10-K 1 SUFFOLK BANCORP -- FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission File Number 0-13580 SUFFOLK BANCORP (Exact name of registrant as specified in its charter) New York 11-2708279 (State or other jurisdiction of (IRS Employer incorporation or organization) dentification No.) 6 West Second Street, Riverhead, New York 11901 (Address of principal executive offices) Registrant's telephone number, including area code: (516) 727-2700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $5 Par Value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Class of Common Stock Number of Shares Outstanding as of February 23, 1995 --------------------- ---------------------------------------------------- $ 5 Par Value 3,799,642 The aggregate market value of the Registrant's Common Stock (based on the most recent sale at $27.25 on March 21, 1995) held by non-affiliates was approximately $98,148,423. 2 DOCUMENT INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held April 11, 1995, filed on March 15, 1995. (Part III) ITEM 1. Business SUFFOLK BANCORP ("Registrant") Registrant was incorporated on January 2, 1985 for the purpose of becoming a bank holding company. On that date, the Registrant acquired, and now owns, all of the outstanding capital stock of The Suffolk County National Bank. On July 14, 1988, the Registrant acquired and now owns all the outstanding capital stock of Island Computer Corporation of New York, Inc. The business of the Registrant consists primarily of the ownership, supervision, and control of its subsidiaries. On April 11, 1994, the Registrant acquired all the outstanding capital stock of Hamptons Bancshares, Inc. and merged it into a subsidiary. The registrant's chief competition is local banking institutions with main or branch offices in the service area of The Suffolk County National Bank, including North Fork Bank and Trust Co., and Bridgehampton National Bank. Additionally, New York City money center banks and regional banks provide competition. These banks include Bank of New York, Chemical Bank, Fleet Bank, European American Bank and National Westminster Bank USA. Registrant and its subsidiaries had 375 full-time and 43 part-time employees as of December 31, 1994. 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 Brookhaven, Islip, Riverhead, Southampton, and Southold. The main office of the Bank is situated at 6 West Second Street, Riverhead, New York. Its branch offices are located at Bohemia, Center Moriches, Cutchogue, East Hampton, Hampton Bays, Mattituck, Medford, Miller Place, Montauk, Riverhead, Port Jefferson, Sag Harbor, Shoreham, Southampton, Wading River, Water Mill, and Westhampton Beach, New York. The Bank is a full-service bank serving the needs of the local residents of eastern Suffolk County. Approximately 90 percent 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 rendered by the Bank are the maintenance of checking accounts, savings accounts, time and savings certificates, money market accounts, negotiable-order-of-withdrawal accounts, holiday club accounts and individual retirement accounts; the making of 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; the maintenance of safe deposit boxes; the performance of 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. ISLAND COMPUTER CORPORATION OF NEW YORK, INC. ("Island Computer") Island Computer Corporation of New York, Inc. is a data processing company which serves several bank and thrift institutions, including The Suffolk County National Bank. (2) 3 Supervision and Regulation References in this section to applicable statutes and regulations are brief summaries only, and do not purport to be complete. The reader should consult such statutes and regulations themselves for a full understanding of the details of their operation. SUFFOLK is a bank holding company registered under the BHC Act, and is subject to supervision and regulation by the Federal Reserve Board. Federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violation of laws and policies. 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. (3) 4 Imposition of Liability for Undercapitalized Subsidiaries. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. The new law also required each federal banking agency to specify, by regulation, the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under the regulations adopted by the banking agencies, SCNB would be deemed to be "well capitalized." FDICIA requires bank regulators to take "prompt corrective action" to resolve problems associated with insured depository institutions. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. If an institution becomes "significantly undercapitalized" or "critically undercapitalized," additional and significant limitations are placed on the institution. The capital restoration plan of an undercapitalized institution will not be accepted by the regulators unless each company "having control of" the undercapitalized institution "guarantees" the subsidiary's compliance with the capital restoration plan until it becomes "adequately capitalized." 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 institution by the Federal Reserve Board of appropriate supervisory or enforcement actions. 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 only allow 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 Comptroller. 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. (4) 5 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. Among other things, 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. Restrictions on Subsidiary Bank Dividends. The Federal Reserve Board and the Comptroller have each issued policy statements to the effect that bank holding companies and national banks should generally only pay dividends out of current operating earnings. The prior approval of the Comptroller is required if the total of all dividends declared by the board of directors of a national bank in any calendar year will exceed the aggregate of the bank's net profits (as defined by regulatory authorities) for that year and its retained net profits for the preceding two years. In addition, national banks can pay dividends only to the extent that retained net profits exceed "bad debts," which are generally defined to include the principal amount of loans that are in arrears as to interest by six months or more and that are not secured and that are not in the process of collection. As of September 30, 1993, SCNB could have declared additional dividends to SUFFOLK of approximately $14.1 million without regulatory approval or restriction. Federal banking regulators also may prohibit federally insured banks from paying dividends if the payment of such dividend would leave the bank "undercapitalized" as defined in FDICIA and the implementing regulations or the payment of dividends would, in light of the financial condition of such bank, constitute an unsafe or unsound practice. Examinations. The FDIC periodically examines and evaluates insured banks. Based upon such an evaluation, the FDIC may revalue the assets of an insured institution and require that it establish specific reserves to compensate for the difference between the FDIC-determined value and the book value of such assets. Effective December 19, 1992, FDICIA requires that these on-site examinations be conducted every 18 months until December 31, 1993, except that certain less-than-satisfactory institutions must be examined every 12 months. Thereafter, the examinations are to be conducted every 12 months, except that certain well capitalized banks may be examined every 18 months. FDICIA authorizes the FDIC to assess the institution for its costs of conducting the examinations. The rules and regulations of the Comptroller also provide for periodic examinations by those agencies. Standards for Safety and Soundness. As part of the FDICIA's efforts to promote the safety and soundness of depository institutions and their holding companies, the appropriate federal banking regulators are required to promulgate by December 1, 1993 regulations specifying operational and management standards (addressing internal controls, loan documentation, credit underwriting and interest rate risk) and asset quality, earnings and stock valuation standards (including a minimum ratio of market value to book value of the publicly traded shares of such depository institutions and holding companies). The Federal Reserve Board issued on April 19, 1993, proposed regulations on standards for safety and soundness, and is seeking public comment on this proposal. The impact of these regulations is difficult to determine until final regulations are issued. The proposed regulations did not address standards for a minimum ratio of market value to book value because the Board found that market value is affected by factors unrelated to safety and soundness. (5) 6 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, begining 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 participants 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, stockholder's equity and borrowed funds. The availability of these various sources of funds and other potential sources, such as preferred stock or commercial paper, and the extent to which they are utilized, depends on many factors, the most important of which are the FRB's monetary policies and the relative costs of different types of funds. An important function of the FRB is to regulate the national supply of bank credit in order to combat recession and curb inflationary pressure. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objections are open market operations in United States Government securities, changes in the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of the recent changes in regulations affecting commercial banks and other actions and proposed actions by the federal government and its monetary and fiscal authorities, including proposed changes in the structure of banking in the United States, no prediction can be made as to future changes in interest rates, credit availability, deposit levels, the overall performance of banks generally or Suffolk and its subsidiaries in particular. (6) 7 STATISTICAL DISCLOSURE Pages 6 through 17 of this Annual Report to Shareholders for the fiscal year ended December 31, 1994. ITEM 2. Properties Registrant Registrant as such has no physical properties. Office facilities of the Registrant are located at 6 West Second Street, Riverhead, New York. Bank The Bank's main offices are also located at 6 West Second Street, Riverhead, New York, which the Bank owns in fee. The Bank owns a total of 17 buildings in fee, and holds 11 buildings under lease agreements. Island Computer Island Computer's offices are located at 40 Orville Drive, Bohemia, New York, which Island Computer holds under a lease agreement. In the opinion of management of the Registrant, the physical facilities are suitable and adequate and at present are being fully utilized. The Company, however, is evaluating future needs, and anticipates changes in its facilities during the next several years. ITEM 3. Legal Proceedings There are no material legal proceedings, individually or in the aggregate to which the Registrant or its subsidiaries are a party or of which any of the property is subject. ITEM 4. Submission of Matters to a Vote of Security Holders None. PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters Pages 6 and 20 of this Annual Report to Shareholders for the fiscal year ended December 31, 1994. At December 31, 1994, there were approximately 1,700 equity holders of record of the Company's common stock. (7) 8 ITEM 6. Selected Financial Data Page 31 of this Annual Report to Shareholders for the fiscal year ended December 31, 1994. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 7 through 17 of this Annual Report to Shareholders for the fiscal year ended December 31, 1994. ITEM 8. Financial Statements and Supplementary Data Pages 18 to 31 of this Annual Report to Shareholders for the fiscal year ended December 31, 1994. The Company's annual report to shareholders was incorrect with respect to the pro forma results of operations disclosed in footnote 2 to the financial statements on page 23. The following table presents that information correctly. Unaudited Pro Forma Results of Operations: (in thousands of dollars except share and per-share data)
December 31, 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Interest income $54,527 $55,582 Interest expense 16,481 17,542 --------------------------------------------------------------------------------------------------------------------------- Net interest income 38,046 38,040 Provision for possible loan losses 805 1,398 Other income 5,906 6,554 Other expenses 30,321 31,223 --------------------------------------------------------------------------------------------------------------------------- Net operating expense 25,220 24,669 Income before taxes and cumulative effect of change in accounting principle 12,826 11,973 Provision for income taxes 4,713 4,162 --------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 8,113 7,811 Cumulative effect of change in accounting principle - 665 --------------------------------------------------------------------------------------------------------------------------- Net income $ 8,113 $ 8,476 Earnings-per-share $ 2.13 $ 2.24 --------------------------------------------------------------------------------------------------------------------------- Average shares 3,800,250 3,792,045 ===========================================================================================================================
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III ITEM 10. Directors and Executive Officers of the Registrant Pages 2 - 8 of Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on April 11, 1995 is incorporated herein by reference. (8) 9 Executive Officers
Name Age Position Business Experience ------------------------------------------------------------------------------------------------------------- Edward J. Merz 63 President & Chief 12/87 - 12/94 President & CEO Executive Officer 9/75 - 12/87 President & CAO Employed by The Suffolk County National Bank Since September 1975 Victor F. Bozuhoski, Jr. 56 Executive Vice President & 12/88 - 12/94 EVP & CFO Chief Financial Officer 12/87 - 12/88 EVP & Comptroller, CFO 12/85 - 12/87SVP & Comptroller 1/78 - 12/85 VP & Comptroller Employed by The Suffolk County National Bank Since September 1965. Ronald M. Krawczyk 45 Executive Vice President 4/94 - 12/94 EVP 1/93 - 4/94 President & Chief Executive Officer Bank of the Hamptons Officer of Bank of the Hamptons since 1984 Employed by The Suffolk County National Bank Since April 1994 Robert C. Dick 45 Senior Vice President 12/88 - 12/94 SVP 4/88 - 12/88 SVP & Compliance Officer 12/82 - 4/88 VP Employed by The Suffolk County National Bank Since January 1980 Thomas S. Kohlmann 48 Senior Vice President 2/92 - 12/94 SVP 1980 - 1992 SVP Marine Midland Bank Employed by The Suffolk County National Bank Since February 1992 Alexander B. Doroski 46 Senior Vice President, 4/88 - 12/94 SVP & Chief Operations Officer Cashier & Chief Operations 12/85 - 4/88 VP & Cashier Officer 12/80 - 12/85 VP Employed by The Suffolk County National Bank Since April 1971 John F. Hanley 48 Senior Vice President 4/86 - 12/94 SVP 12/80 - 4/86 VP Employed by The Suffolk County National Bank Since September 1971 J. Gordon Huszagh 41 Senior Vice President & 12/92 - 12/94 SVP & Comptroller 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 Augustus C. Weaver 52 President, Island Computer 2/87 - 12/94 President Island Computer Corporation of New York, 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 ---------------------------------------------------------------------------------------------------------------------------------
ITEM 11. Executive Compensation Pages 3 - 8 of Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on April 11, 1995 is incorporated herein by reference. (9) 10 ITEM 12. Security Ownership of Certain Beneficial Owners and Management Pages 2, 4, 5, 6, and 8 of Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on April 11, 1995 is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions Pages 7 and 8 of Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on April 11, 1995 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 18 through 32 inclusive, of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1994. Financial Statements (Consolidated) Statements of Condition - December 31, 1994 and 1993 Statements of Income - For the years ended December 31, 1994, 1993, and 1992 Statements of Changes in Stockholders' Equity - For the years ended December 31, 1994, 1993, and 1992 Statements of Cash Flows - For the years ended December 31, 1994, 1993, and 1992 Notes to Consolidated Financial Statements EXHIBITS The following exhibits, which supplement this report, have been filed with the Securities and Exchange Commission. Suffolk Bancorp will furnish a copy of any or all of the following exhibits to any person so requesting in writing to Secretary, Suffolk Bancorp, 6 West Second Street, Riverhead, New York 11901. A. Certificate of Incorporation of Suffolk Bancorp (filed by incorporation by reference to Suffolk Bancorp's Form 10-K for the fiscal year ended December 31, 1985, filed March 18, 1986) B. Bylaws of Suffolk Bancorp (filed by incorporation by reference to Suffolk Bancorp's Form 10-K for the fiscal year ended December 31, 1985, filed March 18, 1986.) The following Exhibit is submitted herewith: C. Notice of Annual Meeting and Proxy Statement. Reports on Form 8-K There were no reports filed on Form 8-K for the three month period ended December 31, 1994. (10) 11 Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUFFOLK BANCORP March 28, 1995 -------------------- (Registrant) By /s/ Raymond A. Mazgulski -------------------------------------- RAYMOND A. MAZGULSKI Chairman of the Board By /s/ Edward J. Merz ------------------------------------- EDWARD J. MERZ President Chief Executive Officer Director By /s/ Victor F. Bozuhoski, Jr. ------------------------------------- VICTOR F. BOZUHOSKI, JR. Executive Vice President, Chief Financial Officer & Treasurer /s/ Joseph A. Deerkoski /s/ Howard M. Finkelstein -------------------------------- ------------------------------------ JOSEPH A. DEERKOSKI HOWARD M. FINKELSTEIN Director Director /s/ Edgar F. Goodale /s/ J. Douglas Stark ------------------------------- ------------------------------------ EDGAR F. GOODALE J. DOUGLAS STARK Director Director /s/ Hallock Luce 3rd /s/ Peter Van de Wetering ----------------------------- ------------------------------------ HALLOCK LUCE 3RD PETER VAN DE WETERING Director Director /s/ Bruce Collins /s/ John J. Raynor ---------------------------- ------------------------------------ BRUCE COLLINS JOHN J. RAYNOR Director Director
EXHIBIT INDEX ------------- Description Exhibit Pages ----------- ------- ----- 1994 Annual Report to Shareholders 13 1-36 Financial Data Schedule 27 (11)
EX-13 2 1994 ANNUAL REPORT TO STOCKHOLDERS 1 PHOTOGRAPH OF SHINNECOCK CANAL NO BORDERS - FOUR COLOR BLEED [SUFFOLK BANCORP LOGO] ANNUAL REPORT 1994 2 ON THE COVER THE SHINNECOCK CANAL The Shinnecock Canal opened in 1886, providing a link between Shinnecock Bay, in the foreground, and Great Peconic Bay. Coastal mariners were saved the long traverse of open ocean to Montauk Point and no longer had to run through the treacherous inlets in the barrier beaches of Long Island's south shore. Named for the Shinnecock tribe whose reservation is still found several miles to the east in Southampton, the canal also marks the line between the branch office networks of The Suffolk County National Bank and the former Bank of the Hamptons, acquired during the past year. Bridges carrying Montauk Highway, The Long Island Railroad, and Sunrise Highway tie the South Fork to Suffolk Bancorp's traditional markets. TABLE OF CONTENTS Corporate Profile & Financial Highlights............................ 1 Message to the Shareholders......................................... 2 Commentary.......................................................... 3 Summary of Selected Financial Data................................. 6 Price Range of Common Stock & Dividends............................ 6 Management's Discussion & Analysis of Financial Condition and Results of Operations........................................ 7 The Company's Business............................................. 7 Acquisition of Hamptons Bancshares, Inc............................ 7 General Economic Conditions........................................ 8 Results of Operations.............................................. 8 Net Income......................................................... 8 Net-interest Income................................................ 8 Average Assets, Liabilities, & Stockholders' Equity, Rate Spread, & Effective Interest Rate Differential........................... 9 Analysis of Changes in Net-interest Income......................... 10 Interest Income.................................................... 10 Investment Securities.............................................. 10 Loan Portfolio..................................................... 11 Summary of Loan Loss Experience & Allowance for Possible Loan Losses............................. 13 Interest Expense................................................... 14 Deposits........................................................... 14 Short Term Borrowings.............................................. 14 Other Income....................................................... 15 Other Expense...................................................... 15 Interest Rate Sensitivity.......................................... 15 Asset/Liability Management & Liquidity............................. 16 Business Risks & Uncertainties..................................... 16 Capital Resources.................................................. 16 Risk-Based Capital/Leverage Guidelines............................. 17 Discussion of Current Accounting Principles........................ 17 Consolidated Statements of Condition............................... 18 Consolidated Statements of Income.................................. 19 Consolidated Statements of Changes in Stockholders' Equity......... 20 Consolidated Statements of Cash Flows.............................. 21 Notes to Consolidated Financial Statements......................... 22 Independent Auditors' Report....................................... 32 Report of Management............................................... 33 Suffolk Bancorp: Directors and Officers............................ 34 Island Computer Corporation: Directors and Officers................ 34 The Suffolk County National Bank: Directors and Officers........... 35 Directory of Offices and Departments: Addresses, Telephones, and Telecopiers......................inside back cover
This statement has not been reviewed or confirmed for accuracy or relevance by the Office of the Comptroller of the Currency. 3 CORPORATE PROFILE Suffolk Bancorp is engaged in the commercial banking business through its wholly owned subsidiary, The Suffolk County National Bank. "SCNB" is a full-service commercial bank. Organized in 1890, the Bank is the second largest independent bank headquartered on Long Island. The Bank has built a strong local reputation by providing personal service which has developed a loyal and growing clientele. The Bank focuses on developing and maintaining ties to the communities it serves. Its business is primarily retail, and emphasizes loans to individual consumers, and to small and medium-sized commercial enterprises. It has special expertise in indirect retail lending, evaluating and buying loans generated by automobile dealers. The Bank's primary market is Suffolk County, New York, which is increasingly suburban in character. The County has a population of more than 1.3 million people, and incomes above the national average. Suffolk Bancorp also owns Island Computer Corporation of New York, Inc., a bank data processing company located in Bohemia, New York. On April 11, 1994, Suffolk Bancorp acquired Hamptons Bancshares, Inc., a bank holding company on the south fork of Long Island which had eight offices and $160,000,000 in assets. The following information for 1994 reflects the earnings from Hamptons Bancshares from April 11, 1994.
