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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1998
COMMISSION FILE NUMBER 0-13580
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SUFFOLK BANCORP
(Exact name of registrant as specified in its charter)
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NEW YORK 11-2708279
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
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6 WEST SECOND STREET, RIVERHEAD, NEW YORK 11901
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 727-5667
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $2.50 PAR VALUE
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(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 [ ]
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CLASS OF COMMON STOCK NUMBER OF SHARES OUTSTANDING AS OF MARCH 5,
1999
$2.50 Par Value 6,076,080
</TABLE>
The aggregate market value of the Registrant's Common Stock (based on the
most recent sale at $28.63 on March 5, 1999) held by non-affiliates was
approximately $173,958,170.
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TABLE OF CONTENTS
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PART I
Item 1. Business........................................... 1
Item 2. Properties......................................... 5
Item 3. Legal Proceedings.................................. 5
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 5
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 6
Item 6. Selected Financial Data............................ 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 8
Suffolk's Business.......................................... 8
General Economic Conditions................................. 8
Results of Operations....................................... 8
Net Income.................................................. 8
Net-Interest Income......................................... 8
Average Assets, Liabilities, and Stockholders' Equity, Rate Spread, and Effective Interest Rate Differential.. 9
Analysis of Changes in Net Interest Income.................. 10
Interest Income............................................. 10
Investment Securities....................................... 11
Loan Portfolio.............................................. 12
Non Performing Loans........................................ 12
Summary of Loan Losses and Allowance for Possible Loan
Losses.................................................... 13
Interest Expense............................................ 14
Deposits.................................................... 15
Short Term Borrowings....................................... 15
Other Income................................................ 15
Other Expenses.............................................. 15
Interest Rate Sensitivity................................... 16
Market Risk................................................. 17
Interest Rate Risk.......................................... 17
Asset/Liability Management & Liquidity...................... 18
Readiness for the Year 2000................................. 18
Capital Resources........................................... 19
Risk-Based Capital and Leverage Guidelines.................. 20
Discussion of Current Accounting Pronouncements............. 20
Item 8. Financial Statements and Supplementary Data........ 20
Consolidated Statements of Condition........................ 21
Consolidated Statements of Income........................... 22
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 23
Consolidated Statements of Cash Flows....................... 24
Notes to Consolidated Financial Statements.................. 25
Report of Independent Accountants........................... 42
Report of Management........................................ 43
Item 9. Changes in and Disagreements with Accountants and
Financial Disclosures..................................... 44
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 44
Item 11. Executive Compensation............................ 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................ 45
Item 13. Certain Relationships and Related Transactions.... 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K....................................... 45
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PART I
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held April 13, 1999, filed on March 13, 1999. (Part III)
ITEM 1. BUSINESS
SUFFOLK BANCORP ("SUFFOLK")
Suffolk was incorporated on January 2, 1985 as a bank holding company. On
that date, Suffolk acquired, and now owns, all of the outstanding capital stock
of The Suffolk County National Bank. On July 14, 1988, Suffolk acquired all the
outstanding capital stock of Island Computer Corporation of New York, Inc. The
business of Suffolk consists primarily of the ownership, supervision, and
control of its subsidiaries. On April 11, 1994, Suffolk acquired all the
outstanding capital stock of Hamptons Bancshares, Inc. and merged it into a
subsidiary. During 1996, the operations of Island Computer Corporation of New
York, Inc. were assumed by The Suffolk County National Bank.
Suffolk's chief competition includes local banking institutions with main
or branch offices in the service area of The Suffolk County National Bank,
including North Fork Bank and Trust Co., and Bridgehampton National Bank.
Additionally, New York City money center banks and regional banks provide
competition. These banks include primarily the Bank of New York, Chase Manhattan
Bank, and Fleet Bank.
Suffolk and its subsidiaries had 363 full-time and 56 part-time employees
on December 31, 1998.
The Suffolk County National Bank ("Bank")
The Suffolk County National Bank of Riverhead was organized under the
National Banking laws of the United States of America on January 6, 1890. The
Bank is a member of the Federal Reserve System, and its deposits are insured by
the Federal Deposit Insurance Corporation to the extent provided by law.
Directed by members of the communities it serves, the Bank's main service
area includes the towns of Babylon, Brookhaven, East Hampton, Islip, Riverhead,
Smithtown, Southampton, and Southold. The main office of the Bank is situated at
6 West Second Street, Riverhead, New York. Its branch offices are located at
Bohemia, Center Moriches, Cutchogue, East Hampton, Hampton Bays, Mattituck,
Medford, Miller Place, Montauk, Riverhead, Port Jefferson, Sag Harbor, Sayville,
Shoreham, Smithtown, Southampton, Wading River, Water Mill, West Babylon, and
Westhampton Beach, New York.
The Bank is a full-service bank serving the needs of the local residents of
Suffolk County. Most of the Bank's business is devoted to rendering services to
those residing in the immediate area of the Bank's main and branch offices.
Among the services offered by the Bank are checking accounts, savings accounts,
time and savings certificates, money market accounts,
negotiable-order-of-withdrawal accounts, holiday club accounts and individual
retirement accounts; secured and unsecured loans, including commercial loans to
individuals, partnerships and corporations, agricultural loans to farmers,
installment loans to finance small businesses, mobile home loans, automobile
loans, home equity and real estate mortgage loans; safe deposit boxes; trust and
estate services, the sale of mutual funds and annuities, and the maintenance of
a master pension plan for self-employed individuals' participation. The business
of the Bank is only mildly seasonal, as a great majority of the Bank's business
is devoted to those residing in the Bank's service area.
SUPERVISION AND REGULATION
References in this section to applicable statutes and regulations are brief
summaries only, and do not purport to be complete. The reader should consult
such statutes and regulations themselves for a full understanding of the details
of their operation.
Suffolk is a bank holding company registered under the BHC Act, and is
subject to supervision and regulation by the Federal Reserve Board. Federal laws
subject bank holding companies to particular
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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
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restoration plan until it becomes "adequately capitalized." Suffolk 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 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 Suffolk 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 Suffolk 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. FDICIA
requires examinations 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.
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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 regulations specifying operational
and management standards (addressing internal controls, loan documentation,
credit underwriting and interest rate risk) and asset quality, and earnings.
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 Suffolk 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 Federal
Reserve Board's monetary policies and the relative costs of different types of
funds. An important function of the Federal Reserve Board is to regulate the
national supply of bank credit in order to combat recession and curb
inflationary pressure. Among the instruments of monetary policy used by the
Federal Reserve Board to implement these 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 Federal Reserve Board have had a significant effect on
the operating results of commercial banks in the past and are expected
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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.
STATISTICAL DISCLOSURE
ITEM 2. PROPERTIES
REGISTRANT
Suffolk as such has no physical properties. Office facilities of Suffolk
are located at 6 West Second Street, Riverhead, New York.
Bank
The Bank's main offices are also located at 6 West Second Street,
Riverhead, New York, which the Bank owns in fee. The Bank owns a total of 15
buildings in fee, and holds 16 buildings under lease agreements.
In the opinion of management of Suffolk, the physical facilities are
suitable and adequate and at present are being fully utilized. Suffolk, 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 Suffolk or its subsidiaries are a party or of which any of the property
is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The approval of the "Suffolk Bancorp 1999 Stock Option Plan."
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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HIGH LOW DIVIDENDS
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1998
First Quarter............................................... $33.00 $28.50 $0.180
Second Quarter.............................................. 34.00 29.75 0.180
Third Quarter............................................... 35.25 27.88 0.180
Fourth Quarter.............................................. 29.75 19.88 0.180
1997
First Quarter............................................... $21.75 $19.13 $0.165
Second Quarter.............................................. 31.25 21.00 0.165
Third Quarter............................................... 32.25 26.75 0.180
Fourth Quarter.............................................. 33.00 27.75 0.180
</TABLE>
At February 2, 1999, there were approximately 1,921 equity holders of
record of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY: (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNT)
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FOR THE YEARS 1998 1997 1996 1995 1994(1)
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Interest income........................... $ 65,874 $ 64,129 $ 60,529 $ 59,312 $ 51,564
Interest expense.......................... 21,464 20,970 19,372 20,331 15,734
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Net-interest income....................... 44,410 43,159 41,157 38,981 35,830
Provision for possible loan losses........ 900 1,059 1,120 530 730
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Net interest income after provision....... 43,510 42,100 40,037 38,451 35,100
Other income.............................. 8,148 7,646 7,286 6,702 5,675
Other expense............................. 31,200 30,303 28,967 30,135 27,752
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Income before income taxes................ 20,458 19,443 18,356 15,018 13,023
Provision for income taxes................ 8,555 8,141 7,709 5,929 4,705
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Net Income................................ $ 11,903 $ 11,302 $ 10,647 $ 9,089 $ 8,318
========= ========= ========= ========= =========
BALANCE AT DECEMBER 31:
Federal funds sold........................ $ 17,800 $ 18,500 $ 1,500 $ 32,500 $ --
Investment securities -- available for
sale.................................... 129,348 120,878 104,649 137,043 68,261
Investment securities -- held to
maturity................................ 21,853 26,048 30,704 44,923 126,380
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Total investment securities............... 151,201 146,926 135,353 181,966 194,641
Net loans................................. 640,565 604,864 578,883 510,015 529,075
Total assets.............................. 909,432 864,913 804,379 805,794 811,654
Total deposits............................ 826,564 777,595 711,018 727,060 723,993
Other borrowings.......................... -- -- 7,200 -- --
Stockholders' equity...................... $ 71,846 $ 65,140 $ 72,750 $ 70,046 $ 77,093
</TABLE>
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FOR THE YEARS 1998 1997 1996 1995 1994(1)
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SELECTED FINANCIAL RATIOS:
Performance:
Return on average equity.................. 17.66% 16.96% 15.12% 11.56% 11.50%
Return on average assets.................. 1.37 1.37 1.35 1.15 1.11
Net interest margin
(taxable-equivalent).................... 5.77 5.84 5.84 5.49 5.34
Average equity to average assets.......... 7.77 8.05 8.96 9.91 9.68
Dividend pay-out ratio.................... 36.87 38.34 38.49 36.83 31.61
Asset quality:
Non-performing assets to total loans (net
of discount)............................ 0.34 0.59 1.02 1.33 1.70(2)
Non-performing assets to total assets..... 0.24 0.41 0.74 0.85 1.11(2)
Allowance to non-performing assets........ 319.33 182.29 127.12 77.38 77.39
Allowance to loans, net of discount....... 1.07 1.07 1.05 1.15 1.16
Net charge-offs to average net loans...... 0.08 0.11 0.17 0.16 0.23
PER SHARE DATA:
Net income (basic)........................ 1.95 1.79 1.60 1.22 1.13(3)
Cash dividends............................ 0.72 0.69 0.62 0.45 0.36
Book value at year-end.................... 11.81 10.69 11.04 10.28 10.15
Highest market value...................... 35.25 33.00 19.88 18.75 14.25
Lowest market value....................... 19.88 19.13 14.75 13.00 10.50
Average shares outstanding................ 6,094,826 6,306,299 6,682,064 7,478,946 7,384,572
Number of full-time-equivalent employees
at year-end............................. 391 378 372 400 426
Number of branch offices at year-end...... 26 25 23 22 21
Number of automatic teller machines....... 18 16 16 15 14
</TABLE>
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(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.
