Suffolk Bancorp Reports First Quarter 2016 Results

First Quarter 2016 Highlights

  • Net income increased by 20.7% to $4.8 million versus first quarter 2015

  • Total loans outstanding increased by 4.9% versus fourth quarter 2015 and 26.5% versus first quarter 2015

  • Demand deposits, representing 42% of total deposits at March 31, 2016, increased by 15.8% versus first quarter 2015

  • Core deposits increased by 5.4% versus fourth quarter 2015, funding 100% of first quarter 2016 loan growth

  • Total cost of funds of 0.23% in first quarter 2016 resulted in strong core net interest margin of 3.80%

  • Core operating efficiency ratio improved to 61.5% versus 66.4% in first quarter 2015

  • Tangible book value per share increased by 7.7% to $16.95 at March 31, 2016 versus comparable 2015 date

RIVERHEAD, N.Y.--()--Suffolk Bancorp (the “Company”) (NYSE:SCNB), parent company of Suffolk County National Bank (the “Bank”), today reported net income of $4.8 million, or $0.41 per diluted common share, for the first quarter of 2016 compared to $4.0 million, or $0.34 per diluted common share, a year ago.

The 20.7% increase in first quarter 2016 earnings versus the comparable 2015 period resulted principally from a $1.8 million increase in net interest income. Partially offsetting this improvement was a $199 thousand reduction in non-interest income, a $44 thousand increase in total operating expenses and a higher effective tax rate (29.0% versus 23.6%) in 2016 when compared to the first quarter of 2015. The provision for loan losses was $250 thousand in each period.

President & CEO Howard C. Bluver stated: “I am pleased to report another excellent quarter, characterized by strong loan and deposit growth, impressive expense control and steady credit performance.

“First, our lending businesses continued to perform exceedingly well in the first quarter. Linked quarter growth in our total loan portfolio was approximately $82 million, from $1.666 billion at December 31, 2015 to $1.748 billion at March 31, 2016, a 4.9% increase. Total loans at the end of the first quarter represented a 26.5% increase from the comparable quarter a year ago. The quarter’s loan growth reflected strong performance by lending teams situated in both our traditional markets in Suffolk County, as well as our expansion markets in Nassau County and New York City. It is gratifying to see that our core growth strategy of protecting and enhancing our traditional markets on the east end of Long Island while simultaneously expanding west has worked exactly as we have consistently articulated.

“That being said, over the past few months, we have become increasingly concerned with conditions in many of our local commercial real estate (“CRE”) markets, particularly those in the boroughs of New York City. We see worrisome signs of markets that are becoming overheated. We have also observed deterioration in underwriting standards elsewhere in the industry, which has often translated into borrower expectations for loan terms that we are simply not comfortable with. It is not unusual in the current environment for our lenders to see three or four term sheets from several banks on deals they are trying to win. Many times these term sheets reflect proposed credit terms that, in our view, are highly irrational. For example, many borrowers now expect loan-to-value ratios to be based on extremely low capitalization rates, which can present significant refinance risk in a high interest rate environment. Many borrowers are also requesting long interest only periods, low debt service coverage ratios, and limited financial performance covenants. As we have consistently articulated, we will compete fiercely for good deals on price because of the significant cost of funds advantage we have over most of the industry. However, we will not compromise on credit quality to win such deals. As a result of these concerns, we stopped accepting new applications for multifamily loans in the boroughs of New York City several weeks ago. In addition, we have taken recent steps to target future growth in non-CRE loans. For example, we have recently brought on several relationship managers with experience in commercial and industrial (“C&I”) lending, and have also enhanced our compliance and technology infrastructure in order to support a higher level of residential mortgage origination for our owned portfolio.

“In addition to the broader economic factors affecting CRE markets, it is also an area which has attracted significant regulatory scrutiny. The OCC, our primary bank regulator, has publicly expressed broadly applicable concerns over the last year about overheated conditions in many CRE markets. In response, we have decided to temporarily pull back from the CRE lending markets and, as described above, target future growth in C&I lending and residential mortgage portfolios. We expect to be back in the CRE lending markets later this year and in the interim intend to implement enhanced risk management processes to ensure that we are equipped to monitor market developments as well as remain compliant with regulatory guidance. While this shift in focus could have a negative impact on our revenue and earnings growth, we believe it is prudent in the current environment. We also expect the OCC to establish individual minimum capital ratios for the Bank that will require us to maintain a tier 1 leverage ratio of at least 9%, a tier 1 risk-based capital ratio of at least 11% and a total risk-based capital ratio of at least 12%. At March 31, 2016, the Bank satisfied these capital ratios, although there is no guarantee that the Bank will be able to maintain compliance with these heightened capital ratios. We are also exploring other options to ensure that we remain compliant with these capital requirements, including possible sales of selected investment securities and multifamily loans.”

Mr. Bluver continued: “Turning to the funding side of our balance sheet, I am pleased to report that our deposit businesses had another excellent quarter, allowing us to fund all of our quarterly loan production through core deposit growth. Total core deposits, consisting of demand, N.O.W., savings and money market accounts, grew approximately $85 million during the quarter, from $1.556 billion at December 31, 2015 to $1.641 billion at March 31, 2016, a 5.4% increase. Total core deposits represented 88% of total deposits at March 31, 2016. Total deposits, including time accounts, were $1.870 billion at March 31, 2016, representing a 17.5% increase from the comparable quarter a year ago. In addition, at the end of the first quarter, 42% of our total deposits were non-interest bearing demand deposits, resulting in an extraordinarily low cost of funds of 23 basis points and an attractive core net interest margin of 3.80%. Our attractive funding profile continues to prove that the core deposit franchise we have built over 126 years is unique in our marketplace and gives us a significant competitive advantage. While it is true that the current “lower for longer” interest rate environment is a major challenge for the industry, including us, and will result in continuing margin pressure moving forward, our cost of funds and resulting margin compared favorably to most of the industry in the first quarter.

