances~~enhanced and ~~expands~~expanded SB One Bank’s presence in Bergen County, New Jersey with the addition of 3 full service branch locations in that county, which ~~will complement~~complements SB One Bank’s existing location in Oradell, New Jersey. Under the terms of the agreement, Community merged with and into SB One Bank, with SB One Bank being the surviving entity and each outstanding share of Community common stock was exchanged for 0.97 shares of ~~SB One Bancorp's~~the Company's common stock. The Company issued 1,873,028 shares of its common stock, having an aggregate fair value of $51.9 million in the Community Merger and paid approximately $2 thousand in cash for fractional shares. Outstanding Community stock options were paid out in cash by the Company for a total payment of $140 thousand. Expenses related to the Community Merger totaled $4.0 million and $1.2 million for the years ended December 31, 2018 and 2017, respectively.

On December 21, 2018, the Company announced the successful completion of the merger with Enterprise Bank N.J. (“Enterprise”) in an all-stock transaction (the “Enterprise Merger”). The Enterprise Merger is expected to enhance and expand the Company's presence in Union, Middlesex and Essex Counties, New Jersey with the addition of 4 full service branch locations in those counties. Pursuant to the terms of the merger agreement, Enterprise merged with and into SB One Bank and each outstanding share of Enterprise common stock was exchanged for 0.4538 shares of the Company’s common stock. The Company issued 1,573,454 shares of its common stock, having an aggregate fair value of $32.4 million and paid approximately $1 thousand in cash for fractional shares. Outstanding Enterprise stock options were paid out in cash by the Company for a total payment of $1.6 million. Expenses related to the Enterprise Merger totaled $1.8 million for the year ended December 31, 2018.

Community

The Community acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management's best estimate using

information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarized the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Community.

(Dollars in thousands) January 4, 2018

Cash and cash equivalents $ 6,693
Interest bearing time deposits with other banks 100
Securities available for sale 75,909
Other bank stock 1,155
Loans 236,070
Foreclosed real estate 1,376
Premises and equipment, net 10,612
Accrued interest receivable 824
Goodwill 22,018
Intangibles assets 1,331
Bank-owned life insurance 7,963
Other assets 1,588
Total Assets $ 365,639

Deposits $ (301,157 )
Borrowings (12,000 )
Other liabilities (599 )
Total Liabilities $ (313,756 )
Net consideration paid - common shares issued $ 51,883

The core deposit intangible totaled $1.3 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method of the sum of the years digits. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes. The goodwill recognized from the merger with Community was created based on the consideration paid by the Company for enhancing its presence in the Bergen County, NJ area in addition to our expected synergies from the combined operations of the Company and Community.



(Dollars in thousands)	January 4, 2018

Cash and cash equivalents	$	6,693
Interest bearing time deposits with other banks	100
Securities available for sale	75,909
Other bank stock	1,155
Loans	236,010
Foreclosed real estate	1,312
Premises and equipment, net	10,612
Accrued interest receivable	824
Goodwill (banking segment)	22,298
Intangibles assets	1,331
Bank-owned life insurance	7,963
Other assets	1,677
Total Assets	$	365,884

Deposits	$	(301,157	)
Borrowings	(12,000		)
Other liabilities	(844		)
Total Liabilities	$	(314,001	)
Net consideration paid - common shares issued	$	51,883

The fair values of deposit liabilities with no stated maturities such as checking, money market and savings accounts, were assumed to equal the carrying amounts since these deposits are payable on demand. The fair values of certificates of deposits and IRAs represent the present value of contractual cash flows discounted at market rates for similar certificates of deposit.

The Company has finalized the accounting as a result of the merger with Community.

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Investment securities available-for-sale

The estimated fair values of the investment securities available for sale, primarily comprised of U.S. ~~Government~~government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value discount of $261 thousand was recorded on the investments.

Loans

Loans acquired in the Community acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Community were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $242.5 million. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan on a level yield amortization over 3.5 years.


(Dollars in thousands)
Gross amortized cost basis at January 4, 2018	$	242,471		$	242,471
Fair value adjustment on general pooled loans	(3,737		)	(3,737		)
Credit fair value adjustment on purchased credit impaired loans	(2,664		)	(2,724		)
Fair value of acquired loans at January 4, 2018	$	236,070		$	236,010

For loans acquired without evidence of credit quality deterioration, the Company prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into general pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value premium of $324 thousand.

Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, Community and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $4.1 million was determined. Both the interest rate and credit fair value adjustments relate to performing loans and loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the weighted average life of the loans of 4 years.

The following is a summary of the loans accounted for in accordance with ASC 310-30 that were acquired in the Community acquisition as of the closing date.



(Dollars in thousands)	Acquired Credit Impaired Loans
Contractually required principal and interest at acquisition	$	6,289
Contractual cash flows not expected to be collected (non-accretable difference)	1,819
Expected cash flows at acquisition	4,470
Interest component of expected cash flows (accretable difference)	846
Fair value of acquired loans	$	3,624

Bank Premises

The Company acquired three branches of Community, all of which were owned by Community, at a premium of $3.5 million. The fair value of Community’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located which will be amortized on a straight line basis over 40 years.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.

The core deposit intangible totaled $1.3 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method of the sum of the years' digits. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes. The goodwill recognized from the merger with Community was created based on the consideration paid by the Company for enhancing its presence in the Bergen County, NJ area in addition to our expected synergies from the combined operations of the Company and Community.

Time Deposits

The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $965 thousand is being amortized into income on a level yield amortization method over the contractual life of the deposits of 22.5 months and a weighted average life of 16.5 months.

Bank Owned Life Insurance

Community's bank-owned life insurance book value was $8.0 million with no fair value adjustment.

Borrowings

The Company acquired borrowings at Community's carrying value of $12.0 million with no fair value adjustment. The remaining maturity of Community's borrowings was less than thirty days at a weighted average cost of funds equivalent to the current market rate for the similar term borrowing type.

The following table presents certain pro forma information as if Community had been acquired on January 1, 2017. These results combine the historical results of the Company in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017. In particular, no adjustments have been made to eliminate the amount of Community’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2017. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:

(Dollars in thousands) For the Year Ended December 31, 2017
Total revenues (net interest income plus non-interest income) $ 47,280
Net Income 6,257
Net earnings applicable to common stockholders $ 0.79

The following table presents certain pro forma information as if Community had been acquired on January 1, 2018. These results combine the historical results of the Company in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Community’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:


(Dollars in thousands)	For the Nine Months Ended September 30, 2018		Year Ended December 31, 2018
Total revenues (net interest income plus non-interest income)	$	41,002	$	54,941
Net Income	7,582		9,935
Net earnings applicable to common stockholders	$	0.96
Basic and diluted earnings per share applicable to common stockholders			$	1.25

Following the closing of the Community Merger on January 4, 2018, the Company reported the results of the combined Company. The Company cannot disaggregate the additional revenue and income before extraordinary items provided by Community since the Company operates as one consolidated entity on its internal systems. The cumulative effect to the Company's net income and net income per share are reported on a consolidated basis for the period ended ~~September 30,~~December 31, 2018.

Enterprise

The Enterprise acquisition was accounted for under the acquisition method of accounting. Accordingly, the assets acquired and liabilities assumed in the acquisition were recorded at their estimated fair values based on management's best estimate using information available at the date of the acquisition, including the use of a third party valuation specialist. The following table summarized the estimated fair value of the acquired assets and liabilities assumed at the date of acquisition for Enterprise.



(Dollars in thousands)	December 21, 2018

Cash and cash equivalents, net of stock options paid in cash	$	9,153
Securities available for sale	2,193
Other bank stock	2,380
Loans	257,170
Foreclosed real estate	1,250
Premises and equipment, net	422
Accrued interest receivable	880
Goodwill (banking segment)	2,204
Intangibles assets	1,039
Other assets	3,064
Total Assets	$	279,755

Deposits	$	(197,321	)
Borrowings	(47,106		)
Other liabilities	(2,882		)
Total Liabilities	$	(247,309	)
Net consideration paid - common shares issued	$	32,446

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Investment securities available-for-sale

The estimated fair values of the investment securities available for sale, primarily comprised of U.S. government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using open market pricing provided by multiple independent securities brokers. Management reviewed the open market quotes used in pricing the securities. A fair value discount of $100 thousand was recorded on the investments.

Loans

Loans acquired in the Enterprise acquisition were recorded at fair value, and there was no carryover related allowance for loan and lease losses. The fair values of loans acquired from Enterprise were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted for estimated future credit losses and the rate of prepayments. Projected cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. The fair value of the acquired loans receivable had a gross amortized cost basis of $262.1 million. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. There was no credit adjustment for purchased credit impaired loans in the Enterprise acquisition.



(Dollars in thousands)
Gross amortized cost basis at December 21, 2018	$	262,126
Fair value adjustment on general pooled loans	(4,956		)
Fair value of acquired loans at December 21, 2018	$	257,170

Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, Enterprise and peer banks. The Company also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $3.9 million was determined. Both the interest rate and credit fair value adjustments will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.

Bank Premises

The Company acquired four branches of Enterprise, all of which were leased by Enterprise, at a discount of $282 thousand. The fair value of Enterprise’s premises was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located which will be amortized on a straight line basis over 3 years.

Core Deposit Intangible

The core deposit intangible totaled $1.0 million and is being amortized over its estimated useful life of approximately 10 years using an accelerated method of the sum of the years' digits. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes. The goodwill recognized from the merger with Enterprise was created based on the consideration

paid by the Company for enhancing its presence in the Bergen County, NJ area in addition to our expected synergies from the combined operations of the Company and Enterprise.

Time Deposits

The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $1.0 million is being amortized into income on a level yield amortization method over the contractual life of the deposits of 11.4 months and a weighted average life of 11.4 months.

Borrowings

The Company acquired borrowings at Enterprise's carrying value of $47.3 million at a weighted average rate of 2.23% with a fair value adjustment of $149 thousand. The fair value of borrowings represents the present value of the borrowings expected contracted payments discounted by market rates for similar borrowings. Market rates were obtained from the Federal Home Loan Bank (“FHLB”) of New York as of December 21, 2018.

The following table presents certain pro forma information as if Enterprise had been acquired on January 1, 2018. These results combine the historical results of the Company in the Company’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments on January 1, 2018. In particular, no adjustments have been made to eliminate the amount of Enterprise’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2018. The Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:



(Dollars in thousands)	Year Ended December 31, 2018
Total revenues (net interest income plus non-interest income)	$	64,827
Net Income	12,496
Basic and diluted earnings per share applicable to common stockholders	$	1.80

The merger transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. Management has not finalized the accounting in connection with the merger and is still in the process of assessing the fair value of loans, other assets and other liabilities which can result in an adjustment to the Company's goodwill and deferred tax asset.

Following the closing of the Enterprise Merger on December 21, 2018, the Company reported the results of the combined Company. The Company cannot disaggregate the additional revenue and income before extraordinary items provided by Enterprise since the Company operates as one consolidated entity on its internal systems. The cumulative effect to the Company's net income and net income per share are reported on a consolidated basis for the period ended December 31, 2018.

NOTE 3 – SECURITIES

Available for Sale

The amortized cost and approximate fair value of securities available for sale as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are summarized as follows:

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(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2019
U.S. government agencies	$	20,500	$	3	$	(299	)	$	20,204
U.S. government-sponsored enterprises	47,145		4		(455		)	46,694
State and political subdivisions	18,850		1,374		—			20,224
Mortgage-backed securities -
U.S. government-sponsored enterprises	92,824		2,430		(88		)	95,166
Private mortgage-backed securities	17,624		552		—			18,176
Corporate Debt	6,588		100		(16		)	6,672
	$	203,531	$	4,463	$	(858	)	$	207,136


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2018
December 31, 2018
U.S. government agencies	$	26,718	$	4	$	(397	)	$	26,325	$	25,161	$	4	$	(371	)	$	24,794
U.S. government-sponsored enterprises	17,490		50		(16		)	17,524		20,404		38		(80		)	20,362
State and political subdivisions	60,886		85		(1,348		)	59,623		60,457		445		(540		)	60,362
Mortgage-backed securities -
U.S. government-sponsored enterprises	69,055		33		(1,889		)	67,199		74,670		100		(1,157		)	73,613
Corporate Debt	2,000		—		(13		)	1,987		3,000		8		—			3,008
	$	176,149	$	172	$	(3,663	)	$	172,658	$	183,692	$	595	$	(2,148	)	$	182,139

December 31, 2017
U.S. government agencies $ 18,799
$ 90
$ (28 ) $ 18,861
U.S. government-sponsored enterprises 6,054
8
(1 ) 6,061
State and political subdivisions 40,470
896
(132 ) 41,234
Mortgage-backed securities -
U.S. government-sponsored enterprises 30,958
65
(479 ) 30,544
Corporate Debt 2,000
30
—
2,030
$ 98,281
$ 1,089
$ (640 ) $ 98,730

Securities with a carrying value of approximately ~~$2.8~~$4.1 million and ~~$17.3~~$2.5 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 September 30, ~~2018~~2019 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.

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(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	—		—		1,267		1,305
Due after five years through ten years	4,952		4,877		8,822		9,110
Due after ten years	57,934		56,733		15,349		16,481
Total bonds and obligations	62,886		61,610		25,438		26,896
U.S. government agencies	26,718		26,325		20,500		20,204
U.S. government-sponsored enterprises	17,490		17,524		47,145		46,694
Mortgage-backed securities:
U.S. government-sponsored enterprises	69,055		67,199		92,824		95,166
Private mortgage-backed securities					17,624		18,176
Total available for sale securities	$	176,149	$	172,658	$	203,531	$	207,136

There were no gross realized gains on sales of securities available for sale and no gross realized losses for the three months ended September 30, ~~2018. Gross realized gains on sales of securities available for sale were $129 thousand~~2019 and ~~gross losses were $155 thousand for the three months ended September 30, 2017.~~2018, respectively.

Gross realized gains on sales of securities available for sale were ~~$46 thousand~~$1.7 million and ~~$294~~$46 thousand and gross realized losses were ~~$10~~$199 thousand and ~~$243~~$10 thousand for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

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 September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

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	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
September 30, 2018
September 30, 2019
U.S. government agencies	$	21,674	$	(369	)	$	1,176	$	(28	)	$	22,850	$	(397	)	$	1,288	$	(3	)	$	15,905	$	(296	)	$	17,193	$	(299	)
U.S. government-sponsored enterprises	6,042		(16		)	—		—			6,042		(16		)	38,226		(361		)	4,980		(94		)	43,206		(455		)
State and political subdivisions	43,562		(1,002		)	6,993		(346		)	50,555		(1,348		)
Mortgage-backed securities -
U.S. government-sponsored enterprises	47,659		(1,144		)	13,907		(745		)	61,566		(1,889		)	5,899		(21		)	5,394		(67		)	11,293		(88		)
Corporate Debt	1,987		(13		)	—		—			1,987		(13		)	2,090		(16		)	—		—			2,090		(16		)
Total temporarily impaired securities	$	120,924	$	(2,544	)	$	22,076	$	(1,119	)	$	143,000	$	(3,663	)	$	47,503	$	(401	)	$	26,279	$	(457	)	$	73,782	$	(858	)


December 31, 2017
December 31, 2018
U.S. government agencies	$	5,280	$	(28	)	$	—	$	—		$	5,280	$	(28	)	$	18,998	$	(316	)	$	2,593	$	(55	)	$	21,591	$	(371	)
U.S. government-sponsored enterprises	3,469		(1		)	—		—			3,469		(1		)	10,348		(80		)	—		—			10,348		(80		)
State and political subdivisions	5,212		(42		)	3,701		(90		)	8,913		(132		)	17,164		(204		)	18,785		(336		)	35,949		(540		)
Mortgage-backed securities -
U.S. government-sponsored enterprises	8,403		(212		)	12,935		(267		)	21,338		(479		)	30,547		(271		)	28,773		(886		)	59,320		(1,157		)
Total temporarily impaired securities	$	22,364	$	(283	)	$	16,636	$	(357	)	$	39,000	$	(640	)	$	77,057	$	(871	)	$	50,151	$	(1,277	)	$	127,208	$	(2,148	)

For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of September 30, ~~2018,~~2019, we reviewed our available for sale securities portfolio for indications of impairment. This review included analyzing the length of time and the extent to which the fair value was 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 September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the declines 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 September 30, ~~2018,~~2019, there were ~~eighteen~~sixteen securities with a fair value of ~~$22.9~~$17.2 million that had an unrealized loss that amounted to ~~$397~~$299 thousand. As of September 30, ~~2018,~~2019, 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~~agencies securities at September 30, ~~2018~~2019 were deemed to be other-than-temporarily impaired (“OTTI”).

At December 31, ~~2017,~~2018, there were ~~three~~eighteen securities with a fair value of ~~$5.3~~$21.6 million that had an unrealized loss that amounted to ~~$28~~$371 thousand.

U.S. Government Sponsored ~~Agencies~~Enterprises

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the ~~decline~~change in fair value and ~~the~~ unrealized losses for our U.S. government sponsored ~~agencies~~enterprises securities were primarily due to changes in spreads and market conditions and not credit quality. At September 30, ~~2018,~~2019, there were ~~three~~eighteen securities with a fair value of ~~$6.0~~$43.2 million that had an unrealized loss that amounted to ~~$16~~$455 thousand. As of ~~September~~June 30, ~~2018,~~2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of the U.S. government sponsored ~~agency~~enterprise securities at September 30, ~~2018,~~2019, were deemed to be OTTI.

