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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, 1997 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 Identification No.)
incorporation or organization)
6 West Second Street, Riverhead, New York 11901
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 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 March 6, 1998
$ 2.50 Par Value 6,095,356
The aggregate market value of the Registrant's Common Stock (based on the most
recent sale at $31.63 on March 6, 1998) held by non-affiliates was approximately
$192,796,110.
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DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held April 14, 1998, filed on March 13, 1998. (Part III)
ITEM 1. BUSINESS
Suffolk Bancorp ("Registrant")
Registrant was incorporated on January 2, 1985 for the purpose of becoming a
bank holding company. On that date, the Registrant acquired, and now owns, all
of the outstanding capital stock of The Suffolk County National Bank. On July
14, 1988, the Registrant acquired and now owns all the outstanding capital stock
of Island Computer Corporation of New York, Inc. The business of the Registrant
consists primarily of the ownership, supervision, and control of its
subsidiaries. On April 11, 1994, the Registrant 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.
The registrant's chief competition is 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.
Registrant and its subsidiaries had 355 full-time and 45 part-time employees as
of December 31, 1997.
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,
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, Riverhead, Port Jefferson, Sag Harbor, 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
plans 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.
Registrant is a bank holding company registered under the BHC Act, and is
subject to supervision and regulation by the
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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.
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 which 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 so closely related to banking, managing, or controlling banks
as to be a proper incident thereto.
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%
or more of the company's consolidated net worth.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") expanded the Federal Reserve Board's 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, FIRREA increased the amount of civil money penalties which
the Federal Reserve Board can assess for such practices or violations. The
penalties can be as high as $1 million per day. FIRREA also expanded the scope
of individuals and entities against which such penalties may be assessed.
ANNUAL REPORTING; 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 non-traditional activities, as
well as reflect the actual performance and expected risk of loss on multi-family
mortgages. The new law also required each federal banking agency to specify, by
regulation, the levels at which an insured institution would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the regulations
adopted by the banking agencies, SCNB 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."
Registrant has control of SCNB 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
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result in supervisory or enforcement actions by the Federal Reserve Board.
ACQUISITIONS 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 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% 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 the banks concerned, the convenience and needs of the communities to
be served, and various competitive factors. 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.
INTERSTATE ACQUISITIONS
The Federal Reserve Board will allow only the acquisition by a bank holding
company of an interest in any bank located in another state if the statutory
laws of the state in which the target bank is located expressly authorize such
acquisition. New York banking laws permit, in certain circumstances,
out-of-state bank holding companies to acquire certain existing banks and bank
holding companies in New York.
BANKING REGULATION
SCNB is a national bank, which is subject to regulation and supervision by the
Office of the Comptroller of the Currency. SCNB 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 Registrant or its subsidiaries.
Section 23B requires that certain transactions between SCNB's 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 Registrant 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 FDIC periodically examines and evaluates insured banks. Based upon such an
evaluation, the FDIC may revalue the assets of an insured institution and
require that it establish specific reserves to compensate for the difference
between the FDIC-determined value and the book value of such assets. Effective
December 19, 1992, FDICIA requires that these on-site examinations be conducted
every 18 months until December 31, 1993, except that certain
less-than-satisfactory institutions must be examined every 12 months.
Thereafter, the examinations are to be conducted every 12 months, except that
certain well capitalized banks may be examined every 18 months. FDICIA
authorizes the FDIC to assess the institution for its costs of conducting the
examinations. The rules and regulations of the Comptroller also provide for
periodic examinations by those agencies.
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, the appropriate federal
banking regulators are required to promulgate by December 1, 1993 regulations
specifying opera-
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tional and management standards (addressing internal controls, loan
documentation, credit underwriting and interest rate risk) and asset quality,
earnings and stock valuation standards (including a minimum ratio of market
value to book value of the publicly traded shares of such depository
institutions and holding companies). The proposed regulations did not address
standards for a minimum ratio of market value to book value because the Board
found that market value is affected by factors unrelated to safety and
soundness.
EXPANDING ENFORCEMENT AUTHORITY
One of the major additional burdens imposed on the banking industry by FDICIA is
the increased ability of banking regulators to monitor the activities of banks
and their holding companies. In addition, the Federal Reserve Board, Comptroller
and FDIC are possessed of 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 which it determines has engaged in an
unsafe or unsound practice. The agencies can also assess civil money penalties
of up to $1 million per day, issue cease and desist or removal orders, seek
injunctions, and publicly disclose such actions. FDICIA, FIRREA and other laws
have expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
RECENT LEGISLATION
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of Registrant and its subsidiaries are
particularly susceptible to being affected by enactment of federal and state
legislation which 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.
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, notwithstanding 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 banks but will 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, pre-existing contrary state law notwithstanding. This law becomes
automatically effective in all states on June 1, 1997, unless (1) the law
becomes effective in a given state at any earlier date through legislation in
that state; or (2) the law does not become effective at all in a given state if
by legislation enacted before June 1, 1997, that state opts 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.
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 FRB's
monetary policies and the relative costs of different types of funds. An
important function of the FRB 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 objections 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 FRB
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 Suffolk and its subsidiaries in particular.
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STATISTICAL DISCLOSURE
Pages 4 through 13 of the Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
ITEM 2. PROPERTIES
Registrant
Registrant as such has no physical properties. Office facilities of the
Registrant 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 15 buildings under lease agreements.
In the opinion of management of the Registrant, the physical facilities are
suitable and adequate and at present are being fully utilized. The Company,
however, is evaluating future needs, and anticipates 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 the Registrant 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 16 of this Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
At March 11, 1998, there were approximately 1,820 equity holders of record of
the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
Page 25 of this Annual Report to Shareholders for the fiscal year ended December
31, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 5 through 13 of this Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
MARKET RISK
Suffolk originates and invests in interest-earning assets and solicits
interest-bearing deposits. There is risk when interest rates fluctuate to the
extent that there is a difference between the amount of interest-earnings assets
and interest-bearing liabilities that are paid or withdrawn before maturity,
mature, or reprice in any given time period. The main objective of Suffolk's
asset/liability management program is to maximize net interest income while
limiting the risks of changing
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interest rates and liquidity to acceptable levels, while meeting Suffolk's need
for funds.
Suffolk monitors the risks of changing interest rates using several techniques,
including an interest-rate sensitivity model and a traditional interest-rate
sensitivity gap analysis. Using the model, Suffolk projects net interest income,
and then estimates the effect of various changes in interest rates, as well as
changed in the composition of assets and liabilities. Suffolk also uses the
model to calculate the change in net portfolio value ("NPV") in a range of
rate-change scenarios. NPV is the present value of cash flows from assets and to
liabilities in the future. Traditional gap analysis computes the difference, or
interest-rate sensitivity gap, between assets and liabilities which reprice in a
given period of time, and also cumulatively through the end of each period of
time.
The following table shows as the "base case" an estimate of Suffolk's NPV at
December 31, 1997, using current discount rates and an estimate of Suffolk net
income for 1998 assuming no changes in interest rates or the composition of
assets or liabilities. It also shows what would happen in the case of "rate
shocks" of 100 and 200 basis points, plus or minus. This analysis assumes that
the change in rates was immediate, and that the change in rates was the same for
instruments of all maturities. The information in this table is based on
estimates and assumptions that Suffolk believes are reasonable. It constitutes a
"forward-looking statement" within the meaning of that term as set forth in Rule
175 of the Securities Act of 1933 and Rule 3-b6 of the Securities Act of 1934,
as amended.
<TABLE>
<CAPTION>
Market Risk (Rate Shock Analysis)
December 31, 1997
(dollars in thousands)
- --------------------------------------------------------------------------------------------------
Net Portfolio Value 12/31/97 Net Interest Income - 1998
Change Change
From From
- --------------------------------------------------------------------------------------------------
Rate Scenario Amount Base Case Amount Base Case
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
+200 basis point rate shock $ 74,170 15.4% $ 46,565 5.1%
+100 basis point rate shock 69,329 7.8% 45,430 2.6%
Base Case 64,287 44,295
- -100 basis point rate shock 59,034 (8.2%) 43,160 (2.6%)
- -200 basis point rate shock 53,562 (16.7%) 42,025 (5.1%)
- --------------------------------------------------------------------------------------------------
</TABLE>
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 $3,608,000 at
December 31, 1997: (in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
After 1 but After
INTEREST RATE PROVISION Within 5 Years 5 Years Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Predetermined rates $ 278,645 $ 28,296 $ 306,941
Floating or adjustable rates 43,803 4,723 48,526
- --------------------------------------------------------------------------------------------------
Total 322,448 $ 33,019 $ 355,467
==================================================================================================
</TABLE>
The following table illustrates the contractual sensitivity to changes in
interest rates on the Company's commercial, financial, and agricultural; and
real estate construction loans not including non-accrual loans totaling
approximately $648,000 at December 31, 1997: (in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Due Within After 1 but After
1 year Before 5 Years 5 years Total
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financal & $ 99,162 $ 3,515 $ 8,250 $ 110,927
agricultural
Real estate construction 5,569 4,077 -- 9,646
- --------------------------------------------------------------------------------------------------
Total $ 104,731 $ 7,592 $ 8,250 $ 120,573
- --------------------------------------------------------------------------------------------------
</TABLE>
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 14 to 25 of this Annual Report to Shareholders for the fiscal year ended
December 31, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for fiscal years beginning after
December 15, 1997 and restatement of financial statements or information for
earlier periods provided for comparative purposes is required. The provisions of
these statements will not affect Suffolk's results of operation or financial
condition.
In February 1998, the Financial Accountings Standards Board issued Statement of
Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions
and Other Post-retirement Benefits" ("SFAS No. 132"). SFAS No. 132 supercedes
the disclosure requirements for pension and other post-retirement plans as set
forth in SFAS No. 87, "Employers' Accounting For Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions." SFAS No. 132 does
not address measurement or recognition for pension and other post-retirement
benefit plans.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available.
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 1 - 9 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 14, 1998 is incorporated herein by reference.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
NAME AGE POSITION BUSINESS EXPERIENCE
<S> <C> <C> <C>
John F. Hanley 51 President & 1/98 - President & CEO of Suffolk Bancorp
Chief Executive Officer 1/97 - President, CEO, and Director
of The Suffolk County National Bank
1/96 - EVP & CAO of Suffolk Bancorp
4/86 - 12/95 SVP 12/80 - 4/86 VP
Employed by The Suffolk County
National Bank Since September 1971
Victor F. Bozuhoski, Jr. 59 Executive Vice President, 1/97 - EVP & CFO of Suffolk Bancorp
Treasurer & 12/88 - 12/96 EVP & CFO
Chief Financial Officer 12/87 - 12/88 EVP & Comptroller, CFO
12/85 - 12/87 SVP & Comptroller
1/78 - 12/85 VP & Comptroller
Employed by The Suffolk County
National Bank Since September 1965.
Thomas S. Kohlmann 51 Executive Vice President 1/98 - EVP Suffolk Bancorp
1/96 - EVP & Chief Lending Officer
2/92 - 12/95 SVP
1980 - 1992 SVP Marine Midland Bank
Employed by The Suffolk County
National Bank
Since February 1992
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Augustus C. Weaver 55 Executive Vice President 1/98 - EVP Suffolk Bancorp
1/96 - EVP & Chief Information Officer
2/87 - 12/95 President, Island
Computer Corporation of N.Y., Inc.
