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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 Commission File Number 0-13580
SUFFOLK BANCORP
(Exact name of registrant as specified in its charter)
New York 11-2708279
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6 West Second Street, Riverhead, New York 11901
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 727-5667
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
(Title of Class)
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 [ ]
Class of Common Stock Number of Shares Outstanding as of February 18, 2000
- ---------------------- ----------------------------------------------------
$2.50 Par Value 6,050,580
The aggregate market value of the Registrant's Common Stock (based on the most
recent sale at $26.75 on February 18, 2000) held by non-affiliates was
approximately $161,853,015.
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PART I
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held April 11, 2000, filed on March 10, 2000. (Part III)
ITEM 1. BUSINESS
SUFFOLK BANCORP ("SUFFOLK")
Suffolk was incorporated on January 2, 1985 as a bank holding company. On that
date, Suffolk acquired, and currently owns, all of the outstanding capital
stock of The Suffolk County National Bank. On July 14, 1988, Suffolk acquired
all the outstanding capital stock of Island Computer Corporation of New York,
Inc. The business of Suffolk consists primarily of the ownership, supervision,
and control of its subsidiaries. On April 11, 1994, Suffolk acquired all the
outstanding capital stock of Hamptons Bancshares, Inc. and merged it into a
subsidiary. During 1996, the operations of Island Computer Corporation of New
York, Inc. were assumed by The Suffolk County National Bank.
Suffolk's chief competition includes local banking institutions with main or
branch offices in the service area of The Suffolk County National Bank,
including North Fork Bank and Trust Co., and Bridgehampton National Bank.
Additionally, New York City money center banks and regional banks provide
competition. These banks include primarily the Bank of New York, Chase
Manhattan Bank, and Fleet Bank.
Suffolk and its subsidiaries had 365 full-time and 48 part-time employees on
December 31, 1999.
THE SUFFOLK COUNTY NATIONAL BANK ("BANK")
The Suffolk County National Bank of Riverhead was organized under the National
Banking laws of the United States of America on January 6, 1890. The Bank is a
member of the Federal Reserve System, and its deposits are insured by the
Federal Deposit Insurance Corporation to the extent provided by law.
Directed by members of the communities it serves, the Bank's main service area
includes the towns of Babylon, Brookhaven, East Hampton, Islip, Riverhead,
Smithtown, Southampton, and Southold. The main office of the Bank is situated
at 6 West Second Street, Riverhead, New York. Its branch offices are located at
Bohemia, Center Moriches, Cutchogue, East Hampton, Hampton Bays, Mattituck,
Medford, Miller Place, Montauk, Port Jefferson, Riverhead, Sag Harbor,
Sayville, Shoreham, Smithtown, Southampton, Wading River, Water Mill, West
Babylon, and Westhampton Beach, New York.
The Bank is a full-service bank serving the needs of the local residents of
Suffolk County. Most of the Bank's business is devoted to rendering services to
those residing in the immediate area of the Bank's main and branch offices.
Among the services offered by the Bank are checking accounts, savings accounts,
time and savings certificates, money market accounts, negotiable-order-of-
withdrawal accounts, holiday club accounts, and individual retirement accounts;
secured and unsecured loans, including commercial loans to individuals,
partnerships, and corporations, agricultural loans to farmers, installment
loans to finance small businesses, mobile home loans, automobile loans; home
equity and real estate mortgage loans; safe deposit boxes; trust and estate
services; the sale of mutual funds and annuities; and the maintenance of a
master pension plan for self-employed individuals' participation. The business
of the Bank is only mildly seasonal, as a great majority of the Bank's business
is devoted to those residing in the Bank's service area.
SUPERVISION AND REGULATION
References in this section to applicable statutes and regulations are brief
summaries only, and do not purport to be complete. The reader should consult
such statutes and regulations themselves for a full understanding of the
details of their operation.
Suffolk is a bank holding company registered under the BHC Act and is subject
to supervision and regulation by the Federal Reserve Board. Federal laws
subject bank holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory requirements
and activities, including regulatory enforcement actions for violation of laws
and policies.
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ACTIVITIES "CLOSELY RELATED" TO BANKING
The BHC Act prohibits a bank holding company, with certain limited exceptions,
from acquiring direct or indirect ownership or control of any voting shares of
any company that is not a bank or from engaging in any activities other than
those of banking, managing or controlling banks and certain other subsidiaries,
or furnishing services to or performing services for its subsidiaries. One
principal exception to these prohibitions allows the acquisition of interests
in companies whose activities are found by the Federal Reserve Board, by order
or regulation, to be closely related to banking, managing, or controlling
banks. In the event that a bank holding company has become a "financial holding
company" (an "FHC"), it may engage in activities that are jointly determined by
the Federal Reserve Board and the Treasury Department to be "financial in
nature or incidental to such financial activity." FHCs may also engage in
activities that are determined by the Federal Reserve to be "complementary to
financial activities." See "Recent Legislation" for a brief summary of the
statutory provisions relating to FHCs.
SAFE AND SOUND BANKING PRACTICES
Bank holding companies are not permitted to engage in unsafe and unsound
banking practices. The Federal Reserve Board may order a bank holding company
to terminate an activity or control of a nonbank subsidiary if such activity or
control constitutes a significant risk to the financial safety, soundness, or
stability of a subsidiary bank and is inconsistent with sound banking
principles. Regulation Y also requires a holding company to give the Federal
Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10
percent or more of the company's consolidated net worth.
The Federal Reserve Board has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or
regulations. Notably, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") provides that the Federal Reserve Board can
assess civil money penalties for such practices or violations, which can be as
high as $1 million per day. FIRREA contains expansive provisions regarding the
scope of individuals and entities against which such penalties may be assessed.
ANNUAL REPORTING AND EXAMINATIONS
Suffolk is required to file an annual report with the Federal Reserve Board,
and such additional information as the Federal Reserve Board may require
pursuant to the BHC Act. The Federal Reserve Board may examine a bank holding
company or any of its subsidiaries, and charge the company for the cost of such
an examination. Suffolk is also subject to reporting and disclosure
requirements under state and federal securities laws.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of nontraditional activities, as
well as reflect the actual performance and expected risk of loss on multifamily
mortgages. In accordance with the law, each federal banking agency has
specified, by regulation, the levels at which an insured institution would be
considered "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." Under
these regulations, the Bank would be deemed to be "well capitalized."
FDICIA requires bank regulators to take "prompt corrective action" to resolve
problems associated with insured depository institutions. In the event an
institution becomes "undercapitalized," it must submit a capital restoration
plan. If an institution becomes "significantly undercapitalized" or "critically
undercapitalized," additional and significant limitations are placed on the
institution. The capital restoration plan of an undercapitalized institution
will not be accepted by the regulators unless each company "having control of"
the undercapitalized institution "guarantees" the subsidiary's compliance with
the capital restoration plan until it becomes "adequately capitalized."
Suffolk has control of the Bank for purpose of this statute.
Additionally, Federal Reserve Board policy discourages the payment of dividends
by a bank holding company from borrowed funds as well as payments that would
adversely affect capital adequacy. Failure to meet the capital guidelines may
result in supervisory or enforcement actions by the Federal Reserve Board.
ACQUISITION BY BANK HOLDING COMPANIES
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve Board before it may acquire
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all or substantially all of the assets of any bank, or ownership or control of
any voting shares of any bank, if after such acquisition it would own or
control, directly or indirectly, more than 5 percent of the voting shares of
such bank. In approving bank acquisitions by bank holding companies, the
Federal Reserve Board is required to consider the financial and managerial
resources and future prospects of the bank holding company and banks concerned,
the convenience and needs of the communities to be served, and the effect on
competition. The Attorney General of the United States may, within 30 days
after approval of an acquisition by the Federal Reserve Board, bring an action
challenging such acquisition under the federal antitrust laws, in which case
the effectiveness of such approval is stayed pending a final ruling by the
courts. Under certain circumstances, the 30-day period may be shortened to 15
days.
INTERSTATE ACQUISITIONS
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 was enacted by Congress. Under the act, beginning on September 29, 1995,
bank holding companies may acquire banks in any state, not withstanding
contrary state law, and all banks commonly owned by a bank holding company may
act as agents for one another. An agent bank may receive deposits, renew time
deposits, accept payments, and close and service loans for its principal bank
and not be considered to be a branch of the principal banks.
Banks also may merge with banks in another state and operate either office as a
branch, preexisting contrary state law notwithstanding. This law became
effective automatically in all states on June 1, 1997, unless a state, by
legislation enacted before June 1, 1997, opted out of coverage by the
interstate branching provision. Upon consummation of an interstate merger, the
resulting bank may acquire or establish branches on the same basis that any
participant in the merger could have if the merger had not taken place.
Banks may also merge with branches of banks in other states without merging
with the banks themselves, or may establish de novo branches in other states if
the laws of the other states expressly permit such mergers or such interstate
de novo branching.
BANKING REGULATION
The Bank is a national bank, which is subject to regulation and supervision
primarily by the Office of the Comptroller of the Currency (the "OCC") and
secondarily by the Federal Reserve Board and the FDIC. The Bank is subject to
the requirements and restrictions under federal law, including requirements to
maintain reserves against deposits, restrictions on the types and amounts of
loans that may be granted and the interest that may be charged thereon, and
limitations on the types of investments that may be made and the types of
services that may be offered. Various consumer laws and regulations also affect
the operations of the banks.
RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES
Section 23A of the Federal Reserve Act imposes quantitative and qualitative
limits on transactions between a bank and any affiliate, and also requires
certain levels of collateral for such loans. It also limits the amount of
advances to third parties which are collateralized by the securities or
obligations of Suffolk or its subsidiaries.
Section 23B requires that certain transactions between the Bank and its
affiliates must be on terms substantially the same, or at least as favorable,
as those prevailing at the time for comparable transactions with or involving
other nonaffiliated companies. In the absence of such comparable transactions,
any transaction between the Bank and its affiliates must be on terms and under
circumstances, including credit standards, that in good faith would be
offered to or would apply to nonaffiliated companies.
EXAMINATIONS
The OCC regularly examines the Bank and records of the Bank. The FDIC may also
periodically examine and evaluate insured banks. In addition, the Federal
Reserve Board regularly examines the Bank and records of Suffolk.
STANDARDS FOR SAFETY AND SOUNDNESS
As part of the FDICIA's efforts to promote the safety and soundness of
depository institutions and their holding companies, appropriate federal
banking regulators are required to have in place regulations specifying
operational and management standards (addressing internal controls, loan
documentation, credit underwriting, and interest rate risk), asset quality, and
earnings. In addition, the Federal Reserve Board, the OCC, and FDIC have
extensive authority to police unsafe or unsound practices and violations of
applicable laws and regulations by depository institutions and their holding
companies. For example, the FDIC may terminate the deposit insurance of any
institution that it determines has engaged in an unsafe or unsound practice.
The agencies can also assess civil money penalties to $1 million per day, issue
cease-and-desist or removal orders, seek injunctions, and publicly disclose
such actions.
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RECENT LEGISLATION
As a consequence of the extensive regulation of commercial banking activities
in the United States, the business of Suffolk and its subsidiaries are
particularly susceptible to being affected by enactment of federal and state
legislation that may have the effect of increasing or decreasing the cost of
doing business, modifying permissible activities, or enhancing the competitive
position of other financial institutions.
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act that will, 120 days thereafter, permit bank holding companies to become
FHCs and, by doing so, affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature or complementary
thereto. A bank holding company may become an FHC, if each of its subsidiary
banks is well capitalized under the FDICIA prompt corrective action provisions,
well managed, and has at least a satisfactory rating under the Community
Reinvestment Act, by filing a declaration that the bank holding company wishes
to become an FHC and meets all applicable requirements.
No prior regulatory approval will be required for an FHC to acquire a company,
other than a bank or savings association, engaged in activities permitted under
the Gramm-Leach-Bliley Act. Activities cited the Gramm-Leach-Bliley Act as
being "financial in nature" include securities underwriting and dealing, and
insurance underwriting and agency activities. Activities that the Federal
Reserve Board has determined to be closely related to banking are also deemed
to be financial in nature
A national bank also may engage, subject to limitations on investment, in
activities that are financial in nature, other than insurance underwriting,
merchant banking, real estate development, and real estate investment, through
a financial subsidiary of the bank, if the bank is well capitalized, well
managed, and has at least a satisfactory Community Reinvestment Act rating.
Subsidiary banks of an FHC or national bank with financial subsidiaries must
continue to be well capitalized and well managed in order to continue to engage
in such activities without regulatory actions or restrictions, which could
include divestiture of the financial subsidiary or subsidiaries. In addition,
an FHC or a bank may not acquire a company that is engaged in such activities
unless each of the subsidiary banks of the FHC or the bank has at least a
satisfactory Community Reinvestment Act rating.
GOVERNMENTAL MONETARY POLICIES AND ECONOMIC CONDITIONS
The principal sources of funds essential to the business of banks and bank
holding companies are deposits, stockholders' equity, and borrowed funds. The
availability of these various sources of funds and other potential sources,
such as preferred stock or commercial paper, and the extent to which they are
utilized, depends on many factors, the most important of which are the Federal
Reserve Board's monetary policies and the relative costs of different types of
funds. An important function of the Federal Reserve Board is to regulate the
national supply of bank credit in order to combat recession and curb
inflationary pressure. Among the instruments of monetary policy used by the
Federal Reserve Board to implement these objectives are open market operations
in United States Government securities, changes in the discount rate on bank
borrowings, and changes in reserve requirements against bank deposits. The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of the recent changes in regulations
affecting commercial banks and other actions and proposed actions by the
federal government and its monetary and fiscal authorities, including proposed
changes in the structure of banking in the United States, no prediction can be
made as to future changes in interest rates, credit availability, deposit
levels, the overall performance of banks generally or of Suffolk and its
subsidiaries in particular.
STATISTICAL DISCLOSURE
ITEM 2. PROPERTIES
REGISTRANT
Suffolk as such has no physical properties. Office facilities of Suffolk are
located at 6 West Second Street, Riverhead, New York.
BANK
The Bank's main offices are also located at 6 West Second Street, Riverhead,
New York, which the Bank owns in fee. The Bank owns a total of 15 buildings in
fee and holds 16 buildings under lease agreements. The decision has been made
to consolidate a number of offices housing central operations in the interest
of operational efficiency. The precise financial impact of such a facility has
not yet been determined, although management anticipates that costs may exceed
current run rates in the first years after construction. Otherwise, management
believes that the physical facilities are suitable and adequate and at present
are being fully utilized. Suffolk,
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however, evaluates future needs continuously and anticipates other changes in
its facilities during the next several years.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings, individually or in the aggregate to
which Suffolk or its subsidiaries are a party or of which any of the property
is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Pages 4 and 17 of this Annual Report to Shareholders for the fiscal year ended
December 31, 1999. At December 31, 1999 there were approximately 1,753 equity
holders of record of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Page 28 of this Annual Report to Shareholders for the fiscal year ended
December 31, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 5 - 14 of this Annual Report to Shareholders for the fiscal year ended
December 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 15 - 29 of this Annual Report to Shareholders for the fiscal year ended
December 31, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pages 2 - 6 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 11, 2000 is incorporated herein by reference.
EXECUTIVE OFFICERS
NAME AGE POSITION BUSINESS EXPERIENCE
---- --- -------- -------------------
Thomas S. Kohlmann 53 President and Chief Executive Oct-99 - Present President, CEO, and Director, Suffolk Bancorp
Officer Oct-99 - Present President, CEO, and Director, SCNB
Jan-98 - Oct-99 EVP, Suffolk Bancorp
Jan-96 - Oct-99 EVP and Chief Lending Officer
Feb-92 - Dec-95 SVP, SCNB
1980 - Feb-92 Marine Midland Bank
Employed by The Suffolk County National Bank since February 1992.
J. Gordon Huszagh 46 Executive Vice President and Jan-99 - Present EVP and CFO, Suffolk Bancorp
Chief Financial Officer Jan-99 - Present EVP and CFO, SCNB
Jan-97 - Jan-99 SVP and CFO, SCNB
Dec-92 - Dec-96 SVP & Comptroller, SCNB
Dec-88 - Dec-92 VP & Comptroller, SCNB
Dec-86 - Dec-88 VP, SCNB
Jan-83 - Dec-86 Auditor, SCNB
1975 - 1982 Eastern Federal Savings and Loan
Employed by The Suffolk County National Bank since January 1983.
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Victor F. Bozuhoski, Jr. 61 Executive Vice President Jan-97 - Present EVP, Retail Banking, Suffolk Bancorp, SCNB
Retail Banking Dec-88 - Dec-96 EVP and CFO, Suffolk Bancorp, SCNB
Dec-87 - Dec-88 EVP, Comptroller, and CFO, Suffolk Bancorp, SCNB
Dec-85 - Dec-87 SVP and Comptroller, Suffolk Bancorp, SCNB
Jan-78 - Dec-85 VP and Comptroller, SCNB
Employed by The Suffolk County National Bank since
September 1965.
Augustus C. Weaver 57 Executive Vice President Jan-98 - Present EVP, Suffolk Bancorp
Chief Information Officer Jan-96 - Present EVP and Chief Information Officer, SCNB
Feb-87 - Dec-95 President, Island Computer Corporation of
New York, Inc.