At December 31, ~~2017,~~2018, there were ~~two~~six securities with a fair value of ~~$3.5~~$10.3 million that had an unrealized loss that amounted to $1$80 thousand.

State and Political Subdivisions

At September 30, ~~2018 and December 31, 2017, the decline in fair value and the unrealized losses for our~~2019, there were no state and political subdivisions securities ~~were caused by changes in interest rates and spreads and were not the result of credit quality.~~ that had an unrealized loss.

At ~~September 30,~~December 31, 2018, there were ~~forty-eight~~thirty-four securities with a fair value of ~~$50.6~~$35.9 million that had an unrealized loss that amounted to ~~$1.3 million. 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 September 30, 2018, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of the U.S. government sponsored agency securities at September 30, 2018, were deemed to be OTTI.

~~At December 31, 2017, there were nine securities with a fair value of $8.9 million that had an unrealized loss that amounted to $132~~$540 thousand.

Mortgage-Backed Securities - U.S. government-sponsored enterprises

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the ~~decline~~change 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 September 30, ~~2018,~~2019, there were ~~thirty-nine~~nine securities with a fair value of ~~$61.6~~$11.3 million that had an unrealized loss that amounted to ~~$1.9 million.~~$88 thousand. As of September 30, ~~2018,~~2019, we did not intend to sell and it was not more-likely-than-not that we would be required to sell any of these securities before recovery of their amortized cost basis. Therefore, none of our mortgage-backed securities at September 30, ~~2018~~2019 were deemed to be OTTI.

At December 31, ~~2017,~~2018, there were ~~sixteen~~thirty-eight securities with a fair value of ~~$21.3~~$59.3 million that had an unrealized loss that amounted to ~~$479 thousand.~~$1.2 million.

Corporate Debt

At September 30, ~~2018,~~2019, there was one security with a fair value of ~~$2.0~~$2.1 million that had an unrealized loss ~~that amounted to $13~~of $16 thousand. These securities typically have maturity dates greater than 5 years and the fair values are more sensitive to changes in market interest rates. As of September 30, ~~2018,~~2019, we did not intend to sell and it was ~~more-likely-than-no~~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 corporate debt securities at ~~September30, 2018,~~September 30, 2019, were deemed to be OTTI.

At December 31, ~~2017,~~2018, there were no securities with an unrealized loss.

Held to Maturity Securities

The amortized cost and approximate fair value of securities held to maturity as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are summarized as follows:

໿


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2018
September 30, 2019
State and political subdivisions	$	4,889	$	80	$	(6	)	$	4,963	$	4,331	$	83	$	—	$	4,414
December 31, 2017
December 31, 2018
State and political subdivisions	$	5,304	$	127	$	(1	)	$	5,430	$	4,078	$	74	$	—	$	4,152

The amortized cost and carrying value of securities held to maturity at September 30, ~~2018~~2019 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,082	$	2,094	$	1,553	$	1,553
Due after one year through five years	253		252		756		758
Due after five years through ten years	2,027		2,073		2,022		2,103
Due after ten years	527		544		—		—
Total held to maturity securities	$	4,889	$	4,963	$	4,331	$	4,414

Temporarily Impaired Securities

For each security whose fair value is less than its amortized cost basis, a review is conducted to determine if an other-than-temporary impairment has occurred. As of September 30, ~~2018,~~2019, there were ~~three~~no securities ~~with a fair value of $1.3 million~~ that had an unrealized ~~loss of $6 thousand.~~loss. 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, ~~2017,~~2018, there ~~was one security~~were no held to maturity securities with ~~a fair value of $254 thousand that had~~ an unrealized ~~loss of $1 thousand.~~

Less Than 12 Months 12 Months or More Total
(Dollars in thousands)
Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses
September 30, 2018
State and political subdivisions $ 1,274
$ (6 ) $ —
$ —
$ 1,274
$ (6 )
Total temporarily impaired securities $ 1,274
$ (6 ) $ —
$ —
$ 1,274
$ (6 )

December 31, 2017
State and political subdivisions $ 254
$ (1 ) $ —
$ —
$ 254
$ (1 )
Total temporarily impaired securities $ 254
$ (1 ) $ —
$ —
$ 254
$ (1 )

loss.

NOTE 4 – LOANS

The composition of net loans receivable at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 is as follows:


(Dollars in thousands)	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018

Commercial and industrial	$	64,791		$	54,759		$	105,392		$	81,709
Construction	68,185			42,484			109,934			142,321
Commercial real estate	714,526			551,445			967,919			878,449
Residential real estate	323,194			171,844			379,566			370,955
Consumer and other	2,082			1,130			1,869			2,393
Total loans receivable	1,172,778			821,662			1,564,680			1,475,827
Unearned net loan origination fees	(1,040		)	(962		)	(1,070		)	(1,052		)
Allowance for loan losses	(8,594		)	(7,335		)	(9,750		)	(8,775		)
Net loans receivable	$	1,163,144		$	813,365		$	1,553,860		$	1,466,000

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The total amount of loans serviced for the benefit of others was approximately ~~$232~~$221 thousand and ~~$239~~$229 thousand at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Purchased Credit Impaired Loans

The carrying value of loans acquired in the Community acquisition and accounted for in accordance with ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” was ~~$3.7~~$3.0 million at September 30, ~~2018,~~2019, which was ~~$10~~$600 thousand ~~more~~less than the balance at the time of acquisition on January 4, 2018. Under ASC Subtopic 310-30, these loans, referred to as purchased credit impaired (“PCI”) loans, may be aggregated and accounted for as pools of loans if the loans being aggregated have common risk characteristics. The Company elected to account for the loans with evidence of credit deterioration individually rather than aggregate them into pools. The difference between the undiscounted cash flows expected at acquisition and the investment in the acquired loans, or the “accretable yield,” is recognized as interest income utilizing the level-yield method over the life of each loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not recognized as a yield adjustment, as a loss accrual or as a valuation allowance.

Increases in expected cash flows subsequent to the acquisition are recognized prospectively through an adjustment of the yield on the loans over the remaining life, while decreases in expected cash flows are recognized as impairments through a loss provision and an increase in the allowance for loan and lease losses. Valuation allowances (recognized in the allowance for loan and lease losses) on these impaired loans reflect only losses incurred after the acquisition (representing all cash flows that were expected at acquisition but currently are not expected to be received).

The following table presents changes in the accretable yield for PCI loans:


(Dollars in thousands)	Nine months ended September 30, 2018			Nine months ended September 30, 2019			Nine months ended September 30, 2018
Accretable yield, beginning balance	$	—		$	539		$	—
Acquisition of impaired loans	846			—			846
Accretable yield amortized to interest income	(229		)	(154		)	(229		)
Reclassification from non-accretable difference	—			(122		)	—
Accretable yield, ending balance	$	617		$	263		$	617

~~There were no PCI loans in 2017.~~

NOTE 5 – 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 and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018: ໿

໿


(Dollars in thousands)	Commercial and Industrial			Construction			Commercial Real Estate			Residential Real Estate			Consumer and Other			Unallocated			Total			Commercial and Industrial			Construction			Commercial Real Estate			Residential Real Estate			Consumer and Other			Unallocated			Total
Three Months Ended:
September 30, 2019
Beginning balance																						$	741		$	373		$	6,268		$	1,444		$	17		$	784		$	9,627
Charge-offs																						—			—			(468		)	(46		)	(19		)	—			(533		)
Recoveries																						—			—			—			16			4			—			20
Provision																						194			5			105			205			7			120			636
Ending balance																						$	935		$	378		$	5,905		$	1,619		$	9		$	904		$	9,750

September 30, 2018
Beginning balance	$	440		$	402		$	5,489		$	1,138		$	27		$	768		$	8,264		$	440		$	402		$	5,489		$	1,138		$	27		$	768		$	8,264
Charge-offs	—			—			—			—			(8		)	—			(8		)	—			—			—			—			(8		)	—			(8		)
Recoveries	—			—			5			11			1			—			17			—			—			5			11			1			—			17
Provision	127			70			342			6			4			(228		)	321			127			70			342			6			4			(228		)	321
Ending balance	$	567		$	472		$	5,836		$	1,155		$	24		$	540		$	8,594		$	567		$	472		$	5,836		$	1,155		$	24		$	540		$	8,594

September 30, 2017
Nine Months Ended:
September 30, 2019
Beginning balance	$	201		$	478		$	4,243		$	917		$	20		$	1,306		$	7,165		$	603		663			$	5,575		$	1,371		$	23		$	540		$	8,775
Charge-offs	—			—			—			—			(7		)	—			(7		)	(198		)	—			(473		)	(476		)	(61		)	—			(1,208		)
Recoveries	1			—			1			1			1			—			4			2			—			124			66			8			—			200
Provision	(31		)	(17		)	1,105			87			30			(834		)	340			528			(285		)	679			658			39			364			1,983
Ending balance	$	171		$	461		$	5,349		$	1,005		$	44		$	472		$	7,502		$	935		$	378		$	5,905		$	1,619		$	9		$	904		$	9,750

Nine Months Ended:
September 30, 2018
Beginning balance	$	208		336			$	5,185		$	1,032		$	26		$	548		$	7,335		$	208		336			$	5,185		$	1,032		$	26		$	548		$	7,335
Charge-offs	(11		)	—			—			(22		)	(50		)	—			(83		)	(11		)	—			—			(22		)	(50		)	—			(83		)
Recoveries	2			—			11			83			19			—			115			2			—			11			83			19			—			115
Provision	368			136			640			62			29			(8		)	1,227			368			136			640			62			29			(8		)	1,227
Ending balance	$	567		$	472		$	5,836		$	1,155		$	24		$	540		$	8,594		$	567		$	472		$	5,836		$	1,155		$	24		$	540		$	8,594

September 30, 2017
Beginning balance	$	110		359			$	3,932		$	899		$	19		$	1,377		$	6,696
Charge-offs	(13		)	—			(266		)	(42		)	(20		)	—			(341		)
Recoveries	1			—			5			10			4			—			20
Provision	73			102			1,678			138			41			(905		)	1,127
Ending balance	$	171		$	461		$	5,349		$	1,005		$	44		$	472		$	7,502

The following table presents the balance of the allowance of loan losses and loans receivable by class at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 disaggregated on the basis of our impairment methodology.

໿


	Allowance for Loan Losses						Loans Receivable						Allowance for Loan Losses						Loans Receivable
(Dollars in thousands)	Balance		Balance Loans Individually Evaluated for Impairment		Balance Related to Loans Collectively Evaluated for Impairment		Balance		Individually Evaluated for Impairment (a)		Collectively Evaluated for Impairment		Balance		Balance Loans Individually Evaluated for Impairment		Balance Related to Loans Collectively Evaluated for Impairment		Balance		Individually Evaluated for Impairment (a)		Collectively Evaluated for Impairment
September 30, 2018
September 30, 2019
Commercial and industrial	$	567	$	180	$	387	$	64,791	$	291	$	64,500	$	935	$	299	$	636	$	105,392	$	836	$	104,556
Construction	472		—		472		68,185		—		68,185		378		—		378		109,934		—		109,934
Commercial real estate	5,836		39		5,797		714,526		14,616		699,910		5,905		216		5,689		967,919		6,101		961,818
Residential real estate	1,155		2		1,153		323,194		3,879		319,315		1,619		93		1,526		379,566		6,380		373,186
Consumer and other loans	24		—		24		2,082		—		2,082		9		—		9		1,869		—		1,869
Unallocated	540		—		—		—		—		—		904		—		—		—		—		—
Total	$	8,594	$	221	$	7,833	$	1,172,778	$	18,786	$	1,153,992	$	9,750	$	608	$	8,238	$	1,564,680	$	13,317	$	1,551,363


December 31, 2017
December 31, 2018
Commercial and industrial	$	208	$	—	$	208	$	54,759	$	20	$	54,739	$	603	$	152	$	451	$	81,709	$	372	$	81,337
Construction	336		—		336		42,484		—		42,484		663		—		663		142,321		—		142,321
Commercial real estate	5,185		28		5,157		551,445		4,763		546,682		5,575		274		5,301		878,449		15,760		862,689
Residential real estate	1,032		10		1,022		171,844		2,064		169,780		1,371		89		1,282		370,955		4,572		366,383
Consumer and other loans	26		—		26		1,130		—		1,130		23		—		23		2,393		—		2,393
Unallocated	548		—		—		—		—		—		540		—		—		—		—		—
Total	$	7,335	$	38	$	6,749	$	821,662	$	6,847	$	814,815	$	8,775	$	515	$	7,720	$	1,475,827	$	20,704	$	1,455,123

(a) loans individually evaluated for impairment exclude PCI loans.

An age analysis of loans receivable, which were past due as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, is as follows:

໿


(Dollars in thousands)	30-59 Days Past Due		60-89 days Past Due		Greater Than 90 Days (a)		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing		30-59 Days Past Due		60-89 days Past Due		Greater Than 90 Days (a)		Total Past Due		Current		Total Financing Receivables		Recorded Investment > 90 Days and Accruing
September 30, 2018
September 30, 2019
Commercial and industrial	$	—	$	—	$	291	$	291	$	64,500	$	64,791	$	—	$	—	$	—	$	704	$	704	$	104,688	$	105,392	$	—
Construction	—		—		—		—		68,185		68,185		—		—		—		—		—		109,934		109,934		—
Commercial real estate	2,693		193		15,199		18,085		696,441		714,526		—		5,220		—		5,507		10,727		957,192		967,919		—
Residential real estate	392		35		4,268		4,695		318,499		323,194		—		290		—		5,808		6,098		373,468		379,566		—
Consumer and other	6		20		—		26		2,056		2,082		—		8		3		1		12		1,857		1,869		1
Total	$	3,091	$	248	$	19,758	$	23,097	$	1,149,681	$	1,172,778	$	—	$	5,518	$	3	$	12,020	$	17,541	$	1,547,139	$	1,564,680	$	1


December 31, 2017
December 31, 2018
Commercial and industrial	$	—	$	—	$	20	$	20	$	54,739	$	54,759	$	—	$	491	$	—	$	372	$	863	$	80,846	$	81,709	$	—
Construction	—		—		105		105		42,379		42,484		—		—		582		—		582		141,739		142,321		—
Commercial real estate	4,935		126		4,314		9,374		542,071		551,445		—		2,282		—		15,760		18,042		860,407		878,449		—
Residential real estate	1,304		122		1,581		3,007		168,837		171,844		—		393		35		4,572		5,000		365,955		370,955		—
Consumer and other	8		1		—		9		1,121		1,130		—		4		1		—		5		2,388		2,393		—
Total	$	6,247	$	249	$	6,020	$	12,515	$	809,147	$	821,662	$	—	$	3,170	$	618	$	20,704	$	24,492	$	1,451,335	$	1,475,827	$	—

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

Loans for which the accrual of interest has been discontinued, excluding PCI loans, at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were:

໿


(Dollars in thousands)	September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Commercial and industrial	$	291	$	20	$	704	$	372
Construction	—		105
Commercial real estate	15,199		4,314		5,507		15,760
Residential real estate	4,268		1,581		5,808		4,572
Total	$	19,758	$	6,020	$	12,019	$	20,704

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.