“Credit quality continues to be strong in all categories. Total non-accrual loans at March 31, 2016 were $7.0 million, or 0.40% of total loans, compared to $5.5 million, or 0.33% of total loans at December 31, 2015 and $12.3 million, or 0.89% of total loans, in the comparable quarter a year ago. The slight quarterly increase in total non-accrual loans was attributable to a prudent decision to place a single relationship on non-accrual status, notwithstanding the fact that we believe we are adequately collateralized and are working with a cooperative borrower who remains current on all payment obligations. All other key credit metrics remain solid and reflect our steadfast commitment to a strong and highly disciplined credit culture. Early delinquencies (30-89 days past due), which we manage aggressively as a harbinger of future credit issues, remain extremely low at $1.2 million, or 0.07% of total loans at March 31, 2016. Given the continuous improvement we have seen in our credit profile, we also believe we are well reserved. Our allowance for loan losses at March 31, 2016 was $20.9 million, or 1.20% of total loans and 299% of total non-accrual loans.

“Finally, we continue to be vigilant in controlling operating expenses and improving our efficiency, while also making smart investments that will generate both revenue increases and operating efficiencies over time. Total operating expenses in the first quarter were $13.2 million, compared to $15.0 million in the fourth quarter of 2015. Excluding the $1.4 million one-time restructuring charge in connection with the core systems conversion recorded in the fourth quarter of 2015, linked quarter core operating expenses were $409 thousand less than the $13.6 million incurred in that period and virtually flat to the $13.1 million incurred in the comparable quarter a year ago. This improvement in operating leverage translated into an improvement in our core operating efficiency ratio during the first quarter to 61.5%, from 65.2% in the fourth quarter of 2015 and 66.4% in the comparable quarter a year ago. We have proven our ability to balance the need for investment to generate revenue with expense saves, something that has become a core part of our culture.”

Performance and Other Highlights

  • Asset Quality – Total non-accrual loans were $7.0 million or 0.40% of loans outstanding at March 31, 2016 versus $5.5 million or 0.33% of loans outstanding at December 31, 2015 and $12.3 million or 0.89% of total loans outstanding at March 31, 2015. Total accruing loans delinquent 30 days or more were $1.2 million or 0.07% of loans outstanding at March 31, 2016 compared to $1.0 million or 0.06% of loans outstanding at December 31, 2015 and $1.1 million or 0.08% of loans outstanding at March 31, 2015. The Company recorded net loan charge-offs of $5 thousand in the first quarter of 2016 versus net loan recoveries of $370 thousand in the fourth quarter of 2015 and net loan charge-offs of $125 thousand in the first quarter of 2015. The allowance for loan losses totaled $20.9 million at March 31, 2016 versus $20.7 million at December 31, 2015 and $19.3 million at March 31, 2015, representing 1.20%, 1.24% and 1.40% of total loans, respectively, at such dates. The allowance for loan losses as a percentage of non-accrual loans was 299%, 374% and 157% at March 31, 2016, December 31, 2015 and March 31, 2015, respectively. The Company held OREO amounting to $650 thousand at March 31, 2016. The Company held no OREO during the other reported periods.
  • Capital Strength – The Company’s capital ratios continue to exceed all regulatory requirements, including the individual minimum capital ratios that we expect the OCC to establish for the Bank. The Company’s tier 1 leverage ratio was 9.52% at March 31, 2016 versus 9.77% at December 31, 2015 and 10.13% at March 31, 2015. The Company’s tier 1 risk-based capital ratio was 11.48% at March 31, 2016 versus 11.68% at December 31, 2015 and 12.52% at March 31, 2015. The Company’s total risk-based capital ratio was 12.65% at March 31, 2016 as compared to 12.89% at December 31, 2015 and 13.77% at March 31, 2015. The Company’s tangible common equity to tangible assets ratio (“TCE ratio”) was 8.91% at March 31, 2016 versus 8.98% at December 31, 2015 and 9.77% at March 31, 2015.
  • Core Deposits – Core deposits, consisting of demand, N.O.W., savings and money market accounts, totaled $1.641 billion at March 31, 2016 versus $1.556 billion at December 31, 2015 and $1.368 billion at March 31, 2015. Core deposits represented 88%, 87% and 86% of total deposits at March 31, 2016, December 31, 2015 and March 31, 2015, respectively. Demand deposits were $791 million at March 31, 2016, reflecting increases of 0.4% and 15.8% from $788 million and $683 million at December 31, 2015 and March 31, 2015, respectively. Demand deposits represented 42%, 44% and 43% of total deposits at March 31, 2016, December 31, 2015 and March 31, 2015, respectively.
  • Loans – Loans outstanding at March 31, 2016 increased by $366 million, or 26.5%, to $1.75 billion when compared to March 31, 2015 and increased by $82 million, or 4.9%, when compared to December 31, 2015.
  • Net Interest Margin – Net interest margin was 3.81% in the first quarter of 2016 versus 3.84% in the fourth quarter of 2015 and 3.99% in the first quarter of 2015. Adjusting for the impact of net non-accrual interest received in each period, the Company’s core net interest margin was 3.80% in the first quarter of 2016 as compared to 3.82% in the fourth quarter of 2015 and 3.99% in the first quarter of 2015. The average cost of funds was 0.23% in the first quarter of 2016 versus 0.21% in the fourth quarter of 2015 and 0.16% in the first quarter of 2015.
  • Performance Ratios – Return on average assets and return on average common stockholders’ equity were 0.89% and 9.64%, respectively, in the first quarter of 2016 versus 0.69% and 7.33%, respectively, in the fourth quarter of 2015, and 0.85% and 8.79%, respectively, in the first quarter of 2015. Excluding the impact of the fourth quarter $1.4 million systems conversion expense, return on average assets and return on average common stockholders’ equity would have been 0.90% and 9.51%, respectively, in the fourth quarter of 2015.