Feb-86 - Feb-87 Director of Data Processing and Corporate
Planning Southland Frozen Food Corporation
Feb-62 - Feb-86 VP & Director of Operations, Long Island Savings
Bank
Employed by The Suffolk County National Bank since January 1996.
Robert C. Dick 50 Senior Vice President Oct-99 - Present SVP and Chief Lending Officer, SCNB
Chief Lending Officer Dec-88 - Oct-99SVP, Commercial Loans, SCNB
Dec-82 - Apr-88VP, Commercial Loans, SCNB
1965 - 1980 Security National Bank/Chemical Bank
Employed by The Suffolk County National Bank since January 1980.
ITEM 11. EXECUTIVE COMPENSATION
Pages 3-7 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 11, 2000 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pages 2, 4, 5, 6, and 7 of Registrant's Proxy Statement for its Annual Meeting
of Shareholders to be held on April 11, 2000 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Page 7 of Registrant's Proxy Statement for its Annual Meeting of Shareholders
to be held on April 11, 2000 is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following consolidated financial statements of the Registrant and
Subsidiaries, and the accountant's report thereon, included on Page 15 through
30 inclusive.
Financial Statements (Consolidated)
Statements of Condition -- December 31, 1999 and 1998
Statements of Income -- For the years ended December 31, 1999, 1998, and 1997
Statements of Changes in Stockholders' Equity -- For the years ended
December 31, 1999, 1998, and 1997
Statements of Cash Flows -- For the years ended December 31, 1999, 1998, and
1997
Notes to Consolidated Financial Statements
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EXHIBITS
The following exhibits, which supplement this report, have been filed with the
Securities and Exchange Commission. Suffolk Bancorp will furnish a copy of any
or all of the following exhibits to any persons or requesting in writing to
Secretary, Suffolk Bancorp, 6 West Second Street, Riverhead, New York 11901.
Ex-3(i) Certificate of Incorporation of Suffolk Bancorp (filed by
incorporation by reference to Suffolk Bancorp's Form 10-K for the
fiscal year ended December 31, 1999, filed March 10, 2000)
Ex-3(ii) Bylaws of Suffolk Bancorp (filed by incorporation by reference to
Suffolk Bancorp's Form 10-K for the fiscal year ended December 31,
1999, filed March 10, 2000)
Ex-99.A Suffolk Bancorp 1995 Shareholder Rights Plan (filed by incorporation by
reference to Suffolk Bancorp's Form 10-K for the fiscal year ended
December 31, 1999, filed March 10, 2000)
Ex-99.B Suffolk Bancorp 1999 Stock Option Plan (filed by incorporation by
reference to Suffolk Bancorp's Form 10-K for the fiscal year ended
December 31, 1999, filed March 10, 2000)
Ex-99.C Suffolk Bancorp Form of Change-of-Control Employment Contract (filed by
incorporation by reference to Suffolk Bancorp's Form 10-K for the
fiscal year ended December 31, 1999, filed March 10, 2000)
REPORTS ON FORM 8-K
The following reports were filed on Form 8-K for the three-month period ended
December 31, 1999:
October 14, 1999
October 29, 1999
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUFFOLK BANCORP
March 10, 2000
(Registrant)
By: /s/ EDWARD J. MERZ By: /s/ BRUCE COLLINS By: /s/ HALLOCK LUCE III
------------------------------- ------------------------- ----------------------------
Edward J. Merz Bruce Collins Hallock Luce III
Chairman Director Director
Director
By: /s/ JOSEPH A. DEERKOSKI By: /s/ TERENCE X. MEYER
By: /s/ RAYMOND A. MAZGULSKI ------------------------- ----------------------------
------------------------------- Joseph A. Deerkoski Terence X. Meyer
Raymond A. Mazgulski Director Director
Vice Chairman
Director By: /s/ HOWARD M. FINKELSTEIN By: /s/ J. DOUGLAS STARK
------------------------- ----------------------------
Howard M. Finkelstein J. Douglas Stark
By: /s/ THOMAS S. KOHLMANN Director Director
------------------------------
Thomas S. Kohlmann
President and By: /s/ EDGAR F. GOODALE By: /s/ PETER VAN DE WETERING
Chief Executive Officer ------------------------ ---------------------------
Director Edgar F. Goodale Peter Van de Wetering
Director Director
By: /s/ J. GORDON HUSZAGH
-----------------------------
J. Gordon Huszagh
Executive Vice President and
Chief Financial Officer
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[SUFFOLK BANCORP LOGO]
DIRECTORS
Edward J. Merz
Chairman
Raymond A. Mazgulski
Vice Chairman
Bruce Collins Hallock Luce 3rd
Retired Director, Lupton & Luce, Inc. (general insurance)
President, Hallup Realty Corp. (real estate)
Joseph A. Deerkoski
President, Neefus-Stype, Inc. (general insurance) Terence X. Meyer
Managing Partner, Meyer, Meyer, Metli & Keneally, Esqs.
Howard M. Finkelstein L.L.P. (attorneys)
Partner, Smith, Finkelstein, Lundberg, Isler & Yakaboski
(attorneys) J. Douglas Stark
President, Stark Mobile Homes, Inc.
Edgar F. Goodale
President, Riverhead Building Supply Corp. Peter Van de Wetering
President, Van de Wetering
Thomas S. Kohlmann Greenhouses, Inc. (wholesale nursery)
President & Chief Executive Officer
OFFICERS
Thomas S. Kohlmann
President & Chief Executive Officer
J. Gordon Huszagh
Executive Vice President & Chief Financial Officer
Victor F. Bozuhoski, Jr.
Executive Vice President
Augustus C. Weaver
Executive Vice President
Douglas Ian Shaw
Vice President & Corporate Secretary
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THE SUFFOLK COUNTY NATIONAL BANK
---- ----
EST. [LOGO] 1890
---- ----
DIRECTORS CONSUMER LOANS Medford Office West Babylon Office
Edward J. Merz Jeanne P. Hamilton Paul E. Vaas Charles F. Bivona
Chairman of the Board Senior Vice President Vice President Assistant Vice President
Raymond A. Mazgulski Joan Brigante
Vice Chairman of the Board Vice President Miller Place Office Westhampton Beach Office
Bruce Collins John Dunleavy Michele Fenning Charles E. Johnson
Joseph A. Deerkoski Vice President Manager Vice President
Howard M. Finkelstein Michael E. Kelley
Edgar F. Goodale Vice President Montauk Harbor Office TRUST
Thomas S. Kohlmann Montauk Village Office Dan A. Cicale
Hallock Luce 3rd AUDIT LIAISON, John Soyars Senior Vice President
Terence X. Meyer COMPLIANCE & SECURITY Manager & Trust Officer
J. Douglas Stark Alexander B. Doroski William C. Araneo
Peter Van de Wetering Senior Vice President Port Jefferson Office Vice President
Peter A. Poten Lori E. Thompson
EXECUTIVE OFFICERS BRANCH ADMINISTRATION Vice President Vice President
Thomas S. Kohlmann Robert H. Militscher
President & Senior Vice President & Riverhead, Ostrander COMPTROLLER
Chief Executive Officer Branch Administrator Avenue Office J. Gordon Huszagh
J. Gordon Huszagh Richard J. Micallef Linda C. Zarro Executive Vice President
Executive Vice President & Vice President Vice President & Chief Financial Officer
Chief Financial Officer William K. Miller
Victor F. Bozuhoski, Jr. Vice President Riverhead, Second Street Office CORPORATE SERVICES
Executive Vice President Barbara A. Scesny Douglas Ian Shaw
Retail Banking Bohemia Office Regional Vice President Vice President &
Augustus C. Weaver Dean S. Kupinsky Corporate Secretary
Executive Vice President & Vice President Sag Harbor Office
Chief Information Officer Jane P. Markowski FACILITIES
Center Moriches Office Assistant Vice President Charles E. Anderson
LENDING Thomas R. Columbus, Sr. Manager
Robert C. Dick Vice President Sayville
Senior Vice President & David Gierasch HUMAN RESOURCES
Chief Lending Officer Cutchogue Office Assistant Vice President Pamela L. Palleschi
Richard J. Noncarrow Vice President
COMMERCIAL LOANS Vice President Shoreham Office Richard Montenegro
Phillip D. Ammirato Wendy A. Stapon Vice President
Senior Vice President East Hampton Pantigo Office Manager
Lawrence Milius Kenneth Lockard DATA PROCESSING
Senior Vice President Manager Smithtown Office Mark J. Drozd
Peter M. Almasy William K. Soriano Senior Vice President
Vice President East Hampton Village Office Vice President
Thomas E. Clemens Jill James OPERATIONS
Vice President Assistant Vice President Southampton Office Dennis F. Orski
David T. De Vito Patricia Bolomey Senior Vice President
Vice President Hampton Bays Office Vice President
Robert T. Ellerkamp David Barczak MARKETING
Vice President Assistant Vice President Wading River Office Brenda B. Sujecki
John J. Reilly Anita Nigrel Vice President
Vice President Mattituck Office Regional Vice President
Frederick J. Weinfurt Janet V. Stewart
Vice President Vice President Water Mill Office
Joanne Goodwin
Assistant Branch Manager
9
11
Directory of Offices and Departments
Area Code (631)
Telephone FAX
- -----------------------------------------------------------------------------------------------------------------------------
Executive Offices 322 Roanoke Avenue, Riverhead, N.Y. 11901 727-3800 727-2638
Audit Liaison, Compliance & Security 220 Roanoke Avenue, Riverhead, N.Y. 11901 727-2855 727-9223
Bohemia Office 3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 585-4477 585-4809
Branch Administration 6 West Second Street, Riverhead, N.Y. 11901 727-3850 727-3873
Business and Professional Banking Center 260 Middle County Road, Smithtown, N.Y. 11787 979-3400 979-3430
Center Moriches Office 502 Main Street, Center Moriches, N.Y. 11934 878-8800 878-4431
Commercial Loans 1149 Old Country Road, Riverhead, N.Y. 11901 727-2701 727-5798
351 Pantigo Road, East Hampton, N.Y. 11937 324-2502 324-6367
137 West Broadway, Port Jefferson, N.Y. 11777 642-1000 642-0200
295 North Sea Road, Southampton, N.Y. 11968 287-3104 287-3296
Comptroller 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5270 369-2230
Consumer Loans 244 Old Country Road, Riverhead, N.Y. 11901 727-7277 727-5521
Corporate Services (Investor Relations) 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5667 727-3214
Cutchogue Office 31525 Main Road, Cutchogue, N.Y. 11935 734-5050 734-7759
Data Processing 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5151 727-3499
East Hampton Pantigo Office 351 Pantigo Road, East Hampton, N.Y. 11937 324-2000 324-6367
East Hampton Village Office 100 Park Place, East Hampton, N.Y. 11937 324-3800 324-3863
Facilities 6 West Second Street, Riverhead, N.Y. 11901 727-6782 208-0767
Financial Planning Center 295 North Sea Road, Southampton, N.Y. 11968 287-3100 287-3296
Hampton Bays Office Montauk Highway, Hampton Bays, N.Y. 11946 728-2700 728-8311
Human Resources 6 West Second Street, Riverhead, N.Y. 11901 727-5377 727-3170
Information Services 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5151 369-5934
Marketing 220 Roanoke Avenue, Riverhead, N.Y. 11901 727-2855 727-9223
Mattituck Office 10900 Main Road, Mattituck, N.Y. 11952 298-9400 298-9188
Medford Office 2799 Route 112, Medford, N.Y. 11763 758-1500 758-1509
Miller Place Office 74 Echo Avenue, Miller Place, N.Y. 11764 474-8400 474-8510
Montauk Harbor Office West Lake Drive, Montauk, N.Y. 11954 668-4333 668-3643
Montauk Village Office 746 Montauk Highway, Montauk, N.Y. 11954 668-5300 668-1214
Mortgage Loans 244 Old Country Road, Riverhead, N.Y. 11901 727-7277 369-2468
Operations 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5151 369-5834
Port Jefferson Harbor Office 135 West Broadway, Port Jefferson, N.Y. 11777 474-7200 331-7806
Port Jefferson Village Office 228 East Main Street, Port Jefferson, N.Y. 11777 473-7700 473-9406
Retail Banking 322 Roanoke Avenue, Riverhead, N.Y. 11901 727-3800 727-2638
Riverhead, Ostrander Avenue Office 1201 Ostrander Avenue, Riverhead, N.Y. 11901 727-6800 727-5095
Riverhead, Second Street Office 6 West Second Street, Riverhead, N.Y. 11901 727-2700 727-3210
Sag Harbor Office 17 Main Street, Sag Harbor, N.Y. 11963 725-3000 725-4627
Sayville Office 161 North Main Street, Sayville, N.Y. 11782 218-1600 218-9425
Shoreham Office 9926 Route 25A, Shoreham, N.Y. 11786 744-4400 744-6743
Smithtown Office 260 Middle Country Road, Smithtown, N.Y. 11787 979-3400 979-3430
Southampton Office 295 North Sea Road, Southampton, N.Y. 11968 283-3800 287-3293
Wading River Office 2065 Wading River-Manor Rd., Wading River, N.Y. 11792 929-6300 929-6799
Water Mill Office 828 Montauk Highway, Water Mill, N.Y. 11976 726-4500 726-7573
West Babylon Office 955 Little East Neck Road, West Babylon, N.Y. 11704 669-7300 669-5211
Westhampton Beach Office 144 Sunset Ave., Westhampton Beach, N.Y. 11978 288-4000 288-9252
10
12
SUFFOLK BANCORP 10-K
13
[FULL PAGE LANDMARK PHOTO]
[SUFFOLK BANCORP LOGO]
1999 ANNUAL REPORT on FORM 10-K
14
[LANDMARK PHOTO]
On The Cover
The Robert Moses Causeway
The Robert Moses Causeway is a landmark instantly familiar to most Long
Islanders, as is the state park of the same name. Both are named for the first
and famous longtime Long Island State Parks Commissioner, Robert Moses. His
public works ranged from bridges to parkways to the extraordinary series of
public beaches along the south shore of Long Island, of which Robert Moses
State Park is the easternmost. From its beginning at Southern State Parkway,
the Causeway is 8.1 miles in length. It runs south from Long Island across
Great South Bay and traverses Captree Island and Fire Island Inlet to its
terminus at the water tower on the western end of Fire Island. Purchased by the
State of New York in 1893, and dedicated as a park in 1908, the Park is the
oldest state park on Long Island.
Corporate Profile.......................................................................................................... 1
Financial Highlights....................................................................................................... 1
To Our Shareholders ....................................................................................................... 2
Price Range of Common Stock and Dividends.................................................................................. 4
Summary of Selected Financial Data......................................................................................... 4
Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 5
Suffolk's Business......................................................................................................... 5
General Economic Conditions................................................................................................ 5
Results of Operations...................................................................................................... 5
Net Income................................................................................................................. 5
Net-Interest Income........................................................................................................ 5
Average Assets, Liabilities, and Stockholders' Equity, Rate Spread, and Effective Interest Rate Differential............... 6
Analysis of Changes in Net Interest Income................................................................................. 7
Interest Income............................................................................................................ 7
Investment Securities...................................................................................................... 7
Loan Portfolio............................................................................................................. 8
Non-Performing Loans....................................................................................................... 9
Summary of Loan Losses and Allowance for Possible Loan Losses.............................................................. 9
Interest Expense...........................................................................................................10
Deposits...................................................................................................................10
Short-Term Borrowings......................................................................................................11
Other Income...............................................................................................................11
Other Expense..............................................................................................................11
Interest Rate Sensitivity..................................................................................................11
Market Risk................................................................................................................12
Interest Rate Risk.........................................................................................................12
Asset/Liability Management & Liquidity.....................................................................................13
Readiness for the Year 2000 and Actual Experience..........................................................................13
Capital Resources..........................................................................................................13
Risk-Based Capital and Leverage Guidelines ................................................................................14
Discussion of New Accounting Pronouncements................................................................................14
Business Risks and Uncertainties...........................................................................................14
Consolidated Statements of Condition.......................................................................................15
Consolidated Statements of Income..........................................................................................16
Consolidated Statements of Changes in Stockholders' Equity.................................................................17
Consolidated Statements of Cash Flows......................................................................................18
Notes to Consolidated Financial Statements.................................................................................19
Report of Independent Public Accountants...................................................................................30
Report of Management.......................................................................................................30
Annual Report on Form 10-K.................................................................................................31
Directors and Officers -- Suffolk Bancorp..................................................................................39
Directors and Officers -- The Suffolk County National Bank.................................................................40
Directory of Offices and Departments........................................................................Inside Back Cover
15
CORPORATE PROFILE
Suffolk Bancorp does commercial banking through its wholly owned subsidiary,
The Suffolk County National Bank. "SCNB" is a full-service, nationally
chartered commercial bank. Organized in 1890, SCNB is the second largest
independent commercial bank headquartered on Long Island. Most of SCNB's
revenue comes from net interest income, and the remainder from charges for a
variety of services. SCNB has built a good reputation for personal, attentive
service. This has developed a loyal and growing clientele. SCNB operates 26
full-service offices throughout Suffolk County, New York.