2/86 - 2/87 Director of Data
Processing and Corporate Planning,
Southland Frozen Food Corporation
2/62 - 2/86 First VP & Director of
Operations, Long Island Savings Bank
J. Gordon Huszagh 44 Senior Vice President & 1/97 - SVP & Chief Financial Officer of
Comptroller The Suffolk County National Bank
12/92 - 12/96 SVP & Comptroller
12/88 - 12/92 VP & Comptroller
12/86 - 12/88 VP 1/83 - 12/86 Auditor
Employed by The Suffolk
County National Bank Since January
1983
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
Pages 3 - 7 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 14, 1998 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pages 2, 4, 5, and 6 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 14, 1998 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pages 7 and 8 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 14, 1998 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 14 through
26 inclusive, of Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997.
Financial Statements (Consolidated)
Statements of Condition - December 31, 1997 and 1996
Statements of Income - For the years ended December 31, 1997, 1996, and
1995 Statements of Changes in Stockholders' Equity - For the years ended
December 31, 1997, 1996, and 1995
Statements of Cash Flows - For the years ended December 31, 1997, 1996,
and 1995
Notes to Consolidated Financial Statements
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 person so requesting in writing to
Secretary, Suffolk Bancorp, 6 West Second Street, Riverhead, New York 11901.
A. Certificate of Incorporation of Suffolk Bancorp (filed by
incorporation by reference to Suffolk Bancorp's
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Form 10-K for the fiscal year ended December 31, 1985, filed March 18,
1986)
B. Bylaws of Suffolk Bancorp (filed by incorporation by reference to
Suffolk Bancorp's Form 10-K for the fiscal year ended December 31,
1985, filed March 18, 1986.)
The following Exhibit is submitted herewith:
C. 1997 Annual Report to the Shareholders.
REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the three-month period ended
December 31, 1997.
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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 31, 1998
- --------------------
(Registrant)
By /s/ Edward J. Merz
---------------------------
EDWARD J. MERZ
Chairman
Director
By /s/ Raymond A. Mazgulski
---------------------------
RAYMOND A. MAZGULSKI
Vice Chairman
Director
By /s/ John F. Hanley
---------------------------
JOHN F. HANLEY
President & Chief Executive Officer
Director
By /s/ Victor F. Bozuhoski, Jr.
---------------------------
VICTOR F. BOZUHOSKI, JR.
Executive Vice President,
Chief Financial Officer & Treasurer
/s/ Joseph A. Deerkoski /s/ Howard M. Finkelstein
--------------------------- ---------------------
JOSEPH A. DEERKOSKI HOWARD M. FINKELSTEIN
Director Director
/s/ Edgar F. Goodale /s/ J. Douglas Stark
--------------------------- ---------------------
EDGAR F. GOODALE J. DOUGLAS STARK
Director Director
/s/ Hallock Luce 3rd /s/ Peter Van de Wetering
--------------------------- ---------------------
HALLOCK LUCE 3RD PETER VAN DE WETERING
Director Director
/s/ Bruce Collins
---------------------------
BRUCE COLLINS
Director
EXHIBIT INDEX
<TABLE>
<CAPTION>
Description Exhibit Pages
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<S> <C> <C>
1997 Annual Report to Shareholders C 1 - 28
</TABLE>
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SUFFOLK BANCORP [Logo]
[GRAPHIC OMITTED]
ANNUAL REPORT 1997
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On The Cover
The Village of Sag Harbor
"Sagg Harbour" was first used in 1665 by settlers from Southampton and Shelter
Island. It served residents of North Haven and Sagaponack with naturally deep
water and wide channels, and an easy approach from Gardiner's Bay and the
Atlantic Ocean beyond. During the 1800's, Sag Harbor rose to fame as one of the
premier whaling ports in the world. Through much of the twentieth century, Sag
Harbor lay in eclipse, serving as home to an assortment of farmers, fishermen,
and baymen. Having missed much of the architectural "progress" of the 1950's and
1960's, Sag Harbor is one of the most consistently authentic eighteenth-century
ports still in existence today. It's unspoiled, well-preserved charm has made it
a magnet for tourists, yachtsmen, and artists, thriving as it has not since the
days of the tall ships. SCNB's Sag Harbor office appears in this photograph near
the foot of main street, just below the large sphere.
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Table of Contents
Corporate Profile..............................................................1
Financial Highlights...........................................................1
To Our Shareholders:...........................................................3
Summary of Selected Financial Data.............................................4
Price Range of Common Stock and Dividends......................................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...........................................................8
Summary of Loan Losses and Allowance for Possible Loan
Losses.......................................................................9
Short Term Borrowings.........................................................10
Interest Expense..............................................................10
Deposits......................................................................10
Other Income..................................................................11
Other Expense.................................................................11
Interest Rate Sensitivity.....................................................11
Asset/Liability Management & Liquidity........................................12
Business Risks and Uncertainties..............................................12
Capital Resources.............................................................13
Risk-Based Capital and Leverage Guidelines....................................13
Discussion of Current Accounting Principles...................................13
Consolidated Statements of Condition..........................................14
Consolidated Statements of Income.............................................15
Consolidated Statements of Changes in Stockholders' Equity....................16
Consolidated Statements of Cash Flows.........................................17
Notes to Consolidated Financial Statements....................................18
Report of Independent Accountants.............................................26
Report of Management..........................................................26
Directors.....................................................................27
Officers......................................................................27
Directory of Offices and Departments...........................Inside Back Cover
<PAGE> 3
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 service charges
for various services. SCNB has built a good reputation for personal, attentive
service. This has developed a loyal and growing clientele. SCNB operates 25
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, 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 have
increased as a percentage of the loan portfolio and have made substantial
contributions to SCNB's profitability. SCNB's primary market is Suffolk County,
New York. Suffolk County is home to more than 1.3 million people, or
approximately half the population of Long Island outside of the limits of New
York City and is increasingly suburban in nature. The western end of the county
is a center for commerce, supporting a diversified economy; the eastern end 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
<TABLE>
<CAPTION>
(dollars in thousands, except ratios, share, and per-share information)
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December 31, 1997 1996
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<S> <C> <C> <C>
EARNINGS FOR THE YEAR Net income $ 11,302 $ 10,647
Net-interest income 43,159 41,157
Net income-per-share 1.79 1.60
Cash dividends-per-share 0.69 0.62
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BALANCES AT YEAR END Assets $ 864,913 $ 804,379
Net loans 604,864 578,883
Investment securities 146,926 135,353
Deposits 777,595 711,018
Equity 65,140 72,750
Shares outstanding 6,095,356 6,592,890
Book value per common share $ 10.69 $ 11.04
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RATIOS Return on average equity 16.96% 15.12%
Return on average assets 1.37 1.35
Average equity to average assets 8.05 8.96
Net-interest margin (taxable-equivalent) 5.84 5.84
Net charge-offs to average net loans 0.11 0.17
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</TABLE>
Suffolk Bancorp Annual Meeting
Tuesday, April 14, 1998, 1:00 P.M.
East Wind
Route 25A
Wading River, New York
Registrar and Transfer Agent
Any questions about the registration or transfer of shares, the
payment 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
(800) 937-5449
Trading
Suffolk Bancorp's common stock is traded over-the-counter, and is listed on the
NASDAQ National Market System under the symbol "SUBK." Market makers at December
31, 1997 included the firms of: Herzog, Heine, Geduld, Inc.; McConnell, Budd &
Downes, Inc.; Sandler O'Neill & Partners, L.P.; and Smith Barney, Inc.
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 (516) 727-5667, fax to (516) 727-3214, or send e-mail to
[email protected].
1
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Chairman Edward J. Merz and his successor as President &
Chief Executive Officer, John F. Hanley
SUFFOLK BANCORP [Logo]
2
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To Our Shareholders:
Nineteen-ninety-seven was another successful year for Suffolk Bancorp and for
its wholly owned subsidiary, The Suffolk County National Bank.
Net income was $11,302,000, up 6.2 percent from $10,647,000 last year.
Earnings-per-share were $1.79 compared to $1.60, an increase of 11.9 percent.
Assets at year-end totaled $864,913,000, compared to $804,379,000, up 7.5
percent. Shareholders' equity amounted to $65,140,000, down 10.5 percent from
$72,750,000, as a result of substantial repurchases of stock. Book
value-per-share was $10.69, down 3.2 percent from $11.04 the previous year, also
owing to the repurchase program. Dividends-per-share were $0.69, increased 11.3
percent from $0.62. Average net loans increased by 8.2 percent, to $588,686,000,
from $544,258,000. Average deposits increased by 5.0 percent, to $744,519,000
from $709,203,000. Net-interest income increased by 4.9 percent to $43,159,000
from $41,157,000. Income other than from interest increased by 4.9 percent, to
$7,646,000 from $7,286,000. Expense other than for interest increased by 4.6
percent, to $30,303,000 from $28,967,000. Return on average common equity
increased to 16.96 percent from 15.12 percent. Return on assets increased to
1.37 percent from 1.35 percent. The price of a share reached $33, an all-time
high.
Capital Management
Our stock repurchase program made one of the most significant contributions to
growth in earnings per share and improvement in return on shareholders' equity
during 1997. Since the inception of the program in 1995, we have repurchased
1,515,064 shares, increasing earnings per-share to $1.79 from $1.63, pro-forma,
over what they would have been without the program. Return on equity was 16.96
percent versus 12.28 percent without, and given current market multiples of
price to earnings, it improved the sustainable market price of your shares by
about almost four dollars each. In the aggregate, this means that you, our
shareholders, are about $16,340,000 to the good over the course of four years in
a company with a market capitalization of $184,523,000 at year end.
As the economy has expanded, most banks have accumulated capital (from earnings)
faster than their assets have grown. We were among the first to recognize this,
and we have been among the few who have exceeded, let alone met, the goals we
announced. We believe that the preservation of capital is our first duty to our
shareholders, so we have not resorted to risky loans or over-priced acquisitions
to inflate our assets and "use up" capital. Instead we have come to manage
equity capital like any other component of the balance sheet of a financial
institution. It must be measured, analyzed, and adjusted to produce the best
possible return consistent with the safety of your investment.
Commercial Lending
The other major contributor to profitability was growth in commercial loans,
including financial and agricultural, commercial mortgages, and construction
loans, comprising 40.8 percent of the portfolio at year end, up 10.7 percent
from last year when they amounted to 38.5 percent of the portfolio.
Growth into the Future - Expanding Markets
Now that capital is adjusted correctly to our actual needs, future growth in
earnings per share must come from increased net income. That means expansion
into new markets in west-central Suffolk County. Accordingly, we opened a
"Business and Professional Centre" in Smithtown. A full-service office, it is
dedicated to the needs of busy professionals and medium-sized businesses in
Smithtown, which in combination with Hauppaugue and Islandia, has become the
largest center of business on Long Island east of Melville. It has already
proven to be a reliable source of good-quality loans, and an entree into one of
the most broadly affluent markets on Long Island's north shore.
Succession of Management
Finally, we come to the passing of the baton. Edward J. Merz has been President
of SCNB since 1975, and of Suffolk Bancorp since it was organized in 1984. He
will remain avidly involved in the Suffolk's future as Chairman. During his
tenure, SCNB has grown by 850 percent, from $91,000,000 to $864,000,000 in
assets. His entire staff thanks him for his sage guidance, and gentlemanly good
humor. John F. "Jack" Hanley started his career with SCNB in 1971, and built the
bank's consumer lending operation into one of the largest on "the Island." He is
the latest helmsman in Suffolk's long tradition of continuity, stability, and
profit. Looking forward as always, we sign this letter with respect and
gratitude for your loyal support of our corporate mission.