Earnings Summary for the Quarter Ended March 31, 2016

The Company recorded net income of $4.8 million during the first quarter of 2016 versus $4.0 million in the comparable quarter a year ago. The 20.7% improvement in first quarter 2016 net income resulted from a $1.8 million increase in net interest income. Partially offsetting this positive factor was a $199 thousand decrease in non-interest income, largely the result of a $198 thousand net gain on the sale of portfolio loans recorded in 2015, a $44 thousand increase in total operating expenses and an increase in the effective tax rate to 29.0% in 2016 from 23.6% a year ago. A $250 thousand provision for loan losses was recorded in the first quarters of 2016 and 2015.

The $1.8 million or 10.9% improvement in first quarter 2016 net interest income resulted from a $247 million (13.9%) increase in average total interest-earning assets. Partially offsetting the earning asset growth was an 18 basis point decline in the Company’s net interest margin to 3.81% in 2016 from 3.99% in 2015. The Company’s first quarter 2016 average total interest-earning asset yield was 4.03% versus 4.15% in the comparable 2015 quarterly period. The decrease in the interest-earning asset yield in 2016 resulted from a 13 basis point decline in the average loan yield to 4.18% in 2016, partially offset by an improvement in the interest-earning asset mix to 83% loans in 2016 from 78% in the comparable 2015 period. Adjusting for the impact of net non-accrual interest received in each period, the Company’s core net interest margin was 3.80% in the first quarter of 2016 versus 3.99% in the comparable 2015 period. The Company’s average balance sheet mix continued to improve as average loans increased by $297 million (21.5%) versus first quarter 2015. The average securities portfolio decreased by $55 million to $304 million in the first quarter of 2016 versus the comparable 2015 period. The average yield on the investment portfolio was 3.59% in the first quarter of 2016 versus 3.81% a year ago. At March 31, 2016, tax-exempt municipal securities, at 37%, made up the largest component of the Company’s investment portfolio. The available for sale securities portfolio had an unrealized pre-tax gain of $5.1 million and the entire securities portfolio had an estimated weighted average life of 3.1 years at March 31, 2016.

The Company’s average cost of total interest-bearing liabilities increased by ten basis points to 0.37% in the first quarter of 2016 versus 0.27% in the comparable 2015 quarter. The Company’s total cost of funds, among the lowest in the industry, increased to 0.23% in the first quarter of 2016 versus 0.16% a year ago. Average core deposits increased $244 million (18.0%) to $1.6 billion during the first quarter of 2016 versus the first quarter of 2015, with average demand deposits representing 42% of first quarter 2016 average total deposits. Total deposits increased by $279 million or 17.5% to $1.9 billion at March 31, 2016 versus March 31, 2015. Core deposit balances, which represented 88% of total deposits at March 31, 2016, grew by $272 million or 19.9% during the same period. Average borrowings increased $10 million (8.3%) during the first quarter of 2016 compared to 2015 and were used, in part, to fund the growth in the Company’s loan portfolio. Total borrowings at March 31, 2016 were $160 million versus $90 million at the comparable 2015 date.

Total operating expenses increased by $44 thousand or 0.3% in the first quarter of 2016 versus 2015 principally the result of growth in other operating expenses of $246 thousand, consulting and professional services expense of $145 thousand and employee compensation and benefits expense of $60 thousand. Partially offsetting these increases was a reduction in 2016 data processing costs of $391 thousand versus the comparable 2015 period. The increase in consulting and professional services expense was largely due to a $113 increase in legal fees in 2016, while the increase in other operating expenses reflected $90 thousand in expenses associated with the transfer of a non-accrual loan to Other Real Estate Owned (“OREO”) during the first quarter of 2016. The improvement in data processing costs resulted from lower core systems expenses incurred in 2016 coupled with the impact of a $77 thousand one-time charge recorded in the first quarter of 2015. The Company’s core operating efficiency ratio improved to 61.5% in the first quarter of 2016 from 66.4% a year ago.

Non-interest income declined by $199 thousand in the first quarter of 2016 versus the comparable 2015 period. This reduction was principally due to reductions in net gain on the sale of portfolio loans (down $198 thousand) and net gain on sale of mortgage loans originated for sale (down $70 thousand). The net gain on the sale of portfolio loans in the first quarter of 2015 resulted from the sale of performing multifamily loans in that period. No portfolio loans were sold in 2016. Partially offsetting these declines were nominal increases in service charges on deposit accounts, other service charges, commissions and fees and income from bank-owned life insurance during the first quarter of 2016.

The Company recorded a provision for loan losses of $250 thousand in the first quarter of 2016 and 2015.

The Company recorded income tax expense of $2.0 million in the first quarter of 2016 resulting in an effective tax rate of 29.0% versus an income tax expense of $1.2 million and an effective tax rate of 23.6% in the comparable period a year ago. The increase in the 2016 effective tax rate resulted from growth in pre-tax income taxed at the 35% federal rate, coupled with a reduction in tax-exempt securities income versus the comparable 2015 period.

Asset Quality

Non-accrual loans totaled $7.0 million or 0.40% of loans outstanding at March 31, 2016 versus $5.5 million or 0.33% of loans outstanding at December 31, 2015 and $12.3 million or 0.89% of total loans outstanding at March 31, 2015. The allowance for loan losses as a percentage of total non-accrual loans amounted to 299%, 374% and 157% at March 31, 2016, December 31, 2015 and March 31, 2015, respectively. Total accruing loans delinquent 30 days or more amounted to $1.2 million or 0.07% of loans outstanding at March 31, 2016 compared to $1.0 million or 0.06% of loans outstanding at December 31, 2015 and $1.1 million or 0.08% of loans outstanding at March 31, 2015.