The staff at SCNB works hard to develop and maintain ties to the communities it
serves. Most of SCNB's business is retail, and includes loans to individual
consumers, to professionals, and to small and medium-sized commercial
enterprises. It has special expertise in indirect retail lending, evaluating
and buying loans generated by automobile dealers. In recent years, however,
commercial loans of all types have increased as a percentage of the loan
portfolio and have made substantial contributions to SCNB's profitability.
SCNB's primary market is Long Island, New York. Long Island is home to more
than 2.6 million people outside of the limits of New York City and is
increasingly suburban in nature. Nassau County and the western end of Suffolk
County are a center for commerce and are highly developed, supporting a
diversified economy. The eastern end of Long Island is supported by retirement,
tourism, and agriculture. Together, they generate family incomes greater than
the national average, providing Suffolk Bancorp with a steady and growing
demand for loans and other services, and a reliable, reasonably priced supply
of deposits.
FINANCIAL HIGHLIGHTS
(dollars in thousands, except ratios, share, and per-share information)
- ----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS FOR THE YEAR Net income $ 13,129 $ 11,903
Net-interest income 46,787 44,410
Net income-per-share 2.16 1.95
Cash dividends-per-share 0.84 0.72
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT YEAR END Assets $ 980,799 $ 909,432
Net loans 720,255 640,565
Investment securities 165,370 151,201
Deposits 877,303 826,564
Equity 77,334 71,846
Shares outstanding 6,055,580 6,080,856
Book value per common share $ 12.77 $ 11.81
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS Return on average equity 17.91 % 17.66 %
Return on average assets 1.41 1.37
Average equity to average assets 7.87 7.77
Net-interest margin (taxable-equivalent) 5.66 5.77
Efficiency Ratio 57.49 59.36
Net charge-offs to average net loans 0.11 0.08
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
SUFFOLK BANKCORP ANNUAL MEETING
Tuesday, April 11, 2000, 1:00 P.M.
East Wind
Route 25A
Wading River, New York
S.E.C. FORM 10-K
The Annual Report to the Securities and Exchange Commission on Form 10-K and
documents incorporated by reference can be obtained, without charge, by writing
to the Secretary, Suffolk Bancorp, 6 West Second Street, Riverhead, New York
11901, or call (631) 727-5667, fax to (631) 727-3214, or send e-mail to
suffolkbancorp@scnb.com.
TRADING
Suffolk Bancorp's common stock is traded over-the-counter,and is listed on the
NASDAQ National Market System under the symbol "SUBK."
REGISTRAR AND TRANSFER AGENT
Any questions about the registration or transfer of shares, the payment,
reinvestment, or direct deposit of dividends can be answered by:
American Stock Transfer & Trust Co.
40 Wall Street, 46th Floor
New York, New York 10269-0436
1-800-937-5449
1
16
[THOMAS S. KOHLMANN PHOTO]
DEAR SHAREHOLDER:
Nineteen-ninety-nine was another successful year for Suffolk Bancorp and for
its wholly owned subsidiary, The Suffolk County National Bank.
It was a profitable year in nearly all respects. Net income was $13,129,000, up
10.3 percent from $11,903,000 last year. Earnings-per-share were $2.16 compared
to $1.95, an increase of 10.8 percent. Each is a record. Assets at year-end
totaled 980,799,000, compared to $909,432,000, up 7.8 percent. Shareholders'
equity amounted to $77,334,000, up 7.6 percent from $71,846,000. Book
value-per-share was $12.77, up 8.1 percent from $11.81 the previous year.
Dividends-per-share were $0.84, increased 16.7 percent from $0.72. Average net
loans increased by 9.3 percent, to $676,810,000, from $619,025,000. Average
deposits increased by 6.8 percent, to $835,175,000 from $781,927,000.
Net-interest income increased by 5.4 percent to $46,787,000 from $44,410,000.
Income other than from interest decreased by 16.9 percent, to $6,771,000 from
$8,148,000. Expense other than for interest decreased by 1.3 percent, to
$30,789,000 from $31,200,000, and our efficiency ratio was 57.49 percent.
Return on average common equity increased to 17.91 percent from 17.66 percent.
Return on assets increased to 1.41 percent from 1.37 percent.
Our success during 1999 is attributable to a number of incremental refinements
in the way we manage our business, aided by a strong economy. Net interest
income increased year to year, primarily due to increases in volume. One
significant change in the balance sheet was the addition of a portfolio of
government agency-backed collateralized mortgage obligations that enabled us to
improve the yield on our investments, while preserving asset quality by means
of the government guarantee. By choosing the issues carefully, we were also
able to moderate the risk of changing rates of interest to our net interest
income. We also improved our leverage, shifting from selling federal funds last
year, to a modest position of short-term borrowings. Savings, N.O.W.s, and
money market accounts, which are moderately priced, grew faster than other
deposits.
2
17
Non-interest income and expense declined, owing largely to the sale of a
merchant services portfolio that affected both sides of the income statement.
After removing the effect of that transaction, non-interest expense was
essentially flat, an accomplishment as average assets grew by 7.4 percent. As
a percentage of the previous year, net charge-offs increased, but in absolute
terms, they remain modest, at 11 basis points of total loans, and the
allowance for possible loan losses is substantial.
"Accumulated Other Comprehensive Income, Net of Tax," which is primarily the
difference between the book and market values of our investments available
for sale, went into negative territory as would be expected when interest
rates climb as they did last year. However, that effect on equity was offset
partially by increases in net interest income because Suffolk's assets
repriced upward faster than its liabilities.
OUR EVOLVING CUSTOMER
Our focus, however, is always on the future, and on identifying not only who
our customers are today, but on who they will be tomorrow. During the current
economic expansion, our primary market area has changed more than during any
similar period in Suffolk's long history.
A generation ago, we were bankers to farmers, fisherman, and the occasional
tourist or retiree. Today, we serve a growing, dynamic region with a diverse
mix of traditional and high-tech companies that rely on the services of a wide
range of professionals to support and advise their businesses. We have
undertaken to reach out to those business people and professionals with an eye
to meeting their special needs, while at the same time satisfying the
requirements of our long-established, retail customers.
Toward this end, we have tailored our offices to the communities and the
customers they serve. Thus, in Riverhead, where we are the retail banker of
choice, we have two high-volume branch offices and two lending offices. In
Smithtown, a highly competitive market for basic banking, we differentiate
ourselves from that market completely, offering comprehensive banking services
at a desk rather than a teller line to business and professional customers who
want personal service and are willing to pay for it. This kind of tailored
approach makes the most of the resources available to a financial institution
of our size.
E-BANKING AND THE FUTURE
You, our shareholders, our customers, and our staff have had to wade through a
lot of "e-hype" during the past year or two, but there is no question that
electronic banking will be a big part of our future and yours. The first
glimpse of that future came more than 15 years ago with the introduction of the
automatic teller machine, now the primary source of cash for many customers.
But the growth of the Internet has transformed the possibilities, and the
responsibilities of a bank to its customers.
Suffolk is ready, with an inclusive web-site at www.SCNB.com; Internet banking
that permits customers to inquire about their accounts, make transfers among
their accounts, and download information about their accounts into popular
financial management software; and our electronic bill payment service.
MANAGEMENT AT SUFFOLK BANCORP
As you know, I am still new to the position of CEO, although I've been with the
company since 1992, serving most recently as Executive Vice President and Chief
Lending Officer. The circumstances under which I assumed my duties were not
happy, coming after the decline and passing of my predecessor in office, John
F. Hanley. Our management team saw us through that difficult period, for which
I am eternally grateful. Events of the past year and the way my colleagues
responded to them gave me a new appreciation of the depth of their experience
and their understanding of your company and its strategic needs. Their
expertise and cohesion will serve us, and you, well into the future.
I'd like to encourage you to read "Management's Discussion and Analysis," which
starts on page 5. We hope that it will help you appreciate the fundamental
value inherent in your shares of Suffolk Bancorp.
It has been quite a year here at Suffolk. Real value is built day by day, year
in and year out, in the relationships we build with real customers. We don't
take your support as shareholders for granted. We work to earn it every day. We
hope that you share in our satisfaction with Suffolk's achievements and see
them, as I do, as the foundation for a long, profitable future.
Sincerely,
/S/ THOMAS S. KOHLMANN
Thomas S. Kohlmann
President &
Chief Executive Officer
3
18
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Suffolk's common stock is traded in the over the counter market, and is quoted
on the NASDAQ National Market System under the symbol "SUBK." Following are
quarterly high and low prices of Suffolk's common stock as reported by NASDAQ.
- --------------------------------------------------------------------------------------------------------------------------------
1999 High Low Dividends 1998 High Low Dividends
- --------------------------------------------------------------------------------------------------------------------------------
First Quarter $ 29.00 $ 24.00 $ 0.21 First Quarter $ 33.00 $ 28.50 $ 0.18
Second Quarter 28.25 22.88 $ 0.21 Second Quarter 34.00 29.75 $ 0.18
Third Quarter 28.50 26.00 $ 0.21 Third Quarter 35.25 27.88 $ 0.18
Fourth Quarter 29.00 26.00 $ 0.21 Fourth Quarter 29.75 19.88 $ 0.18
- --------------------------------------------------------------------------------------------------------------------------------
At February 3, 2000, there were approximately 1,900 equity holders of record of
the Company's common stock.
SUMMARY OF SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY: (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
- --------------------------------------------------------------------------------------------------------------------------------
For the years 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Interest income $ 67,908 $ 65,874 $ 64,129 $ 60,529 $ 59,312
Interest expense 21,121 21,464 20,970 19,372 20,331
- --------------------------------------------------------------------------------------------------------------------------------
Net-interest income 46,787 44,410 43,159 41,157 38,981
Provision for possible loan losses 1,070 900 1,059 1,120 530
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision 45,717 43,510 42,100 40,037 38,451
Other income 6,771 8,148 7,646 7,286 6,702
Other expense 30,789 31,200 30,303 28,967 30,135
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 21,699 20,458 19,443 18,356 15,018
Provision for income taxes 8,570 8,555 8,141 7,709 5,929
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 13,129 $ 11,903 $ 11,302 $ 10,647 9,089
================================================================================================================================
BALANCE AT DECEMBER 31:
Federal funds sold $ - $ 17,800 $ 18,500 $ 1,500 $ 32,500
Investment securities -- available for sale 132,484 129,348 120,878 104,649 137,043
Investment securities -- held to maturity 32,886 21,853 26,048 30,704 44,923
- --------------------------------------------------------------------------------------------------------------------------------
Total investment securities 165,370 151,201 146,926 135,353 181,966
Net loans 720,255 640,565 604,864 578,883 510,015
Total assets 980,799 909,432 864,913 804,379 805,794
Total deposits 877,303 826,564 777,595 711,018 727,060
Other borrowings 13,500 - - 7,200 -
Stockholders' equity $ 77,334 $ 71,846 $ 65,140 $ 72,750 $ 70,046
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Performance:
Return on average equity 17.91% 17.66% 16.96% 15.12% 11.56%
Return on average assets 1.41 1.37 1.37 1.35 1.15
Net interest margin (taxable-equivalent) 5.66 5.77 5.84 5.84 5.49
Efficiency Ratio 57.49 59.36 59.65 59.80 65.96
Average equity to average assets 7.87 7.77 8.05 8.96 9.91
Dividend pay-out ratio 37.48 36.87 38.34 38.49 36.83
Asset quality:
Non-performing assets to total loans
(net of discount) 0.22 0.34 0.59 1.02 1.33
Non-performing assets to total assets 0.16 0.24 0.41 0.74 0.85
Allowance to non-performing assets 451.55 319.33 182.29 127.12 77.38
Allowance to loans, net of discount 1.00 1.07 1.07 1.05 1.15
Net charge-offs to average net loans 0.11 0.08 0.11 0.17 0.16
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA:
Net income (basic) 2.16 1.95 1.79 1.60 1.22
Cash dividends 0.84 0.72 0.69 0.62 0.45
Book value at year-end 12.77 11.81 10.69 11.04 10.28
Highest market value 29.00 35.25 33.00 19.88 18.75
Lowest market value 22.88 19.88 19.13 14.75 13.00
Average shares outstanding 6,068,778 6,094,826 6,306,299 6,682,064 7,478,946
- --------------------------------------------------------------------------------------------------------------------------------
Number of full-time-equivalent employees
at year-end 389 391 378 372 400
Number of branch offices at year-end 26 26 25 23 22
Number of automatic teller machines 18 18 16 16 15
================================================================================================================================
4
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion that follows analyzes Suffolk Bancorp's ("Suffolk") operations
for each of the past three years and its financial condition as of December 31,
1999 and 1998, respectively. Selected tabular data are presented for each of
the past five years.
SUFFOLK'S BUSINESS
Nearly all of Suffolk's business is to provide banking services to its
commercial and retail customers in Suffolk County, on Long Island, New York.
Suffolk is a one-bank holding company. Its banking subsidiary, The Suffolk
County National Bank (the "Bank"), operates 26 full-service offices in Suffolk
County, New York. It offers a full line of domestic, retail, and commercial
banking services, and trust services. The Bank's primary lending area includes
all of Suffolk County, New York. The Bank also makes loans for automobiles in
Nassau County, New York. The Bank serves as an indirect lender to the customers
of many automobile dealers. The Bank also lends to small manufacturers,
wholesalers, builders, farmers, and retailers, and finances dealers' inventory.
The Bank makes loans secured by real estate, including residential mortgages,
of which most are sold to investors; real estate construction loans; and loans
that are secured by commercial real estate and float with the prime rate, or
that have relatively short terms and are retained in the Bank's portfolio. The
Bank offers both fixed and floating rate second mortgage loans with a variety
of plans for repayment.
Other investments are made in short-term United States Treasury debt, high
quality obligations of municipalities in New York State, issues of agencies of
the United States Government, collateralized mortgage obligations, and stock in
the Federal Reserve Bank and the Federal Home Loan Bank of New York required as
a condition of membership.
The Bank finances most of its activities with deposits, including demand,
savings, N.O.W., and money market accounts, as well as term certificates. To a
much lesser degree, it relies on other short-term sources of funds, including
interbank, overnight loans and, when needed, sale-repurchase agreements.
GENERAL ECONOMIC CONDITIONS
Growth in Long Island's economy was steady during 1999. Increased demand for
finance, information, transportation, and tourism were offset by layoffs
resulting from corporate consolidations and downsizing. Long Island has a
highly educated and skilled work force and a diverse industrial base. It is
adjacent to New York City, one of the world's largest centers of distribution
and a magnet for finance and culture. The island's economic cycles vary from
those of the national economy. During 1999, interest rates were stable
throughout the year, and there was less difference between short and long-term
rates than in previous years.
RESULTS OF OPERATIONS
NET INCOME
Net income was $13,129,000 compared to $11,903,000 last year and $11,302,000 in
1997. These figures represent increases of 10.3 percent and 5.3 percent,
respectively. Basic earnings-per-share were $2.16, compared to $1.95 last year
and $1.79 in 1997.
NET INTEREST INCOME
Net-interest income during 1999 was $46,787,000, up 5.4 percent from
$44,410,000 and up 2.9 percent from $43,159,000 in 1998 and 1997, respectively.
Net-interest income is the most important part of the net income of Suffolk.
The effective-interest-rate-differential, on a taxable-equivalent basis, was
5.66 percent in 1999, 5.77 percent during 1998, and 5.84 percent in 1997.
Average rates on average interest-earning assets decreased to 8.19 percent in
1999, from 8.53 percent in 1998 and 8.65 percent in 1997. Average rates on
average interest-bearing liabilities decreased to 3.47 percent in 1999, from
3.70 percent in 1998 and 3.69 percent in 1997. The interest rate differential
decreased slightly in 1999 from 1998, as it did in 1998 from 1997. Also, demand
deposits increased slightly from year to year as a percentage of total
liabilities.