(3) Reflects issuance of 402,109 shares in acquisition of Hamptons on April 11,
1994.
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ITEM 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, 1998 and 1997, respectively. Selected tabular data
are presented for each of the past five years.
SUFFOLK'S BUSINESS
Nearly all of Suffolk's business is to provide banking services to its
commercial and retail customers in Suffolk County, on Long Island, New York.
Suffolk is a one-bank holding company. Its banking subsidiary, The Suffolk
County National Bank (the "Bank"), operates 26 full-service offices in Suffolk
County, New York. It offers a full line of domestic, retail, and commercial
banking services, and trust services. The Bank's primary lending area includes
all of Suffolk County, New York. The Bank also makes loans for automobiles in
Nassau County, New York. The Bank serves as an indirect lender to the customers
of many automobile dealers. The Bank also lends to small manufacturers,
wholesalers, builders, farmers and retailers, and finances dealers' inventory.
The Bank makes loans secured by real estate, including residential mortgages, of
which most are sold to investors; real estate construction loans; and loans that
are secured by commercial real estate and float with the prime rate, or that
have relatively short terms and are retained in the Bank's portfolio. The Bank
offers both fixed and floating-rate second mortgage loans with a variety of
plans for repayment.
Other investments are made in short-term United States Treasury debt, high
quality obligations of municipalities in New York State, issues of agencies of
the United States Government, collateralized mortgage obligations and stock in
the Federal Reserve Bank and the Federal Home Loan Bank of New York required as
a condition of membership.
The Bank finances most of its activities with deposits, including demand,
savings, N.O.W., and money market accounts, as well as term certificates. To a
much lesser degree, it relies on other short-term sources of funds, including
interbank overnight loans and, when needed, sale-repurchase agreements.
GENERAL ECONOMIC CONDITIONS
Growth in Long Island's economy was steady during 1998. 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 1998, 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 $11,903,000 compared to $11,302,000 last year and
$10,647,000 in 1996. These represents increases of 5.3 percent and 6.2 percent
respectively. Basic earnings-per-share were $1.95 compared to $1.79, last year
and $1.60 in 1996.
NET INTEREST INCOME
Net-interest income during 1998 was $44,410,000, up 2.9 percent from
$43,159,000 and up 4.9 percent from $41,157,000 in 1997 and 1996, 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 5.77
percent in 1998, 5.84 percent during 1997, and 5.84 percent in 1996. Average
rates on average interest-earning assets decreased to 8.53 percent in 1998, from
8.65 percent in 1997 and 8.55 percent in 1996. Average rates on
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average interest-bearing liabilities increased to 3.70 percent in 1998, from
3.69 percent in 1997 and 3.54 percent in 1996. The interest rate differential
decreased slightly in 1998 from 1997, and did not change in 1997 from 1996.
Also, demand deposits increased slightly from year to year as a percentage of
total liabilities.
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 the 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>
YEAR ENDED DECEMBER 31,
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1998 1997 1996
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
U.S. treasury securities.......... $ 85,808 $ 5,382 6.27% $101,151 $ 6,557 6.48% $110,483 $ 6,579 5.95%
Obligations of states & political
subdivisions..................... 15,875 1,016 6.41 10,940 744 6.80 13,639 1,005 7.37
U.S. govt. agency obligations..... 26,365 1,790 6.79 23,921 1,597 6.68 26,939 1,801 6.69
Corporate bonds & other
securities....................... 807 38 4.71 638 38 5.96 638 38 5.96
Federal funds sold & securities
purchased under agreements to
resell........................... 29,329 1,547 5.27 20,683 1,128 5.45 17,208 919 5.34
Loans, including non-accrual
loans............................ 619,025 56,554 9.14 588,686 54,448 9.25 544,258 50,659 9.31
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets..... $777,209 $66,327 8.53% $746,019 $64,512 8.65% $713,165 $61,001 8.55%
======== ======= ==== ======== ======= ==== ======== ======= ====
Cash & due from banks............. $ 56,190 $ 43,759 $ 40,114
Other non-interest-earning
assets........................... 33,648 38,020 32,880
-------- -------- --------
Total assets...................... $867,047 $827,798 $786,159
======== ======== ========
INTEREST-BEARING LIABILITIES
Savings, N.O.W.'s & money market
deposits......................... $321,143 $ 7,373 2.30% $323,105 $ 7,567 2.34% $325,788 $ 7,924 2.43%
Time deposits..................... 256,120 13,938 5.44 237,520 12,966 5.46 220,531 11,428 5.18
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total savings & time deposits..... 577,263 21,311 3.69 560,625 20,533 3.66 546,319 19,352 3.54
Federal funds purchased &
securities sold under agreement
to repurchase.................... 2,551 153 6.00 7,792 425 5.45 322 19 5.90
Other borrowings.................. -- -- -- 165 12 7.27 -- -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities...................... $579,814 $21,464 3.70% $568,582 $20,970 3.69% $546,641 $19,371 3.54%
======== ======= ==== ======== ======= ==== ======== ======= ====
Rate spread....................... 4.83% 4.96% 5.01%
Non-interest-bearing deposits..... $204,664 $183,894 $162,884
Other non-interest-bearing
liabilities...................... 15,184 8,690 6,221
-------- -------- --------
Total liabilities................. $799,662 $761,166 $715,746
Stockholders' equity.............. 67,385 66,632 70,413
-------- -------- --------
Total liabilities & stockholders'
equity........................... $867,047 $827,798 $786,159
======== ======== ========
Net-interest income
(taxable-equivalent basis) &
effective interest rate
differential..................... $44,863 5.77% $43,542 5.84% $41,630 5.84%
Less: taxable-equivalent basis
adjustment....................... (453) (383) (473)
------- ------- -------
Net-interest income $44,410 $43,159 $41,157
======= ======= =======
</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
nontaxable U.S. Treasury Securities and state and municipal obligations had been
subject to New York State and federal income taxes yielding the same after-tax
income. The rate used for this adjustment was approximately 34% for federal
income taxes and 9% for
9
<PAGE> 12
New York State income taxes for all periods. For each of the years 1998, 1997
and 1996, $1.00 of nontaxable income from obligations of states and political
subdivisions equates to fully-taxable income of $1.52. In addition, in 1998,
1997 and 1996, $1.00 of nontaxable income on U.S. Treasury securities equates to
$1.02 of fully taxable income. The amortization of loan fees is included in
interest income.
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 1998 OVER 1997 IN 1997 OVER 1996
CHANGES DUE TO CHANGES DUE TO
--------------------------- ---------------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
------ ----- ---------- ------ ----- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
U.S. treasury securities.................. $ (967) $(208) $(1,175) $ (580) $ 558 $ (22)
Obligations of states & political
subdivisions............................ 317 (45) 272 (188) (73) (261)
U.S. govt. agency obligations............. 166 27 193 (201) (3) (204)
Corporate bonds & other securities........ 10 (10) -- -- -- --
Federal fund sold & securities purchased
under agreement to resell............... 457 (38) 419 189 20 209
Loans, including non-accrual loans........ 2,778 (672) 2,106 4,111 (322) 3,789
------ ----- ------- ------ ----- -------
Total interest-earning assets............. $2,761 $(946) $ 1,815 $3,331 $ 180 $ 3,511
------ ----- ------- ------ ----- -------
INTEREST-BEARING LIABILITIES
Savings, N.O.W.'s & money market
deposits................................ $ (46) $(148) $ (194) $ (65) $(292) $ (357)
Time deposits............................. 1,012 (40) 972 908 630 1,538
Federal funds purchased & securities sold
under agreement to repurchase........... (311) 39 (272) 408 (2) 406
Other borrowings.......................... (6) (6) (12) 6 6 12
------ ----- ------- ------ ----- -------
Total interest-bearing liabilities........ $ 649 $(155) $ 494 $1,257 $ 342 $ 1,599
------ ----- ------- ------ ----- -------
Net change in net-interest income
(taxable-equivalent basis).............. $2,112 $(791) $ 1,321 $2,074 $(162) $ 1,912
====== ===== ======= ====== ===== =======
</TABLE>
INTEREST INCOME
Interest income increased to $65,874,000 in 1998, from $64,129,000 in 1997,
and $60,529,000 in 1996 increases of 2.7 and 5.9 percent respectively.
10
<PAGE> 13
INVESTMENT SECURITIES
Average investment in U.S. Treasury securities decreased to $85,808,000
from $101,151,000 in 1997, and $110,483,000 in 1996, a decrease of 15.2 and 8.4
percent, respectively. These securities are Suffolk's primary source of
liquidity. These balances decreased as funds were shifted into government agency
issues as the spread between treasury and agency yields widened during the
period. U.S. Treasury, U.S. Government Agency, and municipal securities provide
collateral for various liabilities to municipal depositors.
The following table summarizes Suffolk's investment securities available
for sale and held to maturity as of the dates indicated: (in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Investment securities available for sale, at fair value:
U.S. treasury securities............................... $ 67,023 $107,140 $ 91,092
U.S. government agency debt securities................. 43,366 13,738 13,557
Collateralized mortgage obligations.................... 18,959 -- --
-------- -------- --------
Total investment securities available for sale.... 129,348 120,878 104,649
-------- -------- --------
Investment securities held to maturity:
U.S. treasury securities............................... -- -- 8,019
Obligations of states & political subdivisions......... 16,231 18,371 10,170
U.S. govt. agency obligations.......................... 2,382 7,039 11,877
Corporate bonds & other securities..................... 3,240 638 638
-------- -------- --------
Total investment securities held to maturity...... 21,853 26,048 30,704
-------- -------- --------
Total investment securities....................... $151,201 $146,926 $135,353
======== ======== ========
Fair value of investment securities held to maturity..... $ 22,015 $ 26,213 $ 30,920
Unrealized gains......................................... 162 170 219
Unrealized losses........................................ -- 5 3
</TABLE>
The amortized cost, maturities and approximate weighted average yields, on
a taxable-equivalent basis, at December 31, 1998 are as follows: (in thousands)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------------- ---------------------------------------
U.S. COLLATERALIZED OBLIGATIONS OF U.S.