FINANCIAL HIGHLIGHTS (dollars in thousands, except ratios, share, and per-share information) -------------------------------------------------------------------------------------------------------------------------------- SUFFOLK BANCORP December 31, 1994 1993 -------------------------------------------------------------------------------------------------------------------------------- EARNINGS FOR THE YEAR Income before cumulative effect of accounting change $ 8,318 $ 7,689 Cumulative effect of accounting change - 624 Net income 8,318 8,313 Net-interest income 35,830 29,472 Income before accounting change per-share 2.25 2.27 Cumulative effect of accounting change per-share - 0.18 Net income-per-share 2.25 2.45 Cash dividends-per-share 0.71 0.68 -------------------------------------------------------------------------------------------------------------------------------- BALANCES AT YEAR-END Assets $811,654 $642,359 Net loans 529,075 406,740 Investment securities available for sale 68,261 - Investment securities held to maturity 126,380 194,391 Deposits 723,993 568,768 Equity 77,093 63,284 Shares outstanding 3,799,674 3,396,460 Book value per common share $ 20.29 $ 18.63 -------------------------------------------------------------------------------------------------------------------------------- RATIOS Return on average equity 11.50% 13.78% Return on average assets 1.11 1.35 Average equity to average assets 9.68 9.79 Net-interest margin (taxable-equivalent) 5.34 5.31 Net charge-offs to average net loans 0.23 0.24 --------------------------------------------------------------------------------------------------------------------------------
SUFFOLK BANCORP ANNUAL MEETING TRADING Tuesday, April 11, 1995, 1:00 P.M. Suffolk Bancorp's common stock is Fox Hill Golf & Country Club traded over-the-counter, and is Oakleigh Avenue listed on the NASDAQ National Baiting Hollow, New York Market System under the symbol "SUBK." Market makers at December 31, 1994 included the firms of: Ernst & Co.; Herzog, Heine, Geduld, Inc.; Keefe, Bruyette & Woods, Inc.; McConnell, Budd & Downes, Inc.; Sandler O'Neill & Partners, L.P.; and Smith Barney Shearson, Inc. REGISTRAR AND TRANSFER AGENT S.E.C. FORM 10-K American Stock Transfer & Trust Co. The Annual Report to the Securities 40 Wall Street, 46th Floor and Exchange Commission on Form 10-K New York, New York 10269-0436 and documents incorporated by (212) 936-5100 reference can be obtained, without charge, by writing to the Secretary, Suffolk Bancorp, 6 West Second Street, Riverhead, New York 11901. 1 4 [SUFFOLK BANCORP LETTERHEAD] To Our Shareholders: Nineteen-ninety-four was a successful year for Suffolk Bancorp and for its wholly owned subsidiaries, The Suffolk County National Bank and Island Computer Corporation. Net income was $8,318,000 compared to $7,689,000 last year before a change in the accounting for income taxes. It was ahead slightly from $8,313,000 after the effect of the change. Earnings-per-share were $2.25 compared to $2.27 last year before the change, and $2.45 after. Assets totaled $811,654 at year-end, up 26 percent from 1993. Shareholders' equity totaled $77,093,000, up 22 percent from year-end 1993. Book-value-per-share was $20.29, up 9 percent from last year. Dividends-per-share increased to $0.71 from $0.68, and the price of your shares reached a new high of $28.50, closing the year at $26.00. Each of these numbers represents entirely satisfactory performance. It is book-value-per-share, of which I am most proud. This year we consummated the acquisition of Hamptons Bancshares, Inc. Even with this transaction, book-value-per-share increased in keeping with our historical rates of growth. This was an important achievement for our shareholders. When we consider the strategic advantages of our new-found presence across Long Island's east end, it is an unqualified success. The economy in our region continued to improve throughout 1994, albeit slowly. Our net interest margin improved slightly from year to year as the repricing of loans and investments moved ahead of the repricing of our core deposits. As we expected, asset quality was affected adversely as we took troubled loans and foreclosed real estate from Hamptons into our own portfolio, but we were able to reduce the ratio of non-performing loans to total loans from a high of 2.18 percent at the end of the second quarter, to 1.70 percent at year-end. Each year, I try to convey to you the principles which guide us in managing Suffolk Bancorp day to day and into the future. In providing our shareholders with a steady and reliable return, our first concern is for our customers, whose loyalty is what makes all else possible. In equal measure, we attend to the needs of our employees and the communities we serve. The Suffolk County National Bank of Riverhead was founded one-hundred-and-five years ago in the twin spirits of independence and service to the community. We do truly trace our roots to that first office on Main Street. While we have prospered and grown, seen great advances in technology and great changes in the communities we serve, I believe that your company's founders would recognize our values today: prudence, common sense, honesty, and decency. These have always been the foundation of Suffolk Bancorp's success, and will remain so far into the future. Once again, and as always, it is an honor and great distinction to have served as your chief executive officer during the past year. I am grateful for your loyal support, and hope that we can count on it in the years to come. Edward J. Merz President & Chief Executive Officer 2 5 COMMENTARY PUTTING IT TOGETHER On April 11, 1994, Hamptons Bancshares, Inc. of Southampton, New York was merged into a subsidiary of Suffolk Bancorp. At the same time, Hamptons' banking subsidiary, The Bank of the Hamptons, was merged directly into Suffolk's banking subsidiary, The Suffolk County National Bank. The immediate result was a super-community bank with twenty-one offices, spanning the region from Montauk to Bohemia on Long Island's south shore, and from Cutchogue to Port Jefferson on the north. The acquisition of Hamptons remains the largest transaction in the long history of Suffolk Bancorp and its predecessor, The Suffolk County National Bank of Riverhead. Throughout those many years, Suffolk has been conservative, pursuing a steady, dependable return to its shareholders, and providing sensible, personal service to its customers. In Hamptons, we saw the opportunity to continue in that tradition, serving five new communities similar to the eleven where we already had offices. Even as the transaction closed, signs bearing the SCNB logo were in place at each of the locations of the former Hamptons. From the first day, the company functioned as one. While the transition was not flawless, in a matter of months, most operational wrinkles had been ironed out of the new organization, and customers across Long Island's east end could enjoy true, hometown service, a commodity provided by the ever smaller number of independent financial institutions operating on Long Island. Last year in this space, we discussed the reasons why management decided to pursue this transaction. This year, we will review those reasons, report on some preliminary steps we have taken to capitalize on the Hamptons franchise, discuss other developments in the past year, and finally articulate an important principle which guides us as we shape your company's future. WHY WE ACQUIRED HAMPTONS. Hometown Service When the management of Hamptons expressed interest in joining forces with Suffolk Bancorp, we saw it as a unique opportunity. Hamptons was devoted to the same kind of hometown hamlets and villages as we were. Pleasant, personal service and the minimum of bureaucratic red tape are what made the reputations of both institutions. Market Share At the time of the transaction, Suffolk had 29.5 percent of local deposits in its east end markets. Hamptons had 18.5 percent. Most of the communities we serve have a "Main Street." This makes its easier for us to focus our message to build and maintain a substantial share of local markets. 3 6 Geographic Proximity Each of the eight offices of the former Hamptons is in a community new to Suffolk. There was no overlap, but the two branch networks were contiguous, making a perfect fit for customers' convenience, advertising and operations. Diversification Commercial credits with variable rates have improved Suffolk's ability to withstand rising rates of interest. Hamptons contributed more demand deposits, proportionately, also working to bolster Suffolk's net interest margin. Cost Savings Consumer and commercial lending, branch administration, item processing, data processing, training, accounting, personnel, marketing, shareholder relations, compliance, audit, facilities and security are managed by the same departments as before the merger, for an institution a quarter again as large. In years to come, consolidation will mean cost savings. Leverage More than 28 percent of the purchase price was paid in cash. That added leverage to Suffolk's capital, unusually high at the time of the acquisition. Liquidity The rest of the price was paid in stock. More than 400,000 additional shares were issued. At year-end, Suffolk was worth $99 million in the stock market, making your company more visible, and easier for our shareholders to trade. MAKING THE MOST OF HAMPTONS Fiduciary Services One of the first steps we took after the merger was to move our trust department to Southampton. "The Hamptons" are renowned the world over for the wealth of a certain element of their population. Hometown service extends beyond taking deposits and making loans to helping customers to manage their money and their estates. We believe this is an unusually good opportunity to develop fee income for the bank. Regional Commercial Lending Hamptons also provided us with the perfect opportunity to focus our efforts to develop and serve new commercial credits in each of three regions, bringing our lending officers closer to their customers. Our office in Southampton is convenient to customers on Long Island's south fork, our office in Port Jefferson taps into the growing markets to the west, and our office in Riverhead tends to our traditional customers on the north fork and in the county seat. RECENT DEVELOPMENTS An Office in Miller Place On February 6, 1995, SCNB opened its 22nd office in Miller Place, New York. This location takes SCNB one step closer to serving each of the communities along Long Island Sound east of Port Jefferson. Proud of its history, Miller Place is home to a number of professionals, academics, and longtime residents who appreciate the personal service on which SCNB's reputation is based. Mutual Fund and Annuity Sales As part of a continuing attempt to meet all of the financial needs of our customers, we brought our "INTRACK" mutual fund sales program in-house, training and registering our own representatives. The same representative will understand all of the services SCNB can offer, including savings accounts and certificates of deposit, as well as mutual funds, and will be able to refer customers to our trust department when that would be most appropriate to their needs. LOOKING TO THE FUTURE It may seem obvious, but it bears frequent restatement. Banking is a service industry. The most successful banks are those which provide the best service to their customers. Suffolk Bancorp has a long history of good service. Not coincidentally, its history of reliable dividends is equally long, and the price of the each share has increased steadily over the years, allowing for temporary fluctuations in the stock market. Service ensures profit. Efficiency is important, and finding the simplest and most effective way of doing our jobs is a daily task for each of us. But efficiency can be measured only against the successful completion of the task at hand. The competitive advantage of a community bank lies not only in the quality of its staff, but in their number as well. It is well to hone operating procedures to find every efficiency possible, but when the customer meets the banker, there is no substitute for a friendly greeting, for useful, well-informed advice, and careful attention to the customer's needs. Recently, many banks have "restructured." We are the first to concede that this may improve the next quarter's earnings, and maybe those of the next year as well. Lean and mean is the fashion of the moment. In the long run, however, we believe that approach is counterproductive to profitable community banking. 4 7 Certain efficiencies make sense. For example, automatic teller machines are as fast as any teller in dispensing cash, do so at any time of the day or night, and can be found around the globe. That is why we operate 15 of them. But banking is much more than cashing checks, and we doubt the day will ever come when the average customer will want a ten-second explanation of service charges, and ten more on home equity loans. That is why we have 22 offices. Momentary efficiencies can have unintended consequences. Over time, with fewer friendly faces in fewer, more crowded offices, with longer lines and slower service, customers would drift away to other banks which take more time with them, and less time from them. This is simply not our way at Suffolk Bancorp. We know that it is easier to lose a customer than to gain one, and much less expensive to keep one than to attract one anew. We think that most of our shareholders will agree that sudden changes in a successful strategy are ill-advised. Our story has never been riveting but always consistent; our performance never spectacular but always reliable. We are traditional enough to believe that bankers should be conservative, and resist the temptation to sprint. We are in business for the long haul. We have offered good service and a steady profit for the last century, and we plan to do so throughout the next. Suffolk Bancorp has grown and prospered through more than a century of the most rapid and amazing changes the world has ever seen. It has done so by keeping the interests of all of its constituents firmly in mind all of the time. In that respect, Suffolk's past is also its future. * * * * Management's discussion and analysis of financial condition and results begins on page 7. The Board of Directors and Management encourage you to read it to gain a better understanding of our operations during the past year. The Board of Directors of Suffolk Bancorp Left to Right: Joseph A. Deerkoski; Peter Van de Wetering; Edgar F. Goodale; Edward J. Merz, President & C.E.O.; J. Douglas Stark; Bruce Collins; John J. Raynor; Howard M. Finkelstein; Hallock Luce 3rd; and Raymond A. Mazgulski, Chairman Mr. Collins and Mr. Raynor come to the board from the former Hamptons. We welcome them and look forward to their counsel as we plan for the future. 5 8 SUMMARY OF SELECTED FINANCIAL DATA FIVE YEAR SUMMARY: (dollars in thousands except per share amounts)
For the Years 1994 (1) 1993 1992 1991 1990 ---------------------------------------------------------------------------------------------------------------------------------- Interest income $ 51,564 $ 43,997 $ 46,984 $ 50,787 $ 52,528 Interest expense 15,734 14,525 18,153 25,619 29,187 ---------------------------------------------------------------------------------------------------------------------------------- Net-interest income 35,830 29,472 28,831 25,168 23,341 Provision for possible loan losses 730 1,098 2,572 2,610 1,548 Other income 5,675 4,730 4,060 3,169 2,526 Other expense 27,752 21,345 19,788 18,090 15,809 ---------------------------------------------------------------------------------------------------------------------------------- Net operating expense 22,077 16,615 15,728 14,921 13,283 Income before income taxes and cumulative effect of change in accounting principle 13,023 11,759 10,531 7,637 8,510 Provision for income taxes 4,705 4,070 3,858 2,576 3,138 ---------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting for income taxes 8,318 7,689 6,673 5,061 5,372 Cumulative effect of change in accounting for income taxes - 624 - - - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 8,318 $ 8,313 $ 6,673 $ 5,061 $ 5,372 ================================================================================================================================== BALANCE AT DECEMBER 31, Federal funds sold $ - $ - $ 27,600 $ 40,400 $ 30,300 Investment securities- available for sale 68,261 - - - - Investment securities- held to maturity 126,380 194,391 166,946 136,113 125,426 ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities 194,641 194,391 166,946 136,113 125,426 Net loans 529,075 406,740 369,005 360,074 351,783 Total assets 811,654 642,359 599,418 574,042 542,792 Total deposits 723,993 568,768 538,604 517,551 487,399 Other borrowings - 6,500 - - - Stockholders' equity $ 77,093 $ 63,284 $ 57,105 $ 52,268 $ 48,765 ---------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS: Performance: Return on average equity 11.50% 13.78% 12.19% 10.02% 11.42% Return on average assets 1.11 1.35 1.13 0.93 1.02 Net interest margin (taxable equivalent) 5.34 5.31 5.43 5.28 5.11 Average equity to average assets 9.68 9.79 9.24 9.27 8.92 Dividend pay-out ratio 31.61 27.32 29.40 37.16 33.96 Asset Quality: (2) Non-performing loans to total loans 1.70 1.26 1.84 1.40 0.58 Non-performing assets to total assets 1.11 0.80 1.13 0.88 0.37 Allowance to non-accrual loans and 90+ 77.39 92.73 71.62 52.50 72.42 Allowance to loans, net of discounts 1.16 1.20 1.27 1.06 0.81 Net charge-offs to average loans 0.23% 0.24% 0.48% 0.46% 0.27% ---------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA: (3) (4) Income before cumulative effect of change in accounting principle $ 2.25 $ 2.27 $ 1.97 $ 1.51 $ 1.62 Cumulative effect of change in accounting principle - 0.18 - - - Net income 2.25 2.45 1.97 1.51 1.62 Cash dividends 0.71 0.68 0.60 0.56 0.55 Book value at year-end 20.29 18.63 16.85 15.51 14.64 Highest market value 28.50 25.00 20.00 11.00 13.25 Lowest market value $ 21.00 $ 19.00 $ 9.00 $ 7.75 $ 7.50 ---------------------------------------------------------------------------------------------------------------------------------- Number of full-time-equivalent employees at year-end 426 322 307 297 287 Number of branch offices at year-end 21 13 13 13 12 Number of automatic teller machines 14 8 5 4 1 ==================================================================================================================================
(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. (4) Per share data is based on average shares outstanding of 3,692,286 in 1994, 3,391,149 in 1993, 3,387,198 in 1992, 3,358,228 in 1991, and 3,316,179 in 1990. PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Company's common stock is traded in the over-the-counter market, and is quoted on the NASDAQ National Market System under the symbol "SUBK." The following table details the quarterly high and low prices of the Company's common stock. Prices for 1994 and 1993 are as reported by NASDAQ.