5
20
AVERAGE ASSETS, LIABILITIES, STOCKHOLDERS' EQUITY,
RATE SPREAD,
AND EFFECTIVE INTEREST RATE DIFFERENTIAL
(ON A TAXABLE-EQUIVALENT BASIS)
The following table illustrates the average composition of Suffolk's statements
of condition. It presents an analysis of net-interest income on a
taxable-equivalent basis, listing each major category of interest-earning
assets and interest-bearing liabilities, as well as other assets and
liabilities: (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 47,033 $ 2,570 5.47% $ 85,808 $ 5,382
Obligations of states & political subdivisions 17,592 1,120 6.36 15,875 1,016
U.S. govt. agency obligations 70,019 4,085 5.83 26,365 1,790
Corporate bonds & other securities 3,358 225 6.70 807 38
Federal funds sold & securities purchased
under agreements to resell 19,318 977 5.06 29,329 1,547
Loans, including non-accrual loans $676,810 59,364 8.77 619,025 56,554
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $834,130 $ 68,341 8.19% $777,209 $ 66,327
====================================================================================================================================
Cash & due from banks $ 58,744 $ 56,190
Other non-interest-earning assets 37,999 33,648
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $930,873 $867,047
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Savings, N.O.W.'s & money market deposits $347,817 $ 7,939 2.28% $321,143 $ 7,373
Time deposits 255,911 12,926 5.05 256,120 13,938
- ------------------------------------------------------------------------------------------------------------------------------------
Total savings & time deposits 603,728 20,865 3.46 577,263 21,311
Federal funds purchased & securities
sold under agreement to repurchase 4,173 205 4.91 2,551 153
Other borrowings 1,188 51 4.29 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $609,089 $ 21,121 3.47% $579,814 $ 21,464
====================================================================================================================================
Rate spread 4.72%
Non-interest-bearing deposits $231,447 $204,664
Other non-interest-bearing liabilities 17,037 15,184
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities $857,573 $799,662
Stockholders' equity 73,300 67,385
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $930,873 $867,047
Net-interest income (taxable-equivalent basis)
& effective interest rate differential $47,220 5.66% $44,863
Less: taxable-equivalent basis adjustment (433) (453)
- ------------------------------------------------------------------------------------------------------------------------------------
Net-interest income $46,787 $44,410
====================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average
Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities 6.27% $101,151 $ 6,557 6.48%
Obligations of states & political subdivisions 6.41 10,940 744 6.80
U.S. govt. agency obligations 6.79 23,921 1,597 6.68
Corporate bonds & other securities 4.71 638 38 5.96
Federal funds sold & securities purchased
under agreements to resell 5.27 20,683 1,128 5.45
Loans, including non-accrual loans 9.14 588,686 54,448 9.25
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 8.53% $746,019 $ 64,512 8.65%
============================================================================================================================
Cash & due from banks $ 43,759
Other non-interest-earning assets 38,020
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $827,798
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------
Savings, N.O.W.'s & money market deposits 2.30% $323,105 $ 7,567 2.34%
Time deposits 5.44 237,520 12,966 5.46
- ----------------------------------------------------------------------------------------------------------------------------
Total savings & time deposits 3.69 560,625 20,533 3.66
Federal funds purchased & securities
sold under agreement to repurchase 6.00 7,792 425 5.45
Other borrowings - 165 12 7.27
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3.70% $568,582 $ 20,970 3.69%
============================================================================================================================
Rate spread 4.83% 4.96%
Non-interest-bearing deposits $183,894
Other non-interest-bearing liabilities 8,690
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities $761,166
Stockholders' equity 66,632
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $827,798
Net-interest income (taxable-equivalent basis)
& effective interest rate differential 5.77% $ 43,542 5.84%
Less: taxable-equivalent basis adjustment (383)
- ----------------------------------------------------------------------------------------------------------------------------
Net-interest income $ 43,159
============================================================================================================================
Interest income on a taxable-equivalent basis includes the additional amount of
interest income that would have been earned if Suffolk's investment in
nontaxable U.S. Treasury securities and state and municipal obligations had
been subject to New York State and federal income taxes yielding the same
after-tax income. The rate used for this adjustment was approximately 34
percent for federal income taxes and 9 percent for New York State income taxes
for all periods. For each of the years 1999, 1998, and 1997, $1.00 of
nontaxable income from obligations of states and political subdivisions equates
to fully taxable income of $1.52. In addition, in 1999, 1998, and 1997, $1.00
of nontaxable income on U.S. Treasury securities equates to $1.02 of fully
taxable income. The amortization of loan fees is included in interest income.
6
21
ANALYSIS OF CHANGES IN NET INTEREST INCOME
The table below presents a summary of changes in interest income, interest
expense, and the resulting net-interest income on a taxable-equivalent basis
for the periods presented, each as compared with the preceding period. Because
of numerous, simultaneous changes in volume and rate during the period, it is
not possible to allocate precisely the changes between volumes and rates. In
this table changes not due solely to volume or to rate have been allocated to
these categories based on percentage changes in average volume and average rate
as they compare to each other: (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
In 1999 over 1998 In 1998 over 1997
Changes Due to Changes Due to
Volume Rate Net Change Volume Rate Net Change
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $(2,188) $(624) (2,812) $(967) $(208) (1,175)
Obligations of states & political subdivisions 109 (5) 104 317 (45) 272
U.S. govt. agency obligations 2,579 (284) 2,295 166 27 193
Corporate bonds & other securities 165 22 187 10 (10) -
Federal fund sold & securities purchased
under agreement to resell (509) (61) (570) 457 (38) 419
Loans, including non-accrual loans 5,132 (2,322) 2,810 2,778 (672) 2,106
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 5,288 $(3,274) $ 2,014 $2,761 $(946) $ 1,815
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- -----------------------------------------------------------------------------------------------------------------------------------
Savings, N.O.W.'s & money market deposits $ 609 $ (43) $ 566 $(46) $(148) $ (194)
Time deposits (11) (1,001) (1,012) 1,012 (40) 972
Federal funds purchased & securities
sold under agreement to repurchase 84 (32) 52 (311) 39 (272)
Other borrowings 26 25 51 (6) (6) (12)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 708 $(1,051) $ (343) $649 $(155) $ 494
- -----------------------------------------------------------------------------------------------------------------------------------
Net change in net-interest income (taxable-equivalent basis) $ 4,580 $(2,223) $ 2,357 $2,112 $(791) $ 1,321
===================================================================================================================================
INTEREST INCOME
Interest income increased to $67,908,000 in 1999, from $65,874,000 in 1998, and
$64,129,000 in 1997 increases of 3.1 and 2.7 percent, respectively.
INVESTMENT SECURITIES
Average investment in U.S. Treasury securities decreased to $47,033,000 from
$85,808,000 in 1998, and $101,151,000 in 1997, a decrease of 45.2 and 15.2
percent, respectively. These securities are Suffolk's primary source of
liquidity. These balances decreased as funds were shifted into collateralized
mortgage obligations as the spread between Treasury and non-Treasury yields
widened during the period. U.S. Treasury, U.S. government agency,
collateralized mortgage obligations, and municipal securities provide
collateral for various liabilities to municipal depositors.
The following table summarizes Suffolk's investment securities available for
sale and held to maturity as of the dates indicated: (in thousands)
- ------------------------------------------------------------------------------------------------------------
December 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Investment securities available for sale, at fair value:
U.S. Treasury securities $31,060 $67,023 $107,140
U.S. government agency debt securities 38,930 43,366 13,738
Collateralized mortgage obligations 62,494 18,959 -
- ------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 132,484 129,348 120,878
- ------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
U.S. Treasury securities - - -
Obligations of states & political subdivisions 27,835 16,231 18,371
U.S. govt. agency obligations 1,583 2,382 7,039
Corporate bonds & other securities 3,468 3,240 638
- ------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity 32,886 21,853 26,048
- ------------------------------------------------------------------------------------------------------------
Total investment securities $165,370 $151,201 $146,926
============================================================================================================
Fair value of investment securities held to maturity $32,723 $22,015 $ 26,213
Unrealized gains 21 162 170
Unrealized losses 184 - 5
============================================================================================================
7
22
The amortized cost, maturities, and approximate weighted average yields, on a
taxable-equivalent basis, at December 31, 1999 are as follows: (in thousands)
- ----------------------------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
- ----------------------------------------------------------------------------------------------------------------------
U.S. Collateralized
U.S. Treasury Govt.Agency Mortgage
Securities Debt Obligations(1)
- ----------------------------------------------------------------------------------------------------------------------
Fair Fair Fair
Maturity (in years) Value Yield Value Yield Value Yield
- ----------------------------------------------------------------------------------------------------------------------
Within 1 $ 5,994 5.35% $ - - % $ - - %
After 1 but within 5 25,066 5.40 38,930 5.72 - -
After 5 but within 10 - - - - - -
After 10 - - - - 62,494 6.40
Other securities - - - - - -
- ----------------------------------------------------------------------------------------------------------------------
TOTAL $ 31,060 5.39% $ 38,930 5.72% $ 62,494 6.40%
======================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
HELD TO MATURITY
- ---------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Corporate Bonds
States & Political Govt. Agency &
Subdivisions Debt Other Securities
- ---------------------------------------------------------------------------------------------------------------------------------
Amortized Amortized Amortized
Maturity (in years) Cost Yield Cost Yield Cost Yield Total
- ---------------------------------------------------------------------------------------------------------------------------------
Within 1 $ 24,203 3.84% $ - - % $ - - $ 30,197
After 1 but within 5 340 5.38 1,583 7.91 - - $ 65,919
After 5 but within 10 492 5.53 - - - - $ 492
After 10 2,800 6.50 - - - - $ 65,294
Other securities - - - - 3,468 $ 3,468
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 27,835 4.16% $ 1,583 7.91% $ 3,468 $ 165,370
=================================================================================================================================
As a member of the Federal Reserve System, the Bank owns Federal Reserve Bank
stock with a book value of $638,000. Being an equity investment, the stock has
no maturity. There is no public market for this investment. The last dividend
was 6 percent.
As a member of the Federal Home Loan Bank of New York, the Bank owns Federal
Home Loan Bank of New York stock with a book value of $2,730,000. Being an
equity investment, the stock has no maturity. There is no public market for
this investment. The last declared dividend was 6.75 percent.
LOAN PORTFOLIO
Loans, net of unearned discounts but before the allowance for possible loan
losses, totaled $727,525,000.
Consumer loans are the largest component of the Suffolk's loan portfolio. Net of
unearned discounts, they totaled $309,653,000 at the end of 1999, up 8.8 percent
from $284,697,000 at the year-end 1998. Consumer loans include primarily
indirect, dealer-generated automobile loans. Competition among commercial banks
and with captive finance companies of automobile manufacturers has reduced
yields. Commercial real estate mortgages closed the year at $162,321,000, up
25.9 percent from $128,923,000 last year. Commercial and industrial loans
followed at $131,429,000, up 6.5 percent from $123,463,000 at the end of 1998.
As commerce on Long Island continued to expand, both commercial mortgages and
loans offered the greatest opportunity for growth, although competition forced
concessions on rates in order to maintain the quality of Suffolk's commercial
portfolio. These loans are made to small local businesses throughout Suffolk
County. Loan balances are seasonal, particularly in the Hamptons where retail
inventories rise in the spring and fall by autumn.
The remaining, significant components of the loan portfolio are residential
mortgages at $82,411,000, up 11.7 percent from $73,754,000, home equity loans
at $20,834,000, down 5.2 percent from $21,980,000, and construction loans at
$17,956,000, up 43.6 percent from $12,500,000.
The following table categorizes total loans (net of unearned discounts) at
December 31: (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial & agricultural loans $ 131,429 $ 123,463 $ 111,575 $ 102,263
Commercial real estate mortgages 162,321 128,923 127,994 113,501
Real estate -- construction loans 17,956 12,500 9,823 9,437
Residential mortgages (1st and 2nd liens) 82,411 73,754 67,061 64,093
Home equity loans 20,834 21,980 26,201 28,974
Consumer loans 309,653 284,697 266,244 265,039
Lease finance - - 7 98
Other loans 2,921 2,203 2,483 1,592
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans (net of unearned discounts) $ 727,525 $ 647,520 $ 611,388 $ 584,997
==================================================================================================================================
- ------------------------------------------------------------------
1995
- ------------------------------------------------------------------
Commercial, financial & agricultural loans $ 78,730
Commercial real estate mortgages 99,940
Real estate -- construction loans 7,946
Residential mortgages (1st and 2nd liens) 55,047
Home equity loans 26,869
Consumer loans 245,317
Lease finance 311
Other loans 1,778
- ------------------------------------------------------------------
Total loans (net of unearned discounts) $ 515,938
==================================================================
8
23
NON-PERFORMING LOANS
Generally, recognition of interest income is discontinued where reasonable
doubt exists as to whether interest can be collected. Ordinarily, loans no
longer accrue interest when 90 days past due. When a loan stops accruing
interest, all interest accrued in the current year, but not collected, is
reversed against interest income in the current year. Any interest accrued in
prior years is charged against the allowance for possible loan losses. Loans
start accruing interest again when they become current as to principal and
interest, and when, in the opinion of management, they can be collected in
full. All non-performing loans, of a material amount, are reflected in the
foregoing tables.
The following table shows non-accrual, past due, and restructured loans at
December 31: (in thousands)
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Loans accruing but past due contractually
90 days or more $ 1,741 $ 2,168 $ 1,941 $ 975 $ 2,584
Loans not accruing interest 1,132 1,546 2,491 3,834 5,071
Restructured loans 275 291 426 208 532
- -------------------------------------------------------------------------------------------------------------------------
TOTAL $ 3,148 $ 4,005 $ 4,858 $ 5,017 $ 8,187
=========================================================================================================================
Interest on loans that are restructured or are no longer accruing interest
would have amounted to about $105,000 for 1999 under the contractual terms of
those loans. Suffolk records the payment of interest on such loans as a
reduction of principal. Interest income recognized on restructured and
non-accrual loans was immaterial for the years 1999, 1998, and 1997. Suffolk
has a formal procedure for internal credit review to more precisely identify
risk and exposure in the loan portfolio.
SUMMARY OF LOAN LOSSES AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is determined by continuous analysis of
the loan portfolio. That analysis includes changes in the size and composition
of the portfolio, historical loan losses, industry-wide losses, current and
anticipated economic trends, and details about individual loans. It also
includes estimates of the actual value of collateral and other possible sources
of repayment. There can be no assurance that the allowance is, in fact,
adequate. When a loan, in full or in part, is deemed uncollectible, it is
charged against the allowance. This happens when it is well past due and the
borrower has not shown the ability or intent to make the loan current, or the
borrower does not have enough assets to pay the debt, or the value of the
collateral is less than the balance of the loan and not likely to improve in
the near future. Residential real estate and consumer loans are not analyzed
individually because of the large number of loans, small balances, and
historically low losses. In the future, the provision for loan losses may
change as a percentage of total loans. The percentage of net charge-offs to
average net loans during 1999 was 0.11, compared to 0.08 percent in 1998, and
0.11 percent during 1997. The ratio of the allowance for possible loan losses
to loans, net of discounts, was 1.00 percent at the end of 1999, 1.07 percent
in 1998, and 1.07 percent in 1997. The allowance for possible loan losses has
seven major categories. A summary of transactions follows: (in thousands)
-------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR POSSIBLE LOAN LOSSES, JANUARY 1, $ 6,955 $ 6,524 $ 6,113 $ 5,923 $ 6,214
LOANS CHARGED-OFF:
Commercial, financial & agricultural loans 320 176 278 322 346
Commercial real estate mortgages - - - 369 271
Real estate -- construction loans - - - - -
Residential mortgages (1st and 2nd liens) 9 1 - - -
Home equity loans - - 76 47 28
Consumer loans 605 494 480 518 539
Lease finance - 2 - - -
Other loans - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL CHARGE-OFFS $ 934 $ 673 834 1,256 1,184
================================================================================================================================
9
24
- -----------------------------------------------------------------------------------------------------------------------------------
Loans recovered after being charged-off
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial, financial & agricultural loans 22 52 35 111 89
Commercial real estate mortgages - - - 4 16
Real estate -- construction loans - - - - -
Residential mortgages (1st and 2nd liens) 1 1 - - -
Home equity loans - - - - -
Consumer loans 156 145 151 209 258
Lease finance - 6 - - -
Other loans - - - 2 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries $ 179 $ 204 $ 186 $ 326 $ 363
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans charged-off 755 469 648 930 821
Provision for possible loan losses 1,070 900 1,059 1,120 530
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses, December 31, $ 7,270 $ 6,955 $ 6,524 $ 6,113 $ 5,923
===================================================================================================================================
The following table presents information concerning loan balances and asset
quality: (dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Loans, net of discounts:
Average $ 676,810 $ 619,025 $ 588,686 $ 544,258 $ 520,139
At end of period 727,525 647,520 611,388 584,997 515,938
Non-performing assets/total loans (net of discounts) 0.22 % 0.34 % 0.04 % 1.02 % 1.33 %
Non-performing assets/total assets 0.16 0.24 0.36 0.74 0.85
Ratio of net charge-offs/average net loans 0.11 0.08 0.11 0.17 0.16
Net charge-offs/net loans at December 31, 0.10 0.07 0.11 0.16 0.16
Allowance for possible loan losses/loans, net of discounts 1.00 1.07 1.07 1.05 1.15
===================================================================================================================================
INTEREST EXPENSE
Interest expense in 1999 was $21,121,000 down 1.6 percent from $21,464,000 the
year before, which was up 2.4 percent from $20,970,000 during 1997. Most
interest was paid for the deposits of individuals, businesses, and various
governments and their agencies. Short-term borrowings, including federal funds
purchased (short-term lending by other banks), securities sold under agreements
to repurchase, and Federal Home Loan Bank borrowings were used occasionally.
Short-term borrowings averaged $5,361,000 during 1999, $2,551,000 during 1998,
and $7,957,000 during 1997.
DEPOSITS
Average interest-bearing deposits increased to $603,728,000 in 1999, up 4.6
percent from $577,263,000 in 1998. Savings, N.O.W., and money market deposits
increased during 1999, averaging $347,817,000, up 8.3 percent from 1998 when
they averaged $321,143,000. Average time certificates of less than $100,000,
totaled $232,254,000, up 0.5 percent from $231,143,000 in 1998. Average time
certificates of $100,000 or more totaled $23,657,000, down 5.3 percent from
$24,977,000, during 1998.