Sincerely,
/s/ Edward J. Merz /s/ John F. Hanley
Edward J. Merz John F. Hanley
Chairman President and Chief Executive Officer
3
<PAGE> 6
Summary of Selected Financial Data
FIVE YEAR SUMMARY: (dollars in thousands except per share amount)
<TABLE>
<CAPTION>
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For the years 1997 1996 1995 1994 (1) 1993
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<S> <C> <C> <C> <C> <C>
Interest income $ 64,129 $ 60,529 $ 59,312 $ 51,564 $ 43,997
Interest expense 20,970 19,372 20,331 15,734 14,525
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Net-interest income 43,159 41,157 38,981 35,830 29,472
Provision for possible loan losses 1,059 1,120 530 730 1,098
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Net interest income after provision 42,100 40,037 38,451 35,100 28,374
Other income 7,646 7,286 6,702 5,675 4,730
Other expense 30,303 28,967 30,135 27,752 21,345
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Income before income taxes & cumulative
effect of change in accounting principle 19,443 18,356 15,018 13,023 11,759
Provision for income taxes 8,141 7,709 5,929 4,705 4,070
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Income before cumulative effect of change
in accounting for income taxes 11,302 10,647 9,089 8,318 7,689
Cumulative effect of change in accounting for income taxes - - - - 624
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Net Income $ 11,302 $ 10,647 $ 9,089 $ 8,318 $ 8,313
====================================================================================================================================
BALANCE AT DECEMBER 31:
Federal funds sold $ 18,500 $ 1,500 $ 32,500 $ - $ -
Investment securities -- available for sale 120,878 104,649 137,043 68,261 -
Investment securities -- held to maturity 26,048 30,704 44,923 126,380 194,391
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Total investment securities 146,926 135,353 181,966 194,641 194,391
Net loans 604,864 578,883 510,015 529,075 406,740
Total assets 864,913 804,379 805,794 811,654 642,359
Total deposits 777,595 711,018 727,060 723,993 568,768
Other borrowings - 7,200 - - 6,500
Stockholders' equity $ 65,140 $ 72,750 $ 70,046 $ 77,093 $ 63,284
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SELECTED FINANCIAL RATIOS:
Performance:
Return on average equity 16.96% 15.12% 11.56% 11.50% 13.78%
Return on average assets 1.37 1.35 1.15 1.11 1.35
Net interest margin (taxable-equivalent) 5.84 5.84 5.49 5.34 5.31
Average equity to average assets 8.05 8.96 9.91 9.68 9.79
Dividend pay-out ratio 38.34 38.49 36.83 31.61 27.32
Asset quality:
Non-performing assets to total loans (net of discount) 0.59 1.02 1.33 1.70(2) 1.26
Non-performing assets to total assets 0.41 0.74 0.85 1.11(2) 0.80
Allowance to non-accrual loans and 90+ 182.29 127.12 77.38 77.39 92.73
Allowance to loans, net of discount 1.07 1.05 1.15 1.16 1.20
Net charge-offs to average net loans 0.11 0.17 0.16 0.23 0.24
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PER SHARE DATA:
Income before cumulative effect of change in
accounting principle $ 1.79 $ 1.60 $ 1.22 $ 1.13 $ 1.14
Cumulative effect of change in accounting principle - - - - 0.09
Net income 1.79 1.60 1.22 1.13 1.23
Cash dividends 0.69 0.62 0.45 0.36 0.34
Book value at year-end 10.69 11.04 10.28 10.15 9.32
Highest market value 33.00 19.88 18.75 14.25 12.50
Lowest market value 19.13 14.75 13.00 10.50 9.50
Average shares outstanding 6,308,482 6,682,064 7,478,946 7,384,572 6,782,298
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Number of full-time-equivalent employees at year-end 378 372 400 426 322
Number of branch offices at year-end 25 23 22 21 13
Number of automatic teller machines 16 16 15 14 8
====================================================================================================================================
</TABLE>
(1) The information for 1994 reflects the acquisition of Hamptons on April 11,
1994.
(2) Includes $2,128,000 of non-performing loans and $1,222,000 of other real
estate acquired from Hamptons.
Price Range of Common Stock and Dividends
The Company'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 the Company's common stock as reported by
NASDAQ.
<TABLE>
<CAPTION>
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1997 High Low Dividends 1996 High Low Dividends
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<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter $ 21.75 $ 19.13 $ 0.165 First Quarter $ 16.38 $ 14.75 $ 0.150
Second Quarter 31.25 21.00 0.165 Second Quarter 16.63 15.25 0.150
Third Quarter 32.25 26.75 0.180 Third Quarter 17.13 15.75 0.150
Fourth Quarter 33.00 27.75 0.180 Fourth Quarter 19.88 16.50 0.165
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</TABLE>
The Company declares regular quarterly cash dividends, payable on the first
business day of each fiscal quarter.
4
<PAGE> 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The discussion which follows analyzes Suffolk Bancorp's (the "Company" or
"Suffolk") operations for each of the past three years, and its financial
condition as of December 31, 1997 and 1996, 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 25 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, and stock in the Federal Reserve Bank 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 in 1997. Increased demand for
finance, information, transportation and tourism were offset by layoffs
resulting from corporate consolidations and down-sizing. 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 1997, 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 $11,302,000, compared to $10,647,000 last year and $9,089,000 in
1995. These represent increases of 6.2 percent and 17.1 percent respectively.
Earnings-per-share were $1.79, compared to $1.60 last year and $1.22 in 1995.
Net Interest Income
Net-interest income during 1997 was $43,159,000, up from $41,157,000 and
$38,981,000 in 1996 and 1995, respectively. These increased 4.9 percent and
5.6 percent, 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 5.84 percent during 1997, 5.84 percent in 1996,
and 5.49 percent in 1995. Average rates on average interest-earning assets
increased to 8.65 percent in 1997 from 8.55 percent in 1996, and 8.30 percent in
1995. Average rates on average interest-bearing liabilities increased to 3.69
percent in 1997 from 3.54 percent in 1996, and 3.65 percent in 1995. The
interest rate differential did not change from 1996 to 1997, but increased 0.35
percent from 1995 to 1996. Also, demand deposits increased slightly from year to
year as a percentage of total liabilities.
5
<PAGE> 8
\
Average Assets, Liabilities, and 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)
<TABLE>
<CAPTION>
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Year ended December 31, 1997 1996
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Average Average Average Average
Balance Interest Rate Balance Interest Rate
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INTEREST-EARNING ASSETS
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<S> <C> <C> <C> <C> <C> <C>
U.S. treasury securities $ 101,151 $ 6,557 6.48% $ 110,483 $ 6,579 5.95%
Obligations of states & political subdivisions 10,940 744 6.80 13,639 1,005 7.37
U.S. govt. agency obligations 23,921 1,597 6.68 26,939 1,801 6.69
Corporate bonds & other securities 638 38 5.96 638 38 5.96
Federal funds sold & securities purchased
under agreements to resell 20,683 1,128 5.45 17,208 919 5.34
Loans, including non-accrual loans 588,686 54,448 9.25 544,258 50,659 9.31
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Total interest-earning assets $ 746,019 $ 64,512 8.65% $ 713,165 $ 61,001 8.55%
======================================================================================================================
Cash & due from banks $ 43,759 $ 40,114
Other non-interest-earning assets 38,020 32,880
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Total assets $ 827,798 $ 786,159
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INTEREST-BEARING LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------
Savings, N.O.W.'s & money market deposits $ 323,105 $ 7,567 2.34% $ 325,788 $ 7,924 2.43%
Time deposits 237,520 12,966 5.46 220,531 11,428 5.18
- ----------------------------------------------------------------------------------------------------------------------
Total savings & time deposits 560,625 20,533 3.66 546,319 19,352 3.54
Federal funds purchased & securities
sold under agreement to repurchase 7,792 425 5.45 322 19 5.90
Other borrowings 165 12 7.27 - - -
Mortgages - - - - - -
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Total interest-bearing liabilities $ 568,582 $ 20,970 3.69% $ 546,641 $ 19,371 3.54%
======================================================================================================================
Rate spread 4.96% 5.01%
Non-interest-bearing deposits $ 183,894 $ 162,884
Other non-interest-bearing liabilities 8,690 6,221
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Total liabilities $ 761,166 $ 715,746
Stockholders' equity 66,632 70,413
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Total liabilities & stockholders' equity $ 827,798 $ 786,159
Net-interest income (taxable-equivalent basis)
& effective interest rate differential $ 43,542 5.84% $ 41,630 5.84%
Less: taxable-equivalent basis adjustment (383) (473)
- ----------------------------------------------------------------------------------------------------------------------
Net-interest income $ 43,159 $ 41,157
======================================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------
Year ended December 31, 1995
- ---------------------------------------------------------------------------------
Average Average
Balance Interest Rate
- ---------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. treasury securities $115,606 $ 6,482 5.61%
Obligations of states & political subdivisions 25,404 1,892 7.45
U.S. govt. agency obligations 30,734 2,052 6.68
Corporate bonds & other securities 638 38 5.96
Federal funds sold & securities purchased
under agreements to resell 31,805 1,839 5.78
Loans, including non-accrual loans 519,602 47,783 9.20
- ---------------------------------------------------------------------------------
Total interest-earning assets $723,789 $ 60,086 8.30%
=================================================================================
Cash & due from banks $ 37,806
Other non-interest-earning assets 31,596
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Total assets $793,191
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INTEREST-BEARING LIABILITIES
- ---------------------------------------------------------------------------------
Savings, N.O.W.'s & money market deposits $337,550 $ 8,462 2.51%
Time deposits 206,801 11,098 5.37
- ---------------------------------------------------------------------------------
Total savings & time deposits 544,351 19,560 3.59
Federal funds purchased & securities
sold under agreement to repurchase 11,140 674 6.05
Other borrowings 72 2 2.78
Mortgages 748 95 12.70
- ---------------------------------------------------------------------------------
Total interest-bearing liabilities $556,311 $ 20,331 3.65%
=================================================================================
Rate spread 4.65%
Non-interest-bearing deposits $152,278
Other non-interest-bearing liabilities 6,000
- ---------------------------------------------------------------------------------
Total liabilities $714,589
Stockholders' equity 78,602
- ---------------------------------------------------------------------------------
Total liabilities & stockholders' equity $793,191
Net-interest income (taxable-equivalent basis)
& effective interest rate differential $ 39,755 5.49%
Less: taxable-equivalent basis adjustment (774)
- ---------------------------------------------------------------------------------
Net-interest income $ 38,981
=================================================================================
</TABLE>
Interest income on a taxable-equivalent basis includes the additional amount of
interest income that would have been earned if Suffolk's investment in
non-taxable 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% for
federal income taxes and 9% for New York State income taxes for all periods.
For each of the years 1997, 1996 and 1995, $1.00 of nontaxable income from
obligations of states and political subdivisions equates to fully-taxable income
of $1.52. In addition, in 1997, 1996 and 1995, $1.00 of non-taxable 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
<PAGE> 9
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)
<TABLE>
<CAPTION>
In 1997 over 1996 In 1996 over 1995
Changes Due to Changes Due to
Volume Rate Net Change Volume Rate Net Change
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INTEREST-EARNING ASSETS
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<S> <C> <C> <C> <C> <C> <C>
U.S. treasury securities $ (580) $ 558 $ (22) $ (295) $ 392 $ 97
Obligations of states & political subdivisions (188) (73) (261) (867) (20) (887)
U.S. govt. agency obligations (201) (3) (204) (254) 3 (251)
Corporate bonds & other securities -- -- -- -- -- --
Federal fund sold & securities purchased
under agreement to resell 189 20 209 (789) (131) (920)
Loans, including non-accrual loans 4,111 (322) 3,789 2,289 587 2,876
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 3,331 $ 180 $ 3,511 $ 84 $ 831 $ 915
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Savings, N.O.W.'s & money market deposits $ (65) $ (292) $ (357) $ (290) $ (248) $ (538)
Time deposits 908 630 1,538 720 (390) 330
Federal funds purchased & securities
sold under agreement to repurchase 408 (2) 406 (639) (16) (655)
Other borrowings 6 6 12 (2) -- (2)
Mortgages -- -- -- (95) -- (95)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,257 $ 342 $ 1,599 $ (306) $ (654) $ (960)
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in net-interest income
(taxable-equivalent basis) $ 2,074 $ (162) $ 1,912 $ 390 $ 1,485 $ 1,875
====================================================================================================================================
</TABLE>
Interest Income
Interest income increased to $64,129,000 in 1997 from $60,529,000 in 1996, and
$59,312,000 in 1995, increases of 5.9 and 2.1 percent respectively. The increase
in 1997 was attributable to higher average loan balances, and higher balances of
demand deposits which do not bear interest.