U.S. TREASURY GOVT. AGENCY MORTGAGE STATES & POLITICAL GOVT. AGENCY
SECURITIES DEBT. OBLIGATIONS(1) SUBDIVISIONS DEBT.
--------------- --------------- --------------- ------------------- -----------------
FAIR FAIR FAIR AMORTIZED AMORTIZED
MATURITY (IN YEARS) VALUE YIELD VALUE YIELD VALUE YIELD COST YIELD COST YIELD
- ------------------- ------- ----- ------- ----- ------- ----- ---------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1............... $60,956 5.24% $ -- --% $ -- --% $13,969 5.81% $ -- --%
After 1 but within 5... 6,067 5.35 43,366 5.70 -- -- 200 6.99 2,382 5.50
After 5 but within
10.................... -- -- -- -- -- -- 2,031 7.85 -- --
After 10............... -- -- -- -- 18,959 5.72 31 7.51 -- --
Other securities....... -- -- -- -- -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total.................. $67,023 5.25% $43,366 5.70% $18,959 5.72% $16,231 6.08% $ 2,382 5.50%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
HELD TO MATURITY
-----------------
CORPORATE FIRMS
AND OTHER
SECURITIES
-----------------
AMORTIZED
MATURITY (IN YEARS) COST YIELD TOTAL
- ------------------- --------- ----- --------
<S> <C> <C> <C>
Within 1............... $ -- -- $ 74,925
After 1 but within 5... -- -- $ 52,015
After 5 but within
10.................... -- -- $ 2,031
After 10............... -- -- $ 18,990
Other securities....... 3,240 6.80% $ 3,240
------- ---- --------
Total.................. $ 3,240 6.80% $151,201
======= ==== ========
</TABLE>
- ---------------
(1) Maturities shown are stated maturities. Securities backed by mortgages are
expected to have substantial periodic prepayments resulting in weighted
average lives considerably shorter than would be surmised from the above
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%.
11
<PAGE> 14
As a member of the Federal Home Loan Bank of New York, the Bank owns
Federal Home Loan Bank of New York stock with a book value of $2,602,000. Being
an equity investment, the stock has no maturity. There is no public market for
this investment. The last declared dividend was 7%.
LOAN PORTFOLIO
Loans, net of unearned discounts, but before the allowance for possible
loan losses totaled $647,520,000.
Consumer loans are the largest component of the Suffolk's loan portfolio.
Net of unearned discounts, they totaled $284,697,000 at the end of 1998, up 6.9
percent from $266,244,000 at the year-end 1997. 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 $128,923,000, up 0.7
percent from $127,994,000 last year. Commercial and industrial loans followed at
$123,463,000, up 10.6 percent from $111,575,000 at the end of 1997. 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 $73,754,000, up 10.0 percent from $67,061,000, home equity loans at
$21,980,000, down 16.1 percent from $26,201,000, and construction loans at
$12,500,000, up 27.3 percent from $9,823,000.
The following table categorizes total loans (net of unearned discounts) at
December 31: (in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial & agricultural
loans................................ $123,463 $111,575 $102,263 $ 78,730 $ 71,414
Commercial real estate mortgages....... 128,923 127,994 113,501 99,940 104,548
Real estate -- construction loans...... 12,500 9,823 9,437 7,946 8,018
Residential mortgages (1st and 2nd
liens)............................... 73,754 67,061 64,093 55,047 50,011
Home equity loans...................... 21,980 26,201 28,974 26,869 27,534
Consumer loans......................... 284,697 266,244 265,039 245,317 269,725
Lease finance.......................... -- 7 98 311 743
Other loans............................ 2,203 2,483 1,592 1,778 3,296
-------- -------- -------- -------- --------
Total loans (net of unearned
discounts)........................... $647,520 $611,388 $584,997 $515,938 $535,289
======== ======== ======== ======== ========
</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 loans, of a material amount, are reflected in the foregoing
tables.
12
<PAGE> 15
The following table shows non-accrual, past due, and restructured loans at
December 31: (in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans accruing but past due contractually 90 days
or more......................................... $2,168 $1,941 $ 975 $2,584 $2,015
Loans not accruing interest....................... 1,546 2,491 3,834 5,071 6,014
Restructured loans................................ 291 426 208 532 372
------ ------ ------ ------ ------
Total............................................. $4,005 $4,858 $5,017 $8,187 $8,401
====== ====== ====== ====== ======
</TABLE>
Interest on loans that are restructured or are no longer accruing interest
would have amounted to about $143,000 for 1998 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 1998, 1997 and 1996. 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 ALLOWANCES 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 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 1998 was
0.08, compared to 0.11 percent in 1997, and 0.17 percent during 1996. The ratio
of the allowance for possible loan losses to loans, net of discounts, was 1.07
percent at the end of 1998, 1.07 percent in 1997, and 1.05 percent in 1996. The
allowance for possible loan losses has seven major categories. A summary of
transactions follows: (in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ----------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses, January
1,........................................ $ 6,524 $ 6,113 $ 5,923 $ 6,214 $ 4,922
Allowance acquired from Hamptons............ -- -- -- -- 1,678
LOANS CHARGED-OFF:
Commercial, financial & agricultural
loans..................................... 176 278 322 346 869
Commercial real estate mortgages............ -- -- 369 271 8
Real estate -- construction loans........... -- -- -- -- --
Residential mortgages (1st and 2nd liens)... 1 -- -- -- --
Home equity loans........................... -- 76 47 28 80
Consumer loans.............................. 494 480 518 539 511
Lease finance............................... 2 -- -- -- --
Other loans................................. -- -- -- -- --
-------- -------- -------- -------- --------
Total Charge-offs........................... $ 673 $ 834 1,256 1,184 1,468
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ----------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- --------
LOANS RECOVERED AFTER BEING CHARGED-OFF
Commercial, financial & agricultural
loans..................................... 52 35 111 89 72
Commercial real estate mortgages............ -- -- 4 16 --
Real estate -- construction loans........... -- -- -- -- 11
Residential mortgages (1st and 2nd liens)... 1 -- -- -- --
Home equity loans........................... -- -- -- -- --
Consumer loans.............................. 145 151 209 258 269
Lease finance............................... 6 -- -- -- --
Other loans................................. -- -- 2 -- --
-------- -------- -------- -------- --------
TOTAL RECOVERIES............................ $ 204 $ 186 $ 326 $ 363 $ 352
-------- -------- -------- -------- --------
Net loans charged-off....................... 469 648 930 821 1,116
Provision for possible loan losses.......... 900 1,059 1,120 530 730
-------- -------- -------- -------- --------
Allowance for possible loan losses, December
31,....................................... $ 6,955 $ 6,524 $ 6,113 $ 5,923 $ 6,214
======== ======== ======== ======== ========
</TABLE>
The following table presents information concerning loan balances and asset
quality: (dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ----------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loans, net of discounts:
Average................................... $619,025 $588,686 $544,258 $520,139 $487,297
At end of period.......................... 647,520 611,388 584,997 515,938 535,289
Non-performing assets/total loans (net of
discounts)................................ 0.34% 0.04% 1.02% 1.33% 1.70%
Non-performing assets/total assets.......... 0.24 0.36 0.74 0.85 1.11
Ratio of net charge-offs/average net
loans..................................... 0.08 0.11 0.17 0.16 0.23
Net charge-offs/net loans at December 31,... 0.07 0.11 0.16 0.16 0.21
Allowance for possible loan losses/loans,
net of discounts.......................... 1.07 1.07 1.05 1.15 1.16
</TABLE>
The disparity between average net loans and net loans at December 31, 1994
is mostly attributable to the acquisition of Hampton's portfolio of loans.
INTEREST EXPENSE
Interest expense in 1998 was $21,464,000 up 2.4 percent from $20,970,000
the year before, which was up 8.2 percent from $19,372,000 during 1996. 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 $2,551,000 during 1998, $7,957,000 during 1997
and $322,000 during 1996.
14
<PAGE> 17
DEPOSITS
Average interest-bearing deposits increased to $577,263,000 in 1998, up 3.0
percent from $560,625,000 in 1997. Savings, N.O.W. and money market deposits
decreased during 1998, averaging $321,143,000, down 0.6 percent from 1997 when
they averaged $323,105,000. Average time certificates of less than $100,000,
totaled $231,143,000, up 8.2 percent from $213,594,000 in 1997. Average time
certificates of $100,000 or more totaled $24,977,000, up 4.4 percent from
$23,926,000, during 1997.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE PAID AVERAGE RATE PAID AVERAGE RATE PAID
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits...................... $204,664 $183,894 $162,884
Savings deposits..................... 197,091 2.54% 190,301 2.59% 190,962 2.72%
N.O.W. & money market deposits....... 124,052 1.91 132,804 1.99 134,826 2.03
Time certificates of $100,000 or
more............................... 24,977 5.17 23,926 4.63 29,213 3.08
Other time deposits.................. 231,143 5.47 213,594 5.55 191,318 5.50
-------- -------- --------
Total deposits....................... $781,927 $744,519 $709,203
======== ======== ========
</TABLE>
The following table classifies average deposits for each of the periods
indicated: (in thousands)
At December 31, 1998, the remaining maturities of time certificates of
$100,000 or more were as follows: (in thousands)
<TABLE>
<S> <C>
3 months or less....................................... $15,432
Over 3 through 6 months................................ 8,489
Over 6 through 12 months............................... 1,516
Over 12 months......................................... 424
-------
Total.................................................. $25,861
=======
</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 $1,411,000 and $1,723,000 for 1998 and 1997
respectively. Average balances of Federal Reserve Bank borrowings were none
during 1998 and $165,000 during 1997. Retail repurchase agreements averaged
$1,140,000 during 1998 and $6,069,000 during 1997. There were none outstanding
during 1996.
OTHER INCOME
Other income increased to $8,148,000 during 1998, up 6.6 percent from
$7,646,000 during 1997 and up 4.9 percent $7,286,000 during 1996. Service
charges on deposit accounts were down 10.7 percent from 1997 to 1998, and up 6.9
percent from 1997 to 1996. Other service charges were up 11.2 and 26.5 for the
same periods. Fiduciary fees in 1998 totaled $566,000 up 19.4 percent from 1997
when they amounted to $474,000 and up 3.7 percent from 1996, when they amounted
to $457,000.
OTHER EXPENSE
Other expense during 1998 was $31,200,000 up 3.0 percent from 1997 when it
was $30,303,000, up 4.6 percent from $28,967,000, in 1996. During 1998,
equipment and other operating expense increased as the result of a conversion to
a new, client-server core data-processing system during the first quarter.