Total criticized and classified loans were $18 million at March 31, 2016 versus $21 million at December 31, 2015 and $44 million at March 31, 2015. Criticized loans are those loans that are not classified but require some degree of heightened monitoring. Classified loans were $11 million at March 31, 2016 as compared to $12 million at December 31, 2015 and $25 million at March 31, 2015. The allowance for loan losses as a percentage of total classified loans was 187%, 170% and 77%, respectively, at the same dates.

At March 31, 2016, the Company had $11 million in troubled debt restructurings (“TDRs”), primarily consisting of commercial and industrial loans, commercial real estate loans, residential mortgages and home equity loans totaling $1 million, $4 million, $5 million and $1 million, respectively. The Company had TDRs amounting to $12 million and $19 million at December 31, 2015 and March 31, 2015, respectively.

At March 31, 2016, the Company’s allowance for loan losses amounted to $20.9 million or 1.20% of period-end loans outstanding. The allowance as a percentage of loans outstanding was 1.24% at December 31, 2015 and 1.40% at March 31, 2015. The Company recorded net loan charge-offs of $5 thousand in the first quarter of 2016 versus net loan recoveries of $370 thousand in the fourth quarter of 2015 and net loan charge-offs of $125 thousand in the first quarter of 2015. As a percentage of average total loans outstanding, these net amounts represented, on an annualized basis, 0.00% for the first quarter of 2016, (0.09%) for the fourth quarter of 2015 and 0.04% for the first quarter of 2015.

The Company held OREO amounting to $650 thousand at March 31, 2016 resulting from the addition of one residential property during the first quarter. The Company held no OREO during the other reported periods.

Capital

Total stockholders’ equity was $204 million at March 31, 2016 compared to $197 million at December 31, 2015 and $188 million at March 31, 2015. The increase in stockholders’ equity versus March 31, 2015 was due principally to net income recorded during the last twelve months, net of dividends paid. The Company’s return on average common stockholders’ equity was 9.64% for the quarter ended March 31, 2016 versus 8.79% for the comparable 2015 period.

The Bank’s tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios were 9.30%, 11.21%, 11.21% and 12.38%, respectively, at March 31, 2016. Each of these ratios exceeds the regulatory guidelines for a “well capitalized” institution, the highest regulatory capital category.

The Company’s capital ratios also exceeded all regulatory requirements, including the individual minimum capital ratios that we expect the OCC to establish for the Bank, at March 31, 2016. The Company’s TCE ratio was 8.91% at March 31, 2016 versus 8.98% at December 31, 2015 and 9.77% at March 31, 2015.

Corporate Information

Suffolk Bancorp is a one-bank holding company engaged in the commercial banking business through Suffolk County National Bank, a full service commercial bank headquartered in Riverhead, New York and Suffolk Bancorp’s wholly owned subsidiary. Organized in 1890, the Bank has 27 branch offices in Nassau, Suffolk and Queens Counties, New York. For more information about the Bank and its products and services, please visit www.scnb.com.

Non-GAAP Disclosure

This discussion includes non-GAAP financial measures of the Company’s TCE ratio, tangible common equity, tangible assets, core net income, core fully taxable equivalent (“FTE”) net interest income, core FTE net interest margin, core operating expenses, core non-interest income, core FTE non-interest income and core operating efficiency ratio. A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The Company believes that these non-GAAP financial measures provide both management and investors a more complete understanding of the underlying operational results and trends and the Company’s marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP and may not be comparable to similarly titled measures used by other financial institutions.

With respect to the calculations of core net income, core FTE net interest income and core FTE net interest margin for the periods presented in this discussion, reconciliations to the most comparable U.S. GAAP measures are provided in the following tables. Such reconciliations for the TCE ratio, tangible common equity, tangible assets, core operating expenses, core non-interest income, core FTE non-interest income and core operating efficiency ratio are provided elsewhere herein.

 
Three Months Ended March 31,
(in thousands) 2016   2015

CORE NET INCOME:

Net income, as reported $ 4,838 $ 4,009
 
Adjustments:
Net non-accrual interest adjustment (51) (7)
OREO-related expenses   90   -
Total adjustments, before income taxes 39 (7)
Adjustment for reported effective income tax rate   11   (2)
Total adjustments, after income taxes   28   (5)
 
Core net income $ 4,866 $ 4,004
 
 
Three Months Ended March 31,
($ in thousands) 2016   2015

CORE NET INTEREST INCOME/MARGIN:

 
Net interest income/margin (FTE) $ 19,179   3.81% $ 17,496 3.99%
 
Net non-accrual interest adjustment   (51)   (0.01%)   (7)   0.00%
 
Core net interest income/margin (FTE) $ 19,128   3.80% $ 17,489   3.99%
 

Safe Harbor Statement Pursuant to the Private Securities Litigation Reform Act of 1995

Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These can include remarks about the Company, the banking industry, the economy in general, expectations of the business environment in which the Company operates, projections of future performance, and potential future credit experience. These remarks are based upon current management expectations, and may, therefore, involve risks and uncertainties that cannot be predicted or quantified, that are beyond the Company’s control and that could cause future results to vary materially from the Company’s historical performance or from current expectations. These remarks may be identified by such forward-looking statements as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Factors that could affect the Company include particularly, but are not limited to: increased capital requirements mandated by the Company’s regulators, including the individual minimum capital ratios that we expect the OCC to establish for the Bank; the Bank's temporary limitation on the growth of its CRE portfolio and the potentially adverse impact thereof on the Company’s overall business, financial condition and results of operation due to the importance of the Bank’s CRE business to the Company’s overall business, financial condition and results of operation; any failure by the Bank to comply with the individual minimum capital ratios (including as a result of increases to the Bank’s allowance for loan losses), which may result in regulatory enforcement actions; the duration of the Bank's limitation on the growth of its CRE portfolio, and the potentially adverse impact thereof on the Company’s overall business, financial condition and results of operation; the cost of compliance and significant amount of time required of management to comply with regulatory requirements; results of changes in law, regulations or regulatory practices; the Company’s ability to raise capital; competitive factors, including price competition; changes in interest rates; increases or decreases in retail and commercial economic activity in the Company’s market area; variations in the ability and propensity of consumers and businesses to borrow, repay, or deposit money, or to use other banking and financial services; the Company’s ability to attract and retain key management and staff; any failure by the Company to maintain effective internal control over financial reporting; larger-than-expected losses from the sale of assets; and the potential that net charge-offs are higher than expected or for increases in our provision for loan losses. Further, it could take the Company longer than anticipated to implement its strategic plans to increase revenue and manage non-interest expense, or it may not be possible to implement those plans at all. Finally, new and unanticipated legislation, regulation, or accounting standards may require the Company to change its practices in ways that materially change the results of operations. We have no obligation to update any forward-looking statements to reflect events or circumstances after the date of this document. For more information, see the risk factors described in the Company’s Annual Report on Form 10-K and other filings with the Securities and Exchange Commission.