---------------------------------------------------------------------------------------------------------------------------------- 1994 High Low Dividends 1993 High Low Dividends ---------------------------------------------------------------------------------------------------------------------------------- First quarter $ 24.00 $ 21.50 $ 0.17 First quarter $ 21.00 $ 19.00 $ 0.17 Second quarter 23.50 21.00 0.17 Second quarter 22.00 19.50 0.17 Third quarter 27.50 22.00 0.18 Third quarter 22.50 20.25 0.17 Fourth quarter 28.50 26.00 0.19 Fourth quarter 25.00 21.88 0.17 ----------------------------------------------------------------------------------------------------------------------------------
The Company declares regular quarterly cash dividends, payable on the first business day of each fiscal quarter. 6 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion which follows provides an analysis of Suffolk Bancorp's (the "Company" or "Suffolk") results of operations for each of the past three years, and its financial condition as of December 31, 1994 and 1993, respectively. Selected tabular data are presented for each of the past five years. THE COMPANY'S BUSINESS Nearly all of the Company's business is providing banking services to its commercial and retail customers in Suffolk County, on Long Island, New York. The Company is a one-bank holding company which banking subsidiary, The Suffolk County National Bank (the "Bank"), operates 21 full-service offices in the eastern half of Suffolk County. It offers a full line of domestic, retail, and commercial banking services, including trust services. The Bank's primary lending area includes all of Suffolk County, New York. The Bank serves as an indirect lender to the customers of many automobile and marine dealers in its service area. The Bank also lends to small manufacturers, wholesalers, builders, farmers and retailers, including financing for dealer inventory. The Bank also makes loans secured by real estate, including residential mortgages, of which most are sold to mortgage investors, real estate construction loans, and loans which are secured by commercial real estate and which float with the prime rate, or which 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 repayment plans. Other investments are made in short-term United States Treasury debt, high quality obligations of municipalities in New York State, issues of agencies of the United States Government, and high-quality corporate bonds. The Bank finances most of its activities with deposits which include 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 sale-repurchase agreements, and when needed, interbank overnight loans. The Company is also the sole owner of Island Computer Corporation of New York, Inc. ("Island Computer"), a financial data-processing service company located in Bohemia, New York. Approximately 86 percent of the ongoing business of Island Computer is providing services to The Suffolk County National Bank. ACQUISITION OF HAMPTONS BANCSHARES, INC. On April 11, 1994, the Company completed the acquisition of Hamptons Bancshares, Inc. ("Hamptons") of Southampton, New York. Shareholders of Hamptons received stock in Suffolk or cash. Seventy-two percent of the aggregate consideration was common stock. Holders of Hamptons' stock received 0.6809 shares of Suffolk common stock for each share of Hamptons stock, or cash of $14.64 per share based on the market price for the Company's shares on September 7, 1993 of $21.50 per share. The total consideration amounted to $12,472,000. Hamptons was a one-bank holding company which conducted business through its wholly owned subsidiary, The Bank of the Hamptons, N.A., a commercial bank headquartered in East Hampton, New York. Established in 1964 as the First National Bank of East Hampton, The Bank of the Hamptons maintained 8 offices in the communities of Bohemia, East Hampton, Montauk, Sag Harbor, Southampton, and Water Mill, New York, all of which have been converted to branches of The Suffolk County National Bank. 7 10 The Company, acquired the assets and assumed the liabilities of Hamptons effective at the close of business on April 11, 1994. This transaction has been accounted for as a purchase. The fair values of the assets and liabilities at that time were as follows:
------------------------------------------------------------------------------ (in thousands) ------------------------------------------------------------------------------ Cash & cash equivalents $ 19,494 Investment securities 34,994 Net loans 88,100 Other assets 14,194 ------------------------------------------------------------------------------ Total assets 156,782 ------------------------------------------------------------------------------ Deposits 142,227 Other liabilities 3,568 ------------------------------------------------------------------------------ Total liabilities $ 145,795 ==============================================================================
The transaction resulted in goodwill of $3,619,000, which is being amortized over 10 years. The following table sets forth the net effect on income of purchase accounting adjustments for the fiscal years ended December 31, 1995 through 1999: (in thousands)
Fiscal Amortization Purchase Accounting Net Effect Year of Goodwill Discounts/(Premium), Net on Income 1995 $ (362) $ 713 $ 351 1996 (362) 296 (66) 1997 (362) 159 (203) 1998 (362) (113) (475) 1999 (362) (202) (564)
GENERAL ECONOMIC CONDITIONS Long Island's economy improved slightly in 1994. The benefits of increased demand for financial, information, transportation and tourist services were offset by the effects of layoffs resulting from corporate consolidations and downsizing. Long Island has a highly educated and skilled work force, and a diverse industrial base. It is adjacent to New York City, one of the world's largest centers of distribution and a magnet for finance and culture. The island's economic cycles vary from those of the national economy. During 1994, interest rates rose throughout the year, particularly those for short-term obligations. This was in response to general fears of inflation and the subsequent actions of the Board of Governors of the Federal Reserve. RESULTS OF OPERATIONS NET INCOME Net income was $8,318,000 compared to $7,689,000 last year before a change in the accounting for income taxes. It was ahead slightly from $8,313,000 after the effect of the change and $6,673,000 in 1992. This represents an 8.18 percent increase after a 24.58 percent increase prior to the change in accounting. This represents a 0.06 percent increase after a 24.58 percent increase after the change. Earnings-per-share were $2.25 compared to $2.27 last year before the change, and $2.45 after the effect of the change and $1.97 in 1992. NET-INTEREST INCOME Net-interest income during 1994 was $35,830,000, up from $29,472,000 and $28,831,000 in 1993 and 1992, respectively. These represent increases of 21.6 percent and 2.2 percent, respectively. Net-interest income is the most important part of the net income of the Company. The increase in net interest income in 1994 is primarily attributable to the net-interest margin produced by additional assets and liabilities acquired from Hamptons. The effective-interest-rate-differential, on a taxable-equivalent basis, was 5.34 percent during 1994, up from 5.31 percent in 1993, which was down from 5.43 percent in 1992. Average rates on average interest-earning assets decreased to 7.62 percent in 1994 from 7.83 percent in 1993. Average rates on average interest-bearing liabilities decreased from 3.15 percent to 2.93 percent. These resulted in a 0.03 percent increase in the interest rate differential from 1993 to 1994, compared to a 0.12 percent decrease from 1992 to 1993. It increased because of the higher yield of assets acquired from Hamptons, and the fact that Hamptons liabilities included a larger proportion of demand deposits. The upward repricing of core deposits lagged the upward repricing of assets. 8 11 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 Company's statements of condition. It presents an analysis of net-interest income on a taxable-equivalent basis, listing each major category of interest-earning assets and interest-bearing liabilities, as well as other assets and liabilities: (dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS --------------------------------------------------------------------------------------------------------------------------------- U.S. treasury securities $123,864 $ 5,520 4.46% $122,175 $ 5,354 4.38% $103,982 $ 5,445 5.24% Obligations of states & political subdivisions 37,004 2,561 6.92 41,663 3,095 7.43 41,556 3,741 9.00 U.S. govt. agency obligations 24,854 1,610 6.48 1,912 99 5.18 3,931 324 8.24 Corporate bonds & other securities 665 49 7.37 934 70 7.49 927 71 7.66 Federal funds sold & securities purchased under agreements to resell 15,771 663 4.20 27,870 852 3.06 47,990 1,636 3.41 Loans, including non-accrual loans 487,297 42,145 8.65 381,884 35,691 9.35 358,093 37,154 10.38 --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $689,455 $52,548 7.62% $576,438 $45,161 7.83% $556,479 $48,371 8.69% ================================================================================================================================= Cash & due from banks $ 25,319 $ 25,319 $ 24,078 Other non-interest-earning assets 32,671 14,494 12,061 --------------------------------------------------------------------------------------------------------------------------------- Total assets $747,445 $616,251 $592,618 --------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES --------------------------------------------------------------------------------------------------------------------------------- Savings, N.O.W.'s & money market deposits $373,690 $ 8,949 2.39% $303,364 $ 7,815 2.58% $280,641 $ 8,935 3.18% Time deposits 155,278 6,430 4.14 158,071 6,705 4.24 177,562 9,218 5.19 --------------------------------------------------------------------------------------------------------------------------------- Total savings & time deposits 528,968 15,379 2.91 461,435 14,520 3.15 458,203 18,153 3.96 Federal funds purchased 3,861 171 4.43 125 4 3.20 - - - Other borrowings 2,132 81 3.80 18 1 5.56 - - - Mortgages 1,446 103 7.12 - - - - - - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $536,407 $15,734 2.93% $461,578 $14,525 3.15% $458,203 $18,153 3.96% ================================================================================================================================= Rate spread 4.69% 4.68% 4.73% Non-interest-bearing deposits $135,593 $ 90,564 $ 76,310 Other non-interest-bearing liabilities 3,097 3,767 3,374 --------------------------------------------------------------------------------------------------------------------------------- Total liabilities $675,097 $555,909 $537,887 Stockholders' equity 72,348 60,342 54,731 --------------------------------------------------------------------------------------------------------------------------------- Total liabilities & stockholders' equity $747,445 $616,251 $592,618 Net-interest income (tax equivalent basis) & effective interest rate differential $36,814 5.34% $30,636 5.31% $30,218 5.43% Less: taxable-equivalent basis adjustment (984) (1,164) (1,387) --------------------------------------------------------------------------------------------------------------------------------- Net-interest income $35,830 $29,472 $28,831 =================================================================================================================================
The average balance of investments and stockholders' equity does not include the effect of SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Interest income on a taxable-equivalent basis includes the additional amount of interest income that would have been earned had the Bank's investment in non-taxable U.S. Treasury Securities and state and municipal obligations had been subject to New York State and Federal income taxes yielding the same after-tax income. The rate used for this adjustment was approximately 34.0% for federal income taxes and 11.9% for New York State income taxes for all periods. For each of the years 1994, 1993 and 1992, $1.00 of non-taxable income from obligations of states and political subdivisions equates to fully taxable income of $1.52. In addition, in 1994, 1993 and 1992, $1.00 of non-taxable income on U.S. Treasury securities equates to $1.02 of fully taxable income. Amortization of loan fees are included in interest income. 9 12 ANALYSIS OF CHANGES IN NET-INTEREST INCOME The following table represents a summary analysis 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 the numerous simultaneous changes in volume and rate during the period analyzed, it is not possible to precisely allocate the changes between volumes and rates. For purposes of this table, changes which are not due solely to volume or to rate have been allocated to these categories based on the respective percentage changes in average volume and average rate as they compare to each other: (in thousands)
--------------------------------------------------------------------------------------------------------------------------------- 1994 over 1993 1993 over 1992 --------------------------------------------------------------------------------------------------------------------------------- Changes due to Changes due to Volume Rate Net Change Volume Rate Net Change --------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS --------------------------------------------------------------------------------------------------------------------------------- U.S. treasury securities $ 75 $ 91 $ 166 $ 872 $ (963) $ (91) Obligations of states & political subdivisions (331) (203) (534) 10 (656) (646) U.S. govt. agency obligations 1,480 31 1,511 (131) (94) (225) Corporate bonds & other securities (20) (1) (21) 1 (2) (1) Federal funds sold & securities purchased Under agreements to resell (444) 255 (189) (629) (155) (784) Loans, including non-accrual loans 9,273 (2,819) 6,454 2,370 (3,833) (1,463) --------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $10,033 $(2,646) $ 7,387 $ 2,493 $ (5,703) $ (3,210) --------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES --------------------------------------------------------------------------------------------------------------------------------- Savings, N.O.W.'s & money market deposits $ 1,690 $ (556) $ 1,134 $ 682 $ (1,802) $ (1,120) Time deposits (117) (158) (275) (942) (1,571) (2,513) Federal funds purchased 165 2 167 4 - 4 Other borrowings 81 (1) 80 1 - 1 Mortgages 103 - 103 - - - --------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 1,922 $ (713) $ 1,209 $ (255) $ (3,373) $ (3,628) --------------------------------------------------------------------------------------------------------------------------------- Net change in net-interest income (taxable-equivalent basis) $ 8,111 $(1,933) $ 6,178 $ 2,748 $ (2,330) $ 418 =================================================================================================================================
The table above includes the effect of the acquisition of Hamptons as of April 11, 1994. INTEREST INCOME Interest income increased to $51,564,000 in 1994 from $43,997,000 in 1993 an increase of 17.2 percent, which was itself down 6.4 percent from $46,984,000 during 1992. Loans acquired from Hamptons resulted in greater interest income for the Company, offsetting lesser income than expected from indirect auto loans, the result of greater competition for these loans on Long Island. INVESTMENT SECURITIES Average investment in U.S. Treasury securities increased to $123,864,000 in 1994 from $122,175,000 in 1993, an increase of 1.4 percent. These securities are the primary source of the Company's liquidity. Holdings of municipal securities have decreased because yields, even on a taxable-equivalent basis, have become less attractive during 1994 as changes in the income tax code for individuals made it possible for them to underbid corporate investors. U.S. Treasury and municipal securities provide collateral for various liabilities to municipal depositors. The Company currently holds no investment in derivative products. The increase in the holdings of U.S. Government Agency Obligations is the result of the acquisition of the investment portfolio of Hamptons. 10 13 The following table summarizes the carrying amounts and the distribution of the Company's Investment Securities available for sale and held to maturity as of the dates indicated: (in thousands)
------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 ------------------------------------------------------------------------------------------------------------------- Investment securities available for sale, at fair value: U.S. treasury securities $ 68,261 $ - $ - ------------------------------------------------------------------------------------------------------------------- Total investment securities available for sale 68,261 - - ------------------------------------------------------------------------------------------------------------------- Investment securities held to maturity: U.S. treasury securities 57,091 149,999 111,921 Obligations of states & political subdivisions 36,780 42,025 51,351 U.S. govt. agency obligations 31,871 1,176 2,743 Corporate bonds & other securities 638 1,191 931 ------------------------------------------------------------------------------------------------------------------- Total investment securities held to maturity 126,380 194,391 166,946 ------------------------------------------------------------------------------------------------------------------- Total investment securities $194,641 $194,391 $166,946 ------------------------------------------------------------------------------------------------------------------- Fair value of investment securities held to maturity $123,096 $195,532 $168,832 Unrealized gains 228 1,298 2,072 Unrealized losses 3,512 157 186 ===================================================================================================================
Investment securities acquired from Hamptons totaled $34,994,000. These investments included $34,262,000 of U.S. Government Agency Obligations, $534,000 of Obligations of States and Political Subdivisions and $198,000 of Federal Reserve Bank stock. The carrying value, maturities and approximate weighted average yields, on a taxable-equivalent basis, at December 31, 1994 are as follows: (in thousands)
----------------------------------------------------------------------------------------------------------------------------------- Available for Sale- - - - - - - - - - - - - - - - - - - - - - - - - Held To Maturity - - - - - - - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Obligations of U.S. Corporate Total U.S. Treasury U.S. Treasury States & Political Govt. Agency Bonds & Carrying Securities Securities Subdivisions Obligations Other Securities Value ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Carrying Carrying Carrying Carrying Carrying Maturity (in years) Value Yield Value Yield Value Yield Value Yield Value Yield ----------------------------------------------------------------------------------------------------------------------------------- Within 1 $34,588 5.93% $45,004 4.12% $30,714 6.67% $ 1 6.50% $ - - % $110,307 After 1 but within 5 34,492 6.60 12,087 5.46 6,066 9.49 14,664 6.36 - - 67,309 After 5 but within 10 - - - - - - 17,206 6.15 - - 17,206 Other securities (FRB) - - - - - - - - 638 6.00 638 ----------------------------------------------------------------------------------------------------------------------------------- Total $69,080 6.26% $57,091 4.41% $36,780 7.14% $31,871 6.25% $638 6.00% $195,460 ===================================================================================================================================