15
<PAGE> 18
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, 1998: (dollars in thousands)
<TABLE>
<CAPTION>
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
MATURITY:
Domestic loans(1) (net of unearned
discount)........................... 200,706 65,995 101,794 274,025 5,000 $647,520
Investment securities(2).............. 36,763 24,735 15,104 71,559 3,040 151,201
Federal funds sold(3)................. 17,800 -- -- -- -- 17,800
-------- -------- -------- --------- -------- --------
Total interest-earning assets......... $255,269 $ 90,730 $116,898 $345,584 $ 8,040 $816,521
======== ======== ======== ========= ======== ========
DEMAND DEPOSITS AND INTEREST-BEARING
LIABILITIES
Demand deposits(4).................... 23,171 23,171 46,341 141,365 -- $234,048
N.O.W. & money market accounts(5)..... 5,140 5,140 10,279 107,379 -- 127,938
Interest-bearing deposits(6).......... 104,442 68,168 93,508 198,460 -- 464,578
-------- -------- -------- --------- -------- --------
Total demand deposits &
interest-bearing liabilities........ $132,753 $ 96,479 $150,128 $447,204 $ -- $826,564
======== ======== ======== ========= ======== ========
Gap................................... 122,516 (5,749) (33,230) (101,620) 8,040 (10,043)
======== ======== ======== ========= ======== ========
Cumulative difference between
interest-earning assets and
interest-bearing liabilities........ 122,516 116,767 83,537 (18,083) (10,043)
-------- -------- -------- --------- -------- --------
Cumulative difference/total assets.... 13.47% 12.84% 9.19% (1.99%) (1.10%)
======== ======== ======== ========= ======== ========
</TABLE>
- ---------------
(1) Based on contractual maturity, instrument repricing date, if applicable,
projected prepayments and prepayments of principal experience.
(2) Based on contractual maturity, and projected prepayments based on
experience. FRB and FHLB 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 assumed to decline over a
period of five years.
As of December 31, 1998, 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.
16
<PAGE> 19
MARKET RISK
Market risk is the risk that a financial instrument will lose value as the
result of adverse changes in market prices, interest rates, foreign currency
exchange rates, commodity prices, or the prices of equity securities. Suffolk's
primary exposure to market risk is to changing interest rates.
Monitoring and managing this risk is an important part of Suffolk's
asset/liability management process. It is governed by policies established by
its Board of Directors. These policies are reviewed and approved annually. The
Board delegates responsibility for asset/liability management to the
Asset/Liability Committee ("ALCO"). ALCO then develops guidelines and strategies
to implement the policy.
INTEREST RATE RISK
Interest rate risk is the sensitivity of earnings to changes in interest
rates. As interest rates change, interest income and expense also change,
thereby changing net interest income ("NII"). NII is the primary component of
Suffolk's earnings. ALCO uses a detailed and dynamic model to quantify the
effect of sustained changes in interest rates on NII. While ALCO routinely
monitors simulated NII sensitivity two years into the future, it uses other
tools to monitor longer-term interest rate risk.
The model measures the effect of changing interest rates on both interest
income and interest expense for all assets and liabilities, as well as for
derivative financial instruments that do not appear on the balance sheet. The
results are compared to ALCO policy limits which specify a maximum effect on NII
one year in the future, assuming no growth in assets or liabilities, and a 2
percent of 200 basis point (bp) change in interest rates, either upward or
downward. Following is Suffolk's NII sensitivity as of December 31, 1998.
Suffolk's board has approved a policy limit of 10%.
<TABLE>
<CAPTION>
RATE CHANGE ESTIMATED NII
----------- -------------
<S> <C>
+ 200 bp 2.22%
- 200 bp (2.72%)
</TABLE>
This estimate should not be interpreted as Suffolk's forecast, and should
not be considered as indicative of management's expectations for operating
results. These are hypothetical estimates which are based on many assumptions
including: the nature and time of changes in interest rates, the shape of the
"yield curve" (variations in interest rates for financial instruments of varying
maturity at a given moment in time), prepayments on loans and securities,
deposit outflows, pricing on loans and deposits, the reinvestment of cash flows
from assets and liabilities, among others. While these assumptions are based on
management's best estimate of current economic conditions, Suffolk cannot give
any assurance that these will actually predict results, nor can they anticipate
how the behavior of customers and competitors may change in the future.
Factors which may affect actual results include: prepayment and refinancing
of loans other than as assumed, interest rate change caps and floors, repricing
intervals on adjustable rate instruments, changes in debt service on adjustable
rate loans, and early withdrawal of deposits. Actual results may also be
affected by actions ALCO takes in response to changes in interest rates, actual
or anticipated.
When appropriate, ALCO may use off-balance-sheet instruments such as
interest rate floors, caps and swaps to hedge its position with regard to
interest rate risk. The Board Directors has approved a hedging policy statement
that governs the use of such instruments. As of December 31, 1998, there were no
derivative financial instruments outstanding.
The following table illustrates the contractual sensitivity to changes in
interest rates of the Company's total loans, net of discounts not including
overdrafts and loans not accruing interest, together totaling $3,728,000 at
December 31, 1998: (in thousands)
<TABLE>
<CAPTION>
AFTER 1 BUT AFTER
WITHIN 5 YEARS 5 YEARS TOTAL
-------------- -------- --------
<S> <C> <C> <C>
INTEREST RATE PROVISION
Predetermined rates................................... $238,045 $ 31,077 $269,122
Floating or adjustable rates.......................... 49,625 -- 49,625
-------- -------- --------
Total................................................. $287,670 $ 31,077 $318,747
======== ======== ========
</TABLE>
17
<PAGE> 20
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
$657,000 at December 31, 1998; (in thousands)
<TABLE>
<CAPTION>
AFTER 1 BUT AFTER
DUE WITHIN BEFORE 5 5
1 YEAR YEARS YEARS TOTAL
---------- -------------- ------- --------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural....... $110,266 $11,823 $835 $122,924
Real estate construction..................... 8,756 3,626 -- 12,382
-------- ------- ---- --------
Total........................................ $119,022 $15,449 $835 $135,306
======== ======= ==== ========
</TABLE>
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.
READINESS FOR THE YEAR 2000
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 accommodate the change in both the century and the
millennium 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.
Suffolk has identified ways in which the year 2000 ("Y2K") may affect its
operations.
1. Suffolk's Readiness.
Suffolk is in the final phase of its evaluation and improvement of its
internal information systems. During the first quarter, Suffolk converted its
core-processing systems (including loans, deposits, and general ledger) to a
state-of-the-art distributed client-server system which is fully ready for Y2K.
Various accounting subsystems (non-core) have been evaluated, and all
modifications were made by December 15, 1998. As a banking corporation, Suffolk
relies mainly on its information systems to conduct business. Management does
not expect that technology embedded in microprocessors which may not work
properly after the year 2000 to have a material effect on Suffolk's operations
or profitability.
2. Cost to Address Y2K.
Management expects the cost of evaluating and modifying systems in
preparation for the year 2000 to be approximately $40,000 for 1999.
18
<PAGE> 21
3. Risk of Y2K.
Management at Suffolk believes that it has made provision for its systems
to continue processing information correctly through and beyond the year 2000.
Management has also confirmed, in writing, that key providers of information
have also made proper provision. However, Suffolk has no control over the
readiness of major utilities and communications networks. In the opinion of
management, the failure of such outside services presents the greatest risk to
Suffolk of Y2K problems.
4. Contingency Plan.
As a matter of standard practice, Suffolk maintains a disaster recovery
plan which is reviewed and updated annually. While Suffolk has no means of
accurately measuring risk to the systems of major utilities and communications
networks, its disaster recovery plan assumes \that these systems may fail, both
for reasons related to Y2K, as well as for other reasons, and makes provision
for operations to continue without them, albeit with reduced efficiency.
5. Assessment of Suffolk's Readiness.
Suffolk's readiness for Y2K has been and continues to be evaluated by its
management. It will also be evaluated by its primary banking regulator, the
Office of the Comptroller of the Currency.
CAPITAL RESOURCES
Primary capital, including stockholders' equity, not including the net
unrealized gain on securities available for sale, net of tax, and the allowance
for possible loan losses, amounted to $78,768,000 compared to $71,210,000 at
year-end 1997 and $78,405,000 at year-end 1996. During 1998, Suffolk repurchased
14,500 shares for an aggregate price of $387,497. Management determined that
this would increase leverage while preserving capital ratios well above
regulatory requirements.
The following table presents Suffolk's capital ratio, and other related
ratios, for each of the last five years: (dollars in thousands)
<TABLE>
<CAPTION>
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Primary capital at year-end...................... $78,768 $71,210 $78,405 $75,271 $83,750
Primary capital at year-end as a percentage of
year-end:
Total assets plus allowance for possible loan
losses...................................... 8.60% 8.17% 9.67% 9.27% 10.24%
Loans, net of unearned discounts............... 12.16% 11.65% 13.40% 14.59% 15.65%
Total deposits................................. 9.53% 9.16% 10.95% 10.35% 11.57%
</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 uses capital by two widely accepted
performance ratios -- return on average assets and return on average common
stockholders' equity. The returns in 1998 on average assets of 1.37 percent and
average common equity of 17.66 percent increased from 1997 when returns were
1.37 percent and 16.96 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 $7,025,000.
19
<PAGE> 22
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,
1998, Suffolk's ratios of core capital and total qualifying capital (core
capital plus Tier 2 capital) to risk-weighted assets were 9.94 percent and 10.97
percent, respectively.
DISCUSSION OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. SFAS No. 133 is effective prospectively for the
Bank on January 1, 2000 and will not impact the Bank's accounting or
disclosures.
In October 1998, the FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This Statement conforms to the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
non-mortgage banking enterprise. This Statement is effective for fiscal years
beginning after December 15, 1998. It is not expected to have a material effect
on Suffolk's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and other supplementary data are found starting at the
top of the following page.