Financial Highlights Follow

 
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited, dollars in thousands, except per share data)
     
March 31, 2016 December 31, 2015 March 31, 2015
ASSETS
Cash and cash equivalents
Cash and non-interest-bearing deposits due from banks $ 86,004 $ 75,272 $ 46,886
Interest-bearing deposits due from banks   31,182   22,814   12,138
Total cash and cash equivalents 117,186 98,086 59,024
Interest-bearing time deposits in other banks - - 10,000
Federal Reserve and Federal Home Loan Bank stock and other investments 10,531 10,756 6,800
Investment securities:
Available for sale, at fair value 249,263 247,099 291,557
Held to maturity (fair value $49,620, $63,272 and $65,414, respectively)   47,141   61,309   62,191
Total investment securities   296,404   308,408   353,748
Loans 1,748,072 1,666,447 1,382,160
Allowance for loan losses   20,930   20,685   19,325
Net loans 1,727,142 1,645,762 1,362,835
Loans held for sale 573 1,666 2,836
Premises and equipment, net 23,395 23,240 23,219
Bank-owned life insurance 52,729 52,383 45,418
Deferred tax assets, net 14,050 15,845 14,886
Accrued interest and loan fees receivable 6,570 5,859 6,482
Goodwill and other intangibles 2,834 2,864 3,043
Other real estate owned ("OREO") 650 - -
Other assets   4,322   3,723   3,666
TOTAL ASSETS $ 2,256,386 $ 2,168,592 $ 1,891,957
 
LIABILITIES & STOCKHOLDERS' EQUITY
Demand deposits $ 790,678 $ 787,944 $ 682,593
Savings, N.O.W. and money market deposits   849,850   768,036   685,891
Subtotal core deposits 1,640,528 1,555,980 1,368,484
Time deposits   229,841   224,643   223,188
Total deposits 1,870,369 1,780,623 1,591,672
Borrowings 160,000 165,000 90,000
Unfunded pension liability 6,416 6,428 6,192
Capital leases 4,365 4,395 4,483
Other liabilities   11,519   14,888   12,050
TOTAL LIABILITIES   2,052,669   1,971,334   1,704,397
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 15,000,000 shares authorized;
issued 14,019,302, 13,966,292 and 13,891,390, respectively;
outstanding 11,853,564, 11,800,554, and 11,725,652, respectively) 35,048 34,916 34,728
Surplus 46,997 46,239 44,495
Retained earnings 133,749 130,093 119,478
Treasury stock at par (2,165,738 shares) (5,414) (5,414) (5,414)
Accumulated other comprehensive loss, net of tax   (6,663)   (8,576)   (5,727)
TOTAL STOCKHOLDERS' EQUITY   203,717   197,258   187,560
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 2,256,386 $ 2,168,592 $ 1,891,957
 

 
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands, except per share data)
 
Three Months Ended March 31,
2016 2015
INTEREST INCOME
Loans and loan fees $ 17,222 $ 14,569
U.S. Government agency obligations 418 541
Obligations of states and political subdivisions 994 1,335
Collateralized mortgage obligations 79 182
Mortgage-backed securities 464 445
Corporate bonds 146 38
Federal funds sold, securities purchased under agreements to
resell and interest-bearing deposits due from banks 29 23
Dividends   75   60
Total interest income   19,427   17,193
INTEREST EXPENSE
Savings, N.O.W. and money market deposits 513 274
Time deposits 348 294
Borrowings   242   108
Total interest expense   1,103   676
Net interest income 18,324 16,517
Provision for loan losses   250   250
Net interest income after provision for loan losses   18,074   16,267
NON-INTEREST INCOME
Service charges on deposit accounts 776 747
Other service charges, commissions and fees 611 593
Net gain on sale of securities available for sale 6 26
Net gain on sale of portfolio loans - 198
Net gain on sale of mortgage loans originated for sale 74 144
Income from bank-owned life insurance 346 309
Other operating income   79   74
Total non-interest income   1,892   2,091
OPERATING EXPENSES
Employee compensation and benefits 8,666 8,606
Occupancy expense 1,442 1,462
Equipment expense 386 385
Consulting and professional services 483 338
FDIC assessment 293 290
Data processing 179 570
Other operating expenses   1,703   1,457
Total operating expenses   13,152   13,108
Income before income tax expense 6,814 5,250
Income tax expense   1,976   1,241
NET INCOME $ 4,838 $ 4,009
 
EARNINGS PER COMMON SHARE - BASIC $ 0.41 $ 0.34
EARNINGS PER COMMON SHARE - DILUTED $ 0.41 $ 0.34
 

       
CONSOLIDATED STATEMENTS OF INCOME
QUARTERLY TREND
(unaudited, dollars in thousands, except per share data)
 