As a member of the Federal Reserve System, the Bank owns Federal Reserve Bank stock with a book value of $638,000. An equity investment, the stock has no maturity. There is no public market for this investment. The last declared dividend was 6%. LOAN PORTFOLIO Consumer loans, net of unearned discounts, totaled $269,725,000 at year-end 1994, up 14.3 from $236,043,000 at the end of 1993. Only $6,215,000 related to Hamptons acquired balances. Consumer loan balances are composed primarily of indirect, dealer-generated automobile loans. The Bank has developed a reputation for good service that has enabled it to maintain its share of the market for this type of lending. Rates on these loans have remained low despite a general rise in interest rates owing to increased competition in our primary market on Long Island. Commercial loans, totaling $71,414,000 at year-end 1994, were up 37.1 percent from $52,103,000 at year-end 1993. The Company acquired $20,399,000 from Hamptons. These loans continue to be made to small local businesses. Several major borrowers had not drawn on their lines of credit as they usually would have at year end. Additionally, the Bank elected to exit from some credits acquired from Hamptons. Commercial and residential real estate mortgages, including home equity loans have increased 54.6 percent to $190,111,000 in 1994 from $122,994,000 in 1993. The increase includes $60,090,000 of loans acquired from Hamptons. 11 14 The following table categorizes the Company's total loans at December 31,: (in thousands)
-------------------------------------------------------------------------------------------------------------------------------- CATEGORY 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------------- Commercial, financial & agricultural loans $ 71,414 $ 52,103 $ 45,030 $ 41,435 $ 47,590 Commercial real estate mortgages 104,548 65,738 59,250 49,365 44,200 Real estate - construction loans 8,018 5,327 6,294 4,883 6,554 Residential mortgages (1st and 2nd liens) 50,011 33,489 34,558 31,782 26,456 Home equity loans 27,534 18,440 19,900 21,843 22,358 Consumer loans (net of unearned discounts) 269,725 236,043 207,211 205,855 206,072 Lease finance 743 - - - - Other loans 3,296 522 1,492 8,782 1,426 -------------------------------------------------------------------------------------------------------------------------------- Total loans (net of unearned discounts) $ 535,289 $ 411,662 $ 373,735 $ 363,945 $ 354,656 ================================================================================================================================
Loans, net of unearned discounts acquired from Hamptons totaled $88,100,000. The composition of loan balances included $20,399,000 of commercial, financial and agricultural loans, $27,278,000 of commercial real estate, $5,538,000 of real estate construction loans $15,295,000 of residential mortgages, $11,979,000 of home equity loans, $6,215,000 of consumer loans, and $1,396,000 of lease finance loans. The following table illustrates the 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 approximately $9,310,000 at December 31, 1994: (in thousands)
-------------------------------------------------------------------------------------------------------------- Due Within After 1 But After INTEREST RATE PROVISION 1 Year Within 5 Years 5 Years Total -------------------------------------------------------------------------------------------------------------- Predetermined rates $ 33,515 $ 284,959 $ 15,618 $ 334,092 Floating or adjustable rates 176,175 11,747 3,965 191,887 -------------------------------------------------------------------------------------------------------------- Total $ 209,690 $ 296,706 $ 19,583 $ 525,979 ==============================================================================================================
The following table shows the Company's non-accrual, past due, restructured loans, and other real estate owned at December 31,: (in thousands)
-------------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------------- Accruing loans which are contractually past due 90 days or more $ 2,015 $ 871 $1,372 $2,441 $2,230 Loans not accruing interest 6,014 4,437 5,175 4,054 1,007 Restructured loans 372 51 744 878 730 Other real estate owned 2,622 649 853 125 298 -------------------------------------------------------------------------------------------------------------------------------- Total $11,023 $6,008 $8,144 $7,498 $4,265 ================================================================================================================================
Loans acquired from Hamptons which were not accruing interest at the time of the acquisition or which have subsequently stopped accruing interest totaled $2,128,000 at December 31, 1994. In addition, $1,222,000 of other real estate acquired from Hamptons remained at December 31, 1994. Interest on loans which have been restructured or are no longer accruing interest would have amounted to $394,000 for 1994, $322,000 for 1993 and $361,000 for 1992 under the contractual terms of those loans. The Company 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 1994, 1993 and 1992. The percentage of net charge-offs to average net loans during 1994 was 0.23 percent, compared to 0.24 percent during 1993 and 0.48 percent during 1992. The ratio of the allowance for possible loan losses to loans, net of discount was 1.16 percent during 1994, compared to 1.20 percent in 1993 and 1.27 percent in 1992. During 1992, the Company refined its policy of internal credit review to more precisely identify risk and exposure in the loan portfolio. 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 ninety days past due. When a loan is placed on non-accrual status, all interest accrued previously 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 are removed from non-accrual status when they become current as to principal and interest, and when, in the opinion of management, the loans can be collected in full. There were no loans of a material amount which have become problems that are not reflected in the foregoing tables. 12 15 SUMMARY OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR POSSIBLE LOAN LOSSES To determine the allowance required for possible loan losses, management identifies problem loans and estimates the probability and amount of potential losses based primarily on the financial condition of the borrower and, among other things, the appraised value of the collateral. For loans not specifically identified as problems, management uses data concerning the Company's general experience with loan losses and considers current economic conditions to compute the additional reserve required to offset unidentified problem loans. In addition, management considers the examination of loans by regulatory authorities, internal reviews and other evaluations. The Company allocates the allowance in proportion to the risk identified in each category of loans. Transactions in the Allowance for Possible Loan Losses are made in seven major loan categories. The summary of such transactions for periods indicated follows: (in thousands)
-------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------------------- Allowance for possible loan losses, January 1, $4,922 $4,730 $3,871 $2,873 $2,264 Allowance acquired from Hamptons 1,678 - - - - Loans charged-off: Commercial, financial & agricultural loans 869 440 623 479 171 Commercial real estate mortgages 8 - 244 - - Real estate - construction loans - - - - - Residential mortgages (1st & 2nd liens) - - - 52 - Home equity loans 80 - 50 - - Consumer loans 511 678 1,022 1,329 896 Lease finance - - - - - Other loans - 49 - - - -------------------------------------------------------------------------------------------------------------------------------- Total charge-offs 1,468 1,167 1,939 1,860 1,067 -------------------------------------------------------------------------------------------------------------------------------- Recoveries of charged-off loans: Commercial, financial & agricultural loans 72 14 11 54 4 Commercial real estate mortgages - - - - - Real estate - construction loans 11 - - - - Residential mortgages (1st & 2nd liens) - - - - - Home equity loans - - - - - Consumer loans 269 247 215 194 124 Lease finance - - - - - Other loans - - - - - -------------------------------------------------------------------------------------------------------------------------------- Total recoveries 352 261 226 248 128 Net loans charged-off 1,116 906 1,713 1,612 939 Provisions for possible loan losses 730 1,098 2,572 2,610 1,548 -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, $6,214 $4,922 $4,730 $3,871 $2,873 ================================================================================================================================
The distribution of the Allowance for Possible Loan Losses, and the percentage of the total allowance, by category at end of period, is listed in the following table. The distribution is proportionate to the risk identified in each category: (dollars in thousands)
-------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1994 % 1993 % 1992 % 1991 % 1990 % -------------------------------------------------------------------------------------------------------------------------------- Commercial, financial & agricultural loans $1,988 32.0 $1,581 32.1 $1,557 32.9 $1,552 40.1 $ 434 15.1 Commercial real estate mortgages 2,212 35.6 1,707 34.7 1,383 29.3 992 25.6 - - Real estate - construction loans 80 1.3 1 0.0 - - - - - - Residential mortgages (1st & 2nd liens) 449 7.2 155 3.1 147 3.1 108 2.8 535 18.6 Home equity loans 200 3.2 254 5.2 223 4.7 204 5.3 - - Consumer loans 1,243 20.0 1,191 24.2 1,396 29.5 1,003 25.9 1,865 64.9 Other loans 42 0.7 34 0.7 24 0.5 12 0.3 39 1.4 -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, $6,214 100.0 $4,922 100.0 $4,730 100.0 $3,871 100.0 $2,873 100.0 ================================================================================================================================
The following table presents information concerning loan balances and asset quality: (dollars in thousands)
--------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 1991 1990 --------------------------------------------------------------------------------------------------------------------------------- Loans, net of discounts: Average net loans $487,297 $381,884 $358,093 $347,286 $351,217 Net loans at end of period $535,289 $411,662 $369,005 $360,074 $351,783 --------------------------------------------------------------------------------------------------------------------------------- Non-performing loans to total loans 1.70% 1.26% 1.84% 1.40% 0.58% Non-performing assets to total assets 1.11 0.80 1.13 0.88 0.37 Ratio of net charge-offs to average net loans 0.23 0.24 0.48 0.46 0.27 Net charge-offs to net loans at December 31, 0.21 0.22 0.46 0.45 0.27 Allowance for possible loan losses to loans, net of discounts 1.16 1.20 1.27% 1.06 0.81 =================================================================================================================================
The disparity between average net loans and net loans at December 31, 1994 is largely attributable to the acquisition of the loan portfolio of Hamptons during the second quarter. 13 16 INTEREST EXPENSE Interest expense for 1994 was $15,734,000, up 8.3 percent from $14,525,000 during 1993, which was down 20.0 percent from $18,153,000 in 1992. The largest part of the Company's interest expense was incurred by deposits of individuals, commercial enterprises, and various levels of government and agencies. The majority of the deposits acquired from Hamptons were core deposits of lower cost, including primarily demand, savings, and N.O.W. deposits. Short-term borrowings, including Federal Funds Purchased (inter-bank short-term lending), Securities Sold Under Agreements to Repurchase, and Federal Reserve Bank Borrowings were minimal during 1994 and 1993. DEPOSITS Average interest-bearing deposits increased to $528,968,000 in 1994 from $461,435,000 in 1993. Traditional savings deposits increased during 1994, averaging $225,142,000, up 22.2 percent from $184,185,000 in 1993. Average balances of time certificates under $100,000, decreased to $139,675,000 in 1994, down from $144,340,000 in 1993, a decrease of 3.2 percent. Average balances of money market deposits of $90,085,000 were 13.6 percent of average total deposits during 1994. Average balances of time certificates of $100,000 or more were $15,603,000, up 13.6 percent from $13,731,000 during 1993. Deposits acquired from Hamptons totaled $142,227,000. These included $42,609,000 of demand deposits, $36,836,000 of savings deposits, $48,209,000 of N.O.W. and money market deposits, $3,058,000 of time certificates of $100,000 or more, and $11,515,000 of other time deposits. The following table shows the classification of the average deposits of the Company for each of the periods indicated: (dollars in thousands)
-------------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 -------------------------------------------------------------------------------------------------------------------------------- Average Average Average Rates Paid Rates Paid Rates Paid -------------------------------------------------------------------------------------------------------------------------------- Demand deposits $ 135,593 - $ 90,564 - $ 76,310 - Savings deposits 225,142 2.67% 184,185 2.84% 138,720 3.50% N.O.W. & money market deposits 148,548 1.98 119,179 2.16 141,921 2.87 Time certificates of $100,000 or more 15,603 2.55 13,731 2.49 20,048 2.88 Other time deposits 139,675 4.32 144,340 4.41 157,514 5.49 -------------------------------------------------------------------------------------------------------------------------------- Total deposits $ 664,561 $ 551,999 $ 534,513 ================================================================================================================================
At December 31, 1994, the remaining maturities of the Company's time certificates of $100,000 or more were as follows: (in thousands) -------------------------------------------------------------------- 3 months or less $ 14,774 Over 3 through 6 months 3,642 Over 6 through 12 months 2,020 Over 12 months 3,330 -------------------------------------------------------------------- Total $ 23,766 ====================================================================
SHORT TERM BORROWINGS The Company uses several types of short-term funding. These include 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 $3,861,000 and $125,000 for 1994 and 1993 respectively. Average balances of Federal Reserve Bank borrowings during 1994 were $351,000 and $18,000 for 1993. Retail repurchase agreements averaged $1,781,000 in 1994. There were no retail repurchase agreements in 1993. 14 17 OTHER INCOME Other income increased to $5,675,000 during 1994, up 20.0 percent from $4,730,000 in 1993, which was up 16.5 percent from $4,060,000 in 1992. Service charges on deposit accounts were up 34.0 percent from 1993 to 1994, and 4.0 percent from 1992 to 1993. The deposits acquired from Hamptons provided the basis for this overall increase. Other service charges were up 31.3 percent and 21.7 percent for the same periods. OTHER EXPENSE Other expense during 1994 was $27,752,000, up 30.0 percent from $21,345,000 in 1993, which was up 7.9 percent from $19,788,000 during 1992. Growth of the Company resulting from the acquisition of Hamptons eight branch offices and the related growth in the volume of business has increased costs in the areas of: retention and training of qualified staff, increased use of data processing to provide better operating and management information, and the improvement and expansion of facilities. The Company expects to realize operating efficiencies from this transaction in the future. FDIC assessments increased from $1,135,000 in 1992, to $1,203,000 in 1993, to $1,407,000 in 1994. INTEREST RATE SENSITIVITY Interest-rate sensitivity is determined by the date when each asset and liability in the Bank's portfolio of assets and liabilities can be repriced. Sensitivity occurs when the interest-earning assets and interest-bearing liabilities cannot be repriced at the same time. While this analysis presents the quantity of assets and liabilities repricing in each time period, it does not consider the sensitivity of various assets and liabilities to changes in interest rates. Management reviews its asset/liability strategy regularly. Given differing sensitivities to the various interest rates of its assets and liabilities, management may selectively mismatch the repricing of assets and liabilities to take advantage of temporary or projected differences in interest rates. The following table reflects the sensitivity of the Company's consolidated statement of condition at December 31, 1994: (dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------------- 0 - 90 91 - 180 181-360 Over One Not Rate MATURITY Days Days Days Year Sensitive Total ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS ---------------------------------------------------------------------------------------------------------------------------------- Domestic loans (1) (net of unearned discount) $131,746 $ 43,145 $ 72,910 $ 274,272 $ 13,216 $535,289 Investment securities (2) 40,514 43,359 26,457 83,673 638 194,641 ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $172,260 $ 86,504 $ 99,367 $ 357,945 $ 13,854 $729,930 ---------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- DEMAND DEPOSITS AND INTEREST-BEARING LIABILITIES ---------------------------------------------------------------------------------------------------------------------------------- Demand deposits (3) $ 14,566 $ 14,566 $ 29,132 $ 88,869 $ - $147,133 N.O.W. & money market accounts (4) 7,366 7,366 14,732 157,816 - 187,280 Interest bearing deposits (5) 49,540 34,681 48,352 257,007 - 389,580 Federal funds purchased (6) 4,300 - - - - 4,300 Mortgage payable (6) 50 51 52 1,781 - 1,934 ---------------------------------------------------------------------------------------------------------------------------------- Total demand deposits and interest-bearing liabilities $ 75,822 $ 56,664 $ 92,268 $ 505,473 $ - $730,227 ---------------------------------------------------------------------------------------------------------------------------------- Gap $ 96,438 $ 29,840 $ 7,099 $(147,528) $ 13,854 $ (297) ---------------------------------------------------------------------------------------------------------------------------------- Cumulative difference between interest-earning assets and interest-bearing liabilities $ 96,438 $126,278 $133,377 $ (14,151) $ (297) $ - ---------------------------------------------------------------------------------------------------------------------------------- Cumulative difference as a percentage of total assets 11.88% 15.56% 16.43% (1.74%) (0.04%) =================================================================================================================================