Investment Securities
Average investment in U.S. Treasury securities decreased to $101,151,000 in 1997
from $110,483,000 in 1996, a decrease of 8.4 percent. These securities are
Suffolk's primary source of liquidity. Average holdings of municipal securities
decreased because yields, even on a taxable-equivalent basis, became less
attractive during 1996 as changes in the income tax code for individuals made it
possible for them to underbid corporate investors. However, balances increased
by the end of 1997. U.S. Treasury, U.S. Government Agency, and municipal
securities provide collateral for various liabilities to municipal depositors.
Suffolk has no investment in derivative securities. The following table
summarizes Suffolk's investment securities available for sale and held to
maturity as of the dates indicated: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment securities available for sale, at fair value:
U.S. treasury securities $107,140 $ 91,092 $121,168
U.S. government agency debt securities 13,738 13,557 15,875
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities available for sale 120,878 104,649 137,043
- ------------------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity:
U.S. treasury securities -- 8,019 12,053
Obligations of states & political subdivisions 18,371 10,170 18,140
U.S. govt. agency obligations 7,039 11,877 14,092
Corporate bonds & other securities 638 638 638
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities held to maturity 26,048 30,704 44,923
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $146,926 $135,353 $181,966
====================================================================================================================================
Fair value of investment securities held to maturity $ 26,213 $ 30,920 $ 45,451
Unrealized gains 170 219 662
Unrealized losses 5 3 134
====================================================================================================================================
</TABLE>
7
<PAGE> 10
The amortized cost, maturities and approximate weighted average yields, on a
taxable-equivalent basis, at December 31, 1997 are as follows: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
------------Available for Sale---- ----------------------Held to Maturity--------------------
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Obligations of U.S. Corporate Bonds
U.S. Treasury Govt. Agency States & Political Govt. Agency &
Securities Debt. Subdivisons Debt. Other Securities
- ------------------------------------------------------------------------------------------------------------------------------------
Fair Fair Amortized Amortized Amortized
Maturity (in years) Value Yield Value Yield Cost Yield Cost Yield Cost Yield Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 $ 70,910 6.30% $ 2,998 6.19% $ 16,621% 6.19% $ 3,793 6.00% $ - - $ 94,322
After 1 but within 5 36,230 6.47 1,989 7.14 - - 3,246 6.97 - - 41,465
After 5 but within 10 - - 8,751 7.20 1,750 7.98 - - - - 10,501
Other securities (FRB) - - - - - - - - 638 6.00% 638
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 107,140 6.36% $ 13,738 6.97% $ 18,371% 6.36% $ 7,039 6.45% $ 638 6.00% $ 146,926
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 declared
dividend was 6%.
Loan Portfolio
Loans, net of unearned discounts, but before the allowance for possible loan
losses totaled $611,387,000.
Consumer loans are the largest component of the Suffolk's loan portfolio. Net of
unearned discounts, they totaled $266,244,000 at the end of 1997, up 0.5 percent
from $265,039,000 at year-end 1996. Consumer loans include primarily indirect,
dealer-generated automobile loans. Competition among commercial banks, and with
captive finance companies of automobile manufacturers has limited yields.
Commercial real estate mortgages closed the year at $127,994,000, up 12.8
percent from $113,501,000 last year. Commercial and industrial loans followed at
$111,575,000, up 9.1 percent from $102,263,000 at the end of 1996. 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 the 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 $67,061,000, up 4.6 percent from $64,093,000, home equity loans at
$26,201,000, down 9.6 percent from $28,974,000, and construction loans at
$9,823,000 up 4.1 percent from $9,437,000.
The following table categorizes total loans (net of unearned discounts) at
December 31,: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial & agricultural loans $111,575 $102,263 $ 78,730 $ 71,414 $ 52,103
Commercial real estate mortgages 127,994 113,501 99,940 104,548 65,738
Real estate -- construction loans 9,823 9,437 7,946 8,018 5,327
Residential mortgages (1st and 2nd liens) 67,061 64,093 55,047 50,011 33,489
Home equity loans 26,201 28,974 26,869 27,534 18,440
Consumer loans 266,244 265,039 245,317 269,725 236,043
Lease finance 7 98 311 743 --
Other loans 2,483 1,592 1,778 3,296 522
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans (net of unearned discounts) $611,388 $584,997 $515,938 $535,289 $411,662
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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,
of a material amount, are reflected in the foregoing tables.
8
<PAGE> 11
The following table shows non-accrual, past due, and restructured loans at
December 31,: (in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans accruing but past due contractually
90 days or more $1,876 $ 975 $2,584 $2,015 $ 871
Loans not accruing interest 2,449 3,834 5,071 6,014 4,437
Restructured loans 701 208 532 372 51
- -----------------------------------------------------------------------------------------------------------------------------------
Total $5,026 $5,017 $8,187 $8,401 $5,359
===================================================================================================================================
</TABLE>
Interest on loans that have been restructured or are no longer accruing interest
would have amounted to about $256,000 for 1997 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 1997, 1996 and 1995. 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 or part of it 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 1997 was
0.11 percent, compared to 0.17 percent during 1996 and 0.16 percent during 1995.
The ratio of the allowance for possible loan losses to loans, net of discounts,
was 1.07 percent at the end of 1997, 1.05 percent in 1996, and 1.15 percent in
1995. The allowance for possible loan losses has seven major categories. A
summary of transactions follows: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses, January 1, $6,113 $5,923 $6,214 $4,922 $4,730
Allowance acquired from Hamptons -- -- -- 1,678 --
Loans charged-off:
Commercial, financial & agricultural loans 278 322 346 869 440
Commercial real estate mortgages -- 369 271 8 --
Real estate -- construction loans -- -- -- -- --
Residential mortgages (1st and 2nd liens) -- -- -- -- --
Home equity loans 76 47 28 80 --
Consumer loans 480 518 539 511 678
Lease finance -- -- -- -- --
Other loans -- -- -- -- 49
- ------------------------------------------------------------------------------------------------------------------------------------
Total Charge-offs $ 834 1,256 1,184 1,468 1,167
- ------------------------------------------------------------------------------------------------------------------------------------
Loans recovered after being charged-off
Commercial, financial & agricultural loans 35 111 89 72 14
Commercial real estate mortgages -- 4 16 -- --
Real estate -- construction loans -- -- -- 11 --
Residential mortgages (1st and 2nd liens) -- -- -- -- --
Home equity loans -- -- -- -- --
Consumer loans 151 209 258 269 247
Lease finance -- -- -- -- --
Other loans -- 2 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries $ 186 $ 326 $ 363 $ 352 $ 261
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans charged-off 648 930 821 1,116 906
Provision for possible loan losses 1,059 1,120 530 730 1,098
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses, December 31, $6,524 $6,113 $5,923 $6,214 $4,922
====================================================================================================================================
</TABLE>
9
<PAGE> 12
The following table presents information concerning loan balances and asset
quality: (dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, net of discounts:
Average $ 588,686 $ 544,258 $ 520,139 $ 487,297 $ 381,884
At end of period 611,388 584,997 515,938 535,289 411,662
- ------------------------------------------------------------------------------------------------------------------------------------
Non-performing assets/total loans (net of discounts) 0.04% 1.02% 1.33% 1.70% 1.26%
Non-performing assets/total assets 0.36 0.74 0.85 1.11 0.80
Ratio of net charge-offs/average net loans 0.11 0.17 0.16 0.23 0.24
Net charge-off/net loans at December 31, 0.11 0.16 0.16 0.21 0.22
Allowance for possible loan losses/loans, net of discounts 1.07 1.05 1.15 1.16 1.20
====================================================================================================================================
</TABLE>
The disparity between average net loans and net loans at December 31, 1994 is
mostly attributable to the acquisition Hampton's portfolio of loans.
Interest Expense
Interest expense in 1997 was $20,970,000, up 8.2 percent from $19,372,000
the year before, which was down 4.7 percent from $20,331,000 during 1995. 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 Reserve Bank borrowings were used occasionally.
Short-term borrowings averaged $7,957,000 during 1997, $322,000 during 1996, and
$11,212,000 in 1995.
Deposits
Average interest-bearing deposits increased to $560,625,000 in 1997, up
2.6 percent from $546,319,000 in 1996. Savings, N.O.W. and money market deposits
decreased during 1997, averaging $323,105,000, down 0.8 percent from 1996, which
averaged $325,788,000. Average time certificates of less than $100,000, totaled
$213,594,000, up 11.6 percent from $191,318,000 in 1996. Average time
certificates of $100,000 or more totaled $23,926,000, down 18.1 percent from
$29,213,000 during 1996.
The following table classifies average deposits for each of the periods
indicated: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Rate Paid Rate Paid Rate Paid
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 183,894 $ 162,884 $ 152,278
Savings deposits 190,301 2.59% 190,962 2.72% 196,587 2.80%
N.O.W. & money market deposits 132,804 1.99 134,826 2.03 140,963 2.10
Time certificates of $100,000 or more 23,926 4.63 29,213 3.08 28,320 3.48
Other time deposits 213,594 5.55 191,318 5.50 178,481 5.67
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits $ 744,519 $ 709,203 $ 696,629
====================================================================================================================================
</TABLE>
At December 31, 1997, the remaining maturities of time certificates of $100,000
or more were as follows: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
3 months or less $ 13,867
Over 3 through 6 months 3,470
Over 6 through 12 months 3,501
Over 12 months 2,568
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 23,406
====================================================================================================================================
</TABLE>
Short Term Borrowings
Occasionally, Suffolk uses short-term funding. This includes lines of
credit for federal funds with correspondent banks, retail sale-repurchase
agreements, and the Federal Reserve Bank discount window. Average balances of
federal funds purchased were $1,723,000 and $322,000 for 1997 and 1996
respectively. Average balances of Federal Reserve Bank borrowings during 1997
were $165,000. Suffolk did not borrow from the Federal Reserve Bank during 1996.
Retail repurchase agreements averaged $6,069,000 during 1997. There were none
outstanding during 1996.
10
<PAGE> 13
Other Income
Other income increased to $7,646,000 during 1997 up 4.9 percent from $7,286,000
during 1996, up 8.7 percent from $6,702,000 in 1995. Service charges on deposit
accounts were up 6.9 percent from 1996 to 1997, and 11.1 percent from 1995 to
1996. Other service charges were up 26.5 and 12.7 for the same periods.
Fiduciary fees in 1997 totaled $474,000 up 3.7 percent from 1996, when they
amounted to $457,000, down 9.3% from $503,000 in 1995.
Other Expense
Other expense during 1997 was $30,303,000, up 4.6 percent from 1996 when it was
$28,967,000, down 3.9 percent from $30,135,000 in 1995.