20
<PAGE> 23
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash & Due From Banks....................................... $ 58,298,278 $ 53,439,245
Federal Funds Sold.......................................... 17,800,000 18,500,000
Investment Securities:
Available for Sale, at Fair Value......................... 129,347,697 120,878,495
Held to Maturity (Fair Value of $22,015,000 and
$26,213,000, respectively)
U.S. Government Agency Obligations..................... 2,381,588 7,038,658
Obligations of States & Political Subdivisions......... 16,231,220 18,371,119
Corporate Bonds & Other Securities..................... 3,240,249 637,849
------------ ------------
Total Investment Securities................................. 151,200,754 146,926,121
Total Loans................................................. 649,006,822 614,555,449
Less: Unearned Discounts.................................... 1,486,875 3,168,102
Allowance for Possible Loan Losses.................... 6,954,993 6,523,677
------------ ------------
Net Loans................................................... 640,564,954 604,863,670
Premises & Equipment, Net................................... 15,249,549 16,181,652
Other Real Estate Owned, Net................................ 340,962 596,970
Accrued Interest Receivable, Net............................ 5,364,743 5,547,902
Excess of Cost Over Fair Value of Net Assets Acquired....... 1,900,241 2,262,173
Other Assets................................................ 18,712,805 16,595,289
------------ ------------
TOTAL ASSETS........................................... $909,432,286 $864,913,022
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Demand Deposits............................................. $234,048,398 $184,084,610
Savings, N.O.W.'s & Money Market Deposits................... 333,098,106 335,047,130
Time Certificates of $100,000 or more....................... 25,861,028 23,405,604
Other Time Deposits......................................... 233,556,330 235,057,476
------------ ------------
Total Deposits......................................... 826,563,862 777,594,820
Dividend Payable on Common Stock............................ 1,096,804 1,097,164
Accrued Interest Payable.................................... 2,866,853 3,074,642
Other Liabilities........................................... 7,058,968 18,005,930
------------ ------------
TOTAL LIABILITIES...................................... 837,586,487 799,772,556
------------ ------------
Commitments and Contingent Liabilities (see note 10)
STOCKHOLDERS' EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized,
6,080,856 and 6,095,356 shares issued at December 31, 1998
& 1997, respectively)..................................... 19,026,050 19,026,050
Surplus..................................................... 18,456,432 18,456,432
Undivided Profits........................................... 38,155,116 30,991,694
Treasury Stock at Par (1,529,564 shares and 1,515,064
shares, respectively)..................................... (3,823,914) (3,787,664)
Accumulated Other Comprehensive Income, Net of Tax.......... 32,115 453,954
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................. 71,845,799 65,140,466
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY............... $909,432,286 $864,913,022
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 24
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Federal Funds Sold................................ $ 1,547,366 $ 1,128,226 $ 918,926
United States Treasury Securities................. 5,275,913 6,248,190 6,450,335
Obligations of States & Political Subdivisions
(tax exempt).................................... 668,630 489,265 660,874
U.S. Government Agency Obligations................ 1,789,543 1,597,169 1,801,373
Corporate Bonds & Other Securities................ 38,271 38,271 38,271
Loans............................................. 56,554,262 54,627,628 50,659,016
----------- ----------- -----------
Total Interest Income............................. 65,873,985 64,128,749 60,528,795
INTEREST EXPENSE
Savings, N.O.W.'s & Money Market Deposits......... 7,373,572 7,566,736 7,924,335
Time Certificates of $100,000 or more............. 1,292,356 1,106,956 900,406
Other Time Deposits............................... 12,645,571 11,858,867 10,528,496
Federal Funds Purchased........................... 152,771 100,377 18,541
Interest on Other Borrowings...................... -- 336,833 58
----------- ----------- -----------
Total Interest Expense....................... 21,464,270 20,969,769 19,371,836
Net-interest Income.......................... 44,409,715 43,158,980 41,156,959
Provision for Possible Loan Losses................ 900,000 1,059,000 1,120,000
----------- ----------- -----------
Net-interest Income After Provision for Possible
Loan Losses.................................. 43,509,715 42,099,980 40,036,959
OTHER INCOME
Service Charges on Deposit Accounts............... 3,954,639 4,427,931 4,144,014
Other Service Charges, Commissions & Fees......... 2,733,446 2,457,955 1,942,930
Fiduciary Fees.................................... 565,628 474,000 456,500
Other Operating Income............................ 894,707 286,301 742,935
----------- ----------- -----------
Total Other Income........................... 8,148,420 7,646,187 7,286,379
OTHER EXPENSE
Salaries & Employee Benefits...................... 16,533,586 16,368,974 15,844,994
Net Occupancy Expense............................. 2,487,646 2,528,459 2,387,113
Equipment Expense................................. 2,316,824 2,087,664 2,518,561
Outside Services.................................. 2,486,712 2,688,718 1,824,813
FDIC Assessments.................................. 90,379 87,954 2,000
Amortization of Excess Cost Over Fair Value of Net
Assets Acquired................................. 361,932 361,932 361,932
Other Operating Expense........................... 6,922,516 6,179,108 6,027,471
----------- ----------- -----------
Total Other Expense.......................... 31,199,595 30,302,809 28,966,884
Income Before Provision for Income Taxes.......... 20,458,540 19,443,358 18,356,454
Provision for Income Taxes........................ 8,555,575 8,140,801 7,709,133
=========== =========== ===========
NET INCOME........................................ $11,902,965 $11,302,557 $10,647,321
=========== =========== ===========
AVERAGE: Common Shares Outstanding................ 6,094,826 6,306,299 6,682,064
Dilutive Stock Options................... 25,434 609 --
----------- ----------- -----------
AVERAGE TOTAL COMMON SHARES AND DILUTIVE
OPTIONS......................................... 6,120,260 6,306,908 6,682,054
EARNINGS PER COMMON SHARE
Basic............................................. $ 1.95 $ 1.79 $ 1.60
Diluted........................................... $ 1.94 $ 1.79 $ 1.60
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMPREHENSIVE
COMMON UNDIVIDED TREASURY INCOME,
STOCK SURPLUS PROFITS STOCK NET OF TAX TOTAL
------ ------- --------- -------- ------------------- -----
<S> <C> <C> <C> <C> <C> <C>
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)
Comprehensive Income...............
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)
Comprehensive Income...............
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997......... 19,026,050 18,456,432 30,991,694 (3,787,664) 453,955 65,140,467
Net Income......................... -- -- 11,902,965 -- -- 11,902,965
Dividend........................... -- -- (4,388,296) -- -- (4,388,296)
Purchase of Treasury Stock......... -- -- (351,247) (36,250) -- (387,497)
Net Change in Unrealized Gain on
Securities Available for Sale..... -- -- -- -- (421,840) (421,840)
Comprehensive Income...............
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998......... $19,026,050 $18,456,432 $38,155,116 $(3,823,914) $ 32,115 $71,845,799
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
Balance, December 31, 1995.........
Net Income......................... $10,647,321
Dividend...........................
Purchase of Treasury Stock.........
Net Change in Unrealized Gain on
Securities Available for Sale..... (240,320)
-----------
Comprehensive Income............... $10,407,001
===========
Adjustment of Issuance of Stock in
Purchase of Hampton Bancshares
(5,536 shares)....................
Balance, December 31, 1996.........
Net Income......................... $11,302,557
Return of Dividend -- Prior
Period............................
Dividend...........................
Purchase of Treasury Stock.........
Net Change in Unrealized Gain on
Securities Available for Sale..... (3,771)
-----------
Comprehensive Income............... $11,298,786
===========
Balance, December 31, 1997.........
Net Income......................... $11,902,965
Dividend...........................
Purchase of Treasury Stock.........
Net Change in Unrealized Gain on
Securities Available for Sale..... (421,840)
-----------
Comprehensive Income............... $11,481,125
===========
Balance, December 31, 1998.........
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME.................................................. $ 11,902,965 $ 11,302,557 $ 10,647,321
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Possible Loan Losses........................ 900,000 1,059,000 1,120,000
Depreciation & Amortization............................... 1,936,784 1,336,273 1,607,673
Amortization of Cost Over Fair Value of Net Assets
Acquired................................................ 361,932 361,932 361,932
Accretion of Discounts.................................... (1,013,601) (829,589) (2,020,315)
Amortization of Premiums.................................. 206,152 291,941 397,373
Decrease (Increase) in Accrued Interest Receivable........ 183,159 (325,719) (89,317)
Increase in Other Assets.................................. (2,117,516) (722,360) (4,677,471)
(Decrease) Increase in Accrued Interest Payable........... (207,789) 1,495,291 (250,701)
(Decrease) Increase in Income Taxes Payable............... (642,355) -- 469,220
(Decrease) Increase in Other Liabilities.................. (10,304,608) 7,261,522 4,504,579
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 1,205,123 21,230,848 12,070,294
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities............... 4,710,692 4,898,415 2,288,510
Maturities of Investment Securities; Available for Sale... 102,815,000 45,500,000 163,533,384
Purchases of Investment Securities; Available for Sale.... (111,244,932) (61,253,203) (129,539,796)
Maturities of Investment Securities; Held to Maturity..... 16,620,750 16,333,259 18,552,503
Purchases of Investment Securities; Held to Maturity...... (17,089,190) (16,520,750) (6,598,000)
Loan Disbursements & Repayments, Net...................... (36,397,474) (27,528,198) (72,302,761)
Purchases of Premises & Equipment, Net.................... (1,004,681) (4,316,746) (3,006,304)
Disposition of Other Real Estate Owned.................... 350,856 1,795,018 1,424,500
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES....... (41,238,979) (41,092,205) (25,647,964)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Decrease) Increase in Deposit Accounts............... 48,969,042 66,577,164 (16,042,207)
Increase (Decrease) in Federal Funds Purchased............ -- (7,200,000) 7,200,000
Common Stock Sold for Cash................................ -- -- 110,720
Dividends Paid to Shareholders............................ (4,388,656) (4,323,549) (4,105,931)
Treasury Shares Acquired.................................. (387,497) (14,577,009) (3,715,713)
------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES....... 44,192,889 40,476,606 (16,553,131)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS........ 4,159,033 20,615,249 (30,130,801)
CASH & CASH EQUIVALENTS BEGINNING OF YEAR............... 71,939,245 51,323,996 81,454,797
------------ ------------ ------------
CASH & CASH EQUIVALENTS END OF YEAR..................... $ 76,098,278 $ 71,939,245 $ 51,323,996
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash Received During the Year for Interest................ $ 66,057,144 $ 63,803,030 $ 60,439,478
============ ============ ============
Cash Paid During the Year for:
Interest................................................ $ 21,672,059 $ 19,474,478 $ 19,622,537
Income Taxes............................................ 9,197,930 8,863,325 7,239,913
------------ ------------ ------------
Total Cash Paid During Year for Interest & Income
Taxes............................................... $ 30,869,989 $ 28,337,803 $ 26,862,450
============ ============ ============
Non-Cash Investing & Financing (loans re-classified as
"other real estate owned," including foreclosures)........ $ 94,848 $ 453,414 $ 2,292,319
(Decrease) Increase in Market Value of Investments.......... (712,129) (6,392) (407,322)
Decrease (Increase) in Deferred Tax (Liability) Benefit
Related to Market Value of Investments.................... 291,973 2,621 167,002
Dividends Declared But Not Paid............................. 1,096,804 1,097,164 1,087,827
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Suffolk Bancorp and its subsidiary
conform to generally accepted accounting principles and general practices within
the banking industry. The following footnotes describe the most significant of
these policies.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported assets and
liabilities as of the date of the consolidated statements of condition. The same
is true of revenues and expenses reported for the period. Actual results could
differ significantly from those estimates.