(1) Based upon contractual maturity, repricing date if applicable, and projected prepayments, based upon experience. Loans not accruing interest, loans in the process of renewal, and potential charge-offs are classified as not sensitive to rates. (2) Includes securities held to maturity and available for sale based upon contractual maturity, projected prepayments, based upon experience. FRB stock is not sensitive to rates. (3) Based upon experience with stable core deposits. (4) N.O.W. and Money Market balances are assumed to decline over a period of two years. (5) Deposits with fixed rates and deposits with fixed pricing intervals are included in the period of contractual maturity. Savings balances are assumed to decline over a period of five years. (6) Based upon contractual maturities. As of December 31, 1994, the volume of interest-earning assets with maturities of less than one year exceeded interest-bearing liabilities of similar maturity. This cumulative gap might result in increased net interest margin if interest-earning assets and interest-bearing liabilities reprice upward. If interest rates decline, a narrowing of the net interest margin could result. 15 18 ASSET/LIABILITY MANAGEMENT & LIQUIDITY The asset/liability management committee (the "committee") reviews the financial performance of the Company under the asset/liability management policy. The committee is composed of two outside directors, executive management, the comptroller, and the heads of commercial lending, retail lending, and marketing. It uses computer simulations of financial performance under changing interest rates to quantify interest-rate risk and project liquidity. The simulations also help in developing alternative strategies to increase the Bank's net-interest margin. The committee always assesses the impact of any change in strategy on the Bank's ability to make loans and repay deposits. While managing financial risk, only strategies and policies which meet regulatory guidelines and are appropriate under the economic and competitive conditions in the Bank's market are considered by the committee. The Bank has not used forward contracts or interest rate swaps to manage interest-rate risk. Liquidity is the Company's ability to meet anticipated loan demand and withdrawals of deposits. It is ensured by assets which can be converted quickly into cash. These liquid assets must be of a short term to minimize the risk to principal from changing interest rates. The committee anticipates cash flows in detail for the coming three months and suggests actions to ensure liquidity. Thus, the Bank has sufficient cash flow under normal operations, and is aware of potential sources of liquidity to meet the demand for loans and withdrawals of deposits. BUSINESS RISKS AND UNCERTAINTIES The Bank's principal investments are in loans and in 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 50.4 percent of the Bank's loan portfolio, more than 84.6 percent of which are indirect dealer-generated loans secured by automobiles. Nearly all of these loans are made to residents of the Bank's primary lending area, which is Suffolk County, New York. Each loan is small in amount, and borrowers represent a cross-section of the population employed in a variety of industries. The risk presented by any one loan is correspondingly small, and therefore, the risk which this portion of the portfolio presents to the Company is dependent upon the financial stability of the population as a whole, and is not dependent on any one entity or industry. Loans secured by real estate represented 35.5 percent of the portfolio, most of which are for commercial properties. Loans of this variety present somewhat greater risk than consumer loans, particularly in the current economy. The Bank has attempted to minimize the risks of these loans by carefully considering, among other things, the creditworthiness of the borrower, whether or not the real estate is located in the Bank's primary lending area, the condition and value of, as well as the business prospects for the security property. Commercial, financial, and agricultural loans, unsecured or secured by collateral other than real estate, comprise 13.4 percent of the loan portfolio. 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. The Bank obtains, whenever possible, the personal guarantees of the principal(s), and cross-guarantees among the principals' business enterprises. U.S. Treasury securities represented 64.4 percent of the investment portfolio and offer little or no financial risk. Municipal obligations constitute 18.9 percent of the investment portfolio. 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 municipal entity, each of which is located in the state of New York. The Company's policy is to hold these securities to maturity, which eliminates the risk to principal caused by variations in interest rates. Aggregate balances of other types of loans and investments are not material in amount, and present little overall risk to the Company. Virtually all 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 the effect of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Management believes that continuation of its efforts to manage its net-interest spread and the maturity of its assets and liabilities will position the Company to benefit from current interest rates. CAPITAL RESOURCES Primary capital including stockholders' equity without consideration for the net unrealized loss on securities available for sale, net of tax and the allowance for possible loan losses amounted to $83,750,000 at year-end 1994, compared to $68,206,000 at year-end 1993 and $61,835,000 at year-end 1992. Capital increased in conjunction with the acquisition of Hamptons totaled $8,531,000. This was represented by the issuance of 402,109 shares of the Company's stock under the terms of the agreement to acquire Hamptons. 19 16 The following table presents the Company's primary capital and related ratios for each of the last five years: (CAPTION> (dollars in thousands) -------------------------------------------------------------------------------------------------------------------- 1994 (1) 1993 1992 1991 1990 -------------------------------------------------------------------------------------------------------------------- Primary capital at year-end $83,750 $68,206 $61,835 $56,139 $51,638 Primary capital at year-end as a percentage of year-end: Total assets plus allowance for possible loan losses 10.24% 10.54% 10.24% 9.69% 9.46% Loans, net of unearned discounts 15.65% 16.57% 16.55% 15.43% 14.56% Total deposits 11.57% 11.99% 11.48% 10.82% 10.59% ===================================================================================================================
(1) Capital ratios do not include the effect of SFAS No. 115 "Accounting for Certain Investments in Debt and Investment Securities." The Company measures how effectively it utilizes capital using two widely accepted performance ratios, return on average assets and return on average common stockholders' equity. The returns in 1994 on average assets of 1.11 percent and average common equity of 11.50 percent decreased from 1993. In 1993, returns were 1.35 percent and 13.78 percent, respectively. All dividends must conform to applicable statutory requirements. The Company's ability to pay dividends depends on the 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 its 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 $17,064,000. RISK-BASED CAPITAL/LEVERAGE GUIDELINES The Federal Reserve Bank's requirements concerning risk-based capital requirements for bank holding companies were implemented during a transition period ending in 1992. The guidelines 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. By year-end 1993, all bank holding companies should have met 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, 1994, the Company's ratios of core capital and total qualifying capital (core capital plus Tier 2 capital) to risk-weighted assets were 12.56 percent and 13.62 percent, respectively. DISCUSSION OF CURRENT ACCOUNTING PRINCIPLES In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 would require all creditors to account for impaired loans, except those that are accounted for at fair market value or at the lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994. The Company will implement SFAS No. 114 as of January 1, 1995 and it is not expected to have a material effect on the financial statements taken as a whole. In October 1994, the FASB issued SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 118 is effective for fiscal years beginning after December 15, 1994 and amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. This Statement also amends the disclosure requirements of SFAS No. 114 to require information about the recorded investment in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. The Company does not believe that the adoption of SFAS No. 118 will have a material impact. In October 1994, the FASB issued SFAS No. 119 "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119 is effective for fiscal years ending after December 15, 1994 and requires disclosure about derivative financial instruments including futures, forwards, swap and option contracts, and other financial instruments with similar characteristics. It also amends the existing requirements of SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk", and SFAS No. 107 "Disclosures about Fair Value of Financial Instruments." This statement requires disclosures about amounts, nature, and terms of derivative financial instruments that are not subject to SFAS No. 105 because they do not result in the off-balance sheet risk of financial loss. It requires that a distinction be made between financial instruments held or issued for trading purposes and financial instruments held or issued for purposes other than trading. It also amends SFAS No. 105 and 107 to require that distinction in certain disclosures required by those statements. The adoption of SFAS No. 119 has not had a material impact. 17 20 CONSOLIDATED STATEMENTS OF CONDITION
December 31, ASSETS 1994 1993 Cash & Cash Equivalents......................................................... $ 56,488,206 $ 27,556,696 Investment Securities Available for Sale, At Fair Value United States Treasury Securities........................................... 68,260,575 - Investment Securities Held to Maturity (Fair Value of $123,096,000 and $195,532,000, respectively) United States Treasury Securities........................................... 57,090,622 149,999,285 Obligations of States & Political Subdivisions.............................. 36,780,489 42,025,332 U.S. Government Agency Obligations.......................................... 31,871,215 1,175,893 Corporate Bonds & Other Securities.......................................... 637,849 1,190,644 ----------- ------------ 126,380,175 194,391,154 ------------ ------------ Total Investment Securities............................................... 194,640,750 194,391,154 Total Loans..................................................................... 568,198,173 442,224,211 Less: Unearned Discounts........................................................ 32,909,042 30,561,954 Allowance for Possible Loan Losses........................................ 6,213,548 4,922,126 ------------ ------------ Net Loans..................................................................... 529,075,583 406,740,131 Premises & Equipment, Net....................................................... 12,428,053 4,727,625 Other Real Estate Owned, Net.................................................... 2,621,598 648,510 Accrued Interest Receivable, Net................................................ 4,007,001 2,199,028 Excess of Cost Over Fair Value of Net Assets Acquired........................... 3,347,969 - Other Assets.................................................................... 9,044,349 6,095,900 ------------ ------------ TOTAL ASSETS $ 811,653,509 $ 642,359,044 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Demand Deposits................................................................. $ 147,133,340 $ 98,531,935 Savings, N.O.W.'s & Money Market Deposits....................................... 408,838,090 319,556,727 Time Certificates of $100,000 or more........................................... 23,766,390 12,868,514 Other Time Deposits............................................................. 144,255,106 137,811,235 ------------ ------------ Total Deposits 723,992,926 568,768,411 Federal Funds Purchased......................................................... 4,300,000 - Other Borrowings................................................................ - 6,500,000 Dividend Payable on Common Stock................................................ 721,938 577,398 Accrued Interest Payable........................................................ 1,099,826 967,808 Other Liabilities............................................................... 4,446,133 2,261,145 ------------ ------------ TOTAL LIABILITIES 734,560,823 579,074,762 Commitments and Contingent Liabilities STOCKHOLDERS' EQUITY Common Stock (par value $5.00; 7,500,000 shares authorized; 3,799,674 & 3,396,460 shares issued and outstanding at December 31, 1994 & 1993, respectively)...................................... 18,998,370 16,982,300 Surplus......................................................................... 18,373,392 11,831,795 Undivided Profits............................................................... 40,164,291 34,470,187 Net Unrealized Loss on Securities Available for Sale, Net of Tax................ (443,367) - ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 77,092,686 63,284,282 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 811,653,509 $ 642,359,044 ============ ============
See accompanying notes to consolidated financial statements 21 18 CONSOLIDATED STATEMENTS OF INCOME For the Years ended December 31,
1994 1993 1992 INTEREST INCOME Federal Funds Sold................................................ $ 663,262 $ 851,504 $ 1,635,665 United States Treasury Securities ................................ 5,412,007 5,249,261 5,338,244 Obligations of States & Political Subdivisions (tax exempt)....... 1,685,087 2,035,667 2,461,312 U.S. Government Agency Obligations................................ 1,609,537 98,884 323,941 Corporate Bonds & Other Securities................................ 49,022 70,436 71,169 Loans............................................................. 42,145,375 35,690,994 37,153,379 ----------- ----------- ----------- Total Interest Income 51,564,290 43,996,746 46,983,710 INTEREST EXPENSE Savings, N.O.W.'s & Money Market Deposits......................... 8,949,438 7,815,716 8,934,992 Time Certificates of $100,000 or more............................. 398,591 341,536 576,887 Other Time Deposits............................................... 6,032,300 6,363,027 8,640,660 Federal Funds Purchased........................................... 170,093 3,999 - Interest on Other Borrowings...................................... 81,387 542 - Interest on Mortgages............................................. 102,612 - - ----------- ----------- ----------- Total Interest Expense 15,734,421 14,524,820 18,152,539 Net-interest Income 35,829,869 29,471,926 28,831,171 Provision For Possible Loan Losses................................ 730,000 1,098,000 2,572,000 ----------- ----------- ----------- Net-interest Income After Provision For Possible Loan Losses...................................................... 35,099,869 28,373,926 26,259,171 OTHER INCOME Service Charges on Deposit Accounts............................... 3,007,977 2,244,682 2,157,584 Other Service Charges, Commissions & Fees......................... 1,502,648 1,145,272 941,128 Fiduciary Activities.............................................. 450,000 410,549 345,383 Other Operating Income............................................ 714,606 929,976 616,046 ----------- ----------- ----------- Total Other Income 5,675,231 4,730,479 4,060,141 OTHER EXPENSE Salaries & Employee Benefits...................................... 14,540,444 11,609,771 10,707,026 Net Occupancy Expense............................................. 2,202,202 1,659,004 1,514,866 Equipment Expense................................................. 2,784,688 2,037,297 2,062,587 FDIC Assessments.................................................. 1,407,465 1,202,640 1,134,996 Amortization of Excess Cost Over Fair Value of Net Assets Acquired........................ 270,969 - - Other Operating Expense........................................... 6,546,500 4,836,464 4,368,839 ----------- ----------- ----------- Total Other Expense 27,752,268 21,345,176 19,788,314 Income Before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes................................ 13,022,832 11,759,229 10,530,998 Provision For Income Taxes........................................ 4,705,000 4,070,000 3,858,000 ----------- ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES 8,317,832 7,689,229 6,672,998 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES - 623,614 - ----------- ----------- ----------- NET INCOME $ 8,317,832 $ 8,312,843 $ 6,672,998 =========== =========== =========== EARNINGS PER COMMON SHARE: Before Cumulative Effect Of Change in Accounting Principle $ 2.25 $ 2.27 $ 1.97 Cumulative Effect Of Change In Accounting Principle - 0.18 - ----------- ----------- ----------- Net Income $ 2.25 $ 2.45 $ 1.97 =========== =========== =========== Average Common Shares Outstanding 3,692,286 3,391,149 3,387,198
See accompanying notes to consolidated financial statements 22 19 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Net Unrealized Loss On Securities Common Undivided Available Stock Surplus Profits For Sale Total ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1991 $16,847,655 $11,596,643 $23,823,211 $ - $52,267,509 Net Income - - 6,672,998 - 6,672,998 Dividend - - (2,032,411) - (2,032,411) Issuance of Stock Under Stock Dividend Reinvestment Plan (19,750 Shares) 98,750 98,368 - - 197,118 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1992 $16,946,405 $11,695,011 $28,463,798 $ - $57,105,214 Net Income - - 8,312,843 - 8,312,843 Dividend - - (2,306,454) - (2,306,454) Issuance of Stock Under Stock Option Plan (7,179 Shares) 35,895 136,784 - - 172,679 ----------- ----------- ----------- ----------- ----------- Balance, December 31, 1993 $16,982,300 $11,831,795 $34,470,187 $ - $63,284,282 Net Income - - 8,317,832 - 8,317,832 Dividend - - (2,623,728) - (2,623,728) Issuance of Stock in Purchase of Hamptons Bancshares (402,109 shares) 2,010,545 6,520,653 - - 8,531,198 Issuance of Stock Under Stock Option Plan (1,105 Shares) 5,525 20,944 - - 26,469 Cumulative Effect of Change in Accounting Principle at January 1, 1994 - - - (328,472) (328,472) Net Change in Unrealized Loss on Securities Available For Sale - - - (114,895) (114,895) ----------- ----------- ----------- ------------ ----------- Balance, December 31, 1994 $18,998,370 $18,373,392 $40,164,291 $ (443,367) $77,092,686 =========== =========== =========== ============= ===========
See accompanying notes to consolidated financial statements 20 23 CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES 1994 1993 1992 NET INCOME........................................................ $ 8,317,832 $ 8,312,843 $ 6,672,998 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH Provision for Possible Loan Losses.......................... 730,000 1,098,000 2,572,000 Depreciation................................................ 1,727,892 1,212,234 1,383,297 Amortization of Excess Cost Over Fair Value of Net Assets Acquired.................................... 270,969 - - Accretion of Discounts...................................... (2,107,671) (1,496,699) (1,489,162) Amortization of Premiums.................................... 284,555 387,413 368,200 (Increase) Decrease in Accrued Interest Receivable.......... (892,059) 323,470 360,397 Increase in Other Assets.................................... (527,083) (1,630,011) (960,094) Decrease in Accrued Interest Payable........................ (36,898) (303,619) (932,473) Increase (Decrease) in Income Taxes Payable................. 6,053 (319,554) 2,788 (Decrease) Increase in Other Liabilities.................... (1,219,703) 685,514 344,533 ----------- ----------- ----------- Net Cash Provided by Operating Activities................. 6,553,887 8,269,591 8,322,484 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Principal Payments on Investment Securities................. 1,449,362 1,575,421 2,508,187 Maturities of Investment Securities; Available for Sale..... 55,000,000 - - Purchases of Investment Securities; Available for Sale ..... (123,295,731) - - Maturities of Investment Securities; Held to Maturity....... 126,756,406 177,424,983 198,974,514 Purchases of Investment Securities; Held to Maturity........ (25,673,742) (205,203,351) (231,061,999) Loan Disbursements & Repayments, Net........................ (35,913,818) (38,868,615) (12,301,844) Purchases of Premises & Equipment, Net...................... (1,184,547) (1,343,369) (723,276) Disposition of OREO Property................................ 823,216 204,990 - Cash & Cash Equivalents Acquired, Net of Cash Disbursement.. 15,938,431 - - ----------- ----------- ----------- Net Cash Provided by (Used) in Investing Activities....... 13,899,577 (66,209,941) (42,604,418) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net Increase in Deposit Accounts............................ 12,997,051 30,164,131 21,053,712 (Decrease) Increase in Other Borrowings..................... (6,500,000) 6,500,000 - Increase in Federal Funds Purchased......................... 4,300,000 - - Common Stock Sold for Cash.................................. 26,469 172,679 197,118 Dividends Paid to Shareholders.............................. (2,490,014) (2,271,341) (1,961,860) Increase in Dividend Payable on Common Stock................ 144,540 35,113 70,551 ----------- ----------- ----------- Net Cash Provided by Financing Activities................ 8,478,046 34,600,582 19,359,521 ----------- ----------- ----------- Net Increase (Decrease) in Cash & Cash Equivalents....... 28,931,510 (23,339,768) (14,922,413) Cash & Cash Equivalents Beginning of Year.............. 27,556,696 50,896,464 65,818,877 ----------- ----------- ----------- Cash & Cash Equivalents End of Year.................... $ 56,488,206 $ 27,556,696 $ 50,896,464 =========== =========== =========== Supplemental Disclosure of Cash Flow Information Cash Received During the Year for Interest.................. $ 49,756,316 $ 44,320,216 $ 47,344,107 =========== =========== =========== Cash Paid During the Year for: Interest.................................................. $ 15,602,404 $ 14,828,440 $ 19,085,012 Income Taxes.............................................. 4,698,947 4,389,554 3,855,212 ----------- ----------- ----------- Total Cash Paid During Year for Interest & Income Taxes. $ 20,301,350 $ 19,217,994 $ 22,940,224 =========== =========== ============ Non Cash Investing & Financing - (loans re-classified as "other real estate owned", including foreclosures and in-substance foreclosures) $ 1,510,346 $ - $ 728,500 Issuance of Common Stock 8,531,198 - - FASB 115 Adjustment 819,229 - - Deferred Tax Benefit from FASB 115 375,862 - - Dividends Declared Not Paid 721,938 - - Net Assets Acquired from Hamptons Bancshares, Inc. (see footnote 2) 9,308,631 - - =========== =========== ============