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, 1997: (dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MATURITY: Less than 3 to 6 7 to 12 More Than Not Rate
3 Months Months Months One Year Sensitive Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Domestic loans (1) (net of unearned discount) $ 160,130 $ 46,307 $ 82,996 $ 314,905 $ 7,049 $ 611,387
Investment securities (2) 12,166 20,218 61,937 51,967 638 146,926
Federal funds sold (3) 18,500 - - - - 18,500
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 190,796 $ 66,525 $ 144,933 $ 366,872 $ 7,687 $ 776,813
====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
DEMAND DEPOSITS AND INTEREST-BEARING LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Demand deposits (4) $ 18,224 $ 18,224 $ 36,449 $ 111,187 $ - $ 184,084
N.O.W. & money market accounts (5) 5,886 5,886 11,772 124,093 - 147,637
Interest-bearing deposits (6) 90,426 75,666 92,492 187,289 - 445,873
Federal funds purchased (3) - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total demand deposits & interest-bearing liabilities $ 114,536 $ 99,776 $ 140,713 $ 422,569 $ - $ 777,594
====================================================================================================================================
Gap 76,260 (33,251) 4,220 (55,697) 7,687 (781)
====================================================================================================================================
Cumulative difference between interest-earning
assets and interest-bearing liabilities 76,260 43,009 47,229 (8,468) (781)
====================================================================================================================================
Cumulative difference/total assets 8.82% 4.97% 5.46% (0.98%) (0.09%)
====================================================================================================================================
</TABLE>
(1) Based on contractual maturity, 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 stock is not considered rate-sensitive.
(3) Based on contractual maturity.
(4) Based on experience of historical stable core deposit relationships.
(5) N.O.W. and Money Market Accounts are assumed to decline over a period of
five years.
(6) 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, 1997, 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.
11
<PAGE> 14
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 which 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.
Business Risks and Uncertainties
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 43.5 percent of Suffolk's
loan portfolio and 30.8 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 37.8 percent of
the portfolio and 26.7 percent of assets, 59.6 percent of which are for
commercial real estate. Commercial real estate loans present greater risk than
residential mortgages. Suffolk has attempted 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 18.2 percent of the loan
portfolio and 12.9 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 72.9 percent of the investment portfolio
and 12.4 percent of assets. They offer little or no financial risk. Municipal
obligations constitute 12.5 percent of the investment portfolio and 1.6 percent
of assets. These obligations present slightly greater risk than U.S. Treasury
securities, 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,
which eliminates the risk to principal caused by fluctuations in interest rates.
Aggregate balances of other types of loans and investments are not material in
amount, and present little overall risk. Most of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than does the
effect of inflation. Interest rates do not necessarily move in the same
direction or to the same degree as the prices of goods and services. Management
believes that its efforts to manage its net-interest spread and the maturity of
its assets and liabilities will help Suffolk to benefit from current interest
rates.
Suffolk has 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 is 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. Management believes that these vendors will modify both
software and hardware to accomodate the change in both the century and the
millenium before they cause problems. However, if one or more of them fail to do
so, it could have an adverse effect on Suffolk's operations. At this time,
however, management does not expect that the expense of modifying systems to
identify the year 2000 correctly will have a significant effect on Suffolk's
results of operation, financial condition or liquidity, now or in the future.
12
<PAGE> 15
Capital Resources
Primary capital, including stockholders' equity, not including the net
unrealized gain on securities available for sale, and net of tax and the
allowance for possible loan losses, amounted to $71,210,000 compared to
$78,405,000 at year-end 1996, and $75,271,000 at year-end 1995. During 1997,
Suffolk repurchased 497,536 shares for an aggregate price of $14,577,009. This
accounts for the decrease in capital from 1996 to 1997. Management determined
that this would increase leverage while preserving capital ratios well above
regulatory requirements.
The following table presents the Company's primary capital and related ratios
for each of the last five years: (dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994 (1) 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Primary capital at year-end $ 71,210 $ 78,405 $ 75,271 $ 83,750 $ 68,206
Primary capital at year-end as a percentage of year-end:
Total assets plus allowance for possible loan losses 8.17% 9.67% 9.27% 10.24% 10.54%
Loans, net of unearned discounts 11.65% 13.40% 14.59% 15.65% 16.57%
Total deposits 9.16% 10.95% 10.35% 11.57% 11.99%
====================================================================================================================================
</TABLE>
(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 utilizes capital using two widely accepted
performance ratios -- return on average assets and return on average common
stockholders' equity. The returns in 1997 on average assets of 1.37 percent and
average common equity of 16.96 percent increased from 1996 when returns were
1.35 percent and 15.12 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 $5,896,000.
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, 1997, Suffolk's ratios of core
capital and total qualifying capital (core capital plus Tier 2 capital) to
risk-weighted assets were 9.27 percent and 10.24 percent, respectively.
Discussion of Current Accounting Principles
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." These statements are effective for fiscal years beginning after
December 15, 1997 and restatement of financial statements or information for
earlier periods provided for comparative purposes is required. The provisions of
these statements will not affect Suffolk's results of operation or financial
condition.
13
<PAGE> 16
Consolidated Statements of Condition
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
ASSETS
Cash & Due From Banks $ 53,439,245 $ 49,823,996
Federal Funds Sold 18,500,000 1,500,000
Investment Securities:
Available for Sale, at Fair Value 120,878,495 104,648,484
Held to Maturity (Fair Value of $26,213,000 and $30,920,000, respectively)
United States Treasury Securities -- 8,019,446
U.S. Government Agency Obligations 7,038,658 11,876,889
Obligations of States & Political Subdivisions 18,371,119 10,169,918
Corporate Bonds & Other Securities 637,849 637,849
------------- -------------
Total Investment Securities 146,926,121 135,352,586
Total Loans 614,555,449 592,774,266
Less: Unearned Discounts 3,168,102 7,777,620
Allowance for Possible Loan Losses 6,523,677 6,113,380
------------- -------------
Net Loans 604,863,670 578,883,266
Premises & Equipment, Net 16,181,652 13,201,180
Other Real Estate Owned, Net 596,970 1,898,574
Accrued Interest Receivable, Net 5,547,902 5,222,184
Excess of Cost Over Fair Value of Net Assets Acquired 2,262,173 2,624,105
Other Assets 16,595,289 15,872,926
------------- -------------
TOTAL ASSETS $ 864,913,022 $ 804,378,817
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Demand Deposits $ 184,084,610 $ 168,315,458
Savings, N.O.W.'s & Money Market Deposits 335,047,130 329,930,465
Time Certificates of $100,000 or more 23,405,604 31,073,585
Other Time Deposits 235,057,476 181,698,148
------------- -------------
Total Deposits 777,594,820 711,017,656
Federal Funds Purchased -- 7,200,000
Dividend Payable on Common Stock 1,097,164 1,087,827
Accrued Interest Payable 3,074,642 1,579,351
Other Liabilities 18,005,930 10,744,407
------------- -------------
TOTAL LIABILITIES 799,772,556 731,629,241
------------- -------------
Commitments and Contingent Liabilities (see note 11)
STOCKHOLDERS' EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized, 6,095,356
and 6,592,890 shares issued at December 31, 1997 & 1996, respectively) 19,026,050 19,026,050
Surplus 18,456,432 18,456,432
Undivided Profits 30,991,694 37,353,193
Treasury Stock at Par (1,515,064 shares and 1,017,530 shares, respectively) (3,787,664) (2,543,825)
Net Unrealized Gain on Securities Available for Sale, Net of Tax 453,954 457,726
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 65,140,466 72,749,576
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 864,913,022 $ 804,378,817
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 17
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME
Federal Funds Sold $ 1,128,226 $ 918,926 $ 1,839,151
United States Treasury Securities 6,248,190 6,450,335 6,354,527
Obligations of States & Political Subdivisions (tax exempt) 489,265 660,874 1,244,807
U.S. Government Agency Obligations 1,597,169 1,801,373 2,052,192
Corporate Bonds & Other Securities 38,271 38,271 38,271
Loans 54,627,628 50,659,016 47,782,904
----------- ----------- -----------
Total Interest Income 64,128,749 60,528,795 59,311,852
INTEREST EXPENSE
Savings, N.O.W.'s & Money Market Deposits 7,566,736 7,924,335 8,460,997
Time Certificates of $100,000 or more 1,106,956 900,406 986,204
Other Time Deposits 11,858,867 10,528,496 10,111,987
Federal Funds Purchased 100,377 18,541 87,123
Interest on Other Borrowings 336,833 58 589,507
Interest on Mortgages -- -- 94,712
----------- ----------- -----------
Total Interest Expense 20,969,769 19,371,836 20,330,530
Net-interest Income 43,158,980 41,156,959 38,981,322
Provision for Possible Loan Losses 1,059,000 1,120,000 530,000
----------- ----------- -----------
Net-interest Income After Provision for Possible Loan Losses 42,099,980 40,036,959 38,451,322
OTHER INCOME
Service Charges on Deposit Accounts 4,427,931 4,144,014 3,729,918
Other Service Charges, Commissions & Fees 2,457,955 1,942,930 1,724,075
Fiduciary Fees 474,000 456,500 503,257
Other Operating Income 286,301 742,935 744,533
----------- ----------- -----------
Total Other Income 7,646,187 7,286,379 6,701,783
OTHER EXPENSE
Salaries & Employee Benefits 16,368,974 15,844,994 16,373,556
Net Occupancy Expense 2,528,459 2,387,113 2,329,290
Equipment Expense 2,087,664 2,518,561 3,162,296
Outside Services 2,688,718 1,824,813 1,291,227
FDIC Assessments 87,954 2,000 810,720
Amortization of Excess Cost
Over Fair Value of Net Assets Acquired 361,932 361,932 361,932
Other Operating Expense 6,179,108 6,027,471 5,805,822
----------- ----------- -----------
Total Other Expense 30,302,809 28,966,884 30,134,843
Income Before Provision for Income Taxes 19,443,358 18,356,454 15,018,262
Provision for Income Taxes 8,140,801 7,709,133 5,929,578
=========== =========== ===========
NET INCOME $11,302,557 $10,647,321 $ 9,088,684
=========== =========== ===========
Average: Common Shares Outstanding 6,306,299 6,682,064 7,478,946
Dilutive Stock Options 609 - -
----------- ----------- -----------
Average Total Common Shares and Dilutive Options 6,306,908 6,682,064 7,478,946
EARNINGS PER COMMON SHARE Basic $ 1.79 $ 1.60 $ 1.22
Diluted $ 1.79 $ 1.60 $ 1.22
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) On
Securities
Common Undivided Treasury Available
Stock Surplus Profits Stock For Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $18,998,370 $18,373,392 $ 40,164,291 $ -- $ (443,367) $ 77,092,686
Net Income -- -- 9,088,684 -- -- 9,088,684
Dividend -- -- (3,347,606) -- -- (3,347,606)
Purchase of Treasury Stock -- -- (11,977,589) (1,951,825) -- (13,929,414)
Net Change in Unrealized Gain on
Securities Available for Sale -- -- -- -- 1,141,413 1,141,413
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 18,998,370 18,373,392 33,927,780 (1,951,825) 698,046 70,045,763
Net Income -- -- 10,647,321 -- -- 10,647,321
Dividend -- -- (4,098,196) -- -- (4,098,196)
Purchase of Treasury Stock -- -- (3,123,712) (592,000) -- (3,715,712)
Net Change in Unrealized Gain on
Securities Available for Sale -- -- -- -- (240,320) (240,320)
Adjustment of Issuance of
Stock in Purchase of Hampton
Bancshares (5,536 shares) 27,680 83,040 -- -- -- 110,720
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 19,026,050 18,456,432 37,353,193 (2,543,825) 457,726 72,749,576
Net Income -- -- 11,302,557 -- -- 11,302,557
Return of Dividend - Prior Period -- -- 2,000 -- -- 2,000
Dividend -- -- (4,332,886) -- -- (4,332,886)
Purchase of Treasury Stock -- -- (13,333,170) (1,243,839) -- (14,577,009)
Net Change in Unrealized Gain on