The following tables illustrate our corporate credit risk profile by creditworthiness category as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018: ໿

໿


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2018
September 30, 2019
Commercial and industrial	$	64,159	$	—	$	632	$	—	$	64,791	$	104,406	$	—	$	986	$	—	$	105,392
Construction	68,185		—		—		—		68,185		107,332		2,352		250		—		109,934
Commercial real estate	692,848		3,025		18,653		—		714,526		957,185		3,877		6,857		—		967,919
Residential real estate	315,939		532		6,723		—		323,194
Consumer and other	2,082		—		—		—		2,082
	$	1,143,213	$	3,557	$	26,008	$	—	$	1,172,778	$	1,168,923	$	6,229	$	8,093	$	—	$	1,183,245


December 31, 2017
December 31, 2018
Commercial and industrial	$	54,405	$	189	$	165	$	—	$	54,759	$	80,977	$	32	$	700	$	—	$	81,709
Construction	42,379		105		—		—		42,484		141,871		—		450		—		142,321
Commercial real estate	537,636		3,508		10,301		—		551,445		855,180		3,908		19,361		—		878,449
Residential real estate	169,395		228		2,221		—		171,844
Consumer and other	1,130		—		—		—		1,130
	$	804,945	$	4,030	$	12,687	$	—	$	821,662	$	1,078,028	$	3,940	$	20,511	$	—	$	1,102,479



(Dollars in thousands)	Residential Real Estate		Consumer and other
September 30, 2019
Performing	$	373,983	$	1,869
Non-Performing	5,583		—
Total	$	379,566	$	1,869

December 31, 2018
Performing	$	366,383	$	2,393
Non-Performing	4,572		—
Total	$	370,955	$	2,393

The following table reflects information about our impaired loans, excluding PCI loans, by class as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30, 2018						December 31, 2017						September 30, 2019						December 31, 2018
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance

With no related allowance recorded:
Commercial and industrial	$	—	$	10	$	—	$	20	$	20	$	—	$	345	$	497	$	—	$	—	$	10	$	—
Commercial real estate	14,577		14,578		—		3,834		4,158		—		5,612		5,853		—		13,745		13,745		—
Residential real estate	3,780		3,780		—		1,844		1,877		—		6,056		6,129		—		2,790		2,790		—


With an allowance recorded:
Commercial and industrial	291	491	180	—	—	—	491	491	299	372	572	152
Commercial real estate	39	39	39	929	1,392	28	488	493	216	2,015	2,437	274
Residential real estate	99	99	2	220	223	10	325	345	93	1,782	2,329	89


Total:
Commercial and industrial	291		501		180		20		20		—		836		988		299		372		582		152
Commercial real estate	14,616		14,617		39		4,763		5,550		28		6,100		6,346		216		15,760		16,182		274
Residential real estate	3,879		3,879		2		2,064		2,100		10		6,381		6,474		93		4,572		5,119		89
	$	18,786	$	18,997	$	221	$	6,847	$	7,670	$	38	$	13,317	$	13,808	$	608	$	20,704	$	21,883	$	515

໿

The following table presents the average recorded investment and income recognized for our impaired loans, excluding PCI loans, for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	For the Three Months Ended September 30, 2018				For the Three Months Ended September 30, 2017				For the Three Months Ended September 30, 2019				For the Three Months Ended September 30, 2018
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	—	$	—	$	20	$	—	$	209	$	4	$	—	$	—
Construction									—		—		—		—
Commercial real estate	13,693		9		3,819		8		7,894		21		13,693		9
Residential real estate	3,858		9		1,880		5		5,500		30		3,858		9
Total impaired loans without a related allowance	17,551		18		5,719		13		13,603		55		17,551		18

With an allowance recorded:
Commercial and industrial	240		—		—		—		435		—		240		—
Commercial real estate	483		—		1,285		—		1,160		—		483		—
Residential real estate	50		—		51		—		214		—		50		—
Total impaired loans with an allowance	773		—		1,336		—		1,809		—		773		—
Total impaired loans	$	18,324	$	18	$	7,055	$	13	$	15,412	$	55	$	18,324	$	18


	For the Nine Months Ended September 30, 2018				For the Nine Months Ended September 30, 2017				For the Nine Months Ended September 30, 2019				For the Nine Months Ended September 30, 2018
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial	$	8	$	—	$	20	$	—	$	115	$	4	$	8	$	—
Construction	21		—		—		—		—		—		21		—
Commercial real estate	7,716		92		2,848		21		12,261		156		7,716		92
Residential real estate	2,869		39		1,639		14		4,476		70		2,869		39
Total impaired loans without a related allowance	10,614		131		4,507		35		16,852		230		10,614		131

With an allowance recorded:
Commercial and industrial	96		—		3		—		366		7		96		—
Commercial real estate	1,014		—		1,832		8		846		9		1,014		—
Residential real estate	84		—		191		—		414		1		84		—
Total impaired loans with an allowance	1,194		—		2,026		8		1,626		17		1,194		—
Total impaired loans	$	11,808	$	131	$	6,533	$	43	$	18,478	$	247	$	11,808	$	131

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
September 30, 2018
Performing $ 431
$ 476
$ 907
Non-performing 1,545
528
2,073
Total $ 1,976
$ 1,004
$ 2,980


December 31, 2017
(Dollars in thousands)							Commercial Real Estate		Commercial & Industrial		Residential Real Estate		Total
September 30, 2019
Performing	$	449	$	483	$	932	$	420	$	132	$	686	$	1,238
Non-performing	1,594		242		1,836		408		—		680		1,088
Total	$	2,043	$	725	$	2,768	$	828	$	132	$	1,366	$	2,326

December 31, 2018
Performing							$	431	$	—	$	475	$	906
Non-performing							1,531		—		517		2,048
Total							$	1,962	$	—	$	992	$	2,954

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of September 30, ~~2018,~~2019, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructuring.

There ~~were no~~was one troubled debt restructuring in the amount of $362 thousand during the three months ended September 30, ~~2018 and 2017.~~2019. There were two troubled debt restructurings during the nine months ended September 30, 2019. There was one troubled debt restructuring in the amount of $514 thousand that occurred during ~~the~~ nine months ended September 30, 2018. ~~There were three troubled debt restructuring in the amount of $637 thousand that occurred during the nine months ended September 30, 2017.~~


(Dollars in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
September 30, 2018
September 30, 2019
Residential real estate	1	$	514	$	306	2	$	410	$	409

September 30, 2017
Residential real estate	3	$	637	$	615



(Dollars in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
September 30, 2018
Residential real estate	1	$	514	$	306

There was no troubled debt restructuring for which there was a payment default within twelve months following the date of the restructuring for the three months ended September 30, ~~2018.~~2019. There was no troubled debt restructuring for which there was a payment default within twelve months following the date of the restructuring for the three months ended September 30, ~~2017.~~2018.

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. As of September 30, ~~2018,~~2019, we had four foreclosed residential real estate properties with a carrying value of ~~$1.1 million.~~$890 thousand. As of December 31, ~~2017,~~2018, we had ~~one~~five foreclosed residential real estate ~~property~~properties with a carrying value of ~~$179 thousand.~~$1.3 million. In addition, as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, we had consumer loans with a carrying value of ~~$698~~$547 thousand and ~~$180~~$682 thousand collateralized by residential real estate property for which formal foreclosure proceedings were in process. ~~The increases in amounts at September 30, 2018, compared to December 31, 2017, were due to loans acquired in the Community acquisition.~~

NOTE 6 – 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 September 30, 2018						Three Months Ended September 30, 2017						Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
(Dollars in thousands, except share and per share data)	Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount
Shares Outstanding (weighted average)			7,861,713						5,953,333						9,342,811						7,861,713
Shares held by Rabbi Trust			97,168						92,885						98,908						97,168
Shares liability under deferred compensation agreement			(97,168	)					(92,885	)					(98,908	)					(97,168	)
Basic earnings per share:
Net earnings applicable to common stockholders	$	3,270	7,861,713		$	0.42	$	1,963	5,953,333		$	0.33	$	5,145	9,342,811		$	0.55	$	3,270	7,861,713		$	0.42
Effect of dilutive securities:
Unvested stock awards	—		48,736				—		47,372				—		32,679				—		48,736
Diluted earnings per share:
Net income applicable to common stockholders and assumed conversions	$	3,270	7,910,449		$	0.41	$	1,963	6,000,705		$	0.33	$	5,145	9,375,490		$	0.55	$	3,270	7,910,449		$	0.41

	Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
(In thousands, except share and per share data)	Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount
(Dollars in thousands, except share and per share data)													Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount
Shares Outstanding (weighted average)			7,821,391						5,158,842						9,378,793						7,821,391
Shares held by Rabbi Trust			97,168						92,885						98,908						97,168
Shares liability under deferred compensation agreement			(97,168	)					(92,885	)					(98,908	)					(97,168	)
Basic earnings per share:
Net earnings applicable to common stockholders	$	7,570	7,821,391		$	0.97	$	5,178	5,158,842		$	1.00	$	17,212	9,378,793		$	1.84	$	7,570	7,821,391		$	0.97
Effect of dilutive securities:
Unvested stock awards	—		46,889				—		41,625				—		31,518				—		46,889
Diluted earnings per share:
Net income applicable to common stockholders and assumed conversions	$	7,570	7,868,280		$	0.96	$	5,178	5,200,467		$	1.00	$	17,212	9,410,311		$	1.83	$	7,570	7,868,280		$	0.96

໿

There were ~~29,876~~38,390 shares of ~~unvested restricted stock awards and~~ options outstanding during the three months ended September 30, ~~2018~~2019 and no shares of ~~unvested restricted stock awards and~~ options outstanding during the three months ended September 30, ~~2017,~~2018, which were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.

There were ~~50,045 and 13,972~~69,001 shares of ~~unvested restricted stock awards and~~ options outstanding during the nine months ended September 30, ~~2018~~2019 and ~~2017, respectively,~~20,169 shares of options outstanding during the nine months ended September 30, 2018, which were not included in the computation of diluted earnings per share because to do so would behave been anti-dilutive.

NOTE 7 – OTHER COMPREHENSIVE INCOME

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

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

໿


	Three Months Ended September 30, 2018									Three Months Ended September 30, 2017									Three Months Ended September 30, 2019									Three Months Ended September 30, 2018
	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
(Dollars in thousands)
Other comprehensive income (loss):
Unrealized losses on available for sale securities	$	(1,383	)	$	(394	)	$	(989	)	$	(10	)	$	(3	)	$	(7	)
Unrealized gains (losses) on available for sale securities																			$	1,241		$	357		$	884		$	(1,383	)	$	(394	)	$	(989	)
Fair value adjustments on derivatives	779			289			490			(63		)	(25		)	(38		)	(1,540		)	(463		)	(1,077		)	779			289			490
Reclassification adjustment for net losses on securities transactions included in net income	—			(1		)	1			26			10			16			—			—			—			—			(1		)	1
Total other comprehensive (loss) income	$	(604	)	$	(106	)	$	(498	)	$	(47	)	$	(18	)	$	(29	)	$	(299	)	$	(106	)	$	(193	)	$	(604	)	$	(106	)	$	(498	)

	Nine Months Ended September 30, 2018									Nine Months Ended September 30, 2017									Nine Months Ended September 30, 2019									Nine Months Ended September 30, 2018
	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
(Dollars in thousands)
Other comprehensive income (loss):
Unrealized (loss) gains on available for sale securities	$	(3,903	)	$	(1,081	)	$	(2,822	)	$	1,810		$	724		$	1,086
Unrealized gains (losses) on available for sale securities																			$	6,683		$	1,908		$	4,775		$	(3,903	)	$	(1,081	)	$	(2,822	)
Fair value adjustments on derivatives	2,214			692			1,522			(478		)	(191		)	(287		)	(6,975		)	(2,099		)	(4,876		)	2,214			692			1,522
Reclassification adjustment for net gains on securities transactions included in net income	(36		)	(11		)	(25		)	(51		)	(20		)	(31		)	(1,524		)	(459		)	(1,065		)	(36		)	(11		)	(25		)
Total other comprehensive income	$	(1,725	)	$	(400	)	$	(1,325	)	$	1,281		$	513		$	768		$	(1,816	)	$	(650	)	$	(1,166	)	$	(1,725	)	$	(400	)	$	(1,325	)

NOTE 8 – GOODWILL AND OTHER INTANGIBLES

The Company had goodwill of ~~$24.8~~$27.3 million ~~and $2.8 million for the periods ended~~as of September 30, ~~2018~~2019 and December 31, ~~2017, respectively. The increase was due~~2018. Goodwill at December 31, 2018, included $22.3 million and $2.2 million related to the ~~merger with~~acquisitions of Community ~~with total goodwill amounting~~and Enterprise, respectively, $2.3 million related to ~~$22.0 million.~~the insurance segment and $486 thousand related to the banking segment. The Company reviews its goodwill and intangible assets annually, on September 30, or more frequently if conditions warrant, for impairment. In testing goodwill for impairment, the Company compares the estimated fair value of its reporting unit to its carrying amount, including goodwill. The estimated fair value of each reporting unit exceeded its book ~~value,~~value; therefore, no write-down of goodwill was required at September 30, ~~2018.~~2019. The ~~goodwill related to~~estimated fair value of the ~~merger with Community was not reviewed for impairment~~insurance segment exceeded its carrying value by 17% at September 30, ~~as the merger took place within the last twelve months.~~2019.

The Company recorded a core deposit intangible of $1.3 million for the Community acquisition and $1.1 million for the Enterprise acquisition. ~~For the period ended September 30, 2018, the~~The Company amortized $305 thousand and $182 thousand in core deposit ~~intangible.~~intangible for the nine months ended September 30, 2019 and 2018, respectively. The estimated future amortization expense for the remainder of ~~2018~~2019 and for each of the succeeding five years ended December 31 is as follows (dollars in thousands):


For the Year Ended	Amortization Expense		Amortization Expense
2018	$	61
2019	217		$	100
2020	194		364
2021	169		320
2022	145		277
2023	121		234
2024			191

NOTE 9 – 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 September 30, 2018						Three Months Ended September 30, 2017						Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
	Banking and Financial Services		Insurance Services		Total		Banking and Financial Services		Insurance Services		Total		Banking and Financial Services		Insurance Services		Total		Banking and Financial Services		Insurance Services		Total
(Dollars in thousands)
Net interest income from external sources	$	10,993	$	—	$	10,993	$	7,574	$	—	$	7,574	$	14,685	$	—	$	14,685	$	10,993	$	—	$	10,993
Other income from external sources	967		1,551		2,518		756		1,273		2,029		1,239		1,864		3,103		967		1,551		2,518
Depreciation and amortization	455		7		462		255		6		261		488		10		498		455		7		462
Income before income taxes	3,907		320		4,227		2,775		194		2,969		6,648		317		6,965		3,907		320		4,227
Income tax expense (1)	829		128		957		928		78		1,006		1,693		127		1,820		829		128		957
Total assets	1,453,536		6,106		1,459,642		950,661		6,141		956,802		1,927,351		6,908		1,934,259		1,453,536		6,106		1,459,642

	Nine Months Ended September 30, 2018						Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
	Banking and Financial Services		Insurance Services		Total		Banking and Financial Services		Insurance Services		Total		Banking and Financial Services		Insurance Services		Total		Banking and Financial Services		Insurance Services		Total
(Dollars in thousands)
Net interest income from external sources	$	32,746	$	—	$	32,746	$	21,218	$	—	$	21,218	$	44,114	$	—	$	44,114	$	32,746	$	—	$	32,746
Other income from external sources	2,901		5,355		8,256		2,141		4,183		6,324		4,518		6,610		11,128		2,901		5,355		8,256
Depreciation and amortization	1,347		19		1,366		780		19		799		1,527		33		1,560		1,347		19		1,366
Income before income taxes	7,809		1,829		9,638		6,424		1,194		7,618		20,205		2,163		22,368		7,809		1,829		9,638
Income tax expense (1)	1,336		732		2,068		1,962		478		2,440		4,291		865		5,156		1,336		732		2,068
Total assets	1,453,536		6,106		1,459,642		950,661		6,141		956,802		1,927,351		6,908		1,934,259		1,453,536		6,106		1,459,642

(1) Insurance Services calculated at statutory tax rate of 28.1%.

NOTE 10 – 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 five 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 three to five years. All dividends paid on restricted stock, whether vested or unvested, are paid to the shareholder.

Information regarding our stock option plans for the nine months ended September 30, ~~2018~~2019 is as follows:


	Number of Shares	Weighted Average Exercise Price per Share		Weighted Average Contractual Term	Aggregate Intrinsic Value		Number of Shares		Weighted Average Exercise Price per Share		Weighted Average Contractual Term	Aggregate Intrinsic Value
Options outstanding, beginning of year	69,123	$	11.10				69,123		$	11.10
Options forfeited							(5,077	)	10.76
Options exercised							(14,304	)	$	10.92
Options outstanding, end of quarter	69,123	$	11.10	6.6	$	974,712	49,742		$	11.17	0.7	$	566,607
Options exercisable, end of quarter	36,229	$	10.85	6.5	$	519,946	35,749		$	10.98	5.6	$	413,929
Option price range at end of quarter	$9.97 to $12.83						$9.97 to $12.83
Option price of exercisable shares	$9.97 to $12.83						$9.97 to $12.83

໿

During ~~each of~~ the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, we expensed $9 thousand and $12 thousand, respectively, in stock-based compensation under stock option awards.

During the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, we expensed ~~$36~~$27 thousand and ~~$37~~$36 thousand, respectively, in stock-based compensation under stock option awards.

During the nine months ended September 30, 2019, there were 14,304 stock options exercised with an intrinsic value of $156 thousand.

During the nine months ended September 30, 2019, there were 5,077 stock options forfeited with an intrinsic value of $55 thousand to the stock options outstanding.

There were no options granted during the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018. Expected future expense relating to the unvested options outstanding as of September 30, ~~2018~~2019 is ~~$79~~$22 thousand over a weighted average period of ~~1.6~~0.7 years. Upon exercise of vested options, management expects to draw on ~~treasury~~common stock as the source of the shares.

The summary of changes in unvested restricted stock awards for the nine months ended September 30, ~~2018,~~2019, is as follows:


	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Unvested restricted stock, beginning of year	85,761		$	18.34	97,465		$	24.45
Granted	50,045		28.85		74,470		21.95
Forfeited	(4,148	)	17.66		(17,584	)	24.44
Vested	(33,882	)	16.34		(40,739	)	22.27
Unvested restricted stock, end of period	97,776		$	24.44	113,612		$	23.59

During the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, we expensed ~~$212~~$281 thousand and ~~$168~~$212 thousand, respectively, in stock-based compensation under restricted stock awards.

During the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, we expensed ~~$531~~$745 thousand and ~~$491~~$531 thousand, respectively, in stock-based compensation under restricted stock awards.

At September 30, ~~2018,~~2019, unrecognized compensation expense for unvested restricted stock was ~~$1.8~~$2.1 million, which is expected to be recognized over an average period of ~~2.3~~3.9 years.

NOTE 11 – 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 September 30, ~~2018,~~2019, we had ~~$1.1~~$1.8 million 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 September 30, ~~2018,~~2019, for guarantees under standby letters of credit issued is not material.

NOTE 12 – 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.