(A) CONSOLIDATION -- The consolidated financial statements include the
accounts of Suffolk and its wholly owned subsidiary, The Suffolk County National
Bank (the "Bank"). In 1998, the Bank formed a Real Estate Investment Trust named
Suffolk Greenway, Inc. 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
("SFAS 114"), titled "Accounting by Creditors for Impairment of a Loan," as
amended by Statement No. 118, titled "Accounting by Creditors for Impairment of
Loan-Income Recognition and Disclosures," an allowance is maintained for
impaired loans to reflect the difference, if any, between the principal balance
of the loan and the present value of projected cash flows, observable fair
value, or collateral value. SFAS 114 defines an impaired loan as a loan for
which it is probable that the lender will not collect all amounts due under
contractual terms of the loan.
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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, which ever 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 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.
The bank adopted SFAS No. 132, "Employers' Disclosures About Pensions and
Other Post-Retirement Benefits," in 1998. SFAS No. 132 only addresses disclosure
and does not change any of the measurement or recognition provisions provided
for in the previously issued accounting standards. SFAS No. 132 did not affect
the Bank's results of operations or financial condition.
(J) CASH AND CASH EQUIVALENTS -- For purposes of the consolidated statement
of cash flows, cash and due from banks, and federal funds sold are considered to
be cash equivalents. Generally, federal funds are sold for one-day periods.
(K) TREASURY STOCK -- The balance of treasury stock is computed at par
value. The excess cost over par is subtracted from undivided profits.
(L) STOCK SPLIT -- On May 15, 1997, the common stock was split 2-for-1, and
par value was changed from $5.00 to $2.50. All share and per share information
has been restated to reflect the split.
(M) EARNINGS PER SHARE -- 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
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dividing net income by the sum of weighted-average number of common shares
outstanding and the weighted-average number of stock options exercisable during
the period. Suffolk has no other securities that could be converted into common
stock, nor any contracts that would result in the issuance of common stock.
(N) COMPREHENSIVE INCOME -- The Bank adopted SFAS No. 130, "Reporting
Comprehensive Income," in 1998. All comparative financial statements provided
for earlier periods have been reclassified to reflect application of the
provisions of this statement.
Comprehensive income includes net income and all other changes in equity
during a period except those resulting from investments by owners and
distributions to owners. Other comprehensive income includes revenues, expenses,
gains, and losses that under generally accepted accounting principles are
included in comprehensive income but excluded from net income.
Comprehensive income and accumulated other comprehensive income are
reported net of related income taxes. Accumulated other comprehensive income for
the Bank consists solely of unrealized holding gains or loses on
available-for-sale securities.
(O) RECLASSIFICATION OF PRIOR YEAR CONSOLIDATED FINANCIAL STATEMENTS --
Certain reclassifications have been made to the prior year's consolidated
financial statements that conform with the current year's presentation.
NOTE 2 -- INVESTMENT SECURITIES
The amortized cost, estimated fair values, and gross unrealized gains and
losses of Suffolk's investment securities available for sale and held to
maturity at December 31, 1998 and 1997 were: (in thousands)
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------- -----------------------------------------------
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.... $ 66,777 $ 67,023 $246 $ - $106,635 $107,140 $505 $ --
U.S. gov't. agency
obligations............... 43,421 43,366 61 (116) 13,474 13,738 264 --
Collateralized mortgage
obligation................ 19,093 18,959 16 (150) -- -- -- --
-------- -------- ---- ----- -------- -------- ---- ----
Balance at end of year........ 129,291 129,348 323 (266) 120,109 120,878 769 --
-------- -------- ---- ----- -------- -------- ---- ----
Held to maturity:
Obligations of states and
political subdivisions.... 16,231 16,315 84 -- 18,371 18,451 83 3
U.S. govt. agency
obligations............... 2,382 2,460 78 -- 7,039 7,124 87 2
Other securities.............. 3,240 3,240 -- -- 638 638 -- --
-------- -------- ---- ----- -------- -------- ---- ----
Balance at end of year........ 21,853 22,015 162 -- 26,048 26,213 170 5
-------- -------- ---- ----- -------- -------- ---- ----
Total investment securities... $151,144 $151,363 $485 $(266) $146,157 $147,091 $939 $ 5
======== ======== ==== ===== ======== ======== ==== ====
</TABLE>
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
U.S. Government Agency obligations are mortgage-backed securities which
represent participating interest in pools of first mortgage loans. The amortized
cost, maturities, and approximate fair value at December 31, 1998 are as
follows: (in thousands)
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------------------------------------------- ----------------------------------------
U.S. COLLATERALIZED OBLIGATIONS OF U.S.
U.S. TREASURY GOVT. AGENCY MORTGAGE STATES & POLITICAL GOVT. AGENCY
SECURITIES DEBT OBLIGATIONS(1) SUBDIVISIONS OBLIGATIONS
------------------- ------------------- ------------------- ------------------- ------------------
MATURITY AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
(IN YEARS) COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
- ---------- --------- ------- --------- ------- --------- ------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Within 1............. $60,766 $60,956 $ -- $ -- $ -- $ -- $13,969 $14,007 $ -- $ --
After 1 but within
5................... 6,011 6,067 43,421 43,366 -- -- 200 204 2,382 2,460
After 5 but within
10.................. -- -- -- -- -- -- 2,031 2,071 -- --
After 10............. -- -- -- -- 19,093 18,959 31 33 -- --
Other Securities..... -- -- -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------ ------
Total................ $66,777 $67,023 $43,421 $43,366 $19,093 $18,959 $16,231 $16,315 $2,382 $2,460
======= ======= ======= ======= ======= ======= ======= ======= ====== ======
<CAPTION>
HELD TO MATURITY
------------------
OTHER
SECURITIES
------------------ TOTAL
MATURITY AMORTIZED FAIR AMORTIZED
(IN YEARS) COST VALUE COST
- ---------- --------- ------ ---------
<S> <C> <C> <C>
Within 1............. $ -- $ -- $ 74,735
After 1 but within
5................... -- -- $ 52,014
After 5 but within
10.................. -- -- $ 2,031
After 10............. -- -- $ 19,124
Other Securities..... 3,240 3,240 $ 3,240
------ ------ --------
Total................ $3,240 $3,240 $151,144
====== ====== ========
</TABLE>
- ---------------
(1) Maturities shown are stated maturities. Securities backed by mortgages are
expected to have substantial periodic prepayments resulting in weighted
average lives considerably less than what would be surmised from the above
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.
As a member of the Federal Home Loan Bank of New York, the bank owns
Federal Home Loan Bank of New York stock with a book value of $2,602,000. The
stock has no maturity and these 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, 1998 and 1997, investment securities carried at $96,007,000
and $127,253,000, respectively, were pledged to secure trust deposits and public
funds on deposit. No securities have been sold during the past three years.
28
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LOANS
At December 31, 1998 and 1997, loans included the following: (in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Commercial, financial and agricultural...................... $123,463 $111,575
Commercial real estate...................................... 128,923 127,994
Real estate construction loans.............................. 12,500 9,823
Residential mortgages (1st and 2nd liens)................... 73,754 67,061
Home equity loans........................................... 21,980 26,201
Consumer loans.............................................. 286,184 269,412
Lease finance............................................... -- 7
Other loans................................................. 2,203 2,483
-------- --------
649,007 614,556
Unearned discounts.......................................... (1,487) (3,168)
Allowance for possible loan losses.......................... (6,955) (6,524)
-------- --------
Balance at end of year...................................... $640,565 $604,864
======== ========
</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 $4,005,000 and $4,858,000 at December 31, 1998 and 1997,
respectively. Interest on loans which have been restructured or are no longer
accruing interest would have amounted to $143,000 during 1998, $256,000 during
1997, $361,000 during 1996, under the contractual terms of those loans. Interest
income recognized on restructured and non-accrual loans was immaterial for the
years 1998, 1997, and 1996.
Suffolk makes loans to its directors and executives, as well as to other
related parties in the ordinary course of its business. Loans made to directors
and executives, either directly or indirectly, which exceed $60,000 in aggregate
for any one director, totaled $12,164,000 and $6,649,000 at December 31, 1998
and 1997, respectively. Unused portions of lines of credit to directors and
executives, directly or indirectly, totaled $1,862,000 and $6,649,000. New loans
totaling $40,758,000 were granted and payments of $34,432,000 were received
during 1998.
Suffolk has no assets pledged as collateral to the Federal Reserve Bank as
of December 31, 1998.
NOTE 4 -- ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the changes in the Allowance for Possible Loan Losses
follows: (in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................ $6,524 $6,113 $5,923
Provision for possible loan losses.......................... 900 1,059 1,120
Loans charged-off........................................... (673) (834) (1,256)
Recoveries on loans......................................... 204 186 326
------ ------ ------
Balance at end of year...................................... $6,955 $6,524 $6,113
====== ====== ======
</TABLE>
At December 31, 1998 and 1997, 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>
1998 1997
------ ------
<S> <C> <C> <C>
Recorded investment......................................... $ 426 $ 946
Valuation allowance......................................... 294 329
</TABLE>
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This allowance is included in the allowance for loan losses on the
statements of condition.
The average investment in impaired loans in 1998 was $599,000.
NOTE 5 -- PREMISES AND EQUIPMENT
The following table details premises and equipment: (in thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land........................................................ $ 3,333 $ 3,333
Premises.................................................... 7,911 7,870
Furniture, fixtures & equipment............................. 16,296 15,776
Leasehold improvements...................................... 1,122 971
-------- --------
28,662 27,950
Accumulated depreciation and amortization................... (13,412) (11,768)
-------- --------
Balance at end of year...................................... $ 15,250 $ 16,182
======== ========
</TABLE>
Depreciation and amortization charged to operations amounted to $1,937,000,
$1,336,000, $1,608,000, during 1998, 1997, and 1996, 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 1998 and 1997: (dollars in
thousands)
<TABLE>
<CAPTION>
1998 1997
------ -------
<S> <C> <C>
Daily average outstanding................................... $2,551 $ 7,957
Total interest cost......................................... 153 437
Average interest rate paid.................................. 5.99% 5.49%
Maximum amount outstanding at any-month-end................. $4,500 $39,260
December 31, balance........................................ -- --
Weighted-average interest rate on balances outstanding at
December 31............................................... -- --
</TABLE>
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 1998, 1997, or 1996.
At the end of December 31, 1998, Suffolk had an Incentive Stock Option Plan
("the Plan") under which 660,000 shares of Suffolk's common stock were reserved
for issuance to key employees. Options are awarded by a committee appointed by
the Board of Directors. The Plan provided that the option price shall not be
less than the fair value of the common stock on the date the option was granted.
All options were exercisable for a period of ten years or less. The Plan
provided for the grant of stock appreciation rights which the holder may
exercise instead of the underlying option. When the stock appreciation right was
exercised, the underlying option was canceled. The optionee received shares of
common stock with a fair market value equal to the excess of the fair value of
the shares subject to the option at the time of exercise (or the portion thereof
so exercised) over the aggregate option price of the shares set forth in the
option agreement. The exercise of stock appreciation rights was treated as the
exercise of the underlying option.