Securities Available for Sale -- -- -- -- (3,771) (3,771)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $19,026,050 $18,456,432 $ 30,991,694 $(3,787,664) $ 453,955 $ 65,140,467
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995
<S> <C> <C> <C>
NET INCOME $ 11,302,557 $ 10,647,321 $ 9,088,684
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Possible Loan Losses 1,059,000 1,120,000 530,000
Depreciation & Amortization 1,336,273 1,607,673 2,074,991
Amortization of Excess Cost Over Fair Value of Net Assets Acquired 361,932 361,932 361,932
Accretion of Discounts (829,589) (2,020,315) (1,839,404)
Amortization of Premiums 291,941 397,373 200,867
Increase in Accrued Interest Receivable (325,719) (89,317) (1,125,866)
Increase in Other Assets (722,360) (4,677,471) (2,151,106)
(Decrease) Increase in Accrued Interest Payable 1,495,291 (250,701) 730,226
Increase in Income Taxes Payable -- 469,220 59,851
Increase in Other Liabilities 7,261,522 4,504,579 1,630,513
------------ ------------- -------------
Net Cash Provided by Operating Activities 21,230,848 12,070,294 9,560,688
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities 4,898,415 2,288,510 2,500,940
Maturities of Investment Securities; Available for Sale 45,500,000 163,533,384 121,070,133
Purchases of Investment Securities; Available for Sale (61,253,203) (129,539,796) (188,275,593)
Maturities of Investment Securities; Held to Maturity 16,333,259 18,552,503 91,768,062
Purchases of Investment Securities; Held to Maturity (16,520,750) (6,598,000) (12,750,500)
Loan Disbursements & Repayments, Net (27,528,198) (72,302,761) 19,157,077
Purchases of Premises & Equipment, Net (4,316,746) (3,006,304) (1,449,487)
Disposition of Other Real Estate Owned 1,795,018 1,424,500 1,521,730
------------ ------------- -------------
Net Cash (Used in) Provided by Investing Activities (41,092,205) (25,647,964) 33,542,362
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Deposit Accounts 66,577,164 (16,042,207) 3,066,937
Increase (Decrease) in Federal Funds Purchased (7,200,000) 7,200,000 (4,300,000)
Common Stock Sold for Cash -- 110,720 --
Dividends Paid to Shareholders (4,323,549) (4,105,931) (2,973,982)
Treasury Shares Acquired (14,577,009) (3,715,713) (13,929,414)
------------ ------------- -------------
Net Cash (Used in) Provided by Financing Activities 40,476,606 (16,553,131) (18,136,459)
------------ ------------- -------------
Net (Decrease) Increase in Cash & Cash Equivalents 20,615,249 (30,130,801) 24,966,591
Cash & Cash Equivalents Beginning of Year 51,323,996 81,454,797 56,488,206
------------ ------------- -------------
Cash & Cash Equivalents End of Year $ 71,939,245 $ 51,323,996 $ 81,454,797
============ ============= =============
Supplemental Disclosure of Cash Flow Information
Cash Received During the Year for Interest $ 63,803,030 $ 60,439,478 $ 58,185,987
============ ============= =============
Cash Paid During the Year for:
Interest $ 19,474,478 $ 19,622,537 $ 19,600,304
Income Taxes 8,863,325 7,239,913 5,869,727
------------ ------------- -------------
Total Cash Paid During Year for Interest & Income Taxes $ 28,337,803 $ 26,862,450 $ 25,470,031
============ ============= =============
Non-Cash Investing & Financing (loans re-classified as "other real estate
owned," including foreclosures) $ 453,414 $ 2,292,319 $ 459,381
(Decrease) Increase in Market Value Related to FASB 115 (6,392) (407,322) 2,002,357
Decrease (Increase) in Deferred Tax (Liability) Benefit Related to FASB 115 2,621 167,002 (860,944)
Dividends Declared But Not Paid 1,097,164 1,087,827 1,095,562
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
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"). All inter-company 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 respected security
using a method which 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 which 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, titled
"Accounting by Creditors for Impairment of a Loan." as amended by Statement No.
118, titled "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures," a valuation allowance is recorded on impaired loans to reflect
the difference, if any, between the loan face and the present value of projected
cash flows, observable fair value or collateral value. This valuation allowance
is reported within the overall allowance for loan losses. Such change in
accounting was not material to the consolidated financial statements.
(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.
(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
<PAGE> 21
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
non-contributory 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.
18
<PAGE> 22
(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--Suffolk adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" in the fourth quarter of 1997. All
comparative data concerning earnings per share provided for earlier periods have
been restated to conform to the provisions of this statement.
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 weighted-average number of common
shares oustanding and the weighted-average number of stock options exerciseable
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) 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.
Note 2--Investment Securities
The amortized cost, estimated fair values, and gross unrealized gains and losses
of the Company's investment securities available for sale and held to maturity
at December 31, 1997 and 1996 were: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Gross Gross Estimated Gross Gross
Amortized Fair Unrealized Unrealized Amortized Fair Unrealized Unrealized
Cost Value Gains Losses Cost Value Gains Losses
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. treasury securities $106,635 $107,140 $ 505 $ -- $ 90,484 $ 91,092 $ 631 $ 23
U.S. gov't. agency obligations 13,474 13,738 264 -- 13,389 13,557 168 --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at end of year 120,109 120,878 769 -- 103,873 104,649 799 23
- ------------------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. treasury securities -- -- -- -- 8,019 8,040 21 --
Obligations of states and
political subdivisions 18,371 18,451 83 3 10,170 10,285 115 --
U.S. govt. agency obligations 7,039 7,124 87 2 11,877 11,957 83 3
Other securities 638 638 -- -- 638 638 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at end of year 26,048 26,213 170 5 30,704 30,920 219 3
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities $146,157 $147,091 $ 939 $ 5 $134,577 $135,569 $ 1,018 $ 26
====================================================================================================================================
</TABLE>
U.S. Government Agency Obligations are mortgage-backed securities which
represent participating interests in pools of first mortgage loans. The
amortized cost, maturities and approximate fair value at December 31, 1997 are
as follows: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Obligations of U.S. Total
U.S. Treasury Govt. Agency States & Political Govt. Agency Other Amortized
Securities Debt Subdivisions Obligations Securities Cost
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair
Maturity (in years) Cost Value Cost Value Cost Value Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1 $ 70,663 $ 70,910 $ 2,993 $ 2,998 $ 16,621 $16,633 $ 3,793 $3,794 $ - $ - $ 94,070
After 1 but within 5 35,972 36,230 1,957 1,989 - - 3,246 3,330 - - 41,175
After 5 but within 10 - - 8,524 8,751 1,750 1,818 - - - - 10,274
Other Securities (FRB) - - - - - - - 638 638 638
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 106,635 $107,140 $ 13,474 $13,738 $ 18,371 $18,451 $ 7,039 $7,124 $ 638 $638 $146,157
====================================================================================================================================
</TABLE>
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.
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, 1997 and 1996, investment securities carried at $127,253,000 and
$124,977,000, respectively, were pledged to secure trust deposits and public
funds on deposit. No securities have been sold during the past three years.
19
<PAGE> 23
Note 3--Loans
At December 31, 1997 and 1996, loans included the following:
(in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 111,575 $ 102,270
Commercial real estate 127,994 113,501
Real estate construction loans 9,823 9,499
Residential mortgages (1st and 2nd liens) 67,061 64,093
Home equity loans 26,201 28,974
Consumer loans 269,412 272,747
Lease finance 7 98
Other loans 2,483 1,592
- --------------------------------------------------------------------------------
614,556 592,774
Unearned discounts (3,168) (7,778)
Allowance for possible loan losses (6,524) (6,113)
- --------------------------------------------------------------------------------
Balance at end of year $ 604,864 $ 578,883
================================================================================
</TABLE>
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
$4,432,000 and $5,017,000 at December 31, 1997 and 1996, respectively. Interest
on loans which have been restructured or are no longer accruing interest would
have amounted to $256,000 during 1997, $361,000 during 1996, $415,000 during
1995 under the contractual terms of those loans. Interest income recognized on
restructured and non-accrual loans was immaterial for the years 1997, 1996, and
1995.
Suffolk makes loans to its directors, as well as to other related parties in the
ordinary course of its business. Loans made to directors, either directly or
indirectly, which exceed $60,000 in aggregate for any one director, totaled
$6,649,000 and $5,837,000 at December 31, 1997 and 1996, respectively. Unused
portions of lines of credit to directors, directly or indirectly, totaled
$6,649,000 and $5,851,000. New loans totaling $17,874,000 were granted and
payments of $14,062,000 were received during 1997.
Suffolk has pledged $14,067,000 of 1-4 family residential mortgages as
collateral against advances from the Federal Reserve Bank as of December 31,
1997.
Note 4--Allowance for Possible Loan Losses
An analysis of the changes in the Allowance for Possible Loan Losses follows:
(in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 6,113 $ 5,923 $ 6,214
Provision for possible loan losses 1,059 1,120 530
Loans charged-off (834) (1,256) (1,184)
Recoveries on loans 186 326 363
- --------------------------------------------------------------------------------
Balance at end of year $ 6,524 $ 6,113 $ 5,923
================================================================================
</TABLE>
The Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures," as of January 1, 1995. SFAS No. 114
requires that certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
secured. When the measure of the impaired loan is less than the recorded
investment in the loan, the impairment is recorded through a valuation
allowance.
The Bank had previously measured the allowance for loan losses using methods
similar to those prescribed in SFAS No. 114 and SFAS No. 118. As a result of
adopting these statements, no additional allowance for loan losses was required
as of January 1, 1995.
At December 31, 1997 and 1996, 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)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Recorded investment $ 946 $1,240
Valuation allowance 329 369
- --------------------------------------------------------------------------------
</TABLE>
This allowance is included in the allowance for loan losses on the statements of
condition.
Note 5--Premises and Equipment
The following table details premises and equipment: (in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,333 $ 3,333
Premises 7,870 7,773
Furniture, fixtures & equipment 15,776 12,939
Leasehold improvements 971 536
- --------------------------------------------------------------------------------
27,950 24,581
Accumulated depreciation
and amortization (11,768) (11,380)
- --------------------------------------------------------------------------------
Balance at end of year $ 16,182 $ 13,201
================================================================================
</TABLE>
Depreciation and amortization charged to operations amounted to $1,336,000,
$1,608,000, $2,075,000 during 1997, 1996, and 1995, respectively.
Note 6--Short-Term Borrowings
Presented below is information concerning short-term interest-bearing
liabilities, principally Federal Reserve 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 1997 and 1996: (dollars in
thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
<S> <C>
Daily average outstanding $ 7,957
Total interest cost 437
Average interest rate paid 5.49%
Maximum amount outstanding at any-
month-end (February 1997) $39,260
December 31, balance --
Weighted-average interest rate
on balances outstanding at December 31 --
================================================================================
</TABLE>
There were no such borrowings during 1996.
Note 7--Stockholders' Equity
Suffolk has a Dividend Reinvestment Plan. Stockholders can reinvest dividends in
common stock of Suffolk at a 3% discount from market value on newly issued
shares. Shareholders may also make additional cash purchases. No shares were
issued in 1997, 1996, or 1995.