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2016 2015 2015 2015 2015
INTEREST INCOME
Loans and loan fees $ 17,222 $ 16,552 $ 15,798 $ 15,995 $ 14,569
U.S. Government agency obligations 418 477 530 531 541
Obligations of states and political subdivisions 994 1,049 1,114 1,276 1,335
Collateralized mortgage obligations 79 86 149 176 182
Mortgage-backed securities 464 438 441 443 445
Corporate bonds 146 132 96 45 38
Federal funds sold, securities purchased under agreements to
resell and interest-bearing deposits due from banks 29 12 7 20 23
Dividends   75   59   71   90   60
Total interest income   19,427   18,805   18,206   18,576   17,193
INTEREST EXPENSE
Savings, N.O.W. and money market deposits 513 477 338 294 274
Time deposits 348 379 396 353 294
Borrowings   242   132   94   108   108
Total interest expense   1,103   988   828   755   676
Net interest income 18,324 17,817 17,378 17,821 16,517
Provision for loan losses   250   -   350   -   250
Net interest income after provision for loan losses   18,074   17,817   17,028   17,821   16,267
NON-INTEREST INCOME
Service charges on deposit accounts 776 723 749 823 747
Other service charges, commissions and fees 611 686 759 680 593
Net gain on sale of securities available for sale 6 - 133 160 26
Net gain on sale of portfolio loans - - 370 - 198
Net gain on sale of mortgage loans originated for sale 74 66 85 61 144
Income from bank-owned life insurance 346 356 306 303 309
Other operating income   79   195   25   23   74
Total non-interest income   1,892   2,026   2,427   2,050   2,091
OPERATING EXPENSES
Employee compensation and benefits 8,666 8,344 7,980 8,516 8,606
Occupancy expense 1,442 1,439 1,401 1,373 1,462
Equipment expense 386 437 410 404 385
Consulting and professional services 483 668 609 544 338
FDIC assessment 293 280 226 286 290
Data processing 179 533 506 514 570
Nonrecurring project costs - 1,443 - - -
Other operating expenses   1,703   1,860   1,536   1,537   1,457
Total operating expenses   13,152   15,004   12,668   13,174   13,108
Income before income tax expense 6,814 4,839 6,787 6,697 5,250
Income tax expense   1,976   1,202   1,864   1,579   1,241
NET INCOME $ 4,838 $ 3,637 $ 4,923 $ 5,118 $ 4,009
EARNINGS PER COMMON SHARE - BASIC $ 0.41 $ 0.31 $ 0.42 $ 0.44 $ 0.34
EARNINGS PER COMMON SHARE - DILUTED $ 0.41 $ 0.31 $ 0.42 $ 0.43 $ 0.34
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.10 $ 0.10 $ 0.10 $ 0.06 $ 0.06
 

 
STATISTICAL SUMMARY
(unaudited, dollars in thousands, except per share data)
 
Three Months Ended March 31,
2016   2015

EARNINGS:

Earnings per common share - diluted $ 0.41 $ 0.34
Net income 4,838 4,009
Net interest income 18,324 16,517
Cash dividends per common share 0.10 0.06

AVERAGE BALANCES:

Total assets $ 2,188,041 $ 1,905,403
Loans and performing loans held for sale 1,680,892 1,383,409
Investment securities 304,337 359,413
Interest-earning assets 2,024,141 1,777,320
Demand deposits 766,488 668,613
Core deposits (1) 1,600,941 1,357,241
Total deposits 1,826,831 1,572,401
Borrowings 134,407 124,111
Stockholders' equity 201,755 184,942

FINANCIAL PERFORMANCE RATIOS:

Return on average assets 0.89% 0.85%
Return on average stockholders' equity 9.64% 8.79%
Average loans/average deposits 92.01% 87.98%
Average core deposits/average deposits 87.63% 86.32%
Average demand deposits/average deposits 41.96% 42.52%
Net interest margin (FTE) 3.81% 3.99%
Operating efficiency ratio (2)

61.35%

66.33%
Core operating efficiency ratio (3) 61.50% 66.35%
 

(1) Demand, savings, N.O.W. and money market deposits.

(2) The operating efficiency ratio is calculated by dividing operating expenses less OREO-related expenses by the sum of fully taxable equivalent ("FTE") net interest income and non-interest income, excluding net gains and losses on sales of available for sale securities.

(3) The core operating efficiency ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate core operating efficiency. Since there is no authoritative requirement to calculate this ratio, our ratio is not necessarily comparable to similar efficiency measures disclosed or used by other companies in the financial services industry. The core operating efficiency ratio is a non-GAAP financial measure and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP. The reconciliation of core operating expenses to U.S. GAAP total operating expenses and core non-interest income to U.S. GAAP total non-interest income and the calculation of the core operating efficiency ratio are set forth below:

Core operating expenses:

 
Total operating expenses $ 13,152   $ 13,108
Adjust for OREO-related expenses   (90)   -
Core operating expenses   13,062   13,108

Core non-interest income:

Total non-interest income 1,892 2,091
Adjustments   -   -
Core non-interest income 1,892 2,091
Adjust for tax-equivalent basis   226   202
Core FTE non-interest income   2,118   2,293

Core operating efficiency ratio:

Core operating expenses   13,062   13,108
Core FTE net interest income 19,128 17,489
Core FTE non-interest income 2,118 2,293
Adjust for net gain on sale of securities available for sale   (6)   (26)
Total FTE revenue   21,240   19,756
Core operating expenses/total FTE revenue   61.50%   66.35%
 

 
STATISTICAL SUMMARY (continued)
(unaudited, dollars in thousands)
 

RECONCILIATION OF BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 
Three Months Ended March 31,
2016 2015
 
Weighted average common shares outstanding 11,714,826 11,602,924
Weighted average unvested restricted shares 114,369 91,503
Weighted average shares for basic earnings per share 11,829,195 11,694,427
Additional diluted shares:
Stock options 71,613 68,672
Weighted average shares for diluted earnings per share 11,900,808 11,763,099
 

CAPITAL RATIOS:

                   
March 31,   December 31, September 30,   June 30,   March 31,
2016 2015 2015 2015 2015

Suffolk Bancorp:

Tier 1 leverage ratio 9.52% 9.77% 9.95% 10.10% 10.13%
Common equity tier 1 risk-based capital ratio 11.48% 11.68% 11.98% 12.01% 12.52%
Tier 1 risk-based capital ratio 11.48% 11.68% 11.98% 12.01% 12.52%
Total risk-based capital ratio 12.65% 12.89% 13.21% 13.26% 13.77%
Tangible common equity ratio (1) 8.91% 8.98% 9.38% 9.43% 9.77%
Total stockholders' equity/total assets (2) 9.03% 9.10% 9.51% 9.57% 9.91%
 

Suffolk County National Bank:

Tier 1 leverage ratio 9.30% 9.58% 9.78% 9.95% 10.02%
Common equity tier 1 risk-based capital ratio 11.21% 11.45% 11.77% 11.83% 12.38%
Tier 1 risk-based capital ratio 11.21% 11.45% 11.77% 11.83% 12.38%
Total risk-based capital ratio 12.38% 12.66% 13.01% 13.08% 13.63%
Tangible common equity ratio (1) 8.70% 8.79% 9.22% 9.29% 9.66%
Total stockholders' equity/total assets (2) 8.81% 8.91% 9.34% 9.42% 9.80%
 

(1) The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets. The TCE ratio is not required by U.S. GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of our capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with U.S. GAAP. With respect to the calculation of the actual unaudited TCE ratios at March 31, 2016, reconciliations of tangible common equity to U.S. GAAP total common stockholders’ equity and tangible assets to U.S. GAAP total assets are set forth below:

Suffolk Bancorp:

               
Total stockholders' equity $ 203,717 Total assets $ 2,256,386 9.03%
Less: intangible assets   (2,834) Less: intangible assets   (2,834)
Tangible common equity $ 200,883 Tangible assets $ 2,253,552 8.91%
 

Suffolk County National Bank:

Total stockholders' equity $ 198,833 Total assets $ 2,255,999 8.81%
Less: intangible assets   (2,834) Less: intangible assets   (2,834)
Tangible common equity $ 195,999 Tangible assets $ 2,253,165 8.70%
 

 

(2) The ratio of total stockholders' equity to total assets is the most comparable U.S. GAAP measure to the non-GAAP tangible common equity ratio presented herein.

     
STATISTICAL SUMMARY (continued)
(unaudited, dollars in thousands, except per share data)
   
Periods Ended
March 31, December 31, September 30, June 30, March 31,
2016 2015 2015 2015 2015
 

LOAN DISTRIBUTION (1):

Commercial and industrial $ 195,321 $ 189,769 $ 181,116 $ 196,881 $ 178,812
Commercial real estate 718,934 696,787 648,132 598,866 579,873
Multifamily 480,678 426,549 392,921 361,309 322,229
Mixed use commercial 83,421 78,787 64,381 50,372 35,333
Real estate construction 37,373 37,233 32,896 31,628 24,608
Residential mortgages 181,649 186,313 186,545 182,828 184,977
Home equity 45,447 44,951 46,990 48,298 49,440
Consumer   5,249   6,058   6,539   6,444   6,888
Total loans $ 1,748,072 $ 1,666,447 $ 1,559,520 $ 1,476,626 $ 1,382,160
Sequential quarter growth rate   4.90%   6.86%   5.61%   6.83%   1.97%
Period-end loans/deposits ratio   93.46%   93.59%   86.84%   85.93%   86.84%
 

FUNDING DISTRIBUTION:

Demand $ 790,678 $ 787,944 $ 801,212 $ 766,444 $ 682,593
N.O.W. 143,862 130,968 123,553 130,583 131,934
Savings 337,657 326,469 326,711 310,055 312,101
Money market   368,331   310,599   308,816   268,812   241,856
Total core deposits 1,640,528 1,555,980 1,560,292 1,475,894 1,368,484
Time   229,841   224,643   235,539   242,500   223,188
Total deposits 1,870,369 1,780,623 1,795,831 1,718,394 1,591,672
Borrowings   160,000   165,000   50,000   65,000   90,000
Total funding sources $ 2,030,369 $ 1,945,623 $ 1,845,831 $ 1,783,394 $ 1,681,672
Sequential quarter growth rate - total deposits   5.04%   (0.85%)   4.51%   7.96%   2.29%
Period-end core deposits/total deposits ratio   87.71%   87.38%   86.88%   85.89%   85.98%
Period-end demand deposits/total deposits ratio   42.27%   44.25%   44.62%   44.60%   42.89%
Cost of funds for the quarter   0.23%   0.21%   0.18%   0.18%   0.16%
 
 

EQUITY:

Common shares outstanding 11,853,564 11,800,554 11,790,512 11,779,470 11,725,652
Stockholders' equity $ 203,717 $ 197,258 $ 196,540 $ 191,151 $ 187,560
Book value per common share 17.19 16.72 16.67 16.23 16.00
Tangible common equity 200,883 194,394 193,625 188,159 184,517
Tangible book value per common share 16.95 16.47 16.42 15.97 15.74
 

(1) Excluding loans held for sale.