The following table classifies average deposits for each of the periods
indicated: (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Rate Paid Rate Paid Rate Paid
- -----------------------------------------------------------------------------------------------------------------------------------
Demand deposits $ 231,447 $ 204,664 $ 183,894
Savings deposits 227,906 2.59 % 197,091 2.54 % 190,301 2.59 %
N.O.W. & money market deposits 119,911 1.70 124,052 1.91 132,804 1.99
Time certificates of $100,000 or more 23,657 4.79 24,977 5.17 23,926 4.63
Other time deposits 232,254 5.08 231,143 5.47 213,594 5.55
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 835,175 $ 781,927 $ 744,519
===================================================================================================================================
10
25
At December 31, 1999, the remaining maturities of time certificates of $100,000
or more were as follows: (in thousands)
- ---------------------------------------------------------------------------------
3 months or less $ 12,827
Over 3 through 6 months 3,525
Over 6 through 12 months 5,772
Over 12 months 1,334
- ---------------------------------------------------------------------------------
Total $ 23,458
=================================================================================
SHORT-TERM BORROWINGS
Occasionally, Suffolk uses short-term funding. This includes lines of credit
for federal funds with correspondent banks, retail sale-repurchase agreements,
the Federal Reserve Bank discount window, and the Federal Home Loan Bank.
Average balances of federal funds purchased were $1,868,000 and $1,411,000 for
1999 and 1998, respectively. Average balances of Federal Home Loan Bank
borrowings were $1,188,000 during 1999 and none during 1998. Retail repurchase
agreements averaged $2,305,000 during 1999 and $1,140,000 during 1998.
OTHER INCOME
Other income decreased to $6,771,000 during 1999, down 16.9 percent from
$8,148,000 during 1998 and up 6.6 percent $7,646,000 during 1997. Service
charges on deposit accounts were up 2.8 percent from 1998 to 1999, and down
10.7 percent from 1997 to 1998. Other service charges were down 56.6 percent
and up 11.2 percent for the same periods. Fiduciary fees in 1999 totaled
$702,000, up 24.0 percent from 1998 when they amounted to $566,000 and up 19.4
percent from 1997, at $474,000.
OTHER EXPENSE
Other expense during 1999 was $30,789,000, down 1.3 percent from 1998 when it
was $31,200,000, up 3.0 percent from $30,303,000 in 1997. During 1998,
equipment and other operating expense increased as the result of a conversion
to a new, client-server core data-processing system during the first quarter.
The primary reason for the decrease from 1998 to 1999 was the sale of a
merchant services portfolio during 1998 which reduced both non-interest income
and non-interest expense. Without this transaction, non-interest expense was
almost flat from 1998 to 1999, while the core business grew by approximately 7
percent, resulting in a modest improvement in efficiency.
INTEREST RATE SENSITIVITY
Interest rate "sensitivity" is determined by the date when each asset and
liability in Suffolk's portfolio can be repriced. Sensitivity increases when
the interest-earning assets and interest-bearing liabilities cannot be repriced
at the same time. While this analysis presents the volume of assets and
liabilities repricing in each period of time, it does not consider how quickly
various assets and liabilities might actually be repriced in response to
changes in interest rates. Management reviews its interest rate sensitivity
regularly and adjusts its asset/liability strategy accordingly. Because the
interest rates of assets and liabilities vary according to their maturity,
management may selectively mismatch the repricing of assets and liabilities to
take advantage of temporary or projected differences between short- and
long-term interest rates. The following table reflects the sensitivity of
Suffolk's assets and liabilities at December 31, 1999: (dollars in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
MATURITY: Less than 3 to 6 7 to 12 More Than Not Rate
3 Months Months Months 1 Year Sensitive Total
- --------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- --------------------------------------------------------------------------------------------------------------------------------
Domestic loans (1) (net of unearned discount) $ 190,170 $ 66,759 $ 110,497 $ 356,052 $ 4,047 $ 727,525
Investment securities (2) 3,917 24,030 7,720 126,231 3,468 165,366
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 194,087 $ 90,789 $ 118,217 $ 482,283 $ 7,515 $ 892,891
================================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
DEMAND DEPOSITS AND INTEREST-BEARING LIABILITIES
- --------------------------------------------------------------------------------------------------------------------------------
Demand deposits (3) $ 12,186 $ 12,186 $ 24,372 $ 193,653 $ - $ 242,397
N.O.W. & money market accounts (4) 6,344 6,344 12,688 101,502 - 126,878
Borrowings 13,500 13,500
Interest-bearing deposits (5) 87,058 57,267 75,637 288,022 - 507,984
- --------------------------------------------------------------------------------------------------------------------------------
Total demand deposits & interest-bearing
liabilities $ 119,088 $ 75,797 $ 112,697 $ 583,177 $ - $ 890,759
================================================================================================================================
Gap 74,999 14,992 5,520 (100,894) 7,515 2,132
================================================================================================================================
Cumulative difference between interest-earning
assets and interest-bearing liabilities 74,999 89,991 95,511 (5,383) 2,132
================================================================================================================================
Cumulative difference/total assets 7.65% 9.18% 9.74% (0.55%) 0.22%
================================================================================================================================
11
26
FOOTNOTES TO INTEREST RATE SENSITIVITY
(1) Based on contractual maturity and instrument repricing date, if applicable;
projected prepayments and prepayments of principal based on experience.
(2) Based on contractual maturity, and projected prepayments based on
experience. FRB and FHLB stock is not considered rate-sensitive.
(3) Based on experience of historical stable core deposit relationships.
(4) N.O.W. and money market accounts are assumed to decline over a period of
five years.
(5) Fixed-rate deposits and deposits with fixed pricing intervals are reflected
as maturing in the period of contractual maturity. Savings accounts are
assumed to decline over a period of five years.
As of December 31, 1999, interest-earning assets with maturities of less than
one year exceed interest-bearing liabilities of similar maturity. This
cumulative gap might result in increased net interest income if interest rates
increase. If interest rates decline, net interest income might decrease.
MARKET RISK
Market risk is the risk that a financial instrument will lose value as the
result of adverse changes in market prices, interest rates, foreign currency
exchange rates, commodity prices, or the prices of equity securities. Suffolk's
primary exposure to market risk is to changing interest rates.
Monitoring and managing this risk is an important part of Suffolk's
asset/liability management process. It is governed by policies established by
its Board of Directors. These policies are reviewed and approved annually. The
Board delegates responsibility for asset/liability management to the
Asset/Liability Committee ("ALCO"). ALCO then develops guidelines and
strategies to implement the policy.
INTEREST RATE RISK
Interest rate risk is the sensitivity of earnings to changes in interest rates.
As interest rates change, interest income and expense also change, thereby
changing net interest income ("NII"). NII is the primary component of Suffolk's
earnings. ALCO uses a detailed and dynamic model to quantify the effect of
sustained changes in interest rates on NII. While ALCO routinely monitors
simulated NII sensitivity two years into the future, it uses other tools to
monitor longer term interest rate risk.
The model measures the effect of changing interest rates on both interest
income and interest expense for all assets and liabilities, as well as for
derivative financial instruments that do not appear on the balance sheet. The
results are compared to ALCO policy limits that specify a maximum effect on NII
one year in the future, assuming no growth in assets or liabilities, and a 2
percent or 200 basis point (bp) change in interest rates, either upward or
downward. Following is Suffolk's NII sensitivity as of December 31, 1999.
Suffolk's board has approved a policy limit of 12.5 percent.
ESTIMATED NII
RATE CHANGE SENSITIVITY
+200 basis point rate shock 0.49%
-200 basis point rate shock (0.95%)
This estimate should not be interpreted as Suffolk's forecast, and should not
be considered as indicative of management's expectations for operating
results. These are hypothetical estimates that are based on many assumptions
including: the nature and time of changes in interest rates, the shape of the
"yield curve" (variations in interest rates for financial instruments of
varying maturity at a given moment in time), prepayments on loans and
securities, deposit outflows, pricing on loans and deposits, the reinvestment
of cash flows from assets and liabilities, among others. While these
assumptions are based on management's best estimate of current economic
conditions, Suffolk cannot give any assurance that these will actually predict
results, nor can they anticipate how the behavior of customers and competitors
may change in the future.
12
27
Factors that may affect actual results include: prepayment and refinancing of
loans other than as assumed, interest rate change caps and floors, repricing
intervals on adjustable rate instruments, changes in debt service on adjustable
rate loans, and early withdrawal of deposits. Actual results may also be
affected by actions ALCO takes in response to changes in interest rates, actual
or anticipated.
When appropriate, ALCO may use off-balance-sheet instruments such as interest
rate floors, caps, and swaps to hedge its position with regard to interest rate
risk. The Board of Directors has approved a hedging policy statement that
governs the use of such instruments. As of December 31, 1999, there were no
derivative financial instruments outstanding.
The following table illustrates the contractual sensitivity to changes in
interest rates of the Company's total loans, net of discounts, not including
overdrafts and loans not accruing interest, together totaling $4,053,000 at
December 31, 1999: (in thousands)
- -----------------------------------------------------------------------------------------------
After 1 but After
INTEREST RATE PROVISION Within 5 Years 5 Years Total
- -----------------------------------------------------------------------------------------------
Predetermined rates $ 241,002 $ 23,795 $ 264,797
Floating or adjustable rates 89,517 - 89,517
- -----------------------------------------------------------------------------------------------
Total $ 330,519 $ 23,795 $ 354,314
===============================================================================================
The following table illustrates the contractual sensitivity to changes in
interest rates on the Company's commercial, financial, agricultural, and real
estate construction loans not including non-accrual loans totaling
approximately $206,000 at December 31,1999: (in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Due Within After 1 but After
1 Year Before 5 Years 5 Years Total
- ---------------------------------------------------------------------------------------------------------------------
Commercial, financial & agricultural $ 125,327 $ 17,344 $ 676 $ 143,347
Real estate construction 13,646 - - 13,646
- ---------------------------------------------------------------------------------------------------------------------
Total $ 138,973 $ 17,344 $ 676 $ 156,993
=====================================================================================================================
ASSET/LIABILITY MANAGEMENT & LIQUIDITY
The asset/liability management committee reviews Suffolk's financial
performance and compares it to the asset/liability management policy. The
committee includes two outside directors, executive management, the
comptroller, and the heads of commercial lending, retail lending, and retail
banking. It uses computer simulations to quantify interest rate risk and to
project liquidity. The simulations also help the committee to develop
contingent strategies to increase net-interest income. The committee always
assesses the impact of any change in strategy on Suffolk's ability to make
loans and repay deposits. Only strategies and policies that meet regulatory
guidelines and that are appropriate under the economic and competitive
circumstances are considered by the committee. Suffolk has not used forward
contracts or interest rate swaps to manage interest rate risk.
READINESS FOR THE YEAR 2000 AND ACTUAL EXPERIENCE
Well in advance of December 31, 1999, Suffolk established a formal program to
identify and assess the effect of the year 2000 on its software, hardware, and
Suffolk's business. Much of Suffolk's data-processing is done by outside
vendors, and Suffolk was dependent on them to evaluate and address problems
that may arise when computers cannot distinguish between the years with the
same final two digits in the current century and in the next. Based on its
experience since January 1, 2000, management believes that these vendors
modified both software and hardware successfully as no operating problems
related to the date have occurred. The expense of modifying systems to identify
the year 2000 correctly did not have a significant effect on Suffolk's results
of operation, financial condition, or liquidity, in 1999, nor is it expected to
affect results in the future.
CAPITAL RESOURCES
Primary capital, including stockholders' equity, not including the net
unrealized gain on securities available for sale, net of tax, and the allowance
for possible loan losses, amounted to $86,442,000 compared to $78,768,000 at
year-end 1998 and $71,210,000 at year-end 1997. During 1999, Suffolk
repurchased 25,276 shares for an aggregate price of $674,000. Management
determined that this would increase leverage while preserving capital ratios
well above regulatory requirements.
13
28
The following table presents Suffolk's capital ratio, and other related ratios,
for each of the past five years: (dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
1999(1) 1998(1) 1997(1) 1996(1) 1995(1)
- -------------------------------------------------------------------------------------------------------------------------------
Primary capital at year-end $ 86,442 $ 78,768 $ 71,210 $ 78,405 $ 75,271
Primary capital at year-end as a percentage of year-end:
Total assets plus allowance for possible loan losses 8.75% 8.60% 8.17% 9.67% 9.27%
Loans, net of unearned discounts 11.88% 12.16% 11.65% 13.40% 14.59%
Total deposits 9.85% 9.53% 9.16% 10.95% 10.35%
===============================================================================================================================
(1) Capital ratios do not include the effect of SFAS No. 115 "Accounting for
Certain Investments in Debt and Investment Securities."
Suffolk measures how effectively it uses capital by two widely accepted
performance ratios -- return on average assets and return on average common
stockholders' equity. The returns in 1999 on average assets of 1.41 percent
and average common equity of 17.91 percent increased from 1998 when returns
were 1.37 percent and 17.66 percent, respectively.
All dividends must conform to applicable statutory requirements. Suffolk
Bancorp's ability to pay dividends depends on The Suffolk County National
Bank's ability to pay dividends. Under 12 USC 56-9, a national bank may not pay
a dividend on its common stock if the dividend would exceed net undivided
profits then on hand. Further, under 12 USC 60, a national bank must obtain
prior approval from the Office of the Comptroller of the Currency to pay
dividends on either common or preferred stock that would exceed the bank's net
profits for the current year combined with retained net profits (net profits
minus dividends paid during that period) of the prior two years. The amount
currently available is approximately $13,227,000.
RISK-BASED CAPITAL AND LEVERAGE GUIDELINES
The Federal Reserve Bank's risk-based capital guidelines call for bank holding
companies to require minimum ratios of capital to risk-weighted assets, which
include certain off-balance sheet activities, such as standby letters of
credit. The guidelines define capital as being "core," or "Tier 1," capital,
which includes common stockholders' equity; a limited amount of perpetual
preferred stock; minority interest in unconsolidated subsidiaries, less
goodwill; or "supplementary" or "Tier 2" capital, which includes subordinated
debt, redeemable preferred stock, and a limited amount of the allowance for
possible loan losses. All bank holding companies must meet a minimum ratio of
total qualifying capital to risk-weighted assets of 8.00 percent, of which at
least 4.00 percent should be in the form of Tier 1 capital. At December 31,
1999, Suffolk's ratios of core capital and total qualifying capital (core
capital plus Tier 2 capital) to risk-weighted assets were 10.15 percent and
11.05 percent, respectively.
DISCUSSION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation.
In June of 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133." This statement deferred the effective date of SFAS No. 133
to fiscal years beginning after June 15, 2000, with early application
encouraged. Suffolk is in the process of determining the impact, if any, the
implementation of SFAS No. 133 and SFAS No. 137 will have on its results of
operations.
BUSINESS RISKS AND UNCERTAINTIES
This annual report contains some statements that look to the future. These
statements may be based on assumptions and are subject to a variety of risks
and uncertainties. Suffolk's actual results of operations could differ
materially from what the reader may infer from this report. Because Suffolk is
in the commercial banking business, it is sensitive to two primary factors.
They are that (1) interest rates could change more quickly or by a greater
amount than management expects; and (2) the economy could change in an
unexpected way that would affect either the demand for loans or the ability of
borrowers to repay or to make deposits, as well as their willingness to pay for
other banking services. Further, it could take Suffolk longer than anticipated
to implement its strategic plans to increase revenue and manage non-interest
expense, or it may not be possible to implement those plans at all. Finally,
new and unanticipated legislation, regulation, or accounting standards may
require Suffolk to change its practices in ways that materially change the
results of operation.
14
29
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
1999 1998
ASSETS
Cash and Due From Banks $ 53,452,328 $ 58,298,278
Federal Funds Sold - 17,800,000
Investment Securities:
Available for Sale, at Fair Value 132,483,969 129,347,697
Held to Maturity (Fair Value of $32,723,000 and $22,015,000, respectively)
U.S. Government Agency Obligations 1,583,659 2,381,588
Obligations of States and Political Subdivisions 27,834,795 16,231,220
Corporate Bonds and Other Securities 3,467,949 3,240,249
------------ ------------
Total Investment Securities 165,370,372 151,200,754
Total Loans 728,620,876 649,006,822
Less: Unearned Discounts 1,095,396 1,486,875
Allowance for Possible Loan Losses 7,270,063 6,954,993
------------ ------------
Net Loans
720,255,417 640,564,954
Premises and Equipment, Net 14,344,706 15,249,549
Other Real Estate Owned, Net 202,889 340,962
Accrued Interest Receivable, Net 5,870,990 5,364,743
Excess of Cost Over Fair Value of Net Assets Acquired 1,538,309 1,900,241
Other Assets 19,763,933 18,712,805
------------ ------------
TOTAL ASSETS $980,798,944 $909,432,286
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Demand Deposits $242,396,732 $234,048,398
Savings, N.O.W.'s and Money Market Deposits 369,920,992 333,098,106
Time Certificates of $100,000 or more 23,458,239 25,861,028
Other Time Deposits 241,526,628 233,556,330
------------ ------------
Total Deposits 877,302,591 826,563,862
Federal Home Loan Bank Borrowings 13,500,000 -
Dividend Payable on Common Stock 1,273,142 1,096,804
Accrued Interest Payable 2,462,829 2,866,853
Other Liabilities 8,926,158 7,058,968
------------ ------------
TOTAL LIABILITIES 903,464,720 837,586,487
------------ ------------
Commitments and Contingent Liabilities (see note 10)
STOCKHOLDERS' EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized, 6,055,580
and 6,080,856 shares outstanding at December 31, 1999 & 1998, respectively) 19,026,050 19,026,050
Surplus 18,456,432 18,456,432
Undivided Profits 45,576,295 38,155,116
Treasury Stock at Par (1,554,840 shares and 1,529,564 shares, respectively) (3,887,104) (3,823,914)
Accumulated Other Comprehensive Income (Loss), Net of Tax (1,837,449) 32,115
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 77,334,224 71,845,799
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $980,798,944 $909,432,286
============ ============
See accompanying notes to consolidated financial statements.