See accompanying notes to consolidated financial statements 21 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies The accounting and reporting policies of Suffolk Bancorp and its subsidiaries 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 the Company and its wholly owned subsidiaries, The Suffolk County National Bank (the "Bank") and Island Computer Corporation of New York, Inc. All intercompany transactions have been eliminated in consolidation. (B) Investment Securities -- Prior to January 1, 1994, debt securities are carried at cost, adjusted for the amortization of premiums and accretion of discounts, and mortgage-backed securities are carried at current unpaid principal balances adjusted for unamortized premiums and unearned discounts. Such securities are reported as "held to maturity" in the consolidated statements of condition because of management's ability and intent to hold such securities to maturity. Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which was issued in May 1993. Under SFAS No. 115, the Company is required to report 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, in adopting SFAS No. 115, the Company classified all of its holdings of debt securities and mortgage-backed securities as either "held to maturity", or "available for sale." The adoption of SFAS No. 115 had no impact on net income in 1994, but resulted in a $328,472 decrease in stockholders' equity at January 1, 1994. The net change in unrealized loss on securities available for sale during 1994 was $114,895. Under SFAS No. 115, at the time a security is purchased, a determination will be 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 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 are removed from non-accrual status 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 (E) Premises and Equipment -- Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated by the declining-balance or straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the term of the lease or the estimated life of the asset, whichever is shorter. (F) Other Real Estate Owned -- Property acquired through foreclosure (other real estate owned or "OREO"), including in-substance foreclosures, 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. Also included is $105,000 representing investment in property purchased by the Bank for a possible branch office. (G) Excess of Cost Over Fair Value of Net Assets Acquired -- The excess of cost over fair value of net assets acquired (goodwill) is amortized over ten years. 25 22 (H) Income Taxes -- Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." The adoption of SFAS No. 109 changed the Company's method of accounting for income taxes from the deferred method to an asset and liability approach. 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. Under SFAS No. 109, deferred tax assets are recognized if it is more likely than not that a future benefit will be realized. It is management's position, as currently supported by the facts and circumstances, that no valuation allowance is necessary against any of the Company's deferred tax assets. SFAS No. 109 was adopted on a prospective basis. (see Note 9.) Prior to January 1, 1993, provisions for income taxes were based upon results reported for purposes of financial statements. Deferred income taxes were provided for significant timing differences arising from reporting the components of such results in different periods than those reported for tax purposes. (I) Summary of Retirement Benefits Accounting -- The Company'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. The Company'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, used in estimating pension costs, are amortized over a period that reflects the long-term nature of pension expense. The Company adopted SFAS No. 106 "Employers' Accounting for Post-retirement Benefits Other Than Pensions" ("SFAS No. 106") on January 1, 1992. This Statement established accounting standards for post-retirement benefits other than pensions (hereinafter referred to as post-retirement benefits). The statement focuses principally on health care, although it applies to all forms of post-retirement benefits other than pensions. SFAS No. 106 changed the Company's practice of accounting for post-retirement benefits on a cash basis by requiring accrual of the cost of providing those benefits to an employee, and the employee's beneficiaries and covered dependents, during the years that the employee renders the necessary service. (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) 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 - Acquisition of Hamptons Bancshares, Inc. On April 11, 1994, Suffolk Bancorp ("Suffolk") acquired Hampton Bancshares, Inc. ("Hamptons"). Hamptons principal asset was Bank of the Hamptons, which operated 8 branch locations in eastern Suffolk County. Each share of Hamptons common stock on that date was entitled to receive 0.6809 shares of Suffolk common stock or $14.64 in cash. 402,109 shares were issued. Total consideration was $12,472,000. At the date of acquisition, Hamptons had $152,271,000 in assets and deposits of $142,461,000. This transaction has been accounted for under the purchase method of accounting and, accordingly, the Company's consolidated results of operations reflect the results of Hamptons from April 11, 1994. The assets and liabilities have been recorded at their estimated fair values. The excess cost over the fair value of net assets acquired of $3,619,000 is shown as an intangible asset on the statement of condition at December 31, 1994, and is being amortized over 10 years. At the date of acquisition, Hamptons had assets (exclusive of cash & cash equivalents) with a fair value of $137,288,000, including investment securities of $34,994,000, net loans of $88,100,000, and other assets of $14,194,000; and liabilities with a fair value of $145,795,000, including deposits of $142,227,000 and other liabilities of $3,568,000; resulting in net liabilities assumed (exclusive of cash & cash equivalents) of $8,507,000. The following is an unaudited pro forma summary of the consolidated results of operations for the years ended December 31, 1994 and 1993, assuming the aforementioned acquisition occurred on January 1, 1993. The unaudited pro forma results are not necessarily indicative of the results which would have actually been attained if the acquisition had been consummated in the past or what may be attained in the future. Unaudited Pro Forma Results of Operations: (in thousands of dollars except share and per-share data)
December 31, 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Interest income $51,579 $55,582 Interest expense 15,761 17,542 --------------------------------------------------------------------------------------------------------------------------- Net interest income 35,818 38,040 Provision for possible loan losses 730 1,398 Other income 5,823 6,554 Other expenses 27,993 31,223 --------------------------------------------------------------------------------------------------------------------------- Net operating expense 22,170 24,669 Income before taxes and cumulative effect of change in accounting principle 12,918 11,973 Provision for income taxes 4,705 4,162 --------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 8,213 7,811 Cumulative effect of change in accounting principle - 665 --------------------------------------------------------------------------------------------------------------------------- Net income $ 8,213 $ 8,476 Earnings-per-share $ 2.16 $ 2.24 --------------------------------------------------------------------------------------------------------------------------- Average shares 3,800,250 3,792,045 ===========================================================================================================================
26 23 Purchase-accounting discounts and premiums from the acquisition of Hamptons which are accreted or amortized over their estimated lives from the acquisition date, using the level yield method are as follows: (dollars in thousands)
----------------------------------------------------------------------------------------------------------------------- Estimated Amount Life ----------------------------------------------------------------------------------------------------------------------- Purchase discount on investment securities $ 1,445 4 years Purchase discount on loans 1,323 2 years Purchase premium on bank premises 1,418 7 years Purchase premium on other time deposits 214 2 years Purchase premium on CD's > $100,000 20 6 months -----------------------------------------------------------------------------------------------------------------------
Note 3 - Investment Securities The amortized cost, estimated fair values and gross unrealized gains and losses of the Company's investment securities available for sale and held to maturity at December 31, 1994 and 1993 were: (in thousands)
----------------------------------------------------------------------------------------------------------------------------------- Investment Securities 1994 1993 ----------------------------------------------------------------------------------------------------------------------------------- Estimated Gross Gross Estimated Gross Gross Amortized Fair Unrealized Unrealized Amortized Fair Unrealized Unrealized Cost Value Gains Losses Cost Value Gains Losses Available for sale: U.S. treasury securities $ 69,080 $ 68,261 $ 23 $ 842 $ - $ - $ - $ - ________ ________ ________ _______ ______ _______ ________ ________ Balance at end of year 69,080 68,261 23 842 - - - - ------------------------------------------------------------------------------------------------------------------------------------ Held to maturity: U.S. treasury securities $ 57,091 $ 55,827 $ - $ 1,264 $149,999 $150,328 $ 373 $ 44 Obligations of states and political subdivisions 36,780 36,841 221 160 42,025 42,894 910 41 U.S. govt. agency obligations 31,871 29,790 7 2,088 1,176 1,123 11 64 Corporate bonds and other securities 638 638 - - 1,191 1,187 4 8 -------- -------- -------- -------- -------- -------- -------- -------- Balance at end of year $126,380 $123,096 $ 228 $ 3,512 $194,391 $195,532 $ 1,298 $ 157 ------------------------------------------------------------------------------------------------------------------------------------ Total investment securities $195,460 $191,357 $ 251 $ 4,354 $194,391 $195,532 $ 1,298 $ 157 ====================================================================================================================================
U.S. Government Agency Obligations are mortgage-backed securities which represent participating interests in pools of first mortgage loans. The carrying value, maturities and approximate fair value at December 31, 1994 are as follows: (in thousands)
-------------------------------------------------------------------------------------------------------------------------------- Available for Sale- - - - - - - - - - - - - - - - - - - - - - - - - Held To Maturity - - - - - - - - - - - -------------------------------------------------------------------------------------------------------------------------------- Obligations of U.S. Corporate Total U.S. Treasury U.S. Treasury States & Political Govt. Agency Bonds & Carrying Securities Securities Subdivisions Obligations Other Securities Value -------------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Carrying Fair Carrying Fair Carrying Fair Maturity (in years) Value Value Value Value Value Value Value Value Value Value -------------------------------------------------------------------------------------------------------------------------------- Within 1 $34,588 $34,611 $45,004 $44,304 $30,714 $30,616 $ 1 $ 1 $ - $ - $110,307 After 1 but within 5 34,492 33,650 12,087 11,523 6,066 6,225 14,664 13,956 - - 67,309 After 5 but within 10 - - - - - - 17,206 15,833 - - 17,206 Other securities (FRB) - - - - - - - - 638 638 638 -------------------------------------------------------------------------------------------------------------------------------- Total $69,080 $68,261 $57,091 $55,827 $36,780 $36,841 $31,871 $29,790 $ 638 $ 638 $195,460 --------------------------------------------------------------------------------------------------------------------------------
As a member of the Federal Reserve system, the Bank owns Federal Reserve Bank Stock with a book value of $638,000. The stock has no maturity and there is no public market for the investment. Actual maturities of U.S. Government Agency Obligations will differ from contractual maturities because the mortgage-loan borrowers have the right to prepay obligations with or without penalties because the issuer can call the security before it is due. At December 31, 1994 and 1993, investment securities carried at $170,522,000 and $168,880,000, respectively, were pledged to secure trust deposits and public funds on deposit. No securities have been sold during the past three years. 24 27 Note 4 - Loans At December 31, 1994 and 1993, loans included the following: (in thousands)
----------------------------------------------------------------- 1994 1993 ----------------------------------------------------------------- Commercial, financial and agricultural loans $ 71,414 $ 52,103 Commercial real estate 104,548 65,738 Real estate construction loans 8,018 5,327 Residential mortgages (1st & 2nd liens) 50,011 33,489 Home equity loans 27,534 18,440 Consumer loans 302,634 266,605 Lease finance 743 - Other loans 3,296 522 $568,198 $442,224 Unearned discounts (32,909) (30,562) Allowance for possible loan losses (6,214) (4,922) ----------------------------------------------------------------- Balance at end of year $529,075 $406,740 -----------------------------------------------------------------
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 $8,401,000 and $5,359,000 at December 31, 1994 and 1993, respectively. Interest on loans which have been restructured or are no longer accruing interest would have amounted to $394,000 during 1994, $322,000 during 1993 and $361,000 during 1992 under the contractual terms of those loans. Interest income recognized on restructured and non-accrual loans was immaterial for the years 1994, 1993 and 1992. The Company makes loans to its directors, as well as to other related parties in the ordinary course of its business. Loans made to directors, either directly or indirectly, which exceed $60,000 in aggregate for any one director totaled $7,012,000 and $5,752,000 at December 31, 1994 and 1993, respectively. Unused portions of lines of credit to directors, directly or indirectly, totaled $4,250,000 and $3,225,000 as of December 31, 1994 and 1993, respectively. New loans totaling $15,819,000 were granted and payments of $14,559,000 were received during 1994. The Company has pledged $8,839,000 of 1-4 family residential mortgages as collateral against advances from the Federal Reserve Bank as of December 31, 1994. Note 5 - Allowance for Possible Loan Losses An analysis of the changes in the Allowance for Possible Loan Losses follows: (in thousands)
------------------------------------------------------------------ 1994 1993 1992 ------------------------------------------------------------------ Balance at beginning of year $4,922 $4,730 $3,871 Allowance acquired from Hamptons 1,678 - - Provision for possible loan losses 730 1,098 2,572 Loans charged-off (1,468) (1,167) (1,939) Recoveries on loans 352 261 226 ------------------------------------------------------------------ Balance at end of year $6,214 $4,922 $4,730 ==================================================================
Note 6 - Premises and Equipment The following table presents detail concerning premises and equipment: (in thousands)
------------------------------------------------------------ 1994 1993 ------------------------------------------------------------ Land $ 2,412 $ 498 Premises 7,477 2,493 Furniture, fixtures & equipment 12,010 9,398 Leasehold improvements 411 560 ------------------------------------------------------------ 22,310 12,949 Accumulated depreciation and amortization (9,882) (8,221) ------------------------------------------------------------ Balance at end of year $ 12,428 $ 4,728 ============================================================
Depreciation and amortization charged to operations amounted to $1,728,000, $1,212,000, and $1,383,000 during 1994, 1993 and 1992, respectively. Note 7 - 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 years 1994 and 1993: (dollars in thousands)
------------------------------------------------------------------------ 1994 1993 ------------------------------------------------------------------------ Daily average outstanding $ 2,132 $ 18 Total interest cost 81 0.5 Average interest rate paid 3.80% 2.78% Maximum amount outstanding at any month- end (February 1994, December 1993) $22,840 $ 6,500 December 31, balance - 6,500 Weighted average interest rate on balances outstanding at December 31, -% 3.00% ------------------------------------------------------------------------
There were no short-term borrowings for the year 1992. Note 8 - Stockholders' Equity The Company has a Dividend Reinvestment Plan. Stockholders can reinvest dividends in common stock of the Company at a 3% discount from market value on newly issued shares. Shareholders may also make additional cash purchases. There were no shares issued in 1994 or 1993, and 19,750 shares were issued under the Plan during 1992 At the 1989 annual meeting, the shareholders approved an Incentive Stock Option Plan ("the Plan") which reserved 330,000 shares of the Company's common stock for issuance to key employees. Options are awarded by a committee appointed by the Board of Directors. The Plan provides that the option price shall not be less than the fair value of the common stock on the date the option is granted. All options are exercisable for a period of ten years or less. The Plan provides for the grant of stock appreciation rights which the holder may exercise instead of the underlying option. When the stock appreciation right is exercised, the underlying option is cancelled. The optionee receives shares of common stock with a fair market value equal to the excess of the fair value of the shares subject to the option at the time of exercise (or the portion thereof so exercised) over the aggregate option price of the shares set 28 25 forth in the option agreement. The exercise of stock appreciation rights is treated as the exercise of the underlying option. The following table presents the options exercised during each of the past three years:
----------------------------------------------------- Number of Shares ----------------------------------------------------- Balance at December 31, 1991 16,096 Options granted - Options exercised - Options expired or terminated - ----------------------------------------------------- Balance at December 31, 1992 16,096 Options granted - Options exercised (11,481) Options expired or terminated - ----------------------------------------------------- Balance at December 31, 1993 4,615 Options granted - Options exercised (1,401) Options expired or terminated (3,214) Balance at December 31, 1994 - -----------------------------------------------------
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 its net profits for the current year combined with retained net profits (net profits minus dividends paid during that period) of the prior two years. At December 31, 1994, approximately $17,064,000 was available for dividends from the Bank to Suffolk Bancorp without prior approval of the OCC. Note 9- Income Taxes As discussed in Note 1(H), the Company adopted Statement No. 109 as of January 1, 1993. The cumulative effect of this change in accounting for income taxes of $624,000 is determined as of January 1, 1993 and is reported separately in the consolidated statements of income in 1993. Prior years' consolidated financial statements have not been restated to apply the provisions of Statement No. 109. The provision for income taxes in the consolidated statements of income is comprised of the following: (in thousands)
-------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 -------------------------------------------------------------- Current Federal $ 3,792 $ 3,115 $ 3,064 State 1,270 1,367 1,347 -------------------------------------------------------------- 5,062 4,482 4,411 Deferred Federal (413) (295) (446) State 56 (117) (107) -------------------------------------------------------------- (357) (412) (553) -------------------------------------------------------------- Total $ 4,705 $ 4,070 $ 3,858 ==============================================================
The total tax expense was less than the amounts computed by applying the Federal income tax rate as a result of the following:
-------------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 -------------------------------------------------------------------- Federal income tax expense at statutory rates 34% 34% 34% Tax exempt interest (4%) (5%) (7%) Amortization of excess cost over fair value of net assets acquired 1% - - State income taxes net of federal benefit 7% 7% 7% Other (1%) (1%) 3% -------------------------------------------------------------------- Total 37% 35% 37% ===================================================================
The tax effects of temporary differences that create significant deferred-tax assets and deferred-tax liabilities at December 31, 1994 and 1993 and the recognition of income and expense for purposes of tax and financial reporting, resulting in net increases to the Company's net deferred tax asset for the year ended December 31, 1994 are presented below: (in thousands)
--------------------------------------------------------------------- Dollar 1994 1993 Change --------------------------------------------------------------------- Deferred tax assets: Provision for possible loan losses $2,230 $1,958 $ 272 Depreciation 41 54 (13) Post-retirement benefits 186 106 80 Deferred compensation 249 285 (36) Purchase accounting 987 - 987 Tax net operating loss carry- forward acquired from Hamptons 192 - 192 Tax benefit from investment securities available for sale 376 - 376 Other - 20 (20) --------------------------------------------------------------------- Total deferred tax assets before valuation allowance 4,261 2,423 1,838 Valuation allowance - - - --------------------------------------------------------------------- Total deferred tax assets net of valuation allowance 4,261 2,423 1,838 --------------------------------------------------------------------- Deferred tax liability: Pension 249 102 (147) Other - 38 38 --------------------------------------------------------------------- Total deferred tax liability 249 140 (109) Net deferred tax asset $4,012 $2,283 $1,729 =====================================================================
The Company recognized a net deferred tax asset of $1,710,000 at the date of acquisition as a result of the acquisition of Hamptons. Included in the net deferred tax asset is a deferred tax asset of $407,000 relating to an acquired tax net operating loss carryforward acquired in the acquisition. The tax net operating loss carryforward of $565,000 as of December 31, 1994 will begin to expire in the year 2005. 29 26 The tax effects of temporary differences that create significant deferred-tax assets and deferred-tax liabilities as of January 1, 1993 and December 31, 1993 and the temporary difference in the recognition of income and expense for purposes of tax and financial reporting, resulting in net increases to the Company's net deferred tax asset for the year ended December 31, 1993 are presented below:
(in thousands) -------------------------------------------------------------- Change for the year ended Jan. 1, Dec. 31, Dec. 31, 1993 1993 1993 -------------------------------------------------------------- Deferred tax assets: Provision for possible loan losses $1,878 $1,958 $ 80 Deferred compensation 220 285 65 Other 64 180 116 -------------------------------------------------------------- Total deferred tax assets before valuation allowance 2,162 2,423 261 Valuation allowance - - - -------------------------------------------------------------- Total deferred tax assets net of valuation allowance 2,162 2,423 261 -------------------------------------------------------------- Deferred tax liability: Depreciation 128 - 128 Other 163 140 23 -------------------------------------------------------------- Total deferred tax liability 291 140 151 Net deferred tax asset $1,871 $2,283 $ 412 ==============================================================
The sources of timing differences prior to the adoption of SFAS No. 109 resulting in deferred income taxes and the related tax effect of each were as follows: (in thousands)
------------------------------------------------- Year Ended December 31, 1992 ------------------------------------------------- Loan loss deduction $ (534) Accelerated tax depreciation (27) Deferred compensation (25) Other, net 33 ------------------------------------------------- Total $ (553) =================================================
The Internal Revenue Service has examined and closed their years through tax year 1990. Note 10 - Employee Benefits On October 1, 1994, the Hamptons Retirement Plan was merged into the retirement plan of Suffolk Bancorp, the Prototype Plan of the New York State Bankers Retirement System. Beginning on October 1, 1994, all remaining Hamptons Plan members (including terminated vested and retired members) will participate in Suffolk's Plan. The benefits for active employees will be calculated as if the employee had always participated in Suffolk's Plan. All service and pay earned while employed by Hamptons will be counted under Suffolk's Plan. Nevertheless, the benefits payable will never be less than the accrued vested plan benefit earned in the Hamptons Plan. (A) Retirement Plan The Company 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 Hamptons' and of Suffolk Bancorp's combined plan as of September 30, 1994 and Suffolk's Plan as of September 30, 1993, the time at which the annual valuation of the plan is made: Actuarial present value of benefit obligations:
----------------------------------------------------------------- 1994 1993 ----------------------------------------------------------------- Accumulated benefit obligation $ 5,939,500 $ 3,490,400 ----------------------------------------------------------------- Vested benefit obligation $ 5,765,409 3,440,437 ----------------------------------------------------------------- Projected benefit obligation for service rendered to date $(8,014,115) $(5,223,485) Plan assets at fair value, primarily listed stocks and bonds 8,304,960 6,220,420 ----------------------------------------------------------------- Plan assets in excess of projected benefit obligation $ 290,845 $ 996,935 Unrecognized net transition assets being amortized over 17.5 years (551,916) (607,541) Unrecognized prior service cost (24,739) 26,562 Unrecognized net loss 1,248,975 230,770 ----------------------------------------------------------------- Prepaid pension cost included in other assets $ 963,165 $ 646,726 =================================================================
The effect of merging the two plans on the components of prepaid pension cost are as follows: Accumulated vested benefit obligations increased $80,994, vested benefit obligation increased $80,125, and the projected benefit obligation increased $237,030. Net pension cost for 1994, 1993 & 1992 included the following components:
----------------------------------------------------------------- 1994 1993 1992 Service cost $ 589,376 $ 446,139 $ 397,851 Interest cost on projected benefit obligations 587,690 391,655 360,456 Expected return on plan assets (676,728) (449,584) (398,832) Net amortization & deferral (37,457) (38,936) (27,914) ----------------------------------------------------------------- Net periodic pension cost $ 462,881 $ 349,274 $ 331,561 =================================================================
30 27 The weighted average discount rate for purposes of determining net periodic pension cost was 8.0% in 1994 and 8.5% 1993. The rate of increase in future compensation levels used in determining these amounts was 5.0% in 1994 and 6.5% 1993, respectively. The expected long-term rate of return on assets is 8.5% for 1994 and 1993. (B) Deferred Compensation Plan During 1986, the Board approved a deferred compensation plan. Under the plan, certain employees and Directors of the Company elected to defer compensation aggregating approximately $177,000 in exchange for stated future payments to be made at specified dates which would include a guaranteed rate of return on the initial deferral. For purposes of financial reporting, interest (approximately $100,000 in 1994, $130,000 in 1993 and $95,000 in 1992) at the plan's contractual rate is being accrued on the deferral amounts over the expected plan term. During 1994, the Company made payments of $99,000 to participants of the plan. The Company 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. The Company is the named beneficiary on the policies. Net insurance expense (income) related to the policies aggregated approximately ($11,000), $1,000 and ($7,000) in 1994, 1993 and 1992, respectively. (C) Post-Retirement Benefits Other Than Pension On January 1, 1992, the Company adopted SFAS No. 106. Post-retirement benefits other than pension are available to all full time employees who have met certain age requirements and have completed at least one year of employment. The accrued post-retirement benefit recognized during 1994 includes a service cost of $83,461, interest of $94,007 and amortization of $37,339. The accrued post-retirement benefit recognized during 1993 includes a service cost of $77,291, interest cost of $51,940 and amortization of $20,769. Interest is calculated assuming a discount rate of 8.5 percent, and the amortization cost represents the unrecognized transition obligation as of January 1, 1992, amortized using the straight-line method over a twenty-year period. The only benefit available after retirement is participation in group insurance plans. Note 11 - 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. The Company is contingently liable under standby letters-of-credit in the amount of $4,432,000 and $1,356,000 at December 31, 1994 and 1993, respectively. The Company 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 $18,080,000 and $12,829,000, and commercial loans of $5,549,000 and $3,860,000 as of December 31, 1994 and 1993, respectively. In the opinion of management, based upon legal counsel, liabilities arising from legal proceedings against the Company, would not have a significant effect on the financial position of the Company. During 1994, the Company was required to maintain balances with the Federal Reserve Bank of N.Y. for reserve and clearing requirements. These balances averaged $4,444,000 in 1994. Total rental expense for the years ended December 31, 1994, 1993 and 1992 amounted to $527,000, $496,000 and $457,000, respectively. At December 31, 1994, the Company was obligated under a number of non-cancellable operating leases for land and buildings used for bank purposes. Minimum annual rentals, exclusive of taxes and other charges under non-cancellable operating leases, are summarized as follows: (in thousands)
------------------------------------------------------------ Year ending December 31, Minimum Annual Rentals ------------------------------------------------------------ 1995 $ 475 1996 473 1997 492 1998 497 1999 and thereafter 507 ============================================================
Note 12 - Credit Concentrations and Regulatory Matters The Bank's principal investments are in loans, and in a portfolio of short and medium term debt of the United States Treasury, states and other political subdivisions, U.S. Government agencies, and corporations. As of December 31, 1994, consumer loans, net of unearned discounts, comprised 50.4 percent of the Bank's loan portfolio, more than 84.6 percent of which are indirect dealer-generated loans secured by automobiles. Most of these loans are made to residents of the Bank's primary lending area, which is Suffolk County, New York. Borrowers represent a cross-section of the population employed in a variety of industries. The risk presented by any one loan is correspondingly small, and therefore, the risk which this portion of the portfolio presents to the Company is dependent upon the financial stability of the population as a whole, and is not dependent on any one entity or industry. As of December 31, 1994, loans secured by real estate represented 35.5 percent of the portfolio, most of which are for commercial properties. Loans of this variety present somewhat greater risk than consumer loans, particularly in the current economy. The Bank has attempted to minimize the risks of these loans by carefully considering, among 31 28 other things, the creditworthiness of the borrower, whether or not the real estate is located in Suffolk County, New York, the Bank's primary lending area, the condition and value of, as well as the business prospects for the security property. The Bank obtains, whenever possible, the personal guarantees of the principal(s), and cross-guarantees among the principal's business enterprises. Commercial, financial, and agricultural loans, unsecured or secured by collateral other than real estate, comprise 13.4 percent of the loan portfolio. 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. The Bank obtains, whenever possible, the personal guarantees of the principal(s), and cross-guarantees among the principal's business enterprises. In connection with the determination of the allowance for possible loan losses and other real estate owned, management obtains independent appraisals for significant properties. Management believes that the allowances for possible loan losses and other real estate owned are adequate. While management uses whatever information is available to recognize losses on loans and other real estate owned, future additions to the allowances may be necessary because of changes in economic conditions, particularly in the northeastern United States. During 1994, management charged-off $1,116,000 net of recoveries, made additions to the allowance of $730,000 and recorded an acquired allowance from Hamptons of $1,678,000. In addition, various regulatory agencies, as part of their examinations, periodically review the Bank's allowance for possible losses on loans and real estate owned. These agencies may require the Bank to make additions to the allowance, based on their judgments about information available to them at the time of their examination. Note 13 - Fair Value of Financial Instruments The following table presents the carrying amounts and fair values of the Banks financial instruments at December 31, 1994 and 1993. FASB 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 or liquidation sale: (in thousands)
-------------------------------------------------------------------- 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value --------------------------------------------------------------------- Cash & cash equivalents $ 56,488 $ 56,488 $ 27,557 $ 27,557 Investment securities available for sale 68,261 68,261 - - Investment securities held to maturity 126,380 123,096 194,391 195,532 Loans 568,198 555,195 442,224 447,526 Accrued interest receivable 4,007 4,007 2,199 2,199 Deposits 723,993 720,857 568,768 569,590 Accrued interest payable 1,100 1,100 968 968 Fed funds purchased 4,300 4,300 - - Other borrowings - - 6,500 6,500 =====================================================================
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 are listed below. 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 period or no maturity 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, savings accounts, accrued interest payable and other borrowings. 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 with appropriate adjustments. 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 inherent in the loan. The estimate of maturity is based on the Bank's historical experience with repayments for each type of loan, modified, as required, by an estimate of the effects of the current economy. Fair value for significant non-performing loans is based on recent external appraisals of collateral, if any. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the associated risk. Assumptions regarding credit risk, cash flows, and discount rates are made using available market information and specific borrower information. The carrying amount and fair value of loans were as follows at December 31, 1994 and 1993: (in thousands)
---------------------------------------------------------------- 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value ---------------------------------------------------------------- Commercial, financial & agricultural $ 71,414 $ 68,617 $52,103 $ 51,344 Commercial real estate 104,548 103,895 65,738 65,936 Real estate construction loans 8,018 7,540 5,327 5,357 Residential mortgages (1st & 2nd liens) 50,011 50,215 33,489 33,723 Home equity loans 27,534 27,531 18,440 18,448 Consumer loans 302,634 293,382 266,605 272,195 Lease finance 743 720 - - Other loans 3,296 3,295 522 523 ---------------------------------------------------------------- Totals $568,198 $555,195 $442,224 $447,526 ================================================================
29 32 Deposit Liabilities The fair value of certificates of deposit were calculated by discounting cash flows with applicable origination rates. At December 31, 1994, the fair value of certificates of deposit of $164,886,000 had a carrying value of $168,021,000. At December 31, 1993, the fair value of certificates of deposit of $151,501,000 had a carrying value of $150,680,000. 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 present creditworthiness of the counterparties. The estimated fair value of written financial guarantees and letters of credit is based on fees currently charged for similar agreements: (in thousands)