Suffolk has an Incentive Stock Option Plan ("the Plan") under which 660,000
shares of Suffolk's common stock are 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
20
<PAGE> 24
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. Suffolk has granted options on 70,294 shares through
December 31, 1997. 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Shares Wtd. Avg. Exercise
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1994 -- --
Options granted -- --
Options exercised -- --
Options expired or terminated -- --
- --------------------------------------------------------------------------------
Balance at December 31, 1995 -- --
Options granted 27,800 19.50
Options exercised -- --
Options expired or terminated -- --
- --------------------------------------------------------------------------------
Balance at December 31, 1996 27,800 19.50
Options granted 9,500 30.00
Options exercised -- --
Options expired or terminated -- --
- --------------------------------------------------------------------------------
Balance at December 31, 1997 37,300 22.17
================================================================================
</TABLE>
Options outstanding at December 31, 1997 have a weighted-average exercise price
of $22.17 and a remaining contractual life of ten years. 27,800 of these options
are currently exercisable. 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%; expected dividend yield of 2.8%; expected life of ten years; and
expected volatility of 24.9%. 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%; expected dividend
yield of 3.5; expected life of ten years; and expected volatility of 32.2%.
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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income: As Reported $ 11,303 $ 10,647
Pro Forma 11,250 10,540
- --------------------------------------------------------------------------------
Primary EPS: As Reported 1.79 1.60
Pro Forma 1.78 1.58
- --------------------------------------------------------------------------------
</TABLE>
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 banks 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, 1997, approximately $5,896,000 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% of the outstanding stock, the
rights then entitle the holder to purchase the acquiring company's stock at a
50% discount upon a subsequent merger with that acquirer. In the event of the
acquisition of 20% or more of Suffolk's common stock, they entitle the holder to
purchase Suffolk's common stock at a 50% discount. Following the acquisition of
20% but less than 50% of the common shares, the Board can exchange one-half of a
share of Suffolk for each valid right.
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)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current: Federal $ 5,920 $ 5,684 $ 4,032
State 1,853 1,913 1,510
- --------------------------------------------------------------------------------
7,773 7,597 5,542
Deferred: Federal 538 95 336
State (170) 17 52
- --------------------------------------------------------------------------------
368 112 388
- --------------------------------------------------------------------------------
Total $ 8,141 $ 7,709 $ 5,930
================================================================================
</TABLE>
The total tax expense was less than the amounts computed by applying the Federal
income tax rate because of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax expense
at statutory rates 34% 34% 34%
Tax exempt interest (1%) (1%) (3%)
Amortization of excess cost over
fair value of net assets acquired 1% 1% 1%
State income taxes net of
federal benefit 7% 7% 7%
Other 1% 1% -
- --------------------------------------------------------------------------------
Total 42% 42% 39%
================================================================================
</TABLE>
The effect of temporary differences between tax and financial accounting that
create significant deferred-tax assets liabilities at December 31, 1997 and
1996, 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, 1997 and 1996 are presented below:
(in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 Change
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Provision for possible
loan losses $2,699 $2,513 $ 186
Depreciation 259 197 62
Post-retirement benefits 495 390 105
Deferred compensation 498 534 (36)
Purchase accounting 462 605 (143)
Other 313 397 (84)
- --------------------------------------------------------------------------------
Total deferred tax assets
before valuation allowance 4,726 4,636 90
Valuation allowance -- -- --
- --------------------------------------------------------------------------------
Total deferred tax assets
net of valuation allowance 4,726 4,636 90
- --------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Pension 1,114 762 352
Tax liability from investment
securities available for sale 315 318 (3)
Bad debt recapture 104 161 (57)
Other 10 -- 10
- --------------------------------------------------------------------------------
Total deferred tax liabilities 1,543 1,241 302
- --------------------------------------------------------------------------------
Net deferred tax asset $3,183 $3,395 $ (212)
================================================================================
</TABLE>
The Internal Revenue Service has examined and closed their years through tax
year 1990.
Note 9--Employee Benefits
(A) Retirement Plan--Suffolk has a non-contributory 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 following tables set forth the status of
Suffolk Bancorp's combined plan as of September 30, 1997 and September 30, 1996,
the time at which the annual valuation of the plan is made:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations: 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation $ 7,670,070 $ 7,052,872
- --------------------------------------------------------------------------------
Vested benefit obligation 7,599,332 6,986,861
- --------------------------------------------------------------------------------
Projected benefit obligation for
service rendered to date (9,805,633) (9,404,786)
Plan assets at fair value, primarily
listed stocks and bonds 13,649,517 10,651,834
- --------------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 3,843,884 1,247,048
Unrecognized net transition assets
being amortized over 17 years (388,316) (442,304)
Unrecognized prior service cost (60,452) (64,431)
Unrecognized net loss (1,100,403) 762,181
- --------------------------------------------------------------------------------
Prepaid pension cost included in
other assets $ 2,294,713 $ 1,502,494
================================================================================
</TABLE>
Net pension cost for 1997, 1996, and 1995 included the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 624,093 $ 667,558 $ 609,669
Interest cost on projected
benefit obligations 744,645 665,768 626,586
Expected return on plan assets (1,176,041) (814,824) (721,316)
Net amortization & deferral (57,967) (49,957) (28,582)
- --------------------------------------------------------------------------------
Net periodic pension cost $ 134,730 $ 468,545 $ 486,357
================================================================================
</TABLE>
The weighted-average discount rate for purposes of determining net periodic
pension cost was 7.75% in all of 1997, 1996, and 1995. The rate of increase in
future compensation levels used in determining these amounts was 5.0% in 1997,
1996, and 1995. The expected long-term rate of return on assets is 8.5% for
1997, 1996, and 1995.
(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
$532,000 and $529,000 on December 31, 1997 and 1996. Interest (approximately
$54,000 in 1997 and 1996) is accrued over the term of the plan. In 1997, the
Bank paid approximately $51,000 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 $268,000 in 1997, $153,000 in 1996, and $183,000 in 1995) at the
plan's contractual rate is being accrued on the deferral amounts over the
expected plan term. During 1997, Suffolk made payments of approximately $74,000
<PAGE> 26
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 expense (income)
related to the policies aggregated approximately $31,000, $37,000, $68,000 in
1997, 1996, and 1995, 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, 1997 and
1996:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit obligation
(the "APBO"):
Retirees $(1,128,859) $ (563,326)
Fully eligible active plan participants (215,823) (597,744)
Other active participants (688,385) (818,977)
- --------------------------------------------------------------------------------
Total APBO $(2,033,067) $(1,980,047)
Unrecognized net loss 490,991 370,097
Unrecognized transition obligation 12,822 311,536
- --------------------------------------------------------------------------------
Post-retirement benefit liability $(1,529,254) $(1,298,414)
================================================================================
</TABLE>
Net periodic post-retirement benefit cost (the "net periodic cost") for the
years ended December 31, 1997, 1996, and 1995 includes the following components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned $125,975 $138,005 $ 97,007
Interest cost on liability 142,316 132,294 115,200
Unrecognized loss 15,804 20,743 9,417
Unrecognized service liability 9,004 20,769 20,769
- --------------------------------------------------------------------------------
Net periodic cost $293,099 $311,811 $242,393
================================================================================
</TABLE>
The average health-care, cost-trend rate assumption significantly affects the
amounts reported. For example, a 1% increase in this rate would have increased
the accumulated benefit obligation by $295,000 at December 31, 1997, and
increase the net periodic cost by $52,000 for the year. The post-retirement
benefit cost components for 1997 were calculated assuming average health-care,
cost-trend rates going up 9% and decreasing 3% after approximately six years.
22
<PAGE> 27
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 $4,615,000, and $5,481,000 at December 31, 1997 and 1996,
respectively. Suffolk has commitments to make or to extend credit in the form of
revolving open-end lines secured by 1--4 family residential properties,
commercial real estate, construction and land development loans, and lease
financing arrangements in the amount of $31,920,000 and $27,474,000, and
commercial loans of $11,851,000 and $10,599,000 as of December 31, 1997 and
1996, 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 1997, Suffolk was required to maintain balances with the Federal Reserve
Bank of N.Y. for reserve and clearing requirements. These balances averaged
$8,594,000 in 1997.
Total rental expense for the years ended December 31, 1997, 1996 and 1995
amounted to $637,000, $491,000, and $501,000, respectively.
At December 31, 1997, Suffolk was obligated under a number of non-cancelable
operating leases for land and buildings used for bank purposes. Minimum annual
rentals, exclusive of taxes and other charges under non-cancelable operating
leases, are summarized as follows: (in thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Minimum Annual Rentals
- --------------------------------------------------------------------------------
<S> <C>
1998 540
1999 513
2000 513
2001 523
2002 and thereafter 2,688
================================================================================
</TABLE>
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
weightings, 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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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. There are no circumstances since that
notification that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the following
table: (in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Action Provisions
Amount Ratio Amount Ratio Amount Ratio
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to risk-weighted assets) $ 68,526 10.24% $ 53,536 8.00% $ 66,920 10.00%
Tier 1 Capital (to risk-weighted assets) 62,002 9.27% 26,768 4.00% 40,152 6.00%
Tier 1 Capital (to average assets) 62,002 7.49% 33,111 4.00% 41,390 5.00%
====================================================================================================================================
As of December 31, 1996
Total Capital (to risk-weighted assets) $ 75,389 11.68% $ 51,632 8.00% $ 64,540 10.00%
Tier 1 Capital (to risk-weighted assets) 69,276 10.73% 25,816 4.00% 38,724 6.00%
Tier 1 Capital (to average assets) 69,276 8.81% 31,453 4.00% 39,308 5.00%
====================================================================================================================================
</TABLE>
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 43.5 percent of Suffolk's
loan portfolio and 30.8 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 37.8 percent of
the portfolio and 26.7 percent of assets, 59.6 percent of which are for
commercial real estate. Commercial real estate loans present greater risk than
residential mortgages. Suffolk has attempted
23
<PAGE> 28
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 18.2 percent of the loan portfolio and 12.9 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 72.9 percent of the
investment portfolio and 12.4 percent of assets. They offer little or no
financial risk. Municipal obligations constitute 12.5 percent of the investment
portfolio and 2.1 percent of assets. These obligations present slightly greater
risk than U.S. Treasury securities, 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, which eliminates the risk to principal caused by
fluctuations in interest rates.
Aggregate balances of other types of loans and investments are not material in
amount, and present little overall risk. Most of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than does the
effect of inflation. Interest rates do not necessarily move in the same
direction or to the same degree as the prices of goods and services. Management
believes that its efforts to manage its net-interest spread and the maturity of
its assets and liabilities will help Suffolk to benefit from current interest
rates.
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 "Discloures 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, orther than in a forced sale or liquidation: (in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash & cash equivalents $ 71,939 $ 71,939 $ 51,324 $ 51,324
Investment securities
available for sale 120,878 120,878 104,648 104,648
Investment securities
held to maturity 26,048 26,213 30,704 30,920
Loans 614,556 608,892 592,774 588,748
Accrued interest receivable 5,548 5,548 5,222 5,222
Deposits 777,595 791,120 711,018 712,829
Accrued interest payable 3,075 3,075 1,579 1,579
Fed funds purchased - - 7,200 7,200
=================================================================================================================
</TABLE>
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 which
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.
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. 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.
The carrying amount and fair value of loans were as follows at December 31, 1997
and 1996: (in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial
& agricultural $ 111,575 $ 110,925 $ 102,270 $ 100,565
Commercial real estate 127,994 126,329 113,501 110,578
Real estate
construction loans 9,823 9,823 9,499 9,421
Residential mortgages
(1st & 2nd liens) 67,061 67,509 64,093 63,693
Home equity loans 26,201 25,911 28,974 28,878
Consumer loans 269,412 265,905 272,747 273,923
Lease finance 7 7 98 98
Other loans 2,483 2,483 1,592 1,592
- -----------------------------------------------------------------------------------------------------------------
Totals $ 614,556 $ 608,892 $ 592,774 $ 588,748
=================================================================================================================
</TABLE>
Deposit Liabilities
The fair value of certificates of deposit was calculated by discounting cash
flows with applicable origination rates. At December 31, 1997, the fair value of
certificates of deposit of $237,019,000 had a carrying value of $235,057,000. At
December 31, 1996, the fair value of certificates of deposit of $181,698,000 had
a carrying value of $181,241,000.