15
30
CONSOLIDATED STATEMENTS OF INCOME
For the Years ended December 31,
1999 1998 1997
INTEREST INCOME
Federal Funds Sold $ 976,553 $ 1,547,366 $ 1,128,226
United States Treasury Securities 2,520,067 5,275,913 6,248,190
Obligations of States and Political Subdivisions (tax exempt) 736,671 668,630 489,265
U.S. Government Agency Obligations 2,235,815 1,789,543 1,597,169
Mortgage-Backed Securities 1,849,481 - -
Corporate Bonds and Other Securities 225,019 38,271 38,271
Loans 59,364,038 56,554,262 54,627,628
-------------------- -------------------- --------------------
Total Interest Income 67,907,644 65,873,985 64,128,749
INTEREST EXPENSE
Savings, N.O.W.'s and Money Market Deposits 7,938,325 7,373,572 7,566,736
Time Certificates of $100,000 or more 1,132,984 1,292,356 1,106,956
Other Time Deposits 11,793,155 12,645,571 11,858,867
Federal Funds Purchased 205,121 152,771 100,377
Interest on Other Borrowings 50,965 - 336,833
-------------------- -------------------- --------------------
Total Interest Expense 21,120,550 21,464,270 20,969,769
Net Interest Income 46,787,094 44,409,715 43,158,980
Provision for Possible Loan Losses 1,070,000 900,000 1,059,000
-------------------- -------------------- --------------------
Net Interest Income After Provision for Possible Loan Losses 45,717,094 43,509,715 42,099,980
OTHER INCOME
Service Charges on Deposit Accounts 4,063,678 3,954,639 4,427,931
Other Service Charges, Commissions & Fees 1,186,676 2,733,446 2,457,955
Fiduciary Fees 701,800 565,628 474,000
Other Operating Income 819,191 894,707 286,301
-------------------- -------------------- --------------------
Total Other Income 6,771,345 8,148,420 7,646,187
OTHER EXPENSE
Salaries & Employee Benefits 17,048,043 16,533,586 16,368,974
Net Occupancy Expense 2,391,873 2,487,646 2,528,459
Equipment Expense 2,375,113 2,316,824 2,087,664
Outside Services 1,623,096 2,486,712 2,688,718
FDIC Assessments 95,977 90,379 87,954
Amortization of Excess Cost
Over Fair Value of Net Assets Acquired 361,932 361,932 361,932
Other Operating Expense 6,892,988 6,922,516 6,179,108
-------------------- -------------------- --------------------
Total Other Expense 30,789,022 31,199,595 30,302,809
Income Before Provision for Income Taxes 21,699,417 20,458,540 19,443,358
Provision for Income Taxes 8,570,356 8,555,575 8,140,801
-------------------- -------------------- --------------------
NET INCOME $ 13,129,061 $ 11,902,965 $ 11,302,557
-------------------- -------------------- --------------------
Average: Common Shares Outstanding 6,068,778 6,094,826 6,306,299
Dilutive Stock Options 6,907 9,097 609
-------------------- -------------------- --------------------
Average Total Common Shares and Dilutive Options 6,075,685 6,103,923 6,306,908
EARNINGS PER COMMON SHARE Basic $ 2.16 $ 1.95 $ 1.79
Diluted $ 2.16 $ 1.95 $ 1.79
See accompanying notes to consolidated financial statements.
16
31
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other Comprehensive
Income,
Common Undivided Treasury (Loss)
Stock Surplus Profits Stock Net of Tax
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $19,026,050 $18,456,432 $ 37,353,193 $ (2,543,825) $ 457,726
Net Income - - 11,302,557 - -
Return of Dividend, Prior Period - - 2,000 - -
Dividend - - (4,332,886) - -
Purchase of Treasury Stock - - (13,333,170) (1,243,839) -
Net Change in Unrealized Gain on
Securities Available for Sale - - - - (3,771)
Comprehensive Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 19,026,050 18,456,432 30,991,694 (3,787,664) 453,955
Net Income - - 11,902,965 - -
Dividend - - (4,388,296) - -
Purchase of Treasury Stock - - (351,247) (36,250) -
Net Change in Unrealized Gain on
Securities Available for Sale - - - - (421,840)
Comprehensive Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $19,026,050 $18,456,432 $ 38,155,116 $ (3,823,914) $ 32,115
Net Income - - 13,129,061 - -
Dividend - - (5,096,978) - -
Purchase of Treasury Stock - - (610,904) (63,190) -
Net Change in Unrealized Gain (Loss) on
Securities Available for Sale - - - - (1,869,564)
Comprehensive Income
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $19,026,050 $18,456,432 $ 45,576,295 $ (3,887,104) $ (1,837,449)
Comprehensive
Total Income
- -----------------------------------------------------------------------------
Balance, December 31, 1996 $ 72,749,576
Net Income 11,302,557 $ 11,302,557
Return of Dividend, Prior Period 2,000
Dividend (4,332,886)
Purchase of Treasury Stock (14,577,009)
Net Change in Unrealized Gain on
Securities Available for Sale (3,771) (3,771)
-----------
Comprehensive Income $11,298,786
- -----------------------------------------------------------------------------
Balance, December 31, 1997 65,140,467
Net Income 11,902,965 $11,902,965
Dividend (4,388,296)
Purchase of Treasury Stock (387,497)
Net Change in Unrealized Gain on
Securities Available for Sale (421,840) (421,840)
-----------
Comprehensive Income $11,481,125
- -----------------------------------------------------------------------------
Balance, December 31, 1998 $ 71,845,799
Net Income 13,129,061 $13,129,061
Dividend (5,096,978)
Purchase of Treasury Stock (674,094)
Net Change in Unrealized Gain (Loss) on
Securities Available for Sale (1,869,564) (1,869,564)
-----------
Comprehensive Income $11,259,497
- -----------------------------------------------------------------------------
Balance, December 31, 1999 $ 77,334,224
See accompanying notes to consolidated financial statements.
17
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1999 1998 1997
NET INCOME $ 13,129,061 $ 11,902,965 $ 11,302,557
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Possible Loan Losses 1,070,000 900,000 1,059,000
Depreciation and Amortization 2,073,649 1,936,784 1,336,273
Amortization of Cost Over Fair Value of Net Assets Acquired 361,932 361,932 361,932
Accretion of Discounts (757,095) (1,013,601) (829,589)
Amortization of Premiums 721,463 206,152 291,941
(Increase) Decrease in Accrued Interest Receivable (506,247) 183,159 (325,719)
Increase in Other Assets (1,006,128) (2,117,516) (722,360)
(Decrease) Increase in Accrued Interest Payable (404,024) (207,789) 1,495,291
Increase (Decrease) in Income Taxes Payable 1,192,942 (642,355) -
Increase (Decrease) in Other Liabilities 850,587 (10,304,608) 7,261,522
---------- ----------- ----------
Net Cash Provided by Operating Activities 16,726,140 1,205,123 21,230,848
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities 894,423 4,710,692 4,898,415
Maturities of Investment Securities; Available for Sale 15,932,250 102,815,000 45,500,000
Purchases of Investment Securities; Available for Sale (27,757,283) (111,244,932) (61,253,203)
Maturities of Investment Securities; Held to Maturity 109,000,000 16,620,750 16,333,259
Purchases of Investment Securities; Held to Maturity (115,372,114) (17,089,190) (16,520,750)
Loan Disbursements and Repayments, Net (79,637,629) (36,397,474) (27,528,198)
Purchases of Premises and Equipment, Net (1,168,806) (1,004,681) (4,316,746)
Disposition of Other Real Estate Owned 93,073 350,856 1,795,018
----------- ----------- ------------
Net Cash Used in Investing Activities (98,016,086) (41,238,979) (41,092,205)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposit Accounts 50,738,729 48,969,042 66,577,164
Increase (Decrease) in Federal Funds Purchased 13,500,000 - (7,200,000)
Dividends Paid to Shareholders (4,920,639) (4,388,656) (4,323,549)
Treasury Shares Acquired (674,094) (387,497) (14,577,009)
----------- ----------- ------------
Net Cash Provided by Financing Activities 58,643,996 44,192,889 40,476,606
----------- ----------- ------------
Net (Decrease) Increase in Cash and Cash Equivalents (22,645,950) 4,159,033 20,615,249
Cash and Cash Equivalents Beginning of Year 76,098,278 71,939,245 51,323,996
----------- ----------- ----------
Cash and Cash Equivalents End of Year $ 53,452,328 $ 76,098,278 $ 71,939,245
=========== =========== ----------
Supplemental Disclosure of Cash Flow Information
Cash Received During the Year for Interest $ 67,401,397 $ 66,057,144 $ 63,803,030
=========== =========== ==========
Cash Paid During the Year for:
Interest $ 21,524,575 $ 21,672,059 $ 19,474,478
Income Taxes 7,078,929 9,197,930 8,863,325
----------- ----------- ------------
Total Cash Paid During Year for Interest & Income Taxes $ 28,603,504 $ 30,869,989 $ 28,337,803
=========== =========== ===========
Non-Cash Investing and Financing (loans re-classified as
"other real estate owned," including foreclosures) $ 138,073 $ 94,848 $ 453,414
Decrease in Market Value of Investments (3,059,888) (712,129) (6,392)
Decrease in Deferred Tax Liability Related to Market Value
of Investments Available for Sale 1,299,189 291,973 2,621
Dividends Declared But Not Paid 1,273,142 1,096,804 1,097,164
See accompanying notes to consolidated financial statements.
18
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Suffolk Bancorp and its subsidiary
conform to generally accepted accounting principles and general practices within
the banking industry. The following footnotes describe the most significant of
these policies.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported assets and liabilities
as of the date of the consolidated statements of condition. The same is true of
revenues and expenses reported for the period. Actual results could differ
significantly from those estimates.
(A) CONSOLIDATION -- The consolidated financial statements include the accounts
of Suffolk and its wholly owned subsidiary, The Suffolk County National Bank
(the "Bank"). In 1998, the Bank formed a Real Estate Investment Trust named Suf
folk Greenway, Inc. All intercompany transactions have been eliminated in
consolidation.
(B) INVESTMENT SECURITIES -- Suffolk reports debt securities and mortgage-backed
securities in one of the following categories: (i) "held to maturity"
(management has the intent and ability to hold to maturity), which are to be
reported at amortized cost; (ii) "trading" (held for current resale), which are
to be reported at fair value, with unrealized gains and losses included in
earnings; and (iii) "available for sale" (all other debt securities and
mortgage-backed securities), which are to be reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. Accordingly, Suffolk classified all of its
holdings of debt securities and mortgage-backed securities as either "held to
maturity," or "available for sale." At the time a security is purchased, a
determination is made as to the appropriate classification.
Premiums and discounts on debt and mortgage-backed securities are amortized as
expense and accreted as income over the estimated life of the respective
security using a method that approximates the level-yield method. Gains and
losses on the sales of investment securities are recognized upon realization,
using the specific identification method and shown separately in the
consolidated statements of income.
(C) LOANS AND LOAN INTEREST INCOME RECOGNITION -- Loans are stated at the
principal amount outstanding. Interest on loans not made on a discounted basis
is credited to income, based upon the principal amount outstanding during the
period. Unearned discounts on installment loans are credited to income using
methods that approximate a level yield. Recognition of interest income is
discontinued when reasonable doubt exists as to whether interest due can be
collected. Loans generally no longer accrue interest when 90 days past due.
When a loan is placed on non-accrual status, all interest previously accrued
in the current year, but not collected, is reversed against current year
interest income. Any interest accrued in prior years is charged against the
allowance for possible loan losses. Loans and leases start accruing interest
again when they become current as to principal and interest, and when, in the
opinion of management, the loans can be collected in full.
(D) ALLOWANCE FOR POSSIBLE LOAN LOSSES -- The balance of the Allowance for
Possible Loan Losses is determined by management's estimate of the amount of
financial risk in the loan portfolio and the likelihood of loss. The analysis
also considers the Bank's loan loss experience and may be adjusted in the
future depending on economic conditions. Additions to the Allowance are made by
charges to expense, and actual losses, net of recoveries, are charged to the
Allowance. Regulatory examiners may require the Bank to add to the allowance
based upon their judgment of information available to them at the time of their
examination.
In accordance with Statement of Financial Accounting Standards No. 114 ("SFAS
114"), titled "Accounting by Creditors for Impairment of a Loan," as amended by
Statement No. 118, titled "Accounting by Creditors for Impairment of
Loan-Income Recognition and Disclosures," an allowance is maintained for
impaired loans to reflect the difference, if any, between the principal balance
of the loan and the present value of projected cash flows, observable fair
value, or collateral value. SFAS 114 defines an impaired loan as a loan for
which it is probable that the lender will not collect all amounts due under the
contractual terms of the loan.
(E) PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated by the
declining-balance or straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized using the straight-line method
over the term of the lease or the estimated life of the asset, whichever is
shorter.
(F) OTHER REAL ESTATE OWNED -- Property acquired through foreclosure (other real
estate owned or "OREO"), is stated at the lower of cost or fair value less
selling costs. Credit losses arising at the time of the acquisition of property
are charged against the allowance for possible loan losses. Any additional
write-downs to the carrying value of these assets that may be required, as well
as the cost of maintaining and operating these foreclosed properties, are
charged to expense. Additional write-downs are recorded in a valuation reserve
account that is maintained asset by asset.
(G) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED -- The excess of cost
over fair value of net assets acquired (goodwill) is being amortized over ten
years.
19
34
(H) INCOME TAXES -- Suffolk uses an asset and liability approach to accounting
for income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. Deferred tax assets are recognized if it is more likely than
not that a future benefit will be realized. It is management's position that no
valuation allowance is necessary against any of Suffolk's deferred tax assets.
(I) SUMMARY OF RETIREMENT BENEFITS ACCOUNTING -- Suffolk's retirement plan is
noncontributory and covers substantially all eligible employees. The plan
conforms to the provisions of the Employee Retirement Income Security Act of
1974, as amended. Suffolk's policy is to accrue for all pension costs and to
fund the maximum amount allowable for tax purposes. Actuarial gains and losses
that arise from changes in assumptions concerning future events are amortized
over a period that reflects the long-term nature of pension expense used in
estimating pension costs.
Suffolk accrues for post-retirement benefits other than pensions by accruing
the cost of providing those benefits to an employee during the years that the
employee serves.
(J) CASH AND CASH EQUIVALENTS -- For purposes of the consolidated statement of
cash flows, cash and due from banks, and federal funds sold are considered to be
cash equivalents. Generally, federal funds are sold for one-day periods.
(K) TREASURY STOCK -- The balance of treasury stock is computed at par value.
The excess cost over par is subtracted from undivided profits.
(L) Stock Split -- On May 15, 1997, the common stock was split 2-for-1, and par
value was changed from $5.00 to $2.50. All share and per share information has
been restated to reflect the split.
(M) Earnings Per Share -- Basic earnings per share is computed by dividing net
income by the number of weighted average shares outstanding during the period.
Diluted earnings per share reflect the dilution that would occur if stock
options were exercised in return for common stock that would then share in
Suffolk's earnings. It is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of stock options exercisable during the period. Suffolk has no other
securities that could be converted into common stock, nor any contracts that
would result in the issuance of common stock.
(N) COMPREHENSIVE INCOME -- Comprehensive income includes net income and all
other changes in equity during a period except those resulting from investments
by owners and distributions to owners. Other comprehensive income includes
revenues, expenses, gains, and losses that under generally accepted accounting
principles are included in comprehensive income but excluded from net income.
Comprehensive income and accumulated other comprehensive income are reported
net of related income taxes. Accumulated other comprehensive income for the
Bank consists solely of unrealized holding gains or losses on available-for-sale
securities.
(O) RECLASSIFICATION OF PRIOR YEAR CONSOLIDATED FINANCIAL STATEMENTS -- Certain
reclassifications have been made to the prior year's consolidated financial
statements that conform with the current year's presentation.