The following table summarizes the fair value of our financial ~~assets~~instruments measured on a recurring basis by the above pricing observability levels as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:

໿


(Dollars in thousands)	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)		Fair Value Measurements			Quoted Prices in Active Markets for Identical Assets (Level I)		Significant Other Observable Inputs (Level II)			Significant Unobservable Inputs (Level III)
September 30, 2018
September 30, 2019
U.S. government agencies	$	26,325	$	—	$	26,325	$	—	$	20,204		$	—	$	20,204		$	—
U.S. government-sponsored enterprises	17,524		—		17,524		—		46,694			—		46,694			—
State and political subdivisions	59,623		—		59,623		—		20,224			—		20,224			—
Mortgage-backed securities -
U.S. government-sponsored enterprises	67,199		—		67,199		—		95,166			—		95,166			—
Private mortgage-backed securities									18,176			—		18,176			—
Corporate debt	1,987		—		1,987		—		6,672			—		6,672			—
Derivative instruments
Interest rate swaps	3,665		—		3,665		—
Interest rate swaps - asset									152			—		152			—
Interest rate swaps - liability									(5,792		)			(5,792		)


December 31, 2017
December 31, 2018
U.S. government agencies	$	18,861	$	—	$	18,861	$	—	$	24,794		$	—	$	24,794		$	—
U.S. government-sponsored enterprises	6,061		—		6,061		—		20,362			—		20,362			—
State and political subdivisions	41,234		—		41,234		—		60,362			—		60,362			—
Mortgage-backed securities -
U.S. government-sponsored enterprises	30,544		—		30,544		—		73,613			—		73,613			—
Corporate debt	2,030		—		2,030		—		3,008			—		3,008			—
Derivative instruments
Interest rate swaps	1,451		—		1,451		—
Interest rate swaps - asset									2,114			—		2,114			—
Interest rate swaps - liability									(779		)			(779		)

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 September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are as follows:

໿


(Dollars in thousands)	Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)		Fair Value Measurements		Quoted Prices in Active Markets for Identical Assets (Level I)		Significant Other Observable Inputs (Level II)		Significant Unobservable Inputs (Level III)
September 30, 2018
September 30, 2019
Impaired loans	$	333	$	—	$	—	$	333	$	1,178	$	—	$	—	$	1,178
Foreclosed real estate	418		—		—		418		1,637		—		—		1,637


December 31, 2017
December 31, 2018
Impaired loans	$	1,794	$	—	$	—	$	1,794	$	1,785	$	—	$	—	$	1,785
Foreclosed real estate	568		—		—		568		730		—		—		730

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

(Dollars in thousands)

Fair

Value

Estimate

Valuation

Techniques

Unobservable

Input

Range

(Weighted

Average)

Fair

Value

Estimate

Valuation

Techniques

Unobservable

Input

Range

(Weighted

Average)

September 30, 2018

September 30, 2019

Impaired loans

333

Appraisal of

Appraisal

0% to (-100.0% )

1,178

Appraisal of

Appraisal

0% to (-100.0% )

collateral

adjustments (1)

(-7.52%)

collateral

adjustments (1)

(-6.8%)

Foreclosed real estate

418

Appraisal of

Selling

1,637

Appraisal of

Selling

collateral

expenses (1)

-7.0%(-7.0%)

collateral

expenses (1)

-7.0%(-7.0%)

December 31, 2017

December 31, 2018

Impaired loans

1,794

Appraisal of

Appraisal

0% to (-100.0% )

1,785

Appraisal of

Appraisal

0% to (-100.0% )

collateral

adjustments (1)

(-0.22%)

collateral

adjustments (1)

(-7.8%)

Foreclosed real estate

568

Appraisal of

Selling

730

Appraisal of

Selling

collateral

expenses ₍₁₎

-7.0% (-7.0%)

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 September 30, ~~2018~~2019 and December 31, ~~2017:~~

~~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.

2018:

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

~~Federal Home Loan Bank Stock (Carried at Cost):~~ ~~The carrying amount~~Management’s best estimate consists of ~~restricted investment in bank stock approximates fair~~both internal and external support on certain Level III measurements. Internal cash flow models using a present value ~~and considers the limited marketability of such securities.~~

~~Loans Receivable (Carried at Cost):~~ ~~The Company has adopted ASU 2016-01, and therefore is measuring the fair value of loans receivable under the~~formula that includes assumptions market participants would use along with indicative exit price notion rather than the previous method of entry price notion. Under the entry price notion, the fair value estimate of loans receivable was based on discounted cash flow. At September 30, 2018, the exit price notionpricing obtained from broker/dealers (where available) were used to ~~estimate the~~support fair ~~value~~values of ~~loans receivable was based on similar techniques, with the addition of current origination spreads, liquidity premiums, or credit adjustments.~~certain Level III investments.

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.~~proceeds, less estimated selling costs. 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 $333 thousand and $1.8 million at September 30, 2018 and December 31, 2017, respectively. These balances consist of loans that were written down or required additional reserves during the periods ended September 30, 2018 and December 31, 2017, 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 is recognized directly in earnings.

~~The~~ fair value of the ~~Company`s~~Company's derivatives ~~are~~is determined using discounted cash flow analysis using observable market-based inputs, which are considered Level 2 inputs.

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

~~Accrued Interest Receivable and Accrued Interest Payable~~Other Real Estate Owned (Carried at ~~Cost)~~Fair Value): ~~The carrying amounts of accrued interest receivable and payable approximate its~~

Other Real Estate Owned is recorded at estimated fair ~~value.~~

~~Off-Balance Sheet Instruments (Disclosed at Cost):~~value, less estimated selling costs when acquired, thus establishing a new cost basis. Fair ~~values for our off-balance sheet financial instruments (lending commitments and letters of credit) are~~value is generally based on ~~fees currently charged in the market~~independent appraisals. These appraisals include adjustments to ~~enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.~~ comparable assets

based on the appraisers’ market knowledge and experience. When an asset is acquired, the excess of the loan balance over fair value, less estimated selling costs, a writedown is recorded through expense.

The fair values of our financial instruments at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, were as follows:


	September 30, 2018				Quoted Prices in Active Markets for Identical Assets (Level I)			Significant Other Observable Inputs (Level II)			Significant Unobservable Inputs (Level III)			September 30, 2019						Quoted Prices in Active Markets for Identical Assets (Level I)			Significant Other Observable Inputs (Level II)			Significant Unobservable Inputs (Level III)
(Dollars in thousands)	Carrying Amount		Fair Value				Carrying Amount							Fair Value
Financial assets:
Cash and cash equivalents	$	14,710	$	14,710	$	14,710			$	—		$	—		$	47,941		$	47,941		$	47,941		$	—		$	—
Time deposits with other banks	200		200		—			200			—			200			200			—			200			—
Securities available for sale	172,658		172,658		—			172,658			—			207,136			207,136			—			207,136			—
Securities held to maturity	4,889		4,963		—			4,963			—			4,331			4,414			—			4,414			—
Federal Home Loan Bank stock	8,804		8,804		—			8,804			—
Other bank stock														9,382			9,382			—			9,382			—
Loans receivable, net of allowance	1,163,144		1,110,551		—			—			1,110,551			1,553,860			1,548,133			—			—			1,548,133
Accrued interest receivable	5,323		5,323		—			5,323			—			6,253			6,253			—			6,253			—
Interest rate swaps	3,665		3,665		—			3,665			—			152			152			—			152			—

Financial liabilities:
Non-maturity deposits	842,097		842,097		—			842,097			—			991,751			991,751			—			991,751			—
Time deposits	272,549		269,028		—			269,028			—			535,105			529,031			—			529,031			—
Short-term borrowings	139,900		139,983		139,983			—			—			121,000			121,036			121,036			—			—
Long-term borrowings	20,000		19,652		—			19,652			—			42,849			42,993			—			42,993			—
Subordinated debentures	27,856		24,817		—			24,817			—			27,866			27,931			—			27,931			—
Accrued interest payable	870		870		—			870			—			1,652			1,652			—			1,652			—
Interest rate swaps														5,792			5,792						5,792


	December 31, 2017				Quoted Prices in Active Markets for Identical Assets (Level I)			Significant Other Observable Inputs (Level II)			Significant Unobservable Inputs (Level III)			December 31, 2018						Quoted Prices in Active Markets for Identical Assets (Level I)			Significant Other Observable Inputs (Level II)			Significant Unobservable Inputs (Level III)
(Dollars in thousands)	Carrying Amount		Fair Value				Carrying Amount							Fair Value
Financial assets:
Cash and cash equivalents	$	11,646	$	11,646	$	11,646			$	—		$	—		$	26,678		$	26,678		$	26,678		$	—		$	—
Time deposits with other banks	100		100		—			100			—			200			200			—			200			—
Securities available for sale	98,730		98,730		—			98,730			—			182,139			182,139			—			182,139			—
Securities held to maturity	5,304		5,430		—			5,430			—			4,078			4,152			—			4,152			—
Federal Home Loan Bank stock	4,925		4,925		—			4,925			—
Other bank stock														11,764			11,764			—			11,764			—
Loans receivable, net of allowance	813,365		788,119		—			—			788,119			1,466,000			1,428,094			—			—			1,428,094
Accrued interest receivable	2,472		2,472		—			2,472			—			6,546			6,546			—			6,546			—
Interest rate swaps	1,451		1,451		—			1,451			—			2,114			2,114			—			2,114			—

Financial liabilities:
Non-maturity deposits	563,694		563,694		—			563,694			—			965,065			965,065			—			965,065			—
Time deposits	198,797		197,549		—			197,549			—			388,874			383,264			—			383,264			—
Short-term borrowings	55,350		55,335		55,335			—			—			175,295			175,366			175,366			—			—
Long-term borrowings	35,000		34,761		—			34,761			—			44,611			44,365			—			44,365			—
Subordinated debentures	27,848		25,259		—			25,259			—			27,859			26,840			—			26,840			—
Accrued interest payable	470		470		—			470			—			1,480			1,480			—			1,480			—
Interest rate swaps														779			779			—			779			—

NOTE 13 – 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 and nine months ended September 30, 2018 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%. During the nine months ended September 30, 2018, the Company entered into four interest rate swap agreements used to hedge the variable cash outflows associated with two future three month FHLB borrowings totaling $75.0 million, with an effective date of September 15, 2018. Two interest rate swaps mature September 15, 2021 with fixed rates of 2.89% and 2.85%, and the other two mature September 15, 2022 with fixed rates of 2.90% and 2.86%. The ineffective portion of the change in fair value of the derivatives ~~are~~is recognized directly in earnings. ~~The Company implemented this program during the quarter ended March 31, 2016.~~

During the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company did not record any hedge ineffectiveness.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Income and Comprehensive Income at September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30, 2018						September 30, 2019
	Notional/ Contract Amount		Fair Value		Balance Sheet Location	Expiration Date	Notional/ Contract Amount		Fair Value			Balance Sheet Location	Expiration Date
(Dollars in thousands)
Derivatives designated as hedging instruments Interest rate swaps by effective date:
March 15, 2016	$	12,500	$	1,164	Other Assets	March 15, 2026	$	12,500	$	(135	)	Other Liabilities	March 15, 2026
December 15, 2016	5,000		409		Other Assets	December 15, 2026	5,000		(152		)	Other Liabilities	December 15, 2026
June 15, 2017	6,000		485		Other Assets	June 15, 2027	6,000		(224		)	Other Liabilities	June 15, 2027
December 15, 2017	10,000		895		Other Assets	December 15, 2027	10,000		(349		)	Other Liabilities	December 15, 2027
December 15, 2017	5,000		431		Other Assets	December 15, 2027	5,000		(191		)	Other Liabilities	December 15, 2027
September 15, 2018	20,000		50		Other Assets	September 15, 2021	20,000		(501		)	Other Liabilities	September 15, 2021
September 15, 2018	20,000		72		Other Assets	September 15, 2022	20,000		(806		)	Other Liabilities	September 15, 2022
September 15, 2018	17,500		65		Other Assets	September 15, 2021	17,500		(424		)	Other Liabilities	September 15, 2021
September 15, 2018	17,500		94		Other Assets	September 15, 2022	17,500		(681		)	Other Liabilities	September 15, 2022

February 21, 2019							40,000		(933		)	Other Liabilities	February 21, 2022
June 3, 2019							20,000		(244		)	Other Liabilities	June 1, 2022
June 17, 2019							25,000		(444		)	Other Liabilities	June 15, 2022
June 17, 2019							20,000		(311		)	Other Liabilities	June 15, 2022
July 1, 2019							10,000		(77		)	Other Liabilities	July 1, 2023
July 1, 2019							10,000		(117		)	Other Liabilities	July 1, 2024
August 2, 2019							10,000		(70		)	Other Liabilities	August 2, 2023
August 2, 2019							10,000		(93		)	Other Liabilities	August 2, 2024
September 3, 2019							10,000		(14		)	Other Liabilities	September 1, 2023
September 3, 2019							10,000		22			Other Assets	September 1, 2023
September 3, 2019							10,000		47			Other Assets	September 1, 2023
September 3, 2019							10,000		(26		)	Other Liabilities	September 1, 2024
September 3, 2019							10,000		21			Other Assets	September 1, 2024
September 3, 2019							10,000		62			Other Assets	September 1, 2024
Total	$	113,500	$	3,665			$	318,500	$	(5,640	)



	December 31, 2018
	Notional/ Contract Amount		Fair Value			Balance Sheet Location	Expiration Date
(Dollars in thousands)
Derivatives designated as hedging instruments Interest rate swaps by effective date:
March 15, 2016	$	12,500	$	768		Other Assets	March 15, 2026
December 15, 2016	5,000		246			Other Assets	December 15, 2026
June 15, 2017	6,000		285			Other Assets	June 15, 2027
December 15, 2017	10,000		554			Other Assets	December 15, 2027
December 15, 2017	5,000		261			Other Assets	December 15, 2027
September 15, 2018	20,000		(176		)	Other Liabilities	September 15, 2021
September 15, 2018	20,000		(266		)	Other Liabilities	September 15, 2022
September 15, 2018	17,500		(134		)	Other Liabilities	September 15, 2021
September 15, 2018	17,500		(203		)	Other Liabilities	September 15, 2022
Total	113,500		1,335

December 31, 2017

Notional/
Contract
Amount

Fair
Value

Balance
Sheet
Location

Expiration
Date
(Dollars in thousands)
Derivatives designated as hedging instruments
Interest rate swaps by effective date:

March 15, 2016 $ 12,500
$ 610
Other Assets March 15, 2026
December 15, 2016 5,000
161
Other Assets December 15, 2026
June 15, 2017 6,000
170
Other Assets June 15, 2027
December 15, 2017 10,000
352
Other Assets December 15, 2027
December 15, 2017 5,000
158
Other Assets December 15, 2027

Total $ 38,500
$ 1,451

The table below presents the Company’s derivative financial instruments that are designated as cash flow ~~hedgers~~hedges of interest rate risk and their effect on the Company’s Consolidated Statements of Income and Comprehensive Income during the three months ended September 30, ~~2018~~2019 and ~~2017:~~2018:

໿


	Three Months Ended September 30, 2018					Three Months Ended September 30, 2019
	Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)		Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)		Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)			Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)
(Dollars in thousands)
Derivatives in cash flow hedges Interest rate swaps by effective date:
March 15, 2016	$	84	Not applicable	$	—	$	(168	)	Not applicable	$	—
December 15, 2016	40		Not applicable	—		(78		)	Not applicable	—
June 15, 2017	52		Not applicable	—		(104		)	Not applicable	—
December 15, 2017	92		Not applicable	—		(190		)	Not applicable	—
December 15, 2017	46		Not applicable	—		(95		)	Not applicable	—
September 15, 2018	55		Not applicable	—		3			Not applicable	—
September 15, 2018	77		Not applicable	—		(31		)	Not applicable	—
September 15, 2018	47		Not applicable	—		1			Not applicable	—
September 15, 2018	68		Not applicable	—		(29		)	Not applicable	—

February 21, 2019						(46		)	Not applicable	—
June 3, 2019						(59		)	Not applicable	—
June 17, 2019						(56		)	Not applicable	—
June 17, 2019						(48		)	Not applicable	—
July 1, 2019						(57		)	Not applicable	—
July 1, 2019						(83		)	Not applicable	—
August 2, 2019						(49		)	Not applicable	—
August 2, 2019						(65		)	Not applicable	—
September 3, 2019						(10		)	Not applicable	—
September 3, 2019						15			Not applicable	—
September 3, 2019						33			Not applicable	—
September 3, 2019						(19		)	Not applicable	—
September 3, 2019						15			Not applicable	—
September 3, 2019						43			Not applicable	—
Total	$	561		$	—	$	(1,077	)		$	—


	Three Months Ended September 30, 2017						Three Months Ended September 30, 2018
	Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)			Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)		Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)		Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)
(Dollars in thousands)
Derivatives in cash flow hedges Interest rate swaps by effective date:
March 15, 2016	$	(9	)	Not applicable	$	—	$	84	Not applicable	$	—
December 15, 2016	(3		)	Not applicable	—		40		Not applicable	—
June 15, 2017	(3		)	Not applicable	—		52		Not applicable	—
December 15, 2017	(15		)	Not applicable	—		92		Not applicable	—
December 15, 2017	(8		)	Not applicable	—		46		Not applicable	—

September 15, 2018							55		Not applicable	—
September 15, 2018							77		Not applicable	—
September 15, 2018							47		Not applicable	—
September 15, 2018							68		Not applicable	—
Total	$	(38	)		$	—	$	561		$	—

The table below presents the Company’s derivative financial instruments that are designated as cash flow ~~hedgers~~hedges of interest rate risk and their effect on the Company’s Consolidated Statements of Income and Comprehensive Income during the nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:

໿


	Nine Months Ended September 30, 2018					Nine Months Ended September 30, 2019
	Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)		Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)		Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)			Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)
(Dollars in thousands)
Derivatives in cash flow hedges Interest rate swaps by effective date:
March 15, 2016	$	397	Not applicable	$	—	$	(632	)	Not applicable	$	—
December 15, 2016	179		Not applicable	—		(278		)	Not applicable	—
June 15, 2017	227		Not applicable	—		(356		)	Not applicable	—
December 15, 2017	390		Not applicable	—		(632		)	Not applicable	—
December 15, 2017	196		Not applicable	—		(316		)	Not applicable	—
September 15, 2018	36		Not applicable	—		(227		)	Not applicable	—
September 15, 2018	52		Not applicable	—		(377		)	Not applicable	—
September 15, 2018	47		Not applicable	—		(202		)	Not applicable	—
September 15, 2018	68		Not applicable	—		(334		)	Not applicable	—

February 21, 2019						(652		)	Not applicable	—
June 3, 2019						(170		)	Not applicable	—
June 17, 2019						(311		)	Not applicable	—
June 17, 2019						(217		)	Not applicable	—
July 1, 2019						(54		)	Not applicable	—
July 1, 2019						(82		)	Not applicable	—
August 2, 2019						(49		)	Not applicable	—
August 2, 2019						(65		)	Not applicable	—
September 3, 2019						(10		)	Not applicable	—
September 3, 2019						15			Not applicable	—
September 3, 2019						33			Not applicable	—
September 3, 2019						(19		)	Not applicable	—
September 3, 2019						15			Not applicable	—
September 3, 2019						44			Not applicable	—
Total	$	1,592		$	—	$	(4,876	)		$	—


	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2018
	Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)			Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)		Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)		Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)
(Dollars in thousands)
Derivatives in cash flow hedges Interest rate swaps by effective date:
March 15, 2016	$	(70	)	Not applicable	$	—	$	397	Not applicable	$	—
December 15, 2016	(26		)	Not applicable	—		179		Not applicable	—
June 15, 2017	(48		)	Not applicable	—		227		Not applicable	—
December 15, 2017	(95		)	Not applicable	—		390		Not applicable	—
December 15, 2017	(48		)	Not applicable	—		196		Not applicable	—

September 15, 2018							36		Not applicable	—
September 15, 2018							52		Not applicable	—
September 15, 2018							47		Not applicable	—
September 15, 2018							68		Not applicable	—
Total	$	(287	)		$	—	$	1,592		$	—

The Company has master netting arrangements with its counterparty. All master netting arrangements include rights to offset associated with the Company's recognized derivative assets, derivative liabilities, and cash collateral received and pledged.

Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest expense as interest payments made on the Company’s variable rate borrowing positions. During the nine months ended September 30, ~~2018~~2019, the Company had ~~$54~~$27 thousand of reclassifications to interest income. During the nine months ended September 30, ~~2017,~~2018, the Company had ~~$97~~$54 thousand of reclassifications to interest expense.

As required under the master netting arrangement with its derivatives counterparty, the Company pledged $6.1 million of financial collateral at September 30, 2019, and received financial collateral ~~from its counterparty totaling~~in the amount of $2.8 million at September 30, ~~2018 that was not included as an offsetting amount.~~

2018.

Offsetting derivatives

The following table presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives in the Consolidated Balance Sheets as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. The net amounts of derivative liabilities and assets can be reconciled to the tabular disclosure of the fair value hierarchy, see Note 12, Fair Value of Financial Instruments. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Company’s Consolidated Balance Sheets.


						Gross Amounts Not Offset												Gross Amounts Not Offset
	Gross Amounts Recognized		Gross Amounts Offset	Net Amounts Presented		Financial Instruments	Cash Collateral Posted		Net Amount		Gross Amounts Recognized			Gross Amounts Offset	Net Amounts Presented			Financial Instruments	Cash Collateral Pledged			Net Amount
(Dollars in thousands)
September 30, 2018
September 30, 2019
Assets:
Interest Rate Swaps	$	3,665	—	$	3,665	—	$	2,800	$	865	$	152		—	$	(2,358	)	—	$	(3,000	)	$	642
Total	$	3,665	—	$	3,665	—	$	2,800	$	865	$	152		—	$	(2,358	)	—	$	(3,000	)	$	642

Liabilities:
Interest Rate Swaps	$	—	—	$	—	—	—		$	—	$	(5,792	)	—	$	(3,282	)	—	$	(3,100	)	$	(182	)
Total	$	—	—	$	—	—	—		$	—	$	(5,792	)	—	$	(3,282	)	—	$	(3,100	)	$	(182	)

December 31, 2017
December 31, 2018
Assets:
Interest Rate Swaps	$	1,451	—	$	1,451	—	$	1,200	$	251	$	2,114		—	$	1,672		—	$	2,460		$	(788	)
Total	$	1,451	—	$	1,451	—	$	1,200	$	251	$	2,114		—	$	1,672		—	$	2,460		$	(788	)

Liabilities:
Interest Rate Swaps	—		—	—		—	—		—		$	(779	)	—	$	(337	)	—	—			$	(337	)
Total	—		—	—		—	—		—		$	(779	)	—	$	(337	)	—	—			$	(337	)

NOTE 14 – BORROWINGS

At September 30, ~~2018,~~2019, the Bank had secured borrowing potential with the Federal Home Loan Bank of New York (“FHLBNY”) for borrowings of up to ~~$287.2~~$330.5 million and a $10.0 million line of credit at Atlantic Central Bankers Bank (“ACBB”). The borrowings at the FHLBNY are secured by a pledge of qualifying residential and commercial mortgage loans, having an aggregate unpaid principal balance of approximately ~~$287.2~~$330.5 million. At September 30, ~~2018,~~2019, the Bank had the ability to borrow up to ~~$146.2~~$156.1 million at FHLBNY and $10.0 million at ACBB.

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had ~~$139.9~~$121.0 million and ~~$55.4~~$175.3 million, respectively, in short term advances at the FHLBNY, having weighted average interest rates of ~~2.43%~~2.21% and ~~1.58%~~2.66%, respectively. ~~The increase in short term advances at September 30, 2018 as compared to December 31, 2017 was to fund the Company's loan growth.~~ These advances are priced at the federal funds rate plus a spread (generally between 20 and 30 basis points), re-price daily and mature within three months.

AtAs of September 30, 2019 and December 31, 2018, respectively, the Company had ~~$20.0~~$42.8 million and $44.6 million in long-term fixed rate advances.

NOTE 15 – REVENUE RECOGNITION

Effective July 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as securities and premises and equipment. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, securities, and derivatives that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented within other income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, and insurance contracts.

The Company, using a modified retrospective transition approach, determined that there will be no cumulative effect adjustment to retained earnings as a result of adopting the new standard, nor will the standard have a material impact on our consolidated financial statements including the timing or amounts of revenue recognized.

All of the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized within other income. The following table presents the Company’s sources of other income for the three and nine ended September 30, 2019 and 2018. Sources of revenue outside the scope of ASC 606 are noted as such.



(Dollars In Thousands)	Three Months Ended September 30,
	2019		2018
Other income:
Service fees on deposit accounts	$	351	$	320
ATM and debit card fees	289		254
Bank-owned life insurance (1)	235		190
Insurance commissions and fees	1,824		1,527
Investment brokerage fees (1)	49		29
Net gain (loss) on sales of securities (1)	—		—
Net gain on sale and disposal of premises and equipment (1)	89		—
Other	266		198
Total Other Income	$	3,103	$	2,518
(1) Not within the scope of ASC 606.



(Dollars In Thousands)	Nine Months Ended September 30,
	2019			2018
Other income:
Service fees on deposit accounts	$	1,048		$	959
ATM and debit card fees	798			717
Bank-owned life insurance (1)	697			563
Insurance commissions and fees	6,482			5,261
Investment brokerage fees (1)	126			92
Net gain (loss) on sales of securities (1)	1,524			36
Net gain on sale and disposal of premises and equipment (1)	(292		)	9
Other	745			619
Total Other Income	$	11,128		$	8,256
(1) Not within the scope of ASC 606.

A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

Service Fees on Deposit Accounts

The Company earns fees from deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed, which is when the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

Interchange Income

The Company earns interchange fees from debit and credit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions are recognized daily, concurrently with the transaction processing services provided by an outsource technology solution and are presented on a net basis.

Insurance commissions and fees

Commission revenues are recognized as of the effective date of the insurance policy or the date on which the policy premium is processed into our systems, whichever is later. Commission revenues related to installment billings are recognized on the latter of effective or invoiced date. Subsequent commission adjustments are recognized upon our receipt of notification from insurance companies concerning matters necessitating such adjustments. Profit-sharing contingent commissions are recognized when determinable, which is generally when such commissions are received from insurance companies, or when we receive formal notification of the amount of such payments.

Other

Other fees consist of revenues that are both in scope and out of scope of ASC 606. Other fee revenues in scope of ASC 606 are made up of wire transfer fees for deposit customers, other agency fee income for SB One Insurance Agency, and other deposit related fees. Revenues for such fees are recognized at the point the fee is incurred by the customer.

NOTE 16 – RIGHT OF USE ASSET AND LEASE LIABILITY

Effective January 1, 2019, the Company adopted ASC Update 2016-02, "Leases (Topic 842)," using the modified retrospective method of applying the new standard at the adoption date. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard as the lessee. This permitted the carry forward of the conclusions on lease identification, lease classification and initial direct costs. The Company also elected not to separate lease and non-lease components. Financial results for reporting periods beginning on or after January 1, 2019 are presented under the new guidance (Topic 842), while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance (Topic 840).

As a lessee, the majority of the Company's operating lease portfolio consists of real estate leases for the Company's branches and office space. The operating leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more. ROU assets and lease liabilities are not recognized for leases with an initial term of 12 months or less. The Company does not have any finance leases as the lessee.

Operating lease expense primarily represents fixed lease payments for operating leases recognized on a straight-line basis over the applicable lease term. Variable lease expense represents the payment of real estate taxes, insurance and common area maintenance based on the Company's pro-rata share of such costs.

The following table presents the components of the Company’s lease costs for operating leases as the lessee, which is included in net occupancy expense on the consolidated statements of income (in thousands):



	Three Months Ended September 30, 2019		Three Months Ended September 30, 2018

Operating lease expense	$	186	$	453
Short term lease expense	69		424
Total lease expense	$	255	$	877

Supplemental balance sheet information related to leases was as follows (in thousands, except for weighted-averages):



Operating Leases	Classification	September 30, 2019
ROU assets	Other assets	$	4,734
Lease liabilities	Other liabilities	$	4,870
Weighted-average remaining lease term		9.2
Weighted-average discount rate		3.02		%

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement or modification date for leases subsequently entered into.

Supplemental cash flow information related to operating leases was as follows (in thousands):



	Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	459
ROU assets obtained in exchange for lease obligations	$	460

Lease payment obligations for each of the next five years and thereafter with a reconciliation to the Company's lease liability are as follows (in thousands):



Year	Operating Leases
For the three months ending December 31, 2019	$	186
2020	684
2021	640
2022	640
2023	640
Thereafter	2,774
Total lease payments	5,564
Less imputed interest	(694		)
Total	$	4,870
(1) Lease liability maturities include 1st option of extension

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 Queens County, New York. 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 nine months ended September 30, ~~2018.~~2019. For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

COMPARISON OF OPERATING RESULTS FOR THREE MONTHS ENDED SEPTEMBER 30, ~~2018~~2019 AND ~~2017~~2018

Overview – For the quarter ended September 30, ~~2018,~~2019, the Company reported net income of $5.1 million, or $0.55 per basic and diluted share, an increase of 57.3%, as compared to net income of $3.3 million, or $0.42 per basic share and $0.41 per diluted share, for the quarter ended September 30, ~~2018, an increase of 67%, as compared to $2.0 million, or $0.33 per basic and diluted share, for the same period last year.~~ 2018.

The ~~Company’s~~increase in net income ~~adjusted for tax effected merger-related expenses of $538 thousand, increased $1.8 million, or 89.5%, to $3.8 million, or $0.48 per diluted share,~~ for the quarter ended September 30, ~~2018,~~2019 was driven by a $3.7 million, or 33.6%, increase in net interest income attributable to loan and deposit growth and the merger with Enterprise, and a $585 thousand increase in non-interest income as compared to the same period last year. The ~~Company’s return on average assets, adjusted for tax effected merger-related expenses, for the quarter ended September 30, 2018, was 1.06%, an~~ increase ~~from 0.86% from the quarter ended September 30, 2017. The following table summarizes~~in net income ~~excluding merger-related~~was partially offset by a $1.2 million, or 13.7%, increase in non-interest expense. The non-interest expense increase was mainly due to a $1.2 million, or 23.7%, increase in compensation mainly due to the Enterprise merger, net of realized cost savings, and to support the continued growth of the Company offset by a decrease in merger related expenses ~~for the three months ended September 30, 2018 and 2017:~~

SUSSEX BANCORP
Non-GAAP Reporting
(Dollars In Thousands)
(Unaudited)
For the Three Months Ended September 30, 2018 For the Three Months Ended September 30, 2017
Net income (GAAP) $ 3,270
$ 1,963
Merger related expenses net of tax (1) 538
1
S-3 registration filing expenses net of tax (1) —
45
Net income, as adjusted $ 3,808
$ 2,009
Average diluted shares outstanding (GAAP) 7,910,449
6,000,704
Diluted EPS, as adjusted $ 0.48
$ 0.33
Return on average assets, as adjusted 1.06 % 0.86 %
Return on average equity, as adjusted 10.10 % 8.60 %

(1) Merger related expenses net of tax expenses of $67 thousand QTD 2018; S-3 registration filing net of tax expenses of $30 thousand QTD 2017.

of $605 thousand.

Comparative Average Balances and Average Interest Rates – The 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 September 30, ~~2018~~2019 and ~~2017:~~2018:

໿


	Three Months Ended September 30,																Three Months Ended September 30,
(Dollars in thousands)	2018								2017								2019								2018
Earning Assets:	Average Balance			Interest			Average Rate (2)		Average Balance			Interest			Average Rate (2)		Average Balance			Interest			Average Rate (2)		Average Balance			Interest			Average Rate (2)
Securities:
Tax exempt (3)	$	63,752		$	666		4.14	%	$	45,252		$	472		4.14	%	$	17,712		$	203		4.55	%	$	63,752		$	666		4.14	%
Taxable	126,961			936			2.92	%	66,235			379			2.27	%	195,463			1,490			3.02	%	126,961			936			2.92	%
Total securities	190,713			1,602			3.33	%	111,487			851			3.03	%	213,175			1,693			3.15	%	190,713			1,602			3.33	%
Total loans receivable (1) (4)	1,152,741			13,009			4.48	%	778,809			8,556			4.36	%	1,548,515			19,135			4.90	%	1,152,741			13,009			4.48	%
Other interest-earning assets	10,219			23			0.89	%	6,945			6			0.34	%	32,383			97			1.19	%	10,219			23			0.89	%
Total earning assets	$	1,353,673		$	14,634		4.29	%	$	897,241		$	9,413		4.16	%	$	1,794,073		$	20,925		4.63	%	$	1,353,673		$	14,634		4.29	%

Non-interest earning assets	97,181								46,944								122,954								97,181
Allowance for loan losses	(8,388		)						(7,237		)						(9,898		)						(8,388		)
Total Assets	$	1,442,466							$	936,948							$	1,907,129							$	1,442,466

Sources of Funds:
Interest bearing deposits:
NOW	$	257,671		$	365		0.56	%	$	181,631		$	150		0.33	%	$	242,258		$	498		0.82	%	$	257,671		$	365		0.56	%
Money market	125,430			538			1.70	%	99,547			243			0.97	%	234,127			1,080			1.83	%	125,430			538			1.70	%
Savings	213,152			266			0.50	%	137,559			72			0.21	%	221,892			369			0.66	%	213,152			266			0.50	%
Time	262,244			987			1.49	%	173,553			498			1.14	%	531,178			2,808			2.10	%	262,244			987			1.49	%
Total interest bearing deposits	858,497			2,156			1.00	%	592,290			963			0.65	%	1,229,455			4,755			1.53	%	858,497			2,156			1.00	%
Borrowed funds	170,168			943			2.20	%	74,939			398			2.11	%	168,998			1,099			2.58	%	170,168			943			2.20	%
Junior subordinated debentures	27,854			318			4.53	%	27,845			320			4.56	%	27,865			318			4.53	%	27,854			318			4.53	%
Total interest bearing liabilities	$	1,056,519		$	3,417		1.28	%	$	695,074		$	1,681		0.96	%	$	1,426,318		$	6,172		1.72	%	$	1,056,519		$	3,417		1.28	%

Non-interest bearing liabilities:
Demand deposits	228,993								144,231								268,864								228,993
Other liabilities	6,081								4,193								17,141								6,081
Total non-interest bearing liabilities	235,074								148,424								286,005								235,074
Stockholders' equity	150,873								93,450								194,806								150,873
Total Liabilities and Stockholders' Equity	$	1,442,466							$	936,948							$	1,907,129							$	1,442,466

Net Interest Income and Margin(5)				11,217			3.29	%				7,732			3.42	%				14,753			3.26	%				11,217			3.29	%
Tax-equivalent basis adjustment				(224		)						(158		)						(68		)						(224		)
Net Interest Income				$	10,993							$	7,574							$	14,685							$	10,993

(1) Includes loan fee income.

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

(3) Full taxable equivalent basis, using an effective tax rate of ~~21%~~30.09% in 2019 and 2018 and ~~39%~~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 deferred fees earned 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.