Commitments to Extend Credit, Standby Letters of Credit, and Written Financial
Guarantees
The fair value of commitments to extend credit was estimated either by
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 counter-parties.
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 $16,466,000 and $17,838,000 at December 31,
1997 and 1996. The fees charged for the commitments were not material in amount.
24
<PAGE> 29
Note 14--Suffolk Bancorp (Parent Company Only) Condensed Financial Statements:
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Condition as of December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Due From Banks $ 1,476 $ 1,610 $ 1,513
Investment in Subsidiaries: SCNB 64,707 71,305 68,817
ICC - 869 763
Other Assets 71 71 69
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 66,254 $ 73,855 $ 71,162
====================================================================================================================================
Liabilities and Stockholders' Equity
Dividends Payable $ 1,097 $ 1,088 $ 1,096
Other Liabilities 17 17 20
Stockholders' Equity 65,140 72,750 70,046
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 66,254 $ 73,855 $ 71,162
====================================================================================================================================
Condensed Statements of Income for the Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Income
Dividends From Subsidiary Bank $ 18,910 $ 7,972 $ 17,277
Interest Income - - 2
- ------------------------------------------------------------------------------------------------------------------------------------
18,910 7,972 17,279
Expense
Other Expense (Income) 146 150 229
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net Income of Subsidiaries 18,764 7,822 17,050
Equity in Undistributed Earnings of Subsidiaries (7,462) 2,825 (7,961)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 11,302 $ 10,647 $ 9,089
====================================================================================================================================
Condensed Statements of Cash Flows for the Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net Income $ 11,302 $ 10,647 $ 9,089
Less: Equity in Undistributed Earnings of Subsidiaries 7,462 2,825 (7,961)
Other, Net 3 (14) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 18,767 7,808 17,048
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Cash Paid for Acquisition - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Investing Activities - - -
Cash Flows From Financing Activities
Issuance of Common Stock - 111 -
Repurchase of Common Stock (14,577) (3,716) (13,929)
Dividends Paid (4,324) (4,106) (2,974)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Financing Activities (18,901) (7,711) (16,903)
Net Increase (Decrease) in Cash and Cash Equivalents (134) 97 145
Cash and Cash Equivalents, Beginning of Year 1,610 1,513 1,368
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 1,476 $ 1,610 $ 1,513
====================================================================================================================================
</TABLE>
Note: No income tax provision has been recorded on the books of Suffolk Bancorp
since it files a return consolidated with its subsidiaries.
Note 15--Selected Quarterly Financial Data (Unaudited)
The comparative results for the four quarters of 1997 and 1996 are as follows:
(in thousands of dollars except for share and per-share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 15,546 $ 15,895 $ 16,328 $ 16,360 $ 14,671 $ 14,993 $ 15,365 $ 15,500
Interest expense 4,972 5,079 5,393 5,526 4,997 4,841 4,795 4,739
- ------------------------------------------------------------------------------------------------------------------------------------
Net-interest income 10,574 10,816 10,935 10,834 9,674 10,152 10,570 10,761
Provision for possible loan losses 251 283 300 225 225 295 300 300
- ------------------------------------------------------------------------------------------------------------------------------------
Net-interest income after provision
for possible loan losses 10,323 10,533 10,635 10,609 9,449 9,857 10,270 10,461
Other income 1,679 1,821 2,165 1,981 1,636 1,752 1,948 1,950
Other expense 7,315 7,684 7,886 7,418 6,970 7,252 7,369 7,376
Provision for income taxes 1,976 1,947 2,034 2,184 1,662 1,823 2,066 2,158
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,711 $ 2,723 $ 2,880 $ 2,988 $ 2,453 $ 2,534 $ 2,783 $ 2,877
====================================================================================================================================
Per-share data:
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.41 $ 0.42 $ 0.47 $ 0.49 $ 0.36 $ 0.38 $ 0.43 $ 0.43
Cash dividends $ 0.165 $ 0.165 $ 0.180 $ 0.180 $ 0.150 $ 0.150 $ 0.150 $ 0.170
Average shares 6,535,686 6,480,221 6,095,356 6,095,356 6,789,190 6,734,248 6,620,416 6,597,638
====================================================================================================================================
</TABLE>
25
<PAGE> 30
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 as of December 31, 1997 and 1996 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, 1997.
These financial statements are the responsibility of Suffolk's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Suffolk Bancorp and
its subsidiary as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
January 16, 1998
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 generally
accepted auditing standards, 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 with
management to discuss audit and internal accounting controls, regulatory audits,
and financial reporting matters.
John F. Hanley, Victor F. Bozuhoski, Jr.
President & Chief Executive Officer Executive Vice President,
Chief Financial Officer & Treasurer
Riverhead, New York
January 16, 1998
26
<PAGE> 31
DIRECTORS AND OFFICERS
SUFFOLK BANCORP [Logo]
Directors
Edward J. Merz
Chairman
Raymond A. Mazgulski
Vice Chairman
Bruce Collins
Retired
Joseph A. Deerkoski
President, See Neefus, Inc. (general insurance)
Howard M. Finkelstein
Partner, Smith, Finkelstein, Lundberg, Isler & Yakaboski (attorneys)
Edgar F. Goodale
President, Riverhead Building Supply Corp.
John F. Hanley
President & Chief Executive Officer
Hallock Luce 3rd
Director, Lupton & Luce, Inc. (general insurance)
President, Hallup Realty Corp. (real estate)
J. Douglas Stark
President, Stark Mobile Homes, Inc.
Peter Van de Wetering
President, Van de Wetering
Greenhouses, Inc. (wholesale nursery)
Officers
John F. Hanley
President & Chief Executive Officer
Victor F. Bozuhoski, Jr.
Executive Vice President, Chief Financial Officer & Treasurer
Thomas S. Kohlmann
Executive Vice President
Augustus C. Weaver
Executive Vice President
Douglas Ian Shaw
Vice President & Corporate Secretary
27
<PAGE> 32
THE SUFFOLK COUNTY NATIONAL BANK
[Logo]
DIRECTORS
Edward J. Merz
Chairman of the Board
Raymond A. Mazgulski
Vice Chairman of the Board
Bruce Collins
Retired
Joseph A. Deerkoski
President, See Neefus, Inc.
(general insurance)
Howard M. Finkelstein
Partner; Smith, Finkelstein,
Lundberg, Isler
& Yakaboski
(attorneys)
Edgar F. Goodale
President
Riverhead Building
Supply Corp.
John F. Hanley
President &
Chief Executive Officer
Hallock Luce 3rd
Director,
Lupton & Luce, Inc.
(general insurance)
President,
Hallup Realty Corp.
(real estate)
J. Douglas Stark
President, Stark
Mobile Homes, Inc.
Peter Van de Wetering
President, Van de Wetering
Greenhouses, Inc.
(wholesale nursery)
EXECUTIVE OFFICERS
John F. Hanley
President &
Chief Executive Officer
Victor F. Bozuhoski, Jr.
Executive Vice President
Thomas S. Kohlmann
Executive Vice President &
Chief Lending Officer
Augustus C. Weaver
Executive Vice President &
Chief Information Officer
CONSUMER LOANS
Jeanne P. Hamilton
Senior Vice President
John Dunleavy
Vice President
Michael E. Kelley
Vice President
COMMERCIAL LOANS
Robert C. Dick
Senior Vice President
Lawrence Milius
Senior Vice President
Peter M. Almasy
Vice President
David T. De Vito
Vice President
Robert T. Ellerkamp
Vice President
Frederick J. Weinfurt
Vice President
Thomas E. Clemens
Vice President
Phillip D. Ammirato
Vice President
AUDIT
Roy Garbarino, C.P.A.
Auditor
BRANCH ADMINISTRATION
Robert H. Militscher
Senior Vice President &
Branch Administrator
Richard J. Micallef
Vice President
William K. Miller
Vice President
Bohemia Office
<PAGE> 33
Dean S. Kupinsky
Assistant Vice President
Center Moriches Office
Thomas R. Columbus, Sr.
Vice President
Cutchogue Office
Richard J. Noncarrow
Vice President
East Hampton Pantigo Office
David Barczak
Assistant Vice President
East Hampton Village Office
Jill M. James
Assistant Vice President
Hampton Bays Office
John J. Reilly
Vice President
Mattituck Office
Janet V. Stewart
Vice President
Medford Office
Paul E. Vaas
Vice President
Miller Place Office
Michele DiBartolomeo
Manager
Montauk Harbor Office
Montauk Village Office
Susan M. Martinelli
Assistant Vice President
Port Jefferson Office
Peter A. Poten
Vice President
Riverhead, Ostrander
Avenue Office
Linda C. Zarro
Vice President
Riverhead, Second Street Office
Barbara A. Scesny
Vice President
Sag Harbor Office
Jane P. Markowski
Assistant Vice President
Shoreham Office
Alison S. Cassara
Manager
Smithtown Office
Paul G. Cuddy
Manager
Southampton Office
Patricia Bolomey
Assistant Vice President
Wading River Office
Anita Nigrel
Vice President
Water Mill Office
Brenda L. Gumbrecht-Philp
Manager
West Babylon Office
Mary E. Libassi
Manager
Westhampton Beach Office
Charles E. Johnson
Vice President
TRUST
Dan A. Cicale
Senior Vice President
& Trust Officer
William C. Araneo
Vice President
Lori E. Thompson
Vice President
<PAGE> 34
COMPTROLLER
J. Gordon Huszagh
Senior Vice President
& Chief Financial Officer
COMPLIANCE
Louis A. Antoniello
Bank Officer & CRA Officer
CORPORATE SERVICES
Douglas Ian Shaw
Vice President &
Corporate Secretary
FACILITIES AND SECURITY
William E. Heck, Jr.
Vice President
HUMAN RESOURCES
Pamela L. Palleschi
Vice President
EMPLOYEE DEVELOPMENT
Richard Montenegro
Vice President
DATA PROCESSING
Mark J. Drozd
Senior Vice President
Joanne Appel
Assistant Data Processing Manager
OPERATIONS
Dennis F. Orski
Senior Vice President
MARKETING
Alexander B. Doroski
Senior Vice President
Brenda B. Sujecki
Vice President
Suffolk Bancorp and The Suffolk County National Bank are
Equal Opportunity Affirmative Action Employers
<PAGE> 35
Directory of Offices and Departments
<TABLE>
<CAPTION>
Area Code (516)
Telephone FAX
<S> <C> <C> <C>
Executive Offices.........................................322 Roanoke Avenue, Riverhead, N.Y. 11901 727-3800 727-2638
Audit ................................................228 East Main St., Port Jefferson, N.Y. 11777 473-3580 473-6221
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
Compliance ...............................................220 Roanoke Avenue, Riverhead, N.Y. 11901 727-5395 727-9223
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....................................................Route 25, 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
Employee Development....................................295 North Sea Road, Southampton, N.Y. 11968 287-3102 287-3293
Facilities & Security...................................6 West Second Street, Riverhead, N.Y. 11901 727-2700 727-3210
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 Rte 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
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
Westhampton Beach Office.............................144 Sunset Ave., Westhampton Beach, N.Y. 11978 288-4000 288-9252
West Babylon Office.............................955 Little East Neck Road, West Babylon, N.Y. 11704 669-7300 669-5211
</TABLE>
<PAGE> 36
[GRAPHIC OMITTED]
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