--------------------------------------------------------------------- 1994 1993 Contract Fair Contract Fair Amount Value Amount Value --------------------------------------------------------------------- Commitments to extend credit $21,124 $21,173 $14,968 $15,016 Stand-by letters of credit 4,432 4,432 1,356 1,376 Written financial guarantees 5,549 5,559 3,860 3,874 --------------------------------------------------------------------- Totals $31,105 $31,164 $20,184 $20,266 ---------------------------------------------------------------------
Note 14 - Suffolk Bancorp (Parent Company Only)
Condensed Financial Statements: (in thousands) --------------------------------------------------------------------------------------------------------------------------- Condensed Statements of Condition as of December 31, 1994 1993 --------------------------------------------------------------------------------------------------------------------------- Assets Due From Banks $ 1,368 $ 1,635 Investment in Subsidiaries:SCNB 75,811 61,695 ICC 587 281 Other Assets 69 293 --------------------------------------------------------------------------------------------------------------------------- Total Assets $77,835 $63,904 --------------------------------------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Dividends Payable $ 722 $ 577 Other Liabilities 20 43 Stockholders' Equity 77,093 63,284 --------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $77,835 $63,904 ---------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------- Condensed Statements of Income for the year ended December 31, 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------- Income Dividends from Subsidiary Bank $ 2,629 $ 2,306 $ 2,032 Interest Income 8 23 27 --------------------------------------------------------------------------------------------------------------------------- 2,637 2,329 2,059 Expense Other (Income) Expense (17) 185 5 --------------------------------------------------------------------------------------------------------------------------- Income before Equity in Undistributed Net Income of Subsidiaries 2,654 2,144 2,054 Equity in Undistributed Earnings of Subsidiaries 5,664 6,169 4,619 --------------------------------------------------------------------------------------------------------------------------- Net Income $ 8,318 $ 8,313 $ 6,673 ---------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------- Condensed Statements of Cash Flows for the year ended December 31, 1994 1993 1992 --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net Income $ 8,318 $ 8,313 $ 6,673 less: Equity in Undistributed Earnings of Subsidiaries 5,664 6,169 4,619 Other, net 3,099 (252) - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 5,753 1,892 2,054 --------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Cash Paid for Acquisition (3,556) - - --------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Investing Activities (3,556) - - Cash Flows from Financing Activities Issuance of Stock under Stock Option Plan 26 173 197 Dividends Paid (2,490) (2,271) (1,961) --------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Financing Activities (2,464) (2,098) (1,764) Net (Decrease) Increase in Cash and Cash Equivalents (267) (206) 290 Cash and Cash Equivalents, Beginning of Year 1,635 1,841 1,551 --------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents, End of Year $ 1,368 $ 1,635 $ 1,841 ---------------------------------------------------------------------------------------------------------------------------
Note: No income tax provision has been recorded on the books of Suffolk Bancorp since it files a return consolidated with its subsidiaries. 30 33 Note 15- Selected Quarterly Financial Data (Unaudited) The comparative results for the four quarters of 1994 and 1993 are as follows:
(in thousands of dollars except for share and per-share data) --------------------------------------------------------------------------------------------------------------------------------- 1994 1993 --------------------------------------------------------------------------------------------------------------------------------- 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. --------------------------------------------------------------------------------------------------------------------------------- Interest income $10,711 $12,880 $13,999 $13,974 $11,273 $11,021 $10,882 $10,821 Interest expense 3,465 3,920 4,087 4,262 3,781 3,618 3,559 3,567 --------------------------------------------------------------------------------------------------------------------------------- Net-interest income 7,246 8,960 9,912 9,712 7,492 7,403 7,323 7,254 Provision for possible loan losses 150 330 130 120 345 253 150 350 --------------------------------------------------------------------------------------------------------------------------------- Net-interest income after provision for possible loan losses 7,096 8,630 9,782 9,592 7,147 7,150 7,173 6,904 Other income 1,011 1,428 1,518 1,866 950 1,022 1,490 1,268 Other expense 5,310 7,338 7,521 7,731 5,185 5,275 5,435 5,450 Provision for income taxes 890 1,110 1,155 1,550 1,080 990 1,155 845 --------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of accounting change 1,907 1,610 2,624 2,177 1,832 1,907 2,073 1,877 Cumulative effect of accounting change - - - - 624 - - - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 1,907 $ 1,610 $ 2,624 $ 2,177 $ 2,456 $ 1,907 $ 2,073 $ 1,877 --------------------------------------------------------------------------------------------------------------------------------- Per-share data: Income before cumulative effect of accounting change $ 0.56 $ 0.43 $ 0.69 $ 0.57 $ 0.54 $ 0.56 $ 0.61 $ 0.56 Cumulative effect of accounting change - - - - 0.18 - - - --------------------------------------------------------------------------------------------------------------------------------- Net income $ 0.56 $ 0.43 $ 0.69 $ 0.57 $ 0.72 $ 0.56 $ 0.61 $ 0.56 --------------------------------------------------------------------------------------------------------------------------------- Cash dividends $ 0.17 $ 0.17 $ 0.18 $ 0.19 $ 0.17 $ 0.17 $ 0.17 $ 0.17 Average shares 3,396,689 3,741,574 3,799,088 3,799,674 3,389,587 3,390,139 3,390,628 3,396,460 ---------------------------------------------------------------------------------------------------------------------------------
31 34 KPMG PEAT MARWICK LLP Certified Public Accountants 1 Jericho Plaza Jericho, New York 11753 Independent Auditors' Report The Stockholders and Board of Directors Suffolk Bancorp: We have audited the accompanying consolidated statements of condition of Suffolk Bancorp and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Suffolk Bancorp and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in notes 1(b) and 9, the Company adopted provisions of Statement of Accounting Standards Nos. 115, "Accounting for Certain Debt and Equity Securities," effective January 1, 1994, and Statement of Accounting Standards No. 109 "Accounting for Income Taxes" on January 1, 1993. January 23, 1995 32 35 [SUFFOLK BANCORP LETTERHEAD] The Stockholders and Board of Directors 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 reliable financial records are maintained for preparing financial statements. Internal audits are conducted to continually evaluate the adequacy and effectiveness of such internal controls, policies, and procedures. The examining 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. Edward J. Merz Victor F. Bozuhoski, Jr. President and Executive Vice-President, Chief Executive Officer Chief Financial Officer, and Treasurer 33 36 [SUFFOLK BANCORP LOGO] DIRECTORS Raymond A. Mazgulski Chairman of the Board, Suffolk Bancorp Bruce Collins Superintendent of Public Works, Village of East Hampton, N.Y. Joseph A. Deerkoski President, See Neefus, Inc. (general insurance) Howard M. Finkelstein Partner, Smith, Finkelstein, Lundberg, Isler & Yakaboski (attorneys) Edgar F. Goodale President, Riverhead Building Supply, Corp. Hallock Luce 3rd Director, Lupton & Luce, Inc. (general insurance) President, Hallup Realty Corp. (real estate) Edward J. Merz President & Chief Executive Officer, Suffolk Bancorp John J. Raynor President, John J. Raynor, P.E.& L.S., P.C. (Civil Engineering/Surveying Firm) J. Douglas Stark President, Stark Mobile Homes, Inc. Peter Van de Wetering President, Van de Wetering Greenhouses, Inc. (wholesale nursery) OFFICERS Edward J. Merz President & Chief Executive Officer Victor F. Bozuhoski, Jr. Executive Vice President, Chief Financial Officer, & Treasurer Douglas Ian Shaw Vice President & Corporate Secretary AUDIT DEPARTMENT Roy Garbarino, C.P.A. Auditor Joanne Appel IS Audit Manager Maureen Mougios Assistant Vice President Carolyn Leahy Senior Staff Auditor SUBSIDIARIES DIRECTORS Edward J. Merz, Chairman, President & Chief Executive Officer, Suffolk Bancorp Augustus C. Weaver President, Island Computer Corporation of New York, Inc. Joseph A. Deerkoski President, See Neefus, Inc. (general insurance) Alexander B. Doroski Senior Vice President & Chief Operations Officer, The Suffolk County National Bank Peter Van de Wetering President, Van de Wetering Greenhouses, Inc. (wholesale nursery) [ISLAND COMPUTER CORPORATION LOGO] OFFICERS Augustus C. Weaver President Mark J. Drozd Vice President Thomas J. Munkelwitz Corporate Secretary Janet L. Maher Corporate Treasurer Suffolk Bancorp and its subsidiaries are Equal Opportunity Affirmative Action Employers 34 37 [LOGO] THE SUFFOLK COUNTY NATIONAL BANK DIRECTORS Raymond A. Mazgulski Chairman of the Board The Suffolk County National Bank Bruce Collins Superintendent of Public Works Village of East Hampton Joseph A. Deerkoski President, See Neefus, Inc. (general insurance) Howard M. Finkelstein Partner; Smith, Finkelstein, Lundberg, Isler & Yakaboski (attorneys) Edgar F. Goodale President Riverhead Building Supply, Corp. Hallock Luce 3rd Director, Lupton & Luce, Inc. (general insurance) President, Hallup Realty Corp. (real estate) Edward J. Merz President & Chief Executive Officer, Suffolk Bancorp John J. Raynor President, John J. Raynor, P.E.& L.S., P.C. (civil engineering/surveying firm) J. Douglas Stark President, Stark Mobile Homes, Inc. Peter Van de Wetering President, Van de Wetering Greenhouses, Inc. (wholesale nursery) OFFICERS Edward J. Merz President & Chief Executive Officer Victor F. Bozuhoski, Jr. Executive Vice President & Chief Financial Officer Ronald M. Krawczyk Executive Vice President Retail Banking CONSUMER LOANS John F. Hanley Senior Vice President Brian Both Vice President Linda J. Brooks Vice President Jeanne P. Hamilton Vice President Gordon F. Handshaw Vice President Stasia Bermudez Assistant Vice President Robert D. Brown Assistant Vice President Jacqueline A. Covell Assistant Vice President John Dunleavy Assistant Vice President Laura D. Ogden Assistant Vice President Pamela L. Palleschi Assistant Vice President Karen A. Szalay Assistant Vice President Helene Caspar Bank Officer Henry J. Fine Bank Officer Marilyn Lang Bank Officer Kathleen Manglaviti Bank Officer Christopher R. Martinelli Bank Officer Sarah Mayo Bank Officer Stephen B. Probst Bank Officer Deborah A. Simonetti Bank Officer COMMERCIAL LOANS Robert C. Dick Senior Vice President Frank Filipo Senior Vice President Lawrence Milius Senior Vice President Peter M. Almasy Vice President David T. De Vito Vice President Robert T. Ellerkamp Assistant Vice President Steven W. Goad Assistant Vice President Fredrick J. Weinfurt Assistant Vice President Wendy Harris Bank Officer Jana Saelzer Bank Officer Loan Administration Thomas S. Kohlmann Senior Vice President Loan Review Vanessa J. Pusar Bank Officer Vincent J. Toner Bank Officer BRANCH ADMINISTRATION Robert H. Militscher Senior Vice President & Branch Administrator Barbara A. Scesny Regional Vice President Wayne Swiatocha Vice President Deanna L. Miller Assistant Vice President Francis G. Painter, Jr. Assistant Vice President Mary Ann Tepedino Bank Officer Bohemia Office Dwight W. Miller Vice President Center Moriches Office Thomas R. Columbus, Sr. Vice President Paul G. Cuddy Assistant Manager Cutchogue Office Richard J. Noncarrow Vice President Juneann Zarzecki Assistant Manager East Hampton Pantigo Office Katherine M. Francis Vice President Neil Toner Assistant Manager 35 38 East Hampton Village Office Jill M. James Assistant Vice President Hampton Bays Office John J. Reilly Vice President Jeannette Jarzombek Assistant Manager Mattituck Office Janet V. Stewart Assistant Vice President Anita M. Young Assistant Manager Medford Office Paul E. Vaas Vice President Wendy A. Hackal Assistant Manager Miller Place William K. Miller Vice President Annette Hawkins Assistant Manager Montauk Harbor Office Susan M. Williams Assistant Vice President Patricia L. Morici Assistant Manager Montauk Village Office Susan M. Williams Assistant Vice President Port Jefferson Office Peter Poten Vice President Alison S. Cassara Assistant Manager Riverhead, Ostrander Avenue Office Linda C. Zarro Vice President Theresa M. Danglemaier Assistant Manager Riverhead, Second Street Office Anita J. Nigrel Assistant Vice President David E. Hawkes Assistant Manager Sag Harbor Office Jane P. Markowski Assistant Vice President Recilla L. Stamos Assistant Manager Shoreham Office William K. Miller Vice President Eloise L. Husch Assistant Manager Southampton Office Jeffrey D. Morch Assistant Vice President David Barczak Assistant Manager Wading River Office William K. Miller Vice President Barbara McHugh Assistant Manager Westhampton Beach Office Charles E. Johnson Vice President Maryellin Whaley Assistant Manager Water Mill Office Mildred E. Hornell Assistant Vice President TRUST Dan A. Cicale Senior Vice President & Trust Officer William C. Araneo Vice President Linda A. Schwartz Assistant Vice President Lori E. Thompson Assistant Vice President COMPTROLLER J. Gordon Huszagh Senior Vice President & Comptroller David J. Bennett Vice President Patricia M. Bihn Assistant Vice President Arlyne M. Morgenstern Assistant Vice President Barbara J. Danowski Bank Officer COMPLIANCE Louis A. Antoniello Bank Officer CORPORATE SERVICES Douglas Ian Shaw Vice President & Secretary Nellie J. Tysz Bank Officer Ronald A. Zlatniski Bank Officer FACILITIES AND SECURITY William E. Heck, Jr. Vice President John Rutkoske Bank Officer HUMAN RESOURCES Richard Montenegro Vice President Lillian M. Spiess Assistant Vice President Judi A. Fouchet Training Officer Christine Troyano Bank Officer Roberta J. Zaweski Bank Officer MARKETING Brenda B. Sujecki Assistant Vice President OPERATIONS Alexander B. Doroski Senior Vice President, Cashier & Chief Operations Officer Dennis F. Orski Vice President Margaret M. Coughlin Assistant Vice President Linda M. Follett Assistant Vice President Yvette C. McGuinness Assistant Vice President Michael E. Newins Assistant Vice President Dawn P. Sadowski Assistant Vice President Susan Tersillo Assistant Vice President Diana M. Whelan Assistant Vice President Donna J. DeLong Bank Officer Virginia Kleinheksel Bank Officer Lawrence A. Mennella Data Systems Officer Melinda Noncarrow Bank Officer FOR ONE-HUNDRED-AND-FIVE YEARS... ...A TRADITION OF STRENGTH 36 39 DIRECTORY OF OFFICES AND DEPARTMENTS
Area Code (516) Telephone Telecopier Executive Offices.......................................6 West Second Street, Riverhead, N.Y. 11901 727-2700 727-3210 Audit ..........................................3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 585-4678 585-4780 Bohemia Office..................................3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 585-4477 585-4809 Center Moriches Office.................................502 Main Street, Center Moriches, N.Y. 11934 878-8800 878-4431 Commercial Loans .......................................6 West Second Street, Riverhead, N.Y. 11901 727-2701 727-5798 Compliance ...............................................220 Roanoke Avenue, Riverhead, N.Y. 11901 727-5395 727-3214 Comptroller..............................................206 Griffing Avenue, Riverhead, N.Y. 11901 727-5270 369-2230 Consumer Loans .........................................244 Old Country Road, Riverhead, N.Y. 11901 727-7277 727-5521 Corporate Services (investor relations)...................220 Roanoke Avenue, Riverhead, N.Y. 11901 727-5667 727-3214 Cutchogue Office....................................................Route 25, Cutchogue, N.Y. 11935 734-5050 734-7759 East Hampton Pantigo Office..............................351 Pantigo Road, East Hampton, N.Y. 11937 324-2000 324-6367 East Hampton Village Office................................100 Park Place, East Hampton, N.Y. 11937 324-3800 324-3863 Facilities & Security...................................6 West Second Street, Riverhead, N.Y. 11901 727-2700 727-3210 Hampton Bays Office.......................................Montauk Highway, Hampton Bays, N.Y. 11946 728-2700 728-8311 Human Resources..........................................206 Griffing Avenue, Riverhead, N.Y. 11901 727-5377 727-3170 Item Processing.........................................295 North Sea Road, Southampton, N.Y. 11968 287-3100 287-5422 Marketing ................................................220 Roanoke Avenue, Riverhead, N.Y. 11901 727-4712 727-3214 Mattituck Office.............................................10900 Main Road, Mattituck, N.Y. 11952 298-9400 298-9188 Miller Place Office........................................74 Echo Avenue, Miller Place, N.Y. 11764 474-8400 474-8510 Medford Office..........................................2690R Expressway Plaza, Medford, N.Y. 11763 758-1500 758-1509 Montauk Harbor Office..........................................West Lake Drive, Montauk, N.Y. 11954 668-4333 668-3643 Montauk Village Office.....................................746 Montauk Highway, Montauk, N.Y. 11954 668-5300 668-1214 Mortgage Loans .........................................244 Old Country Road, Riverhead, N.Y. 11901 727-7277 369-2468 Operations ..............................................206 Griffing Avenue, Riverhead, N.Y. 11901 727-5151 369-5834 Port Jefferson Harbor Office..........................135 West Broadway, Port Jefferson, N.Y. 11777 473-9603 331-7806 Port Jefferson Village Office......................228 East Main Street, Port Jefferson, N.Y. 11777 473-7700 473-9406 Riverhead, Second Street Office.........................6 West Second Street, Riverhead, N.Y. 11901 727-2700 727-3210 Riverhead, Ostrander Avenue Office.....................1201 Ostrander Avenue, Riverhead, N.Y. 11901 727-6800 727-5095 Sag Harbor Office............................................17 Main Street, Sag Harbor, N.Y. 11963 725-3000 725-4627 Shoreham Office................................................9926 Route 25A, Shoreham, N.Y. 11786 744-4400 744-6743 Southampton Office......................................295 North Sea Road, Southampton, N.Y. 11968 287-3100 287-3293 Trust and Investment Services...........................295 North Sea Road, Southampton, N.Y. 11968 727-3100 287-3296 Wading River Office...........................2065 Wading River-Manor Rd., Wading River, N.Y. 11792 929-6300 929-6799 Water Mill Office.......................................828 Montauk Highway, Water Mill, N.Y. 11976 726-4500 726-7573 Westhampton Beach Office.............................144 Sunset Ave., Westhampton Beach, N.Y. 11978 288-4000 288-9252 Island Computer Corporation...................................40 Orville Drive, Bohemia, N.Y. 11716 589-5131 589-6329
40 BACK COVER WRAP AROUND PHOTOGRAPH OF SHINNECOCK CANAL NO BORDERS - FOUR COLOR BLEED
EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 US DOLLARS YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 1 56,488 0 0 0 68,261 126,380 123,096 535,290 6,214 811,654 723,993 4,300 6,268 0 77,536 0 0 (443) 77,093 42,145 8,756 663 51,564 15,381 15,734 35,830 730 0 27,752 13,023 8,318 0 0 8,318 2.25 2.25 7.62 6,014 2,015 372 0 4,922 1,468 352 6,214 6,214 0 0