Net interest income on a fully tax equivalent basis increased $3.5 million, or 31.5%, to $14.8 million for the third quarter of 2019, as compared to $11.2 million for the same period in 2018. The increase in net interest income was largely due to a $440.4 million, or 32.5%, increase in average interest earning assets, principally loans receivable, which increased $395.8 million, or 34.3%, led by organic growth and the December 2018 closing of the Enterprise merger. The net interest margin decreased 3 basis points to 3.26% for the third quarter of 2019, as compared to the same period in 2018, as a result of an increase in cost of funds of 44 basis points. The increase in the Company’s cost of funds was partially offset by an increase in yield on earning assets of 34 basis points driven by an increase in yields on loans receivable of 42 basis points.

Interest Income – Our total interest income, on a fully tax equivalent basis, increased $6.3 million, or 43.0%, to $20.9 million for the quarter ended September 30, 2019, as compared to the same period last year. The increase was primarily due to higher average earning assets, which increased $440.4 million for the quarter ended September 30, 2019, as compared to the same period in 2018. The average yield increased 34 basis points to 4.63% for the quarter ended September 30, 2019, as compared to 4.29% for the same period last year.

Our total interest income earned on loans receivable increased $6.1 million, or 47.1%, to $19.1 million for the third quarter of 2019, as compared to the same period in 2018. The increase was primarily driven by an increase in average balance of loans receivable of $395.8 million, or 34.3%, for the three months ended September 30, 2019, as compared to the same period last year. The average yield increased 42 basis points to 4.90% for the quarter ended September 30, 2019, as compared to 4.48% for the same period last year. The increases in average yield were largely driven by purchase accounting accretion resulting from the acquisitions of Community and Enterprise.

Our total interest income earned on securities, on a fully tax equivalent basis, increased $91 thousand, to $1.7 million for the quarter ended September 30, 2019 from $1.6 million for the same period in 2018. The increase in interest income earned on securities was mainly due to a 11.8% increase on the average balance. The average yield for the quarter ended September 30, 2019 decreased 18 basis points to 3.15% as compared to the same period in 2018.

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets increased $74 thousand to $97 thousand for the third quarter of 2019 as compared to the same period last year. The average balances in other interest-earning assets increased $22.2 million to $32.4 million in the third quarter of 2019 from $10.2 million during the third quarter a year earlier. The average yield for the quarter ended September 30, 2019 increased 30 basis points to 1.19% as compared to 0.89% in the same period in 2018 which was mainly driven by the deposits held at the Federal Reserve Bank and Wilmington Trust.

Interest Expense – Our interest expense for the three months ended September 30, 2019 increased $2.8 million, or 80.6%, to $6.2 million from $3.4 million for the same period in 2018. The increase was principally due to higher average balances in interest-bearing liabilities, which increased $369.8 million, or 35.0%, to $1.4 billion for the third quarter of 2019 from $1.1 billion for the same period in 2018. In addition the increase was due to a 44 basis points increase in the average rate to 1.72% for the quarter ended September 30, 2019, as compared to 1.28% for the same period last year.

Our interest expense on deposits increased $2.6 million, or 120.5%, for the quarter ended September 30, 2019, 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 $371.0 million during the third quarter of 2019, as compared to the same period in 2018. The average rate increased 53 basis points to 1.53% for the quarter ended September 30, 2019, as compared to 1.00% for the same period last year.

Our interest expense on borrowed funds increased $156 thousand, or 16.5%, for the quarter ended September 30, 2019, as compared to the same period last year. The increase was largely attributed to an increase in the average rate of 38 basis points to 2.58% as compared to 2.20% in the same period in 2018. The increase was offset by a $1.2 million decrease in the average balance of borrowed funds during the third quarter of 2019, as compared to the same period in 2018.

Our interest expense on all of the Company's subordinated debt remained the same for the quarter ended September 30, 2019, as compared to the same period last year.

Provision for Loan Losses – Provision for loan losses increased $315 thousand, or 98.1%, to $636 thousand for the third quarter of 2019, as compared to $321 thousand for the same period in 2018. 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 $585 thousand, or 23.2%, to $3.1 million for the third quarter of 2019, as compared to the same period in 2018. The growth was largely due to an increase in insurance commissions and fees relating to SB One Insurance Agency of $297 thousand, or 19.4%, for the third quarter of 2019, as compared to the same period in 2018.

Non-Interest Expense– Our non-interest expenses increased $1.2 million, or 13.7%, to $10.2 million for the third quarter of 2019, as compared to the same period in 2018. The increase in non-interest expenses occurred largely in salaries and employee benefits of $1.2 million, data processing of $290 thousand and expenses and write-downs related to foreclosed real estate of $152 thousand. The increase in non-interest expenses for the third quarter of 2019, as compared to the same period in 2018, was the result of the Company’s continued growth, inclusive of the Enterprise merger net of cost savings. The increase in expenses and write-downs related to foreclosed real estate was driven by a one-time charge for write-downs of $149 thousand on three properties. The aforementioned increases were partially offset by decreases in professional fees and FDIC assessment costs of $111 thousand and $45 thousand, respectively.

Income Taxes– Our income tax expense, which includes both federal and state tax expenses, increased $863 thousand, or 90.2%, to $1.8 million for the third quarter of 2019, as compared to the same period last year. The Company’s effective tax rate for the third quarter of 2019 was 26.1%, as compared to 22.6% for the third quarter of 2018.

COMPARISON OF OPERATING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2019AND 2018

Overview– For the nine months ended September 30, 2019, the Company reported net income of $17.2 million, or $1.84 per basic and $1.83 diluted share, for the nine months ended September 30, 2019, an increase of 127.4%, as compared to $7.6 million, or $0.97 per basic share and $0.96 per diluted share, for the same period last year.

For the nine months ended September 30, 2019, the net income growth was driven by an increase in net interest income of $11.4 million, or 34.7%, as compared to the same period last year, resulting from growth of $18.9 million in loan interest income which was attributable to organic loan growth and the merger with Enterprise. In addition, non-interest income increased $2.9 million, or 34.8%, from a $1.2 million increase in insurance commissions and fees as compared to the same period last year. The increase in net income was partially offset by an increase in non-interest expense of $754 thousand, or 2.5%.

Comparative Average Balances and Average Interest Rates– The 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 nine month periods ended September 30, 2019 and 2018:

໿



	Nine Months Ended September 30,
(Dollars in thousands)	2019								2018
Earning Assets:	Average Balance			Interest			Average Rate (2)		Average Balance			Interest			Average Rate (2)
Securities:
Tax exempt (3)	$	42,253		$	1,386		4.39	%	$	61,187		$	1,919		4.19	%
Taxable	165,482			3,942			3.18	%	124,756			2,476			2.65	%
Total securities	207,735			5,328			3.43	%	185,943			4,395			3.16	%
Total loans receivable (1) (4)	1,522,197			56,354			4.95	%	1,109,975			37,471			4.51	%
Other interest-earning assets	22,588			211			1.25	%	10,456			69			0.88	%
Total earning assets	$	1,752,520		$	61,893		4.72	%	$	1,306,374		$	41,935		4.29	%

Non-interest earning assets	118,562								96,629
Allowance for loan losses	(9,353		)						(7,993		)
Total Assets	$	1,861,729							$	1,395,010

Sources of Funds:
Interest bearing deposits:
NOW	$	249,238		$	1,397		0.75	%	$	255,823		$	1,110		0.58	%
Money market	235,252			3,423			1.95	%	104,603			1,073			1.37	%
Savings	223,338			1,068			0.64	%	218,359			534			0.33	%
Time	487,806			7,190			1.97	%	263,533			2,556			1.30	%
Total interest bearing deposits	1,195,634			13,078			1.46	%	842,318			5,273			0.84	%
Borrowed funds	167,899			3,286			2.62	%	152,178			2,323			2.04	%
Junior subordinated debentures	27,863			949			4.55	%	27,852			946			4.54	%
Total interest bearing liabilities	$	1,391,396		$	17,313		1.66	%	$	1,022,348		$	8,542		1.12	%

Non-interest bearing liabilities:
Demand deposits	266,999								220,156
Other liabilities	11,558								4,978
Total non-interest bearing liabilities	278,557								225,134
Stockholders' equity	191,776								147,528
Total Liabilities and Stockholders' Equity	$	1,861,729							$	1,395,010

Net Interest Income and Margin(5)				44,580			3.40	%				33,393			3.42	%
Tax-equivalent basis adjustment				(466		)						(647		)
Net Interest Income				$	44,114							$	32,746

(1) Includes loan fee income.

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

(3) Full taxable equivalent basis, using an effective tax rate of 30.09% in ~~2017~~2019 and 2018 and adjusted for TEFRA (Tax and Equity Fiscal Responsibility Act) interest expense disallowance

(4) Loans outstanding include non-accrual loans.

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

Net interest income on a fully tax equivalent basis increased ~~$3.5~~$11.2 million, or ~~45.1%~~33.5%, to ~~$11.2~~$44.6 million for the ~~third quarter~~first nine months of ~~2018,~~2019 as compared to ~~$7.7~~$33.4 million for the same period in ~~2017.~~2018. The increase in net interest income was largely due to a ~~$456.4~~$446.1 million, or ~~50.9%~~34.2%, increase in average interest earning assets, principally loans receivable, which increased ~~$373.9~~$412.2 million, or ~~48.0%. However, the net interest margin decreased by 13 basis points to 3.29% for the third quarter of 2018, as compared to the same period in 2017. The decrease was primarily~~37.1% driven by ~~an increase in wholesale funding to support loan~~organic growth and ~~a $130 thousand decrease in prepayment penalties on commercial loans.~~the Enterprise merger.

Interest Income – Our total interest income, on a fully tax equivalent basis, increased ~~$5.2~~$20.0 million, or ~~55.5%~~47.6%, to ~~$14.6~~$61.9 million for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to the same period last year. The increase was primarily due to higher average earning assets, which increased ~~$456.4~~$446.1 million for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to the same period

in ~~2017.~~2018. The average yield increased 1343 basis points to ~~4.29%~~4.72% for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to ~~4.16%~~4.29% for the same period last year.

Our total interest income earned on loans receivable increased ~~$4.5~~$18.9 million, or ~~52.0%~~50.4%, to ~~$13.0~~$56.4 million for the ~~third quarter~~first nine months of ~~2018,~~2019, as compared to the same period in ~~2017.~~2018. The increase was primarily driven by an increase in average balance of loans receivable of ~~$373.9~~$412.2 million, or ~~48.0%~~37.1%, for the ~~three~~nine months ended September 30, ~~2018,~~2019, as compared to the same period last year. The average yield increased 1244 basis points to ~~4.48%~~4.95% for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to ~~4.36%~~4.51% for the same period last year. The increases in average yield ~~was~~were largely driven by purchase accounting accretion resulting from the ~~merger with Community.~~acquisitions of Community and Enterprise.

Our total interest income earned on securities, on a fully tax equivalent basis, increased ~~$751~~$933 thousand, to ~~$1.6~~$5.3 million for the ~~quarter~~nine months ended September 30, ~~2018~~2019 from ~~$851 thousand~~$4.4 million for the same period in ~~2017.~~2018. The increase in interest income earned on securities was mainly due to a ~~71.1%~~11.7% increase on the average balance. The average yield for the ~~quarter~~nine months ended September 30, ~~2018~~2019 increased 3027 basis points to ~~3.33%~~3.43% as compared to the same period in ~~2017.~~2018.

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets increased ~~$17~~$142 thousand to ~~$23~~$211 thousand for the ~~third quarter~~first nine months of ~~2018~~2019 as compared to the same period last year. The average balances in other interest-earning assets increased ~~$3.3~~$12.1 million to ~~$10.2~~$22.6 million in the ~~third quarter~~first nine months of ~~2018~~2019 from ~~$6.9~~$10.4 million during the ~~third quarter~~first nine months a year earlier. The average yield for the ~~quarter~~nine months ended September 30, ~~2018~~2019 increased 5537 basis ~~point~~points to ~~0.89%~~1.25% as compared to ~~0.34%~~0.88% in the same period in ~~2017~~2018 which was mainly driven by the deposits held at the Federal Reserve Bank and Wilmington Trust.

Interest Expense – Our interest expense for the ~~three~~nine months ended September 30, ~~2018~~2019 increased ~~$1.7~~$8.8 million, or ~~103.3%~~102.7%, to ~~$3.4~~$17.3 million from ~~$1.7~~$8.5 million for the same period in ~~2017.~~2018. The increase was principally due to higher average balances in interest-bearing liabilities, which increased ~~$361.4~~$369.0 million, or ~~52.0%~~36.1%, to ~~$1.1~~$1.4 billion for the ~~third quarter~~first nine months of ~~2018~~2019 from ~~$695.1 million~~$1.0 billion for the same period in ~~2017.~~2018. In addition the increase was due to a 3254 basis points increase in the average rate to ~~1.28%~~1.66% for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to ~~0.96%~~1.12% for the same period last year.

Our interest expense on deposits increased ~~$1.2~~$7.8 million, or ~~123.9%~~148.0%, for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, 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 ~~$266.2~~$353.3 million during the ~~third quarter~~first nine months of ~~2018,~~2019, as compared to the same period in ~~2017.~~2018. The average rate increased 3562 basis points to ~~1.00%~~1.46% for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to ~~0.65% for the same period last year. The average rate excluding purchase accounting accretion increased 32 basis points to 0.97% for the quarter ended September 30, 2018, as compared to 0.65%~~0.84% for the same period last year.

Our interest expense on borrowed funds increased ~~$545~~$963 thousand, or ~~136.9%~~41.5%, for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to the same period last year. The increase was largely attributed to ~~a $95.2 million~~an increase in the average rate of 58 basis points to 2.62% as compared to 2.04% in the same period in 2018. The average balance of borrowed funds ~~during~~increased $15.7 million to $167.9 million for the ~~third quarter~~first nine months of ~~2018,~~2019, as compared to the same period in ~~2017. The average rate increased nine basis point to 2.20% as compared to 2.11% in the same period in 2017.~~2018.

Our interest expense on all of the ~~Company`s~~Company's subordinated debt ~~decreased $2~~increased $3 thousand, or ~~0.6%~~0.3%, for the ~~quarter~~nine months ended September 30, ~~2018,~~2019, as compared to ~~the same period last year. The decrease was mainly attributed to a three basis points decrease in average rate to 4.53% for the quarter ended September 30, 2018, as compared to 4.56 % for~~ the same period last year.

Provision for Loan Losses – Provision for loan losses ~~decreased $19~~increased $756 thousand, or 61.6%, to ~~$321 thousand~~2.0 million for the ~~third quarter~~first nine months of ~~2018,~~2019, as compared to ~~$340 thousand~~$1.2 million for the same period in ~~2017.~~2018. 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 ~~$489 thousand,~~$2.9 million, or ~~24.1%~~34.8%, to ~~$2.5~~$11.1 million for the ~~third quarter~~first nine months of ~~2018,~~2019 as compared to the same period last year. The increase was ~~largely~~principally due to an$1.2 million increase ~~of $264 thousand, or 20.9%,~~ in insurance commissions and fees relating to SB One Insurance ~~Agency. In addition, ATM~~Agency, and ~~debit card fees, service fees~~a $1.5 million increase in gains on ~~deposit accounts,~~sale of securities. The aforementioned increases were partially offset by a $292 thousand loss on the disposal of fixed assets relating to closing of the Company’s corporate center in Rockaway, NJ, and ~~bank owned life insurance, increased $56 thousand, $46 thousand, and $46 thousand, respectively.~~the sale of the Andover branch.

Non-Interest Expense – Our non-interest expenses increased ~~$2.7 million~~$754 thousand, or 2.5%, to ~~$9.0~~$30.9 million for the ~~third quarter~~first nine months of ~~2018, as compared to the same period last year. Non-interest expenses, adjusted for merger related expenses of $605 thousand, increased $2.1 million to $8.4 million for the third quarter of 2018~~2019 as compared to the same period last year. The increase ~~was largely attributed to the growth of the Company resulting from the merger with Community Bank which represented an estimated $1.4 million in non-~~

interest expenses based on the reported average quarterly non-interest expenses of $2.2 million for the nine months ended September 30, 2017 less approximately 35% in realized projected merger expense savings. The increase in non-interest expenses ~~occurred largely~~was primarily due to increases in salaries and employee benefits of ~~$1.3~~$3.2 million, occupancy of ~~$295~~$518 thousand and data processing of ~~$145 thousand, which were~~$499 thousand. The aforementioned increase was partially offset by a decrease in merger related expenses of ~~$201 thousand in expenses and write-downs related to foreclosed real estate. The merger-related expenses for the third quarter were driven by the announced merger with Enterprise Bank.~~$4.3 million.

Income Taxes – Our income tax expense, which includes both federal and state tax expenses, decreased $49 thousand, or 4.9% to $957 thousand for the third quarter of 2018, as compared to the same period last year. The Company’s effective tax rate for the third quarter of 2018 was 22.6%, as compared to 33.9% for the third quarter of 2017. The decrease in the Company’s tax rate was largely due to the Tax Cuts and Jobs Act enacted in December 2017 which reduced the federal corporate income tax rate to 21% and the merger with Community which resulted in the Company’s tax free income becoming a larger percentage of its overall income.

On July 1, 2018, New Jersey's Assembly Bill 4202 was signed into law. The new bill, effective January 1, 2018, imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million at a rate of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and at 1.5% for years beginning on or after January 1, 2020, through December 31, 2021. The Company evaluated the change in income tax expense for the third quarter of 2018 and recorded income tax expense of $7 thousand.