20
35
NOTE 2 -- INVESTMENT SECURITIES
The amortized cost, estimated fair values, and gross unrealized gains and losses
of Suffolk's investment securities available for sale and held to maturity at
December 31, 1999 and 1998 were: (in thousands)
- -----------------------------------------------------------------------------------------------------
1999
- -----------------------------------------------------------------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
- -----------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury securities $ 31,329 $ 31,060 $ - $ (269)
U.S. gov't. agency debt 40,217 38,930 - (1,287)
Collateralized mortgage obligations 64,053 62,494 8 (1,567)
- -----------------------------------------------------------------------------------------------------
Balance at end of year 135,599 132,484 8 (3,123)
- -----------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of states and
political subdivisions 27,835 27,658 7 (184)
U.S. govt. agency obligations 1,583 1,597 14 -
Other securities 3,468 3,468 - -
- -----------------------------------------------------------------------------------------------------
Balance at end of year 32,886 32,723 21 (184)
- -----------------------------------------------------------------------------------------------------
Total investment securities $168,485 $165,207 $ 29 $ (3,307)
=====================================================================================================
- -------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
- -------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury securities $ 66,777 $ 67,023 $ 246 $ -
U.S. gov't. agency debt 43,421 43,366 61 (116)
Collateralized mortgage obligations 19,093 18,959 16 (150)
- -------------------------------------------------------------------------------------------------
Balance at end of year 129,291 129,348 323 (266)
- -------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of states and
political subdivisions 16,231 16,315 84 -
U.S. govt. agency obligations 2,382 2,460 78 -
Other securities 3,240 3,240 - -
- -------------------------------------------------------------------------------------------------
Balance at end of year 21,853 22,015 162 -
- -------------------------------------------------------------------------------------------------
Total investment securities $151,144 $151,363 $ 485 $ (266)
=================================================================================================
U.S. government agency obligations are mortgage-backed securities, which
represent participating interest in pools of first mortgage loans. The
amortized cost, maturities, and approximate fair value at December 31, 1999 are
as follows: (in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Available for Sale
- ---------------------------------------------------------------------------------------------------------------------
U.S. Collateralized
U.S. Treasury Govt. Agency Mortgage
Securities Debt Obligations(1)
- ---------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Maturity (in years) Cost Value Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------
Within 1 $ 6,003 $ 5,994 $ - $ - $ - $ -
After 1 but within 5 25,326 25,066 40,217 38,930 - -
After 5 but within 10 - - - - - -
After 10 - - - - 64,053 62,494
Other Securities - - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total $ 31,329 $ 31,060 $ 40,217 $ 38,930 $ 64,053 $ 62,494
=====================================================================================================================
- --------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
- --------------------------------------------------------------------------------------------------------------------------------
Obligations of U.S. Total
States & Political Govt. Agency Other Amortized
Subdivisions Obligations Securities Cost
- --------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
Maturity (in years) Cost Value Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------------------------
Within 1 $ 24,203 $ 24,146 $ - $ - $ - $ - $ 30,206
After 1 but within 5 340 342 1,583 1,597 - - $ 67,466
After 5 but within 10 492 488 - - - - $ 492
After 10 2,800 2,682 - - - - $ 66,853
Other Securities - - - - 3,468 3,468 $ 3,468
- --------------------------------------------------------------------------------------------------------------------------------
Total $ 27,835 $ 27,658 $ 1,583 $ 1,597 $ 3,468 $ 3,468 $168,485
================================================================================================================================
(1) Maturities shown are stated maturities. Securities backed by mortgages are
expected to have substantial periodic prepayments resulting in weighted
average lives considerably less than what would be surmised from the table
above.
As a member of the Federal Reserve system, the Bank owns Federal Reserve Bank
Stock with a book value of $638,000. The stock has no maturity and there is no
public market for the investment.
As a member of the Federal Home Loan Bank of New York, the bank owns Federal
Home Loan Bank of New York stock with a book value of $2,730,000. The stock has
no maturity and there is no public market for the investment.
Actual maturities of U.S. government agency obligations will differ from
contractual maturities because the mortgage-loan borrowers have the right to
prepay obligations with or without penalties and because the issuer can call the
security before it is due.
At December 31, 1999 and 1998, investment securities carried at $108,000,000 and
$96,007,000, respectively, were pledged to secure trust deposits and public
funds on deposit. No securities have been sold during the past three years.
21
36
NOTE 3 -- LOANS
At December 31, 1999 and 1998, loans included the following: (in thousands)
- ------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $131,429 $123,463
Commercial real estate 162,321 128,923
Real estate construction loans 17,956 12,500
Residential mortgages (1st and 2nd liens) 82,411 73,754
Home equity loans 20,834 21,980
Consumer loans 310,748 286,184
Lease finance - -
Other loans 2,921 2,203
- ------------------------------------------------------------------------------------------------
728,620 649,007
Unearned discounts (1,095) (1,487)
Allowance for possible loan losses (7,270) (6,955)
- ------------------------------------------------------------------------------------------------
Balance at end of year $720,255 $640,565
================================================================================================
Restructured loans, loans not accruing interest, and loans contractually past
due 90 days or more with regard to payment of principal and/or interest
amounted to $3,148,000 and $4,005,000 at December 31, 1999 and 1998,
respectively. Interest on loans that have been restructured or are no longer
accruing interest would have amounted to $105,000 during 1999, $143,000 during
1998, and $256,000 during 1997, under the contractual terms of those loans.
Interest income recognized on restructured and non-accrual loans was immaterial
for the years 1999, 1998, and 1997.
Suffolk makes loans to its directors and executives, as well as to other
related parties in the ordinary course of its business. Loans made to directors
and executives, either directly or indirectly, which exceed $60,000 in
aggregate for any one director, totaled $6,336,000 and $12,164,000 at December
31, 1999 and 1998, respectively. Unused portions of lines of credit to
directors and executives, directly or indirectly, totaled $8,197,000 and
$1,862,000. New loans totaling $31,612,000 were granted and payments of
$37,140,000 were received during 1999.
NOTE 4 -- ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the changes in the Allowance for Possible Loan Losses follows:
(in thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 6,955 $ 6,524 $ 6,113
Provision for possible loan losses 1,070 900 1,059
Loans charged-off (934) (673) (834)
Recoveries on loans 179 204 186
- --------------------------------------------------------------------------------
Balance at end of year $ 7,270 $ 6,955 $ 6,524
================================================================================
At December 31, 1999 and 1998, respectively, the Bank's
recorded investment in impaired loans and the related
valuation allowance calculated under SFAS No. 114 and
SFAS No. 118 are as follows: (in thousands)
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Recorded investment $ 170 $ 426
Valuation allowance 98 294
- -------------------------------------------------------------------------------
This allowance is included in the allowance for loan losses
on the statements of condition.
The average investment in impaired loans in 1999 was
$401,000, compared to $599,000 in 1998.
NOTE 5 -- PREMISES AND EQUIPMENT
The following table details premises and equipment: (in
thousands)
- --------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------
Land $ 3,333 $ 3,333
Premises 7,791 7,911
Furniture, fixtures & equipment 17,337 16,296
Leasehold improvements 1,292 1,122
- --------------------------------------------------------------------------------------------------
29,753 28,662
Accumulated depreciation
and amortization (15,408) (13,412)
- --------------------------------------------------------------------------------------------------
Balance at end of year $ 14,345 $ 15,250
==================================================================================================
Depreciation and amortization charged to operations
amounted to $2,074,000, $1,937,000, and $1,336,000 during
1999, 1998, and 1997, respectively.
NOTE 6 -- SHORT-TERM BORROWINGS
Presented below is information concerning short-term
interest-bearing liabilities, principally Federal Home Loan
Bank Borrowings, and Securities Sold Under Agreements to
Repurchase, with maturities of less than one year, and their
related weighted-average interest rates for the year 1999 and
1998: (dollars in thousands)
- ------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------
Daily average outstanding $ 5,361 $ 2,551
Total interest cost 256 153
Average interest rate paid 4.78% 5.99%
Maximum amount outstanding at any
month-end $40,616 $ 4,500
December 31, balance 13,500 -
Weighted-average interest rate
on balances outstanding at December 31 5.10% -
========================================================================
Suffolk has no assets pledged as collateral to the Federal Reserve Bank as of
December 31, 1999. Assets pledged as collateral to the Federal Home Loan Bank as
of December 31, 1999 totaled $16,505,000.
22
37
NOTE 7 -- STOCKHOLDERS' EQUITY
Suffolk has a Dividend Reinvestment Plan. Stockholders can reinvest dividends in
common stock of Suffolk at a 3 percent discount from market value on newly
issued shares. Share holders may also make additional cash purchases. No shares
were issued in 1999, 1998, or 1997.
At the end of December 31, 1999, Suffolk has a Stock Option Plan ("the Plan")
under which 600,000 shares of Suffolk's common stock were reserved for issuance
to key employees. Options are awarded by a committee appointed by the Board of
Directors. The Plan provides that the option price shall not be less than the
fair value of the common stock on the date the option is granted. All options
are exercisable for a period of ten years or less. The Plan provides for the
grant of stock appreciation rights which the holder may exercise instead of the
underlying option. When the stock appreciation right is exercised, the
underlying option is canceled. The optionee receives shares of common stock with
a fair market value equal to the excess of the fair value of the shares subject
to the option at the time of exercise (or the portion thereof so exercised) over
the aggregate option price of the shares set forth in the option agreement. The
exercise of stock appreciation rights is treated as the exercise of the
underlying option.
Options vest after one year and expire after ten years. The following table
presents the options granted, exercised, or expired during each of the past
three years:
- ----------------------------------------------------------------
Shares Wtd. Avg. Exercise
- ----------------------------------------------------------------
Balance at December 31, 1996 27,800 $19.50
Options granted 9,500 30.00
Options exercised - -
Options expired or terminated (2,600) 19.50
- ----------------------------------------------------------------
Balance at December 31, 1997 34,700 22.37
Options granted - -
Options exercised - -
Options expired or terminated - -
- ----------------------------------------------------------------
Balance at December 31, 1998 34,700 22.37
Options granted 11,000 26.25
Options exercised - -
Options expired or terminated - -
- ----------------------------------------------------------------
Balance at December 31, 1999 45,700 $23.30
================================================================
Options outstanding at December 31, 1999 have a weighted-average exercise price
of $23.30 and a remaining contractual life of 8.09 years; 34,700 of these
options were exercisable. The weighted-average, fair value of the options
granted during 1999 was $5.26. The fair value of each option was estimated on
the date granted using the Black-Scholes option pricing model. The following
weighted-average assumptions were used for grants in 1999: risk-free interest
rate of 4.63 percent; expected dividend yield of 3.42 percent; expected life of
ten years; and expected volatility of 20.70 percent. The weighted-average, fair
value of the options granted during 1997 was $9.39. The fair value of each
option was estimated on the date granted using the Black-Scholes option pricing
model. The following weighted-average assumptions were used for grants in 1997:
risk-free interest rate of 5.7 percent; expected dividend yield of 2.8 percent;
expected life of ten years; and expected volatility of 24.9 percent. The
weighted-average fair value of the options granted during 1996 was $6.55. The
following weighted-average assumptions were used for grants in 1996: risk-free
interest rate of 6.3 percent; expected dividend yield of 3.5; expected life of
ten years; and expected volatility of 32.2 percent.
Suffolk accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, Suffolk's net income and
earnings per share would have been reduced to the following pro forma amounts:
(in thousands except per share amounts)
- ------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
Net Income: As Reported $ 13,129 $ 11,903 $ 11,303
Pro Forma 13,096 11,876 11,275
- ------------------------------------------------------------------------------
Basic EPS: As Reported 2.16 1.95 1.79
Pro Forma 2.16 1.95 1.79
- ------------------------------------------------------------------------------
All dividends must conform to applicable statutory requirements. Under 12 USC
56-9, a national bank may not pay a dividend on its common stock if the dividend
would exceed net undivided profits then on hand. Further, under 12 USC 60, a
national bank must obtain prior approval from the Office of the Comptroller of
the Currency ("OCC") to pay dividends on either common or preferred stock that
would exceed the bank's net profits for the current year combined with retained
net profits (net profits minus dividends paid during that period) from the prior
two years. At December 31, 1999, approximately $13,227,000 was available for
dividends from the Bank to Suffolk Bancorp without prior approval of the OCC.
On October 23, 1995, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one right per common share. Each right, if made
exercisable by certain events, entitles the holder to acquire one-half of a
share of common stock for $35, adjustable to prevent dilution. The rights expire
in 2005 if they are not redeemed before then. The Plan protects stockholders
from possible, unsolicited attempts to acquire Suffolk. In the event of the
acquisition by any potential acquirer of 10 percent of the outstanding stock,
the rights then entitle the holder to purchase the acquiring company's stock at
a 50 percent discount upon a subsequent merger with that acquirer. In the event
of the acquisition of 20 percent or more of Suffolk's common stock, they entitle
the holder to purchase Suffolk's common stock at a 50 percent discount.
Following the acquisition of 20 percent but less than 50 percent of the common
shares, the Board can exchange one-half of a share of Suffolk for each valid
right.
23
38
NOTE 8 -- INCOME TAXES
The following table presents the provision for income taxes in the consolidated
statements of income which is comprised of the following: (in thousands)
- -------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------
Current: Federal $ 7,242 $ 6,571 $ 5,920
State 1,478 1,674 1,853
- -------------------------------------------------------------
8,720 8,245 7,773
Deferred: Federal 205 247 538
State (355) 63 (170)
- -------------------------------------------------------------
(150) 310 368
- -------------------------------------------------------------
Total $ 8,570 $ 8,555 $ 8,141
=============================================================
The total tax expense was greater than the amounts computed by applying the
Federal income tax rate because of the following:
- ----------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------
Federal income tax expense
at statutory rates 34% 34% 34%
Tax exempt interest (1%) (1%) (1%)
Amortization of excess cost over
fair value of net assets acquired 1% 1% 1%
State income taxes net of
federal benefit 5% 6% 7%
Other 0% 2% 1%
- ----------------------------------------------------------------------
Total 39% 42% 42%
======================================================================
The effect of temporary differences between tax and financial accounting that
create significant deferred-tax assets and liabilities at December 31, 1999 and
1998, and the recognition of income and expense for purposes of tax and
financial reporting, that resulted in net increases to Suffolk's net deferred
tax asset for the years ended December 31, 1999 and 1998 are presented below:
(in thousands)
- ---------------------------------------------------------------------------
1999 1998 Change
- ---------------------------------------------------------------------------
Deferred tax assets:
Provision for possible
loan losses $ 2,977 $ 2,848 $ 129
Securities available for sale 1,277 - 1,277
Depreciation 357 326 31
Post-retirement benefits 540 524 16
Deferred compensation 593 515 78
Purchase accounting 275 361 (86)
Other 123 351 (228)
- ---------------------------------------------------------------------------
Total deferred tax assets
before valuation allowance 6,142 4,925 1,217
Valuation allowance - - -
- ---------------------------------------------------------------------------
Total deferred tax assets
net of valuation allowance 6,142 4,925 1,217
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Pension 1,390 1,410 (20)
Securities available for sale - 22 (22)
- ---------------------------------------------------------------------------
Total deferred tax liabilities 1,390 1,432 (42)
- ---------------------------------------------------------------------------
Net deferred tax asset $ 4,752 $ 3,493 $ 1,259
===========================================================================
NOTE 9 -- EMPLOYEE BENEFITS
(A) RETIREMENT PLAN -- Suffolk has a noncontributory defined benefit pension
plan available to all full-time employees who are at least 21 years old and have
completed at least one year of employment. The plan is governed by the rules and
regulations in the Prototype Plan of the New York Bankers Association Retirement
System and the Retirement System Adoption Agreement executed by the Bank. For
purpose of investment, the plan contributions are pooled with those of other
participants in the system.
The following tables set forth the status of Suffolk Bancorp's combined plan as
of September 30, 1999 and September 30, 1998, the time at which the annual
valuation of the plan is made.
The following table sets forth the Plan's change in benefit obligation:
- ------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 11,130,492 $ 9,805,633
Service cost 706,713 624,093
Interest cost 761,401 744,645
Actuarial loss 272,009 623,492
Benefits paid (627,210) (667,371)
- ------------------------------------------------------------------------------
Benefit Obligation at end of year $ 12,243,405 $ 11,130,492
==============================================================================
The following table sets forth the Plan's change in Plan Assets:
- -------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------
Fair value of Plan Assets at beginning of year $ 14,653,280 $ 13,649,517
Actual return on Plan Assets 2,267,636 465,201
Employer contribution - 896,555
Benefits paid (627,210) (667,371)
- -------------------------------------------------------------------------------------
Fair value of Plan Assets at end of year $ 16,293,706 $ 14,343,902
=====================================================================================
The following table summarizes the funded status of the Plan:
- -----------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------
Funded status $ 4,050,301 $ 3,213,410
Unrecognized net transition (liability) asset (280,340) 233,929
Unrecognized prior service cost (52,494) (56,473)
Unrecognized net (gain) loss (532,011) (334,328)
- -----------------------------------------------------------------------------------
Prepaid cost $ 3,185,456 $ 3,056,538
===================================================================================
The following table summarizes the net periodic pension cost:
- --------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------
Service cost $ 773,131 $ 706,713 $ 624,093
Interest cost on projected
benefit obligations 839,619 761,401 744,645
Expected return on plan assets (1,397,643) (1,229,687) (1,176,041)
Net amortization & deferral (57,967) (57,967) (57,967)
- --------------------------------------------------------------------------------------
Net periodic pension cost $ 157,140 $ 180,460 $ 134,730
======================================================================================
24
39
The weighted-average discount rate for purposes of determining net periodic
pension cost was 7.0 percent in 1999 and 7.75 percent in 1998 and 1997. The rate
of increase in future compensation levels used in determining these amounts was
4.0 percent in 1999 and 1998, and 5.0 percent in 1997. The expected long-term
rate of return on assets is 7.5 percent for 1999 and 8.5 percent in 1998 and
1997.