         
ASSET QUALITY ANALYSIS
(unaudited, dollars in thousands)
 
Three Months Ended
March 31, December 31, September 30, June 30, March 31,
2016 2015 2015 2015 2015

Non-performing assets (1):

Non-accrual loans:
Commercial and industrial $ 4,128 $ 1,954 $ 3,662 $ 1,785 $ 3,035
Commercial real estate 1,959 1,733 1,746 1,759 6,647
Residential mortgages 724 1,358 1,424 1,465 2,074
Home equity 186 406 548 355 414
Consumer   1   77   121   165   122
Total non-accrual loans   6,998   5,528   7,501   5,529   12,292
Loans 90 days or more past due and still accruing   -   -   -   -   -
Total non-performing loans   6,998   5,528   7,501   5,529   12,292
Non-accrual loans held for sale - - - - -
OREO   650   -   -   -   -
Total non-performing assets $ 7,648 $ 5,528 $ 7,501 $ 5,529 $ 12,292
Additions to non-accrual loans during the quarter $ 2,519 $ 50 $ 3,118 $ 63 $ 496
Total non-accrual loans/total loans (2) 0.40% 0.33% 0.48% 0.37% 0.89%
Total non-performing loans/total loans (2) 0.40% 0.33% 0.48% 0.37% 0.89%
Total non-performing assets/total assets 0.34% 0.25% 0.36% 0.28% 0.65%
 

Troubled debt restructurings ("TDRs") (2):

Total TDRs $ 11,343 $ 11,563 $ 12,560 $ 12,932 $ 18,741
Performing TDRs 9,267 9,239 10,172 10,091 9,418
 

Criticized and classified loans (2):

Special mention $ 6,637 $ 9,197 $ 14,080 $ 15,466 $ 18,938
Substandard/doubtful   11,218   12,190   15,238   17,616   25,088
Total criticized and classified loans $ 17,855 $ 21,387 $ 29,318 $ 33,082 $ 44,026
 

Activity in the allowance for loan losses:

Balance at beginning of period $ 20,685 $ 20,315 $ 20,051 $ 19,325 $ 19,200
Less: charge-offs 66 3 253 9 493
Recoveries 61 373 167 735 368
Provision for loan losses   250   -   350   -   250
Balance at end of period $ 20,930 $ 20,685 $ 20,315 $ 20,051 $ 19,325
Allowance for loan losses/non-accrual loans (1) (2) 299% 374% 271% 363% 157%
Allowance for loan losses/non-performing loans (1) (2) 299% 374% 271% 363% 157%
Allowance for loan losses/total loans (1) (2) 1.20% 1.24% 1.30% 1.36% 1.40%
 

Net charge-offs (recoveries):

Commercial and industrial $ (45) $ (350) $ 114 $ (693) $ 149
Commercial real estate (10) (11) (10) (11) (7)
Residential mortgages (2) (1) (4) (16) (11)
Home equity 6 (5) (10) (5) (2)
Consumer   56   (3)   (4)   (1)   (4)
Total net charge-offs (recoveries) $ 5 $ (370) $ 86 $ (726) $ 125
Net charge-offs (recoveries) (annualized)/average loans 0.00% (0.09%) 0.02% (0.21%) 0.04%
 
Delinquencies and non-accrual loans

as a % of total loans (1):

Loans 30 - 59 days past due 0.05% 0.05% 0.05% 0.11% 0.05%
Loans 60 - 89 days past due 0.02% 0.01% 0.01% 0.20% 0.03%
Loans 90 days or more past due and still accruing   -   -   -   -   -
Total accruing past due loans 0.07% 0.06% 0.06% 0.31% 0.08%
Non-accrual loans   0.40%   0.33%   0.48%   0.37%   0.89%
Total delinquent and non-accrual loans   0.47%   0.39%   0.54%   0.68%   0.97%

 

(1) At period end.

(2) Excluding loans held for sale.

           
NET INTEREST INCOME ANALYSIS
For the Three Months Ended March 31, 2016 and 2015
(unaudited, dollars in thousands)
 
2016 2015

Average
Balance

  Interest  

Average
Yield/Cost

Average
Balance

  Interest  

Average
Yield/Cost

Assets:

Interest-earning assets:
Investment securities (1) $ 304,337 $ 2,715 3.59 % $ 359,413 $ 3,378 3.81 %
Federal Reserve and Federal Home Loan Bank stock
and other investments 9,379 75 3.22 8,335 60 2.92
Federal funds sold, securities purchased under agreements
to resell and interest-bearing deposits due from banks 29,533 29 0.39 26,163 23 0.36
Loans and performing loans held for sale (2)   1,680,892     17,463   4.18   1,383,409     14,711   4.31
Total interest-earning assets   2,024,141   $ 20,282   4.03 %   1,777,320   $ 18,172   4.15 %
Non-interest-earning assets   163,900   128,083
Total assets $ 2,188,041 $ 1,905,403
 

Liabilities and stockholders' equity:

Interest-bearing liabilities:
Savings, N.O.W. and money market deposits $ 834,453 $ 513 0.25 % $ 688,628 $ 274 0.16 %
Time deposits   225,890     348   0.62   215,160     294   0.55
Total savings and time deposits   1,060,343     861   0.33   903,788     568   0.25
Borrowings   134,407     242   0.72   124,111     108   0.35
Total interest-bearing liabilities   1,194,750     1,103   0.37   1,027,899     676   0.27
Demand deposits 766,488 668,613
Other liabilities   25,048   23,949
Total liabilities 1,986,286 1,720,461
Stockholders' equity   201,755   184,942
Total liabilities and stockholders' equity $ 2,188,041 $ 1,905,403
Total cost of funds 0.23 % 0.16 %
Net interest rate spread 3.66 % 3.88 %
Net interest income/margin 19,179 3.81 % 17,496 3.99 %
Less tax-equivalent basis adjustment   (855)   (979)
Net interest income $ 18,324 $ 16,517
 

(1) Interest on securities includes the effects of tax-equivalent basis adjustments of $614 and $837 in 2016 and 2015, respectively.

(2) Interest on loans includes the effects of tax-equivalent basis adjustments of $241 and $142 in 2016 and 2015, respectively.

Contacts

Investors and Press:
Suffolk Bancorp
Brian K. Finneran, 631-208-2400
Executive Vice President & Chief Financial Officer
invest@scnb.com

Contacts

Investors and Press:
Suffolk Bancorp
Brian K. Finneran, 631-208-2400
Executive Vice President & Chief Financial Officer
invest@scnb.com