Market Overview

Suffolk Bancorp Reports Fourth Quarter and Full Year 2016 Results

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RIVERHEAD, N.Y.--(BUSINESS WIRE)--

Suffolk Bancorp (the "Company") (NYSE: SCNB), parent company of Suffolk County National Bank (the "Bank"), today reported net income of $3.7 million, or $0.31 per diluted common share, for the fourth quarter of 2016 compared to $3.6 million, or $0.31 per diluted common share, a year ago. For the year ended December 31, 2016, the Company recorded net income of $19.8 million, or $1.66 per diluted common share, versus $17.7 million, or $1.49 per diluted common share for the comparable 2015 full year period. Excluding merger-related charges, net non-accrual interest received and other real estate owned ("OREO") expenses incurred in 2016, core net income was $5.0 million and $21.5 million in the fourth quarter and full year 2016 periods, respectively.

The 2.6% increase in fourth quarter 2016 earnings versus the comparable 2015 period resulted from a $239 thousand increase in net interest income and a $400 thousand reduction in the provision for loan losses. Based upon consideration of many factors, including credit risk grades and economic conditions, in its evaluation of the various classes of the loan portfolio, the Company recorded in total a $400 thousand credit to the provision for loan losses in the fourth quarter of 2016. No provision expense was recorded in the comparable 2015 period. Partially offsetting these improvements was a $378 thousand increase in total operating expenses in 2016 when compared to the fourth quarter of 2015.

The Company is also pleased that the Office of the Comptroller of the Currency has approved the merger of the Bank with People's United Bank, N.A., the bank subsidiary of People's United Financial, Inc., in connection with the previously announced merger of the Company and People's United Financial, Inc. The merger transaction, which was previously approved by the Company's shareholders, remains subject to the approval of the Board of Governors of the Federal Reserve System and other customary conditions to closing, and is currently expected to be completed during the first quarter.

President & CEO Howard C. Bluver stated: "I am pleased to report a strong fourth quarter. Most importantly, we made significant progress during the quarter toward ensuring a smooth and successful integration in connection with our pending merger with People's United Financial. When the merger was announced on June 27, 2016, I stated my belief that we could leverage the strengths of our combined institutions for the benefit of all our current and future stakeholders. After seeing how closely and cooperatively our respective teams have worked together over the past seven months, I am even more confident today that we will hit the ground running on day one. It is also gratifying to see that our continued Company-wide focus on high quality execution has not been compromised as a result of the pending merger.

"First, our deposit businesses performed well during the quarter. While linked-quarter commercial and municipal deposit levels reflect the winter seasonality that is inherent in many of our markets, particularly in the Hamptons on the east end of Long Island, we continue to grow deposit levels year over year, particularly with respect to non-interest bearing demand deposits. Total non-interest bearing demand deposits at December 31, 2016 were $867 million, compared to $788 million at December 31, 2015, an increase of $79 million, or 10.1%. At the end of 2016, 47% of our total deposits were demand deposits, resulting in an extraordinarily low cost of funds of 18 basis points during the fourth quarter and an attractive net interest margin of 3.68% for the quarter.

"Second, we experienced modest loan growth in 2016 compared to 2015, which is not surprising given our previously announced decision to temporarily pull back from certain commercial lending markets during the middle of the year. In addition, we sold $77 million in multi-family loans during the year, including approximately $28 million during the fourth quarter, in order to generate non-interest income, protect our net interest margin and avoid becoming too concentrated in a single product line. Notwithstanding these factors, I am pleased to report that we are building a very strong and diversified loan pipeline for the future and, once the merger with People's United closes, we will no longer be subject to the growth constraints that come from operating with a relatively small balance sheet.

"Finally, credit quality continues to be strong in all categories. Total non-accrual loans at December 31, 2016 were $5.6 million, or 0.33% of total loans, compared to $6.3 million, or 0.37% of total loans, at September 30, 2016. All other key credit metrics remain solid and reflect our steadfast commitment to a strong and highly