(B) DIRECTOR'S RETIREMENT INCOME AGREEMENT OF THE BANK OF THE HAMPTONS -- On
April 11, 1994, Suffolk acquired Hamptons Bancshares, Inc., which had a
director's deferred compensation plan. The liability for this plan was
approximately $551,000 and $579,000 on December 31, 1999 and 1998. Interest
(approximately $54,000 in 1999 and 1998) is accrued over the term of the plan.
In 1999, the Bank paid approximately $79,000 to participants.
(C) DEFERRED COMPENSATION PLAN -- During 1986, the Board approved a deferred
compensation plan. Under the plan, certain employees and Directors of Suffolk
elected to defer compensation aggregating approximately $177,000 in exchange for
stated future payments to be made at specified dates. The rate of return on the
initial deferral was guaranteed. For purposes of financial reporting, interest
(approximately $204,000 in 1999, $191,000 in 1998, and $268,000 in 1997) at the
plan's contractual rate is being accrued on the deferral amounts over the
expected plan term. During 1999, Suffolk made payments of approximately $74,000
to participants of the plan.
Suffolk has purchased life insurance policies on the plan's participants based
upon reasonable actuarial benefit and other financial assumptions where the
present value of the projected cash flows from the insurance proceeds
approximates the present value of the projected cost of the employee benefit.
Suffolk is the named beneficiary on the policies. Net insurance income related
to the policies aggregated approximately $33,000, $36,000, and $31,000, in
1999, 1998, and 1997, respectively.
(D) POST-RETIREMENT BENEFITS OTHER THAN PENSION -- The following table sets
forth the post-retirement benefit liability included in other liabilities in the
accompanying consolidated statements of condition as of December 31, 1999 and
1998:
- -----------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation
(the "APBO")
Retirees $ (745,693) $ (363,820)
Fully eligible active plan participants (547,413) (206,589)
Other active participants (766,463) (1,224,459)
- -----------------------------------------------------------------------------------
Total APBO $(2,059,569) $(1,794,868)
Unrecognized net loss 119,018 64,337
Unrecognized transition obligation 11,006 11,914
- -----------------------------------------------------------------------------------
Post-retirement benefit liability $(1,929,545) $(1,718,617)
===================================================================================
Net periodic post-retirement benefit cost (the "net periodic cost") for the
years ended December 31, 1999, 1998, and 1997 includes the following components:
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
Service cost of benefits earned $ 85,169 $ 80,746 $125,975
Interest cost on liability 131,389 114,118 142,316
Unrecognized loss 908 908 15,804
Unrecognized service liability - - 9,004
- ----------------------------------------------------------------------------
Net periodic cost $217,466 $195,772 $293,099
============================================================================
The average health-care, cost-trend rate assumption significantly affects the
amounts reported. For example, a 1 percent increase in this rate would have
increased the accumulated benefit obligation by $158,000 at December 31, 1999,
and increased the net periodic cost by $24,000 for the year. The post-retirement
benefit cost components for 1999 were calculated assuming average health-care,
cost-trend rates going up 8 percent and decreasing 2 percent after
approximately four years.
(E) DEFERRED BONUS PLANS -- During 1998, the Board approved a non-qualified
deferred compensation plan. Under this plan, certain employees and Directors of
Suffolk may elect to defer some or all of their compensation in exchange for a
future payment of the compensation deferred, with accrued interest, at
retirement. During 1999 participants deferred compensation totaling $201,000. No
payments have been made to any of the participants.
NOTE 10 -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding commitments and
contingent liabilities, such as standby letters-of-credit and commitments to
extend credit, which are not reflected in the accompanying consolidated
financial statements. No material losses are anticipated as a result of these
transactions. Suffolk is contingently liable under standby letters-of-credit in
the amount of $4,054,000, and $5,144,000 at December 31, 1999 and 1998,
respectively. Suffolk has commitments to make or to extend credit in the form of
revolving open-end lines secured by 1 to 4 family residential properties,
commercial real estate, construction and land development loans, and lease
financing arrangements in the amount of $34,145,000 and $29,369,000, and
commercial loans of $13,160,000 and $10,107,000 as of December 31, 1999 and
1998, respectively.
In the opinion of management, based upon legal counsel, liabilities arising from
legal proceedings against Suffolk would not have a significant effect on the
financial position of Suffolk.
During 1999, Suffolk was required to maintain balances with the Federal Reserve
Bank of N.Y. for reserve and clearing requirements. These balances averaged
$13,741,000 in 1999.
25
40
Total rental expense for the years ended December 31, 1999, 1998, and 1997
amounted to $603,000, $592,000, and $637,000, respectively.
At December 31, 1999, Suffolk was obligated under a number of noncancelable
operating leases for land and buildings used for bank purposes. Minimum annual
rentals, exclusive of taxes and other charges under noncancelable operating
leases, are summarized as follows: (in thousands)
- --------------------------------------------------
Minimum Annual Rentals
- --------------------------------------------------
2000 $ 597
2001 440
2002 349
2003 290
2004 and thereafter 634
==================================================
NOTE 11 -- REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital requirements that involve quantitative measures of the Bank's assets,
liabilities, and certain off balance-sheet items calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. Management believes that since that
notification no circumstances have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the following
table: (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Action Provisions
Amount Ratio Amount Ratio Amount Ratio
===========================================================================================================================
As of December 31, 1999
Total Capital (to risk-weighted assets) $88,615 11.05% $61,905 8.00% $77,381 10.00%
Tier 1 Capital (to risk-weighted assets) 81,345 10.15% 30,952 4.00% 46,429 6.00%
Tier 1 Capital (to average assets) 81,345 8.74% 30,952 4.00% 47,010 5.00%
===========================================================================================================================
As of December 31, 1998
Total Capital (to risk-weighted assets) $76,423 10.55% $57,941 8.00% $72,426 10.00%
Tier 1 Capital (to risk-weighted assets) 69,468 9.59% 28,970 4.00% 43,455 6.00%
Tier 1 Capital (to average assets) 69,468 7.83% 28,970 4.00% 36,213 5.00%
===========================================================================================================================
NOTE 12 -- CREDIT CONCENTRATIONS
Suffolk's principal investments are loans and a portfolio of short- and
medium-term debt of the United States Treasury, states and other political
subdivisions, U.S. government agencies, and corporations.
Consumer loans, net of unearned discounts, comprised 42.6 percent of Suffolk's
loan portfolio and 31.7 percent of assets. A majority are indirect
dealer-generated loans secured by automobiles. Most of these loans are made to
residents of Suffolk's primary lending area. Each loan is small in amount.
Borrowers represent a cross-section of the population and are employed in a
variety of industries. The risk presented by any one loan is correspondingly
small, and therefore, the risk that this portion of the portfolio presents to
Suffolk depends on the financial stability of the population as a whole, not
any one entity or industry. Loans secured by real estate comprise 39.0 percent
of the portfolio and 28.8 percent of assets, 22.3 percent of which are for
26
41
commercial real estate. Commercial real estate loans present greater risk than
residential mortgages. Suffolk has at tempted to minimize the risks of these
loans by considering several factors, including the creditworthiness of the
borrower, location, condition, value, and the business prospects for the
security property. Commercial, financial, and agricultural loans, unsecured or
secured by collateral other than real estate, comprise 18.0 percent of the loan
portfolio and 13.4 percent of assets. These loans present significantly greater
risk than other types of loans. Average credits are greater in size than
consumer loans, and unsecured loans may be more difficult to collect. Suffolk
obtains, whenever possible, both the personal guarantees of the principal(s),
and also cross-guarantees among the principals' business enterprises. U.S.
Treasury securities represented 18.8 percent of the investment portfolio and
3.2 percent of assets. U.S. government agency debt securities represented 23.5
percent of the investment portfolio and 4.0 percent of assets. Collateralized
mortgage obligations represented 37.8 percent of the investment portfolio and
6.4 percent of assets. These offer little or no financial risk. Municipal
obligations constitute 16.8 percent of the investment portfolio and 2.8 percent
of assets. These obligations present slightly greater risk than U.S. Treasury
securities, or those secured by the U.S. government, but significantly less
risk than loans because they are backed by the full faith and taxing power of
the issuer, each of which is located in the state of New York. Suffolk's policy
is to hold these securities to maturity.
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of Suffolk's
financial instruments. SFAS No. 107 "Disclosures About Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation: (in thousands)
- ---------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------
Cash & cash equivalents $ 53,452 $ 53,452 $ 76,098 $ 76,098
Investment securities
available for sale 132,484 132,484 129,348 129,348
Investment securities
held to maturity 32,886 32,723 21,853 22,015
Loans 720,255 716,727 649,007 654,402
Accrued interest receivable 5,871 5,871 5,365 5,365
Deposits 877,303 877,499 826,564 827,100
Accrued interest payable 2,463 2,463 2,867 2,867
=======================================================================================
LIMITATIONS
The following estimates are made at a specific point in time and may be based on
judgments regarding losses expected in the future, risk, and other factors that
are subjective in nature. The methods and assumptions used to produce the fair
value estimates follow.
SHORT-TERM INSTRUMENTS
Short-term financial instruments are valued at the carrying amounts included in
the statements of condition, which are reasonable estimates of fair value due to
the relatively short term of the instruments. This approach applies to cash and
cash equivalents; federal funds purchased; accrued interest receivable;
non-interest-bearing demand deposits; N.O.W., money market, and savings
accounts; accrued interest payable, and other borrowings.
LOANS
Fair values are estimated for portfolios of loans with similar characteristics.
Loans are segregated by type.
The fair value of performing loans was calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest-rate risk of the loan. Estimated maturity is
based on the Bank's history of repayments for each type of loan, and an estimate
of the effect of the current economy.
Fair value for significant non-performing loans is based on recent external
appraisals of collateral, if any. If appraisals are not available, estimated
cash flows are discounted using a rate commensurate with the associated risk.
Assumptions regarding credit risk, cash flows, and discount rates are made using
available market information and specific borrower information.
INVESTMENT SECURITIES
The fair value of the investment portfolio, including mortgage-backed
securities, was based on quoted market prices or market prices of similar
instruments.
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The carrying amount and fair value of loans were as follows at December 31, 1999
and 1998: (in thousands)
- ----------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ----------------------------------------------------------------------------------
Commercial, financial
& agricultural $131,429 $129,810 $123,463 $123,614
Commercial real estate 162,321 161,807 128,923 132,665
Real estate
construction loans 17,956 19,580 12,500 13,113
Residential mortgages
(1st & 2nd liens) 82,411 81,118 73,754 75,222
Home equity loans 20,834 20,835 21,980 21,976
Consumer loans 310,748 307,926 286,184 285,605
Other loans 2,921 2,921 2,203 2,207
- ----------------------------------------------------------------------------------
Totals $728,620 $723,997 $649,007 $654,402
==================================================================================
DEPOSIT LIABILITIES
The fair value of certificates of deposit less than $100,000 was calculated by
discounting cash flows with applicable origination rates. At December 31, 1999,
the fair value of certificates of deposit less than $100,000 totaling
$241,155,000 had a carrying value of $241,527,000. At December 31, 1998, the
fair value of certificates of deposit more than $100,000 totaling $24,028,000
had a carrying value of $23,458,000.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND WRITTEN FINANCIAL
GUARANTEES
The fair value of commitments to extend credit was estimated by either
discounting cash flows or using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
current creditworthiness of the counterparties.
The estimated fair value of written financial guarantees and letters of credit
is based on fees currently charged for similar agreements. The contractual
amounts of these commitments were $17,214,000 and $15,251,000 at December 31,
1999 and 1998. The fees charged for the commitments were not material in amount.
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The comparative results for the four quarters of 1999 and 1998 are as follows:
(in thousands of dollars except for share and pershare data)
- --------------------------------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- --------------------------------------------------------------------------------------------------------
Interest income $ 16,362 $ 16,573 $ 17,367 $ 17,606
Interest expense 5,201 5,110 5,333 5,477
- --------------------------------------------------------------------------------------------------------
Net-interest income 11,161 11,463 12,034 12,129
Provision for possible loan losses 270 225 275 300
- --------------------------------------------------------------------------------------------------------
Net-interest income after provision
for possible loan losses 10,891 11,238 11,759 11,829
Other income 1,465 1,679 1,782 1,845
Other expense 7,452 7,595 7,629 8,113
Provision for income taxes 1,881 2,115 2,330 2,244
- --------------------------------------------------------------------------------------------------------
Net income $ 3,023 $ 3,207 $ 3,582 $ 3,317
========================================================================================================
Basic per-share data:
- --------------------------------------------------------------------------------------------------------
Net income $ 0.50 $ 0.53 $ 0.59 $ 0.54
Cash dividends $ 0.210 $ 0.210 $ 0.210 $ 0.210
Average shares 6,076,842 6,070,080 6,065,596 6,062,352
- --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -------------------------------------------------------------------------------------------------------
Interest income $ 16,392 $ 16,247 $ 16,882 $ 16,353
Interest expense 5,659 5,291 5,291 5,223
- -------------------------------------------------------------------------------------------------------
Net-interest income 10,733 10,956 11,591 11,130
Provision for possible loan losses 300 300 300 -
- -------------------------------------------------------------------------------------------------------
Net-interest income after provision
for possible loan losses 10,433 10,656 11,291 11,130
Other income 1,918 2,021 2,210 1,999
Other expense 7,250 7,492 7,998 8,460
Provision for income taxes 2,195 2,280 2,429 1,651
- -------------------------------------------------------------------------------------------------------
Net income $ 2,906 $ 2,905 $ 3,074 $ 3,018
=======================================================================================================
Basic per-share data:
- -------------------------------------------------------------------------------------------------------
Net income $ 0.48 $ 0.47 $ 0.51 $ 0.49
Cash dividends $ 0.180 $ 0.180 $ 0.180 $ 0.180
Average shares 6,095,356 6,095,356 6,095,356 6,093,253
- -------------------------------------------------------------------------------------------------------
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NOTE 15 - SUFFOLK BANCORP (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
Condensed Statements of Condition as of December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Assets
Due From Banks $ 1,388 $ 1,343 $ 1,476
Investment in Subsidiaries: SCNB 77,289 71,566 64,707
Other Assets 145 74 71
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 78,822 $ 72,983 $ 66,254
===================================================================================================================
Liabilities and Stockholders' Equity
Dividends Payable $ 1,273 $ 1,097 $ 1,097
Other Liabilities 215 40 17
Stockholders' Equity 77,334 71,846 65,140
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 78,822 $ 72,983 $ 66,254
===================================================================================================================
Condensed Statements of Income for the Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Income
Dividends From Subsidiary Bank $ 5,635 $ 4,775 $ 18,910
- -------------------------------------------------------------------------------------------------------------------
5,635 4,775 18,910
Expense
Other Expense 275 153 146
- -------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net Income of Subsidiaries 5,360 4,622 18,764
Equity in Undistributed Earnings of Subsidiaries 7,769 7,281 (7,462)
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 13,129 $ 11,903 $ 11,302
===================================================================================================================
Condensed Statements of Cash Flows for the Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net Income $ 13,129 $ 11,903 $ 11,302
Less: Equity in Undistributed Earnings of Subsidiaries (7,769) (7,281) 7,462
Other, Net 280 20 3
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,640 4,642 18,767
- -------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Repurchase of Common Stock (674) (387) (14,577)
Dividends Paid (4,921) (4,388) (4,324)
- -------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Financing Activities (5,595) (4,775) (18,901)
Net Increase (Decrease) in Cash and Cash Equivalents 45 (133) (134)
Cash and Cash Equivalents, Beginning of Year 1,343 1,476 1,610
- -------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 1,388 $ 1,343 $ 1,476
===================================================================================================================
Note: No income tax provision has been recorded on the books of Suffolk Bancorp
since it files a return consolidated with its subsidiaries.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Suffolk Bancorp:
We have audited the accompanying consolidated statements of condition of
Suffolk Bancorp and its subsidiary (the Company) as of December 31, 1999 and
1998 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
auditing standards generally accepted in the United States of America.
ARTHUR ANDERSEN LLP
New York, New York
January 17, 2000
REPORT OF MANAGEMENT
To the Stockholders and Board of Directors of Suffolk Bancorp:
The management of Suffolk Bancorp is responsible for the preparation and
integrity of the consolidated financial statements and all other information in
this annual report, whether audited or unaudited. The financial statements have
been prepared in accordance with generally accepted accounting principles and,
where necessary, are based on management's best estimates and judgment. The
financial information contained elsewhere in this annual report is consistent
with that in the consolidated financial statements.
Suffolk Bancorp's independent auditors have been engaged to perform an audit of
the consolidated financial statements in accordance with auditing standards
generally accepted in the United States of America, and the auditors' report
expresses their opinion as to the fair presentation of the consolidated
financial statements and conformity with generally accepted accounting
principles.
Suffolk Bancorp maintains systems of internal controls that provide reasonable
assurance that assets are safeguarded and keeps reliable financial records for
preparing financial statements. Internal audits are conducted to continually
evaluate the adequacy and effectiveness of such internal controls, policies,
and procedures.
The examination and audit committee of the Board of Directors, which is
composed entirely of directors who are not employees of Suffolk Bancorp, meets
periodically with the independent auditors, internal auditors, and management
to discuss audit and internal accounting controls, regulatory audits, and
financial reporting matters.
Thomas S. Kohlmann J. Gordon Huszagh
President & Chief Executive Officer Executive Vice President
& Chief Financial Officer
Riverhead, New York
January 17, 2000
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