30
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
WTD. AVG.
SHARES EXERCISE
------ ---------
<S> <C> <C>
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............................... (2,600) (19.50)
------ ------
Balance at December 31, 1997................................ 34,700 22.37
Options granted............................................. -- --
Options exercised........................................... -- --
Options expired or terminated............................... -- --
------ ------
Balance at December 31, 1998................................ 34,700 $22.37
====== ======
</TABLE>
Options outstanding at December 31, 1998 have a weighted-average exercise
price of $22.37 and a remaining contractual life of nine years. 34,700 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>
1998 1997
------- -------
<S> <C> <C>
Net Income:
As Reported............................................... $11,903 $11,303
Pro Forma................................................. 11,903 11,250
Basic EPS:
As Reported............................................... 1.95 1.79
Pro Forma................................................. 1.95 1.78
</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, 1998, approximately $7,025,000
was available for dividends from the Bank to Suffolk Bancorp without prior
approval of the OCC.
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 out-standing 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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current: Federal............................................ $6,571 $5,920 $5,684
State.............................................. 1,674 1,853 1,913
------ ------ ------
8,245 7,773 7,597
Deferred: Federal........................................... 247 538 95
State............................................. 63 (170) 17
------ ------ ------
310 368 112
------ ------ ------
Total....................................................... $8,555 $8,141 $7,709
====== ====== ======
</TABLE>
The total tax expense was greater than the amounts computed by applying the
Federal income tax rate because of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal income tax expense at statutory rates............... 34% 34% 34%
Tax exempt interest......................................... (1%) (1%) (1%)
Amortization of excess cost over fair value of net assets
acquired.................................................. 1% 1% 1%
State income taxes net of federal benefit................... 6% 7% 7%
Other....................................................... 2% 1% 1%
--- --- ---
Total....................................................... 42% 42% 42%
=== === ===
</TABLE>
32
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of temporary differences between tax and financial accounting
that create significant deferred-tax assets and liabilities at December 31, 1998
and 1997, 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, 1998 and 1997 are presented below:
(in thousands)
<TABLE>
<CAPTION>
1998 1997 CHANGE
------ ------ ------
<S> <C> <C> <C>
Deferred tax assets:
Provision for possible loan losses........................ $2,848 $2,699 $149
Depreciation.............................................. 326 259 67
Post-retirement benefits.................................. 524 495 29
Deferred compensation..................................... 515 498 17
Purchase accounting....................................... 361 462 (101)
Other..................................................... 351 313 38
------ ------ ----
Total deferred tax assets before valuation allowance........ 4,925 4,726 199
Valuation allowance....................................... -- -- --
------ ------ ----
Total deferred tax assets net of valuation allowance........ 4,925 4,726 199
Deferred tax liabilities:
Pension................................................... 1,410 1,114 296
Securities available for sale............................. 22 315 (293)
Bad debt recapture........................................ -- 104 (104)
Other..................................................... -- 10 (10)
------ ------ ----
Total deferred tax liabilities.............................. 1,432 1,543 (111)
------ ------ ----
Net deferred tax asset...................................... $3,493 $3,183 $310
====== ====== ====
</TABLE>
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, 1998 and September
30, 1997, the time at which the annual valuation of the plan is made.
The following table sets forth the Plan's change in benefit obligation:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Benefit obligation at beginning of year..................... $ 9,805,633 $9,404,786
Service cost................................................ 624,093 645,523
Interest cost............................................... 744,645 716,115
Actuarial loss/(gain)....................................... 623,492 (459,477)
Benefits paid............................................... (667,371) (501,314)
----------- ----------
Benefit Obligation at end of year........................... 11,130,492 9,805,633
=========== ==========
</TABLE>
33
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Plan's change in Plan Assets:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Fair value of Plan Assets at beginning of year.............. $13,649,517 $10,651,834
Actual return on Plan Assets................................ 465,201 2,343,512
Employer contribution....................................... 896,555 1,155,485
Benefits paid............................................... (667,371) (501,314)
----------- -----------
Fair value of Plan Assets at end of year.................... $14,343,902 $13,649,517
=========== ===========
</TABLE>
The following table summarizes the funded status of the Plan:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Funded status............................................... $3,213,410 $ 3,843,884
Unrecognized net transition asset........................... 233,929 (388,316)
Unrecognized prior service cost............................. (56,473) (60,452)
Unrecognized net (gain) loss................................ (334,328) (1,100,403)
---------- -----------
Prepaid cost................................................ $3,056,538 $ 2,294,713
========== ===========
</TABLE>
The following table summarizes the net periodic pension cost:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Service cost....................................... $ 706,713 $ 624,093 $ 667,558
Interest cost on projected benefit obligations..... 761,401 744,645 665,768
Expected return on plan assets..................... (1,229,687) (1,176,041) (814,824)
Net amortization & deferral........................ (57,967) (57,967) (49,957)
----------- ----------- ---------
Net periodic pension cost.......................... $ 180,460 $ 134,730 $ 468,545
=========== =========== =========
</TABLE>
The weighted-average discount rate for purposes of determining net periodic
pension cost was 7.0% in 1998 and 7.75% in all of 1997 and 1996, respectively.
The rate of increase in future compensation levels used in determining these
amounts was 4.0% in 1998 and 5.0% in 1997 and 1996. The expected long-term rate
of return on assets is 8.5% for 1998, 1997, and 1996.
(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 $579,000 and $532,000 on December 31, 1998 and 1997. Interest
(approximately $54,000 in 1998 and 1997) is accrued over the term of the plan.
In 1998, 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 $191,000 in 1998, and $268,000 in 1997, and
$153,000 in 1996) at the plan's contractual rate is being accrued on the
deferral amounts over the expected plan term. During 1998, Suffolk made payments
of approximately $73,000 to participants of the plan.
Suffolk has purchased life insurance policies on the plan's participants
based upon reasonable actuarial benefit and other financial assumptions where
the present value of the projected cash flows from the insurance proceeds
approximates the present value of the projected cost of the employee benefit.
Suffolk is the named
34
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beneficiary on the policies. Net insurance income related to the policies
aggregated approximately $36,000, $31,000, $37,000, in 1998, 1997, and 1996,
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, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Accumulated post-retirement benefit obligation (the "APBO"):
Retirees.................................................... $ (363,820) $(1,128,859)
Fully eligible active plan participants..................... (206,589) (215,823)
Other active participants................................... (1,224,459) (688,385)
----------- -----------
Total APBO.................................................. $(1,794,868) $(2,033,067)
Unrecognized net loss....................................... 64,337 490,991
Unrecognized transition obligation.......................... 11,914 12,822
----------- -----------
Post-retirement benefit liability........................... $(1,718,617) $(1,529,254)
=========== ===========
</TABLE>
Net periodic post-retirement benefit cost (the "net periodic cost") for the
years ended December 31, 1998, 1997, and 1996 includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost of benefits earned.......................... $ 80,746 $125,975 $138,005
Interest cost on liability............................... 114,118 142,316 132,294
Unrecognized loss........................................ 908 15,804 20,743
Unrecognized service liability........................... -- 9,004 20,769
-------- -------- --------
Net periodic cost........................................ $195,772 $293,099 $311,811
======== ======== ========
</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 $160,000 at December 31, 1998,
and increased the net periodic cost by $22,000 for the year. The post-retirement
benefit cost components for 1998 were calculated assuming average health-care,
cost-trend rates going up 9% and decreasing 3% after approximately six years.
(E) DEFERRED BONUS PLANS -- During 1998, the Board approved a non-qualified
deferred compensation plan. Under this plan, certain employees and Directors of
Suffolk may elect to defer some or all of their compensation in exchange for a
future payment of the compensation deferred, with accrued interest, at
retirement. During 1998 participants deferred compensation totaling $171,000. No
payments have been made to any of the participants.
NOTE 10 -- COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as standby letters-of-credit and commitments to
extend credit, which are not reflected in the accompanying consolidated
financial statements. No material losses are anticipated as a result of these
transactions. Suffolk is contingently liable under standby letters-of-credit in
the amount of $5,144,000, and $4,615,000 at December 31, 1998 and 1997,
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 $29,369,000 and $31,920,000, and
commercial loans of $10,107,000 and $11,851,000 as of December 31, 1998 and
1997, 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.
35
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, Suffolk was required to maintain balances with the Federal
Reserve Bank of N.Y. for reserve and clearing requirements. These balances
averaged $9,924,000 in 1998.
Total rental expense for the years ended December 31, 1998, 1997 and 1996
amounted to $592,000, $637,000, and $491,000, respectively.
At December 31, 1998, 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 RENTAL
-------------
<S> <C>
1999....................................................... $602
2000....................................................... 567
2001....................................................... 440
2002....................................................... 349
2003 and thereafter........................................ 924
</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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
36
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
following table: (in thousands)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY ACTION PROVISIONS
---------------- --------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital (to risk-weighted
assets)............................ $76,423 10.55% $57,941 8.00% $72,426 10.00%
Tier 1 Capital (to risk-weighted
assets)............................ 69,468 9.59% 28,970 4.00% 43,455 6.00%
Tier 1 Capital (to average assets)... 69,468 7.83% 28,970 4.00% 36,213 5.00%
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%
</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 44.0 percent of
Suffolk's loan portfolio and 31.3 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 36.6 percent of
the portfolio and 26.1 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 19.1 percent of the loan
portfolio and 13.6 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 44.3 percent of the investment portfolio and 7.4
percent of assets. They offer little or no financial risk. Municipal obligations
constitute 10.7 percent of the investment portfolio and 1.8 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.
37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of
Suffolk's financial instruments. SFAS No. 107 "Disclosures About Fair Value of
Financial Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation: (in
thousands)
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Cash & cash equivalents................. $ 76,098 $ 76,098 $ 71,939 $ 71,939
Investment securities available for
sale.................................. 129,348 129,348 120,878 120,878
Investment securities held to
maturity.............................. 21,853 22,015 26,048 26,213
Loans................................... 649,007 654,402 614,556 608,892
Accrued interest receivable............. 5,365 5,365 5,548 5,548
Deposits................................ 826,564 827,100 777,595 791,120
Accrued interest payable................ 2,867 2,867 3,075 3,075
</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.
The fair value of performing loans was calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest-rate risk of the loan. Estimated maturity
is based on the Bank's history of repayments for each type of loan, and an
estimate of the effect of the current economy.
Fair value for significant non-performing loans is based on recent external
appraisals of collateral, if any. If appraisals are not available, estimated
cash flows are discounted using a rate commensurate with the associated risk.
Assumptions regarding credit risk, cash flows, and discount rates are made using
available market information and specific borrower information.