~~COMPARISON OF OPERATING RESULTS FOR NINE MONTHS ENDED SEPTEMBER 30, 2018AND 2017~~

~~Overview~~– ~~For the nine months ended September 30, 2018, the Company reported net income of $7.6~~increased $3.1 million, or $0.97 per basic and $0.96 per diluted share, or a 46.2% increase, as compared to net income of $5.2 million, or $1.00 per basic and diluted share, for the same period last year. The Company’s net income, adjusted for tax effected merger-related expenses of $3.2 million and non-recurring rebrand expenses of $152 thousand, respectively, increased $5.4 million, or 96.5%149.3%, to $10.9 million, or $1.39 per diluted share, for the nine months ended September 20, 2018, as compared to the same period last year. The changes were largely attributed to the growth of the Company resulting from the merger with Community Bank, along with non-interest expense savings, double digit loan growth, the positive impacts from the Tax Cut and Jobs Act and newly enacted New Jersey tax legislation in 2018, and a 53% increase in SB One’s Insurance pretax income. The following table summarizes net income excluding merger-related expenses and other non-recurring expenses for the nine months ended September 30, 2018 and 2017:

SUSSEX BANCORP
Non-GAAP Reporting
(Dollars In Thousands)
(Unaudited)
For the Nine Months Ended September 30, 2018 For the Nine Months Ended September 30, 2017
Net income (GAAP) $ 7,570
$ 5,178
Merger related expenses net of tax (1) 3,220
345
Non-recurring rebrand expenses net of tax (2) 152
—
S-3 registration filing expenses net of tax (1) —
45
Net income, as adjusted $ 10,942
$ 5,568
Average diluted shares outstanding (GAAP) 7,868,280
5,200,466
Diluted EPS, as adjusted $ 1.39
$ 1.07
Return on average assets, as adjusted 1.05 % 0.83 %
Return on average equity, as adjusted 9.89 % 10.03 %

(1) Merger related expenses net of tax expenses $1.1 million YTD 2018 and $137 thousand YTD 2017; S-3 registration filing net of tax expenses of $30 thousand in 2017.
(2) Non-recurring rebrand expenses net of tax expense of $54 thousand

~~Comparative Average Balances and Average Interest Rates~~– The 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 nine month periods ended September 30, 2018 and 2017:

໿

Nine Months Ended September 30,
(Dollars in thousands) 2018 2017
Earning Assets:
Average
Balance
Interest
Average
Rate (2)

Average
Balance
Interest
Average
Rate (2)
Securities:
Tax exempt (3)
$ 61,187
$ 1,919
4.19 % $ 46,188
$ 1,419
4.11 %
Taxable 124,756
2,476
2.65 % 65,169
1,064
2.18 %
Total securities 185,943
4,395
3.16 % 111,357
2,483
2.98 %
Total loans receivable (1) (4)
1,109,975
37,471
4.51 % 740,451
24,030
4.34 %
Other interest-earning assets 10,456
69
0.88 % 8,976
28
0.42 %
Total earning assets $ 1,306,374
$ 41,935
4.29 % $ 860,784
$ 26,541
4.12 %

Non-interest earning assets 96,629
44,474

Allowance for loan losses (7,993 ) (6,974 )
Total Assets $ 1,395,010
$ 898,284

Sources of Funds:
Interest bearing deposits:
NOW $ 255,823
$ 1,110
0.58 % $ 180,378
$ 399
0.30 %
Money market 104,603
1,073
1.37 % 91,614
593
0.87 %
Savings 218,359
534
0.33 % 137,901
215
0.21 %
Time 263,533
2,556
1.30 % 165,861
1,325
1.07 %
Total interest bearing deposits 842,318
5,273
0.84 % 575,754
2,532
0.59 %
Borrowed funds 152,178
2,323
2.04 % 79,999
1,358
2.27 %
Junior subordinated debentures 27,852
946
4.54 % 27,842
957
4.60 %
Total interest bearing liabilities $ 1,022,348
$ 8,542
1.12 % $ 683,595
$ 4,847
0.95 %

Non-interest bearing liabilities:
Demand deposits 220,156
136,642

Other liabilities 4,978
4,050

Total non-interest bearing liabilities 225,134
140,692

Stockholders' equity 147,528
73,997

Total Liabilities and Stockholders' Equity $ 1,395,010
$ 898,284

Net Interest Income and Margin(5)
33,393
3.42 % 21,694
3.37 %
Tax-equivalent basis adjustment (647 ) (476 )
Net Interest Income $ 32,746
$ 21,218

~~(1) Includes loan fee income.~~

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

~~(3) Full taxable equivalent basis, using an effective tax rate of 21% in 2018 and 39% in 2017 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 deferred fees earned 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.

~~Net interest income on a fully tax equivalent basis increased $11.7 million, or 53.9%, to $33.4~~$5.2 million for the first nine months of 2018 as compared to $21.7 million for the same period in 2017. The increase in net interest income was largely due to a $445.6 million, or 51.8%, increase in average interest earning assets, principally loans receivable, which increased $369.5 million, or 49.9%. The net interest margin increased by 5 basis points to 3.42% for the first nine months of 2018, as compared to the same period in 2017. These increases were largely attributable to the merger with Community Bank.

~~Interest Income –~~ Our total interest income, on a fully tax equivalent basis, increased $15.4 million, or 58.0%, to $41.9 million for the nine months ended September 30, 2018, as compared to the same period last year. The increase was primarily due to higher average earning assets, which increased $445.6 million for the nine months ended September 30, 2018, as compared to the same period in 2017. The average yield increased seventeen basis points to 4.29% for the nine months ended September 30, 2018, as compared to 4.12% for the same period last year.

Our total interest income earned on loans receivable increased $13.4 million, or 55.9%, to $37.5 million for the first nine months of 2018, as compared to the same period in 2017. The increase was primarily driven by an increase in average balance of loans receivable of $369.5 million, or 49.9%, for the nine months ended September 30, 2018, as compared to the same period last year. The average yield increased 17 basis points to 4.51% for the nine months ended September 30, 2018, as compared to 4.34% for the same period last year. The increases in average yield was largely driven by purchase accounting accretion resulting from the merger with Community. The average yield excluding purchase accounting accretion increased 7 basis points to 4.41% for the nine months ended September 30, 2018, as compared to 4.34% for the same period last year.

Our total interest income earned on securities, on a fully tax equivalent basis, increased $1.9 million, to $4.4 million for the nine months ended September 30, 2018 from $2.5 million for the same period in 2017. The increase in interest income earned on securities was mainly due to a 67.0% increase on the average balance. The average yield for the nine months ended September 30, 2018 increased eighteen basis points to 3.16% as compared to the same period in 2017.

Other interest-earning assets include federal funds sold and interest bearing deposits in other banks. Our interest earned on total other interest-earning assets increased $41 thousand to $69 thousand for the first nine months of 2018 as compared to the same period last year. The average balances in other interest-earning assets increased $1.5 million to $10.5 million in the first nine months of 2018 from $9.0 million during the first nine months a year earlier. The average yield for the first nine months of 2018 increased 46 basis points to 0.88% as compared to 0.42% in the same period in 2017 which was mainly driven by the deposits held at the Federal Reserve Bank and Wilmington Trust.

~~Interest Expense –~~ Our interest expense for the nine months ended September 30, 2018 increased $3.7 million, or 76.2%, to $8.5 million from $4.8 million for the same period in 2017. The increase was principally due to higher average balances in interest-bearing liabilities, which increased $338.8 million, or 49.6%, to $1.0 billion for the first nine months of 2018 from $683.6 million for the same period in 2017. The average rate for the nine months ended September 30, 2018 increased seventeen basis points to 1.12% as compared to 0.95% for the same period last year.

Our interest expense on deposits increased $2.7 million, or 108.3%, for the nine months ended September 30, 2018, 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 $266.6 million during the first nine months of 2018, as compared to the same period in 2017. The average rate increased 25 basis points to 0.84% for the nine months ended September 30, 2018, as compared to 0.59% for the same period last year. The average rate excluding purchase accounting accretion increased 21 basis points to 0.80% for the nine months ended September 30, 2018, as compared to 0.59% for the same period last year.

Our interest expense on borrowed funds increased $965 thousand, or 71.1%, for the nine months ended September 30, 2018, as compared to the same period last year. The increase was largely attributed to a $72.2 million increase in the average balance of borrowed funds during the first nine months of 2018, as compared to the same period in 2017. The increase was partially offset by a 23 basis point decrease in the average rate to 2.04% as compared to 2.27% in the same period in 2017.

Our interest expense on all of the Company`s subordinated debt decreased $11 thousand, or 1.1%, for the nine months ended September 30, 2018, as compared to the same period last year. The decrease was mainly attributed to a six basis points decrease in average rate to 4.54% for the nine months ended September 30, 2018, as compared to 4.60% for the same period last year.

~~Provision for Loan Losses –~~ Provision for loan losses increased $100 thousand to $1.2 million for the first nine months of 2018, as compared to $1.1 million for the same period in 2017. 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 $1.9 million, or 30.6%, to $8.3 million for the first nine months of 2018 as compared to the same period last year. The increase was largely due to growth of $1.1 million in insurance commissions and fees related to SB One Insurance Agency. In addition, other income, bank owned life insurance, service fees on deposit accounts, and ATM and debit card fees, increased $279 thousand, $185 thousand, $147 thousand, and $139 thousand, respectively.

~~Non-Interest Expense~~– Our non-interest expenses increased $11.3 million to $30.1 million for the first nine months of 2018 as compared to the same period last year. Non-interest expenses, adjusted for merger related expenses of $4.3 million, increased $7.5 million to $25.8 million for the first nine months of 2018 as compared to the same period last year. The increase was largely attributed to the growth of the Company resulting from the merger with Community Bank. The increase in non-interest expenses occurred largely in salaries and employee benefits of $4.5 million, data processing of $797 thousand, occupancy of $668 thousand, other expenses of $233 thousand, advertising and promotion of $229 thousand and professional fees of $224 thousand.

~~Income Taxes~~– ~~Our income tax expense, which includes both federal and state tax expenses, decreased $372 thousand, or 15.2% to $2.1 million for the first nine months of 2018,~~2019, as compared to the same period last year. The Company’s effective tax rate for the first nine months of ~~2018~~2019 was ~~21.5%~~23.1%, as compared to ~~32.0%~~21.5% for the first nine months of 2017. The decrease in the Company’s tax rate was largely due to the Tax Cuts and Jobs Act enacted in December 2017 which reduced the federal corporate income tax rate to 21% and the merger with Community which resulted in the Company’s tax free income becoming a larger percentage of its overall income.same period last year.

On July 1, 2018, New Jersey's Assembly Bill 4202 was signed into law. The new bill, effective January 1, 2018, imposed a temporary surtax on corporations earning New Jersey allocated income in excess of $1 million at a rate of 2.5% for tax years beginning on or after January 1, 2018 through December 31, 2019, and at 1.5% for years beginning on or after January 1, 2020, through December 31, 2021. The Company evaluated the change in income tax expense for the first nine months of 2018 and recorded a decrease in income tax expense of $61 thousand.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, ~~2018~~2019 TO DECEMBER 31, ~~2017~~2018

Total Assets – At September 30, ~~2018,~~2019, our total assets were ~~$1.5~~$1.9 billion, an increase of ~~$480.3~~$138.6 million, or ~~49.0%~~7.7%, as compared to total assets of ~~$979.4 million~~$1.8 billion at December 31, ~~2017.~~2018. The increase was ~~largely~~mainly attributable to ~~$366~~an increase in loans receivable of $88.8 million, ~~in assets acquired through the merger with Community.~~or 6.0%, to $1.6 billion.

Cash and Cash Equivalents – Our cash and cash equivalents increased by ~~$3.1~~$21.3 million to ~~$14.7~~$47.9 million at September 30, ~~2018,~~2019, or ~~1.0%~~2.5% of total assets, from ~~$11.6~~$26.7 million, or ~~1.2%~~1.5% of total assets, at December 31, ~~2017~~2018.

Securities Portfolio – At September 30, ~~2018,~~2019, the securities portfolio, which includes available for sale and held to maturity securities, was ~~$177.5~~$211.5 million, compared to ~~$104.0~~$186.2 million at December 31, ~~2017.~~2018. Available for sale securities were ~~$172.7~~$207.1 million at September 30, ~~2018,~~2019, compared to ~~$98.7~~$182.1 million at December 31, 2017. The Company liquidated the securities portfolio acquired as part of the Community Merger because it did match its strategic objectives. The proceeds from the liquidation were subsequently used to purchase securities within sectors that conformed to the Company’s objectives for profitability and liquidity.2018. 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 subdivision obligations and mortgage-backed securities. Held to maturity securities were ~~$4.9~~$4.3 million at September 30, ~~2018~~2019 and ~~$5.3~~$4.1 million at December 31, ~~2017.~~2018.

Net unrealized ~~losses~~gain in the available for sale securities portfolio ~~were $3.5~~was $3.7 million at September 30, ~~2018~~2019 as compared to a net unrealized ~~gain~~loss of ~~$449 thousand~~$1.6 million at December 31, ~~2017.~~2018.

We conduct a regular assessment of our investment securities to determine whether any securities are OTTI. Further details of the composition of the securities portfolio and discussion of the results of the most recent OTTI assessment are in Note 3 – 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 September 30, ~~2018~~2019 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, which consisted primarily of FHLB stock, ~~increased $3.9~~decreased $2.4 million to ~~$8.8~~$9.4 million at September 30, ~~2018~~2019 as compared to ~~$4.9~~$11.8 million at December 31, ~~2017.~~2018. We also held $200 thousand in time deposits with other financial institutions at September 30, 2018 ~~as compared to $100 thousand~~and at December 31, ~~2017.~~

2018.

Loans – The loan portfolio comprises our largest class of earning assets. Total loans receivable, net of unearned income, increased ~~$351.0~~$88.8 million, or ~~42.8%~~6.0%, to ~~$1.2~~$1.6 billion at September 30, ~~2018,~~2019, as compared to ~~$820.7 million~~$1.5 billion at December 31, 2017. The merger with Community resulted in an increase in total loans of $236.1 million. During the nine months ended September 30, 2018, the Company also had $166.9 million of commercial loan production, which was partly offset by $35.0 million in commercial loan payoffs.2018.

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

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(Dollars in thousands)	September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Commercial and industrial loans	$	64,791	$	54,759	$	105,392	$	81,709
Construction	68,185		42,484		109,934		142,321
Commercial real estate	714,526		551,445		967,919		878,449
Residential real estate	323,194		171,844		379,566		370,955
Consumer and other	2,082		1,130		1,869		2,393
Total gross loans	$	1,172,778	$	821,662	$	1,564,680	$	1,475,827

Loan and Asset Quality – The ratio of non-performing assets (“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 ~~increased~~decreased to ~~1.67%~~0.87% at September 30, ~~2018 from 0.94%~~2019 as compared to 1.43% at December 31, ~~2017.~~2018. The decrease in NPAs is mainly attributable to the payoff of two non-accrual commercial real estate loans totaling approximately $8.9 million. NPAs exclude ~~$3.7~~$3.0 million of ~~purchased credit-impaired~~Purchased Credit-Impaired (“PCI”) loans acquired through the merger with ~~Community.~~Community Bank of Bergen County (“Community Bank”). NPAs ~~increased $15.2~~decreased $8.9 million to ~~$24.4~~$16.9 million at September 30, ~~2018,~~2019, as compared to ~~$9.2~~$25.8 million at December 31, ~~2017.~~2018. Non-accrual loans, excluding ~~$3.7~~$3.0 million of PCI loans, ~~increased $13.7~~decreased $8.7 million, or ~~228.2%~~41.9%, to ~~$19.8~~ $12.0

million at September 30, ~~2018,~~2019, as compared to ~~$6.0~~$20.7 million at December 31, 2017. The increase in non-accrual loans was largely attributed to two commercial real estate loans totaling $9.0 million, $1.9 million loans acquired from Community not classified as PCI, and 7 consumer loans totaling $2.0 million.2018. Loans past due 30 to 89 days totaled ~~$3.3~~$5.5 million at September 30, ~~2018,~~2019, representing ~~a decrease~~an increase of ~~$3.2~~$1.7 million, or ~~48.6%~~45.8%, as compared to ~~$6.5~~$3.8 million at December 31, ~~2017.~~2018.

We continue to actively market our foreclosed real estate properties, the value of which ~~increased $382~~decreased $549 thousand to ~~$2.7~~$3.6 million at September 30, ~~2018~~2019 as compared to ~~$2.3~~$4.1 million at December 31, ~~2017.~~2018. The decrease in foreclosed real estate properties was largely attributable to the sale of six properties totaling $1.5 million which was partially offset by two new foreclosed properties valued at $1.1 million. At September 30, ~~2018,~~2019, the Company’s foreclosed real estate properties had an average carrying value of approximately ~~$242~~$400 thousand per property.

The allowance for loan losses increased $1.3 million, or 17.2%, to $8.6 million, or 0.73% of total loans, at September 30, 2018, compared to $7.3 million, or 0.89% of total loans, at December 31, 2017. The decline in allowance coverage was primarily driven by the addition of Community acquired loans with no allowance for loan losses; such loans were recorded at fair value at the acquisition date. The Company's outstanding credit mark recorded on the Community Bank portfolio of $212 million totaled $5.7 million at September 30, 2018. The Company's combined coverage of allowance for loan loss and credit mark downs on the Community Bank portfolio totaled $14.3 million, or 1.22%, at September 30, 2018. The Company recorded $1.2 million in provision for loan losses for the nine months ended September 30, 2018 as compared to $1.1 million for the nine months ended September 30, 2017. Additionally, the Company recorded net recoveries of $32 thousand for the nine months ended September 30, 2018, as compared to $321 thousand in net charge-offs for the nine months ended September 30, 2017. The allowance for loan losses as a percentage of non-accrual loans decreased to 43.5% at September 30, 2018 from 121.8% at December 31, 2017.