INVESTMENT SECURITIES
The fair value of the investment portfolio, including mortgage-backed
securities, was based on quoted market prices or market prices of similar
instruments.
38
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amount and fair value of loans were as follows at December 31,
1998 and 1997: (in thousands)
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial, financial & agricultural.... 123,463 123,614 $111,575 $110,925
Commercial real estate.................. 128,923 132,665 127,994 126,329
Real estate construction loans.......... 12,500 13,113 9,823 9,823
Residential mortgages (1st & 2nd
liens)................................ 73,754 75,222 67,061 67,509
Home equity loans....................... 21,980 21,976 26,201 25,911
Consumer loans.......................... 286,184 285,605 269,412 265,905
Lease finance........................... -- -- 7 7
Other loans............................. 2,203 2,207 2,483 2,483
-------- -------- -------- --------
Totals.................................. $649,007 $654,402 $614,556 $608,892
======== ======== ======== ========
</TABLE>
DEPOSIT LIABILITIES
The fair value of certificates of deposit less than $100,000 was calculated
by discounting cash flows with applicable origination rates. At December 31,
1998, the fair value of certificates of deposit less than $100,000 totaling
$234,077,000 had a carrying value of $233,556,000. At December 31, 1997, the
fair value of certificates of deposit less than $100,000 totaling $237,019,000
had a carrying value of $235,057,000.
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 $15,251,000 and $16,466,000 at
December 31, 1998 and 1997. The fees charged for the commitments were not
material in amount.
NOTE 14 -- SUFFOLK BANCORP (PARENT COMPANY ONLY) CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CONDITION AS OF DECEMBER 31,
Assets
Due From Banks.............................................. $ 1,343 $ 1,476 $ 1,610
Investment in Subsidiaries: SCNB............................ 71,566 64,707 71,305
ICC............................ -- -- 869
Other Assets................................................ 74 71 71
------- -------- -------
Total Assets................................................ $72,983 $ 66,254 $73,855
======= ======== =======
Liabilities and Stockholders' Equity
Dividends Payable........................................... $ 1,097 $ 1,097 $ 1,088
Other Liabilities........................................... 40 17 17
Stockholders' Equity........................................ 71,846 65,140 72,750
------- -------- -------
Total Liabilities and Stockholders' Equity.................. $72,983 $ 66,254 $73,855
======= ======== =======
</TABLE>
39
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER
31,
Income
Dividends From Subsidiary Bank.............................. $ 4,775 $ 18,910 $ 7,972
------- -------- -------
4,775 18,910 7,972
Expense
Other Expense............................................... 153 146 150
------- -------- -------
Income Before Equity in Undistributed Net Income of
Subsidiaries.............................................. 4,622 18,764 7,822
Equity in Undistributed Earnings of Subsidiaries............ 7,281 (7,462) 2,825
------- -------- -------
Net Income.................................................. $11,903 $ 11,302 $10,647
======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31,
Cash Flows From Operating Activities
Net Income.................................................. $11,903 $ 11,302 $10,647
Less: Equity in Undistributed Earnings of Subsidiaries...... (7,281) 7,462 (2,825)
Other, Net.................................................. 20 3 (14)
------- -------- -------
Net Cash Provided by Operating Activities................... 4,642 18,767 7,808
Cash Flows From Financing Activities
Issuance of Common Stock.................................. -- -- 111
Repurchase of Common Stock................................ (387) (14,577) (3,716)
Dividends Paid............................................ (4,388) (4,324) (4,106)
------- -------- -------
Net Cash (Used in) Financing Activities..................... (4,775) (18,901) (7,711)
Net Increase (Decrease) in Cash and Cash Equivalents........ (133) (134) 97
Cash and Cash Equivalents, Beginning of Year................ 1,476 1,610 1,513
------- -------- -------
Cash and Cash Equivalents, End of Year...................... $ 1,343 $ 1,476 $ 1,610
======= ======== =======
</TABLE>
Note: No income tax provision has been recorded on the books of Suffolk Bancorp
since it files a return consolidated with its subsidiaries.
40
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The comparative results for the four quarters of 1998 and 1997 are as
follows: (in thousands of dollars except for share and per-share data)
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------- ----------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income....... $ 16,392 $ 16,247 $ 16,882 $ 16,353 $ 15,546 $ 15,895 $ 16,328
Interest expense...... 5,659 5,291 5,291 5,223 4,972 5,079 5,393
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net-interest income... 10,733 10,956 11,591 11,130 10,574 10,816 10,935
Provision for possible
loan losses......... 300 300 300 -- 251 283 300
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net-interest income
after provision for
possible loan
losses.............. 10,433 10,656 11,291 11,130 10,323 10,533 10,635
Other income.......... 1,918 2,021 2,210 1,999 1,679 1,821 2,165
Other expense......... 7,250 7,492 7,998 8,460 7,315 7,684 7,886
Provision for income
taxes............... 2,195 2,280 2,429 1,651 1,976 1,947 2,034
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............ $ 2,906 $ 2,905 $ 3,074 $ 3,018 $ 2,711 $ 2,723 $ 2,880
========== ========== ========== ========== ========== ========== ==========
Basic Per-share data:
Net income.......... $ 0.48 $ 0.47 $ 0.51 $ 0.49 $ 0.41 $ 0.42 $ 0.47
Cash dividends...... $ 0.180 $ 0.180 $ 0.180 $ 0.180 $ 0.165 $ 0.165 $ 0.180
Average shares...... 6,095,356 6,095,356 6,095,356 6,093,253 6,535,686 6,480,221 6,095,356
<CAPTION>
1997
----------
4TH QTR.
----------
<S> <C>
Interest income....... $ 16,360
Interest expense...... 5,526
----------
Net-interest income... 10,834
Provision for possible
loan losses......... 225
----------
Net-interest income
after provision for
possible loan
losses.............. 10,609
Other income.......... 1,981
Other expense......... 7,418
Provision for income
taxes............... 2,184
----------
Net income............ $ 2,988
==========
Basic Per-share data:
Net income.......... $ 0.49
Cash dividends...... $ 0.180
Average shares...... 6,095,356
</TABLE>
41
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Suffolk Bancorp:
We have audited the accompanying consolidated statements of condition of
Suffolk Bancorp and its subsidiary (the Company) as of December 31, 1998 and
1997 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, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 the Company as of December
31, 1998 and 1997 and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
January 22, 1999
42
<PAGE> 45
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.
<TABLE>
<S> <C>
John F. Hanley, J. Gordon Huszagh
President & Chief Executive Officer Executive Vice President & Chief Financial
Officer
</TABLE>
Riverhead, New York
January 22, 1999
43
<PAGE> 46
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 13, 1999 is incorporated herein by reference.
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION BUSINESS EXPERIENCE
- ---- --- -------- -------------------
<S> <C> <C> <C>
John F. Hanley................. 52 President & Chief 1/98 -- President & CEO of Suffolk
Executive Officer Bancorp
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........ 60 Executive Vice President, 1/97 -- EVP Suffolk Bancorp
Treasurer 12/88 -- 12/96 EVP & CFO
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.
J. Gordon Huszagh.............. 45 Executive Vice President & 1/99 -- EVP & CFO of Suffolk Bancorp
Chief Financial Officer 1/97 -- SVP & Chief Financial Officer
of
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.
Thomas S. Kohlmann............. 52 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.
Augustus C. Weaver............. 56 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
</TABLE>
44
<PAGE> 47
ITEM 11. EXECUTIVE COMPENSATION
Pages 3-7 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 13, 1999 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 13, 1999 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Page 7 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 13, 1999 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 21 through
42 inclusive.
Financial Statements (Consolidated)
Statements of Condition -- December 31, 1998 and 1997
Statements of Income -- For the years ended December 31, 1998, 1997, and
1996
Statements of Changes in Stockholders' Equity -- For the years ended
December 31, 1998, 1997, and 1996
Statements of Cash Flows -- For the years ended December 31, 1998, 1997,
and 1996
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 oral of the following exhibits to any persons or 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 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.)
REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the three-month period ended
December 31, 1998.
45
<PAGE> 48
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
-------------------------------------------------------------------
(registrant)
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ EDWARD J. MERZ Chairman March 12, 1999
- --------------------------------------------- Director
Edward J. Merz
By: /s/ RAYMOND A. MAZGULSKI Vice Chairman March 12, 1999
- --------------------------------------------- Director
Raymond A. Mazgulski
By: /s/ JOHN F. HANLEY President & Chief March 12, 1999
- --------------------------------------------- Executive Officer
John F. Hanley Director
By: /s/ J. GORDON HUSZAGH Executive Vice President & March 12, 1999
- --------------------------------------------- Chief Financial Officer
J. Gordon Huszagh
By: /s/ JOSEPH A. DEERKOSKI Director March 12, 1999
- ---------------------------------------------
Joseph A. Deerkoski
By: /s/ EDGAR F. GOODALE Director March 12, 1999
- ---------------------------------------------
Edgar F. Goodale
By: /s/ HALLOCK LUCE 3RD Director March 12, 1999
- ---------------------------------------------
Hallock Luce 3rd
By: /s/ BRUCE COLLINS Director March 12, 1999
- ---------------------------------------------
Bruce Collins
By: /s/ HOWARD M. FINKELSTEIN Director March 12, 1999
- ---------------------------------------------
Howard M. Finkelstein
By: /s/ DOUGLAS STARK Director March 12, 1999
- ---------------------------------------------
Douglas Stark
By: /s/ PETER VAN DE WETERING Director March 12, 1999
- ---------------------------------------------
Peter Van de Wetering
</TABLE>
46
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 58,298
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129,348
<INVESTMENTS-CARRYING> 21,853
<INVESTMENTS-MARKET> 151,201
<LOANS> 647,520
<ALLOWANCE> 6,955
<TOTAL-ASSETS> 909,432
<DEPOSITS> 826,564
<SHORT-TERM> 0
<LIABILITIES-OTHER> 11,023
<LONG-TERM> 0
71,846
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 909,432
<INTEREST-LOAN> 56,554
<INTEREST-INVEST> 7,773
<INTEREST-OTHER> 1,547
<INTEREST-TOTAL> 65,874
<INTEREST-DEPOSIT> 21,312
<INTEREST-EXPENSE> 152
<INTEREST-INCOME-NET> 44,410
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 31,200
<INCOME-PRETAX> 20,458
<INCOME-PRE-EXTRAORDINARY> 20,458
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,903
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.94
<YIELD-ACTUAL> 5.77
<LOANS-NON> 1,546
<LOANS-PAST> 2,168
<LOANS-TROUBLED> 291
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,524
<CHARGE-OFFS> 673
<RECOVERIES> 204
<ALLOWANCE-CLOSE> 6,955
<ALLOWANCE-DOMESTIC> 6,955
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