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:

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(Dollars in thousands) September 30, 2018 December 31, 2017
Non-accrual loans $ 19,758
$ 6,020
Non-accrual loans to total loans 1.69 % 0.73 %
NPAs $ 24,401
$ 9,227
NPAs to total assets 1.67 % 0.94 %
Allowance for loan losses as a % of non-accrual loans 43.50 % 121.84 %
Allowance for loan losses to total loans 0.73 % 0.89 %



(Dollars in thousands)	September 30, 2019			December 31, 2018
Non-accrual loans	$	12,019		$	20,704
Non-accrual loans to total loans	0.77		%	1.40		%
NPAs	$	16,858		$	25,759
NPAs to total assets	0.87		%	1.43		%
Allowance for loan losses as a % of non-accrual loans	81.12		%	42.38		%
Allowance for loan losses to total loans	0.62		%	0.60		%

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 were ~~$18.8~~$13.3 million and ~~$6.8~~$20.7 million at September ~~30. 2018~~30, 2019 and December 31, ~~2017,~~2018, respectively. The Company also had PCI loans from the ~~merger with~~acquisition of Community with a carrying value of ~~$3.7~~$3.0 million at September 30, ~~2018.~~2019. 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 ~~$2.0~~$1.2 million and ~~$932~~$906 thousand at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 September 30, ~~2018,~~2019, we had ~~three loan relationships comprised of three~~eight loans totaling ~~$2.2~~$4.7 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 5 – 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 September 30, 2018, the total~~The Company’s allowance for loan losses increased ~~$1.3 million,~~$975 thousand, or ~~17.2%~~11.1%, to ~~$8.6~~$9.8 million, ~~or 0.73% of total loans,~~at September 30, 2019 as compared to ~~$7.3~~$8.8 million ~~or 0.89% of total loans,~~ at December 31, ~~2017.~~2018. The ~~decline in allowance~~Company’s outstanding credit mark recorded on the legacy Community and Enterprise

portfolios of $433.8 million totaled $6.8 million at September 30, 2019. The Company’s combined coverage ~~was primarily driven by the addition~~ of ~~Community acquired loans with no~~ allowance for loan ~~losses; such loans were recorded~~loss and credit mark on the legacy Community and Enterprise portfolios totaled $16.8 million, or 1.05% of the overall loan portfolio, at ~~fair value at the acquisition date.~~September 30, 2019. The Company recorded ~~$1.2~~$2.0 million in provision for loan losses for the nine months ended September 30, ~~2018~~2019 as compared to ~~$1.1~~$1.2 million for the nine months ended September 30, ~~2017.~~2018. Additionally, the Company recorded net ~~recoveries~~charge-offs of ~~$32 thousand~~$1.0 million for the nine months ended September 30, ~~2018,~~2019, as compared to ~~$321~~$32 thousand in net ~~charge-offs~~recoveries for the nine months ended September 30, ~~2017.~~2018. The allowance for loan losses as a percentage of non-accrual loans ~~decreased~~increased to ~~43.5%~~81.1% at September 30, ~~2018~~2019 from ~~121.8%~~43.5% at December 31, ~~2017.~~2018.

The table below presents information regarding our provision and allowance for loan losses for the nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:

໿

(Dollars in thousands) September 30, 2018 September 30, 2017
Balance, beginning of period $ 7,335
$ 6,696
Provision 1,227
1,127
Charge-offs (83 ) (341 )
Recoveries 115
20
Balance, end of period $ 8,594
$ 7,502



(Dollars in thousands)	September 30, 2019			September 30, 2018
Balance, beginning of period	$	8,775		$	7,335
Provision	1,983			1,227
Charge-offs	(1,208		)	(83		)
Recoveries	200			115
Balance, end of period	$	9,750		$	8,594

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.

໿


	September 30, 2018				December 31, 2017				September 30, 2019				December 31, 2018
(Dollars in thousands)	Amount		Percentage of Loans In Each Category To Gross Loans		Amount		Percentage of Loans In Each Category To Gross Loans		Amount		Percentage of Loans In Each Category To Gross Loans		Amount		Percentage of Loans In Each Category To Gross Loans
Commercial and industrial	$	567	5.5	%	$	208	6.7	%	$	935	6.7	%	$	603	6.6	%
Construction	472		5.8	%	336		5.2	%	378		7.0	%	663		6.9	%
Commercial real estate	5,836		61.0	%	5,185		67.1	%	5,905		62.0	%	5,575		66.2	%
Residential real estate	1,155		27.6	%	1,032		20.9	%	1,619		24.3	%	1,371		20.2	%
Consumer and other loans	24		0.1	%	26		0.1	%	9		—	%	23		0.1	%
Unallocated	540		—	%	548		—	%	904		—	%	540		—	%
Total	$	8,594	100.0	%	$	7,335	100.0	%	$	9,750	100.0	%	$	8,775	100.0	%

Bank-Owned Life Insurance (“BOLI”) – Our BOLI carrying value amounted to ~~$30.6~~$36.5 million at September 30, ~~2018~~2019 and ~~$22.1~~$35.8 million at December 31, ~~2017.~~2018. The increase of ~~$8.5 million~~$697 thousand is largely due to ~~the merger with Community.~~net earnings on BOLI policies.

Goodwill and Other Intangibles – Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. At September 30, 2019 and December 31, 2018, we had recorded goodwill totaling ~~$24.8 million as compared to $2.8 million at December 31, 2017. The increase in our goodwill primarily resulted from the merger with Community in the recorded amount of $22.0~~$27.3 million. ~~Additionally, our~~Our recorded goodwill includes the acquisition of Tri-State in 2001, ~~and~~ the 2006 acquisition of ~~deposits.~~deposits and the acquisitions of Community and Enterprise. 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 recorded a core deposit intangible of $1.3 million and $1.1 million for the Community ~~acquisition.~~and Enterprise acquisitions, respectively. For the period ended September 30, ~~2018,~~2019, we amortized ~~$182~~$305 thousand in core deposit intangible. 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 each reporting unit exceeded its book ~~value,~~value; therefore, no write-down of goodwill was required at September 30, ~~2018. The goodwill related to the merger with Community was not reviewed for impairment at September 30 as the merger took place within the last twelve months.~~2019. The goodwill related to the insurance agency is not deductible for tax purposes.

Deposits – Our total deposits increased ~~$352.2~~$172.9 million, or ~~46.2%~~12.8%, to ~~$1.1~~$1.5 billion at September 30, ~~2018,~~2019, from ~~$762.5 million~~$1.4 billion at December 31, ~~2017. The merger with Community resulted in an increase in total deposits of $300.2 million.~~2018. The growth in deposits was mostly due to an increase in interest bearing deposits of ~~$266.5~~$157.0 million, or ~~43.2%~~14.4%, and an increase in non-interest bearing deposits of ~~$85.7~~$15.9 million, or ~~58.6%~~6.1%, at September 30, ~~2018,~~2019, as compared to December 31, ~~2017, respectively.~~2018.

Borrowings – Our 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 ~~$159.9~~$163.8 million and ~~$90.4~~$219.9 million in

borrowings at the FHLB, at a weighted average interest rate of ~~2.35%~~2.19% and ~~1.61%~~2.52% at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The long-term borrowings at September 30, ~~2018~~2019 consisted of ~~$15.0~~$37.8 million of fixed rate advances and $5.0 million of advances with quarterly convertible puts that allow us to put the advance back to the FHLB quarterly after one year from issuance. 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 – Off-Balance Sheet Arrangements.

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 September 30, ~~2018~~2019 was ~~3.77%~~3.56%. During the quarter ended March 31, 2016, the Company entered into an interest rate swap agreement related to the junior subordinated debentures where the Company pays a fixed rate of 3.10% and receives the three-month LIBOR plus 144 basis points. Please refer to Liquidity and Capital Resources – Off-Balance Sheet Arrangements. 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 December 31, 2016, the Company completed the private placement of the subordinated notes. The subordinated notes have a maturity date of December 22, 2026 and bear interest at the rate of 5.75% per annum, payable quarterly, for the first five years of the term, and then at a variable rate that will reset quarterly to a level equal to the then current 3-month LIBOR plus 350 basis points over the remainder of the term.

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 ~~$151.2~~$196.1 million at September 30, 2019, an increase of ~~$57.0~~$10.6 million when compared to December 31, ~~2017, largely due to the merger with Community.~~2018. The Company completed the ~~merger~~mergers with Community ~~on January 4,~~and Enterprise in 2018 which ~~was~~were the primary ~~driver in~~drivers of an increase in book value per common share of ~~22.3%~~7.0% from ~~$15.59~~$19.45 at December 31, ~~2017~~2018 to ~~$19.07~~$20.81 at September 30, ~~2018.~~2019. At September 30, ~~2018,~~2019, the leverage, Tier I risk-based capital, total risk-based capital and common equity Tier I capital ratios for the Bank were ~~10.51%~~10.22%, ~~12.74%~~12.00%, ~~13.48%~~12.61% and ~~12.74%~~12.00%, respectively, all in excess of the ratios required to be deemed “well-capitalized.”

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 September 30, ~~2018,~~2019, total deposits amounted to ~~$1.1~~$1.5 billion, an increase of ~~$352.2~~$172.9 million, or ~~46.2%~~12.8%, from December 31, ~~2017.~~2018. At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, borrowings from the FHLB and subordinated debentures totaled ~~$187.8~~$191.7 million and ~~$118.2~~$247.8 million, respectively, and represented ~~12.9%~~9.9% and ~~12.1%~~13.8% of total assets, respectively.

Loan production continued to be our principal investing activity. Total loans receivable, net of unearned income, at September 30, ~~2018,~~2019, amounted to ~~$1.2~~$1.5 billion, an increase of ~~$351.0~~$88.8 million, or ~~42.8%~~6.0%, compared to December 31, ~~2017.~~2018.

Our most liquid assets are cash and due from banks and federal funds sold. At September 30, ~~2018,~~2019, the total of such assets amounted to ~~$14.7~~$47.9 million, or ~~1.0%~~2.5%, of total assets, compared to ~~$11.6~~$26.7 million, or ~~1.2%~~1.5% of total assets at December 31, ~~2017.~~2018. Another significant liquidity source is our available for sale securities portfolio. At September 30, ~~2018,~~2019, available for sale securities amounted to ~~$172.7~~$207.1 million, compared to ~~$98.7~~$182.1 million at December 31, ~~2017.~~2018.

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 ~~$146.2~~$156.1 million through its membership in the FHLB and $10.0 million ~~at Atlantic Community Bankers' Bank (“ACBB”)~~from ACBB at September 30, ~~2018.~~2019. 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.

At September 30, ~~2018,~~2019, the Bank’s Tier I, Total and Common Equity Tier I (“CET1”) capital ratios were ~~12.74%~~12.00%, ~~13.48%~~12.61% and ~~12.74%~~12.00%, 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 September 30, ~~2018,~~2019, the Bank had a leverage ratio of ~~10.51%~~10.22%. 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~~require 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~~The Company ~~will include~~maintains 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 September 30, ~~2018,~~2019, the Bank had a capital conservation buffer of ~~5.48%~~4.61%.

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.

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. At September 30, ~~2018,~~2019, these unused commitments totaled ~~$196.0~~$315.1 million and consisted of ~~$75.8~~$152.2 million in commitments to grant commercial real estate, construction and land development loans, ~~$37.0~~$38.6 million in home equity lines of credit, ~~$82.1~~$122.5 million in other unused commitments and ~~$1.1~~$1.8 million 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 coinciding with the maturity of five FHLB advances over the next 21 months that had 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%.

During the second quarter of 2018, the Company entered into two interest rate swap agreements with notional amounts totaling $40 million, of which all are designated as cash flow hedges. The Company entered into $20.0 million in two different forward starting interest rate swap agreements coinciding with the maturity of two FHLB advances over 36 and 48 months both beginning on September 15, 2018. The forward interest rate swap with a 3 year term has a fixed rate of 2.89% and the forward interest rate swap with a 4 year term has a fixed rate of 2.90%.

During the third quarter of 2018, the Company entered into two interest rate swap agreements with notional amounts totaling $35 million, of which all are designated as cash flow hedges. The Company entered into $17.5 million in two different forward starting

interest rate swap agreements coinciding with the maturity of two FHLB advances over 36 and 48 months both beginning on September 15, 2018. The forward interest rate swap with a 3 year term has a fixed rate of 2.85% and the forward interest rate swap with a 4 year term has a fixed rate of 2.86%.

During the quarter ended March 31, 2019, the Company entered into a forward starting interest rate swap agreement with a notional amount totaling $40 million, designated as a cash flow hedge. The Company entered into a $40 million brokered CD. The forward interest rate swap with a 3 year term has a fixed rate of 2.56%.

During the quarter ended June 30, 2019, the Company entered into five forward starting interest rate swap agreements with a notional amount totaling $85 million, designated as a cash flow hedge of variable cash flows, one associated with a $20 million with a one month LIBOR (IND Promontory) or similar funding, with a 3 year term and a fixed rate of 1.87%, one associated with a $25 million brokered CD, with a 3 year term and a fixed rate of 2.21%, one associated with a $20 million brokered CD, with a 3 year term and a fixed rate of 2.13%, one associated with a $10 million one month LIBOR (IND Promontory) or similar funding, with a 4 year term and a fixed rate of 1.59%, and one associated with a $10 million one month LIBOR (IND Promontory) or similar funding, with a 5 year term and a fixed rate of 1.62%.

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 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.

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 ~~2017~~2018 Annual Report on Form 10-K.

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 September 30, 2019:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Number of Shares that May Yet Be Purchased Under the Program(1)

July 1, 2019 through July 31, 2019	—	$	—	—	325,063
August 1, 2019 through August 31, 2019	14,841	22.05		14,841	310,222
September 1, 2019 through September 30, 2019	20,424	22.01		20,424	289,798
Total	35,265	$	14.69	35,265

(1) On February 1, 2019, the Board of Directors authorized a continuation of the stock repurchase program, under which we may repurchase up to 470,000 shares. The stock repurchase program expires on January 22, 2020, unless completed sooner or otherwise extended.

There were no sales by us of unregistered securities during the three months ended September 30, ~~2018.~~2019.

໿

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 below.

EXHIBIT INDEX



Exhibit
Number		Description
2.1		Agreement and Plan of Merger, dated as of April 10, 2017, by and between Sussex Bancorp, Sussex Bank and Community Bank of Bergen County, NJ (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on April 11, 2017).
2.2		Agreement and Plan of Merger, dated as of June 19, 2018, by and between SB One Bancorp, SB One Bank and Enterprise Bank N.J. (incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-K filed with the SEC on June 20, 2018).
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		Amendment to ~~Restate~~Restated Certificate of Incorporation ~~(incorporated by reference to Exhibit 3.1 to the Currency Report on Form 8-K filed with the SEC on May 4, 2018).~~
~~3.3~~		~~Second 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 May 4, 2018).
3.3		Second Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on April 30, 2019).
3.4		Second Amended and Restated By-laws (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the SEC on May 4, 2018).
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 SB One Bancorp for the quarter ended September 30, ~~2018,~~2019, 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.Filed herewith.

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: November ~~8, 2018~~9, 2019		SB ONE BANCORP

	By:	/s/ ~~Steven~~Adriano M. ~~Fusco~~Duarte
		~~Steven~~Adriano M. ~~Fusco~~Duarte
		Chief Financial Officer and ~~Senior~~ Executive Vice President
		(Principal Financial and Accounting Officer)

5157



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	3743
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	4955
Item 4 - Controls and Procedures	4955
PART II – OTHER INFORMATION	5055
Item 1 - Legal Proceedings	5056
Item 1A - Risk Factors	5056
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	5056
Item 3 - Defaults Upon Senior Securities	5056
Item 4 - Mine Safety Disclosures	5056
Item 5 - Other Information	5056
Item 6 - Exhibits	5056



(Dollars in thousands)	For the Year Ended December 31, 2017
Total revenues (net interest income plus non-interest income)	$	47,280
Net Income	6,257
Net earnings applicable to common stockholders	$	0.79



December 31, 2017
U.S. government agencies	$	18,799	$	90	$	(28	)	$	18,861
U.S. government-sponsored enterprises	6,054		8		(1		)	6,061
State and political subdivisions	40,470		896		(132		)	41,234
Mortgage-backed securities -
U.S. government-sponsored enterprises	30,958		65		(479		)	30,544
Corporate Debt	2,000		30		—			2,030
	$	98,281	$	1,089	$	(640	)	$	98,730



SUSSEX BANCORP
Non-GAAP Reporting
(Dollars In Thousands)
(Unaudited)
	For the Three Months Ended September 30, 2018			For the Three Months Ended September 30, 2017
Net income (GAAP)	$	3,270		$	1,963
Merger related expenses net of tax (1)	538			1
S-3 registration filing expenses net of tax (1)	—			45
Net income, as adjusted	$	3,808		$	2,009
Average diluted shares outstanding (GAAP)	7,910,449			6,000,704
Diluted EPS, as adjusted	$	0.48		$	0.33
Return on average assets, as adjusted	1.06		%	0.86		%
Return on average equity, as adjusted	10.10		%	8.60		%

(1) Merger related expenses net of tax expenses of $67 thousand QTD 2018; S-3 registration filing net of tax expenses of $30 thousand QTD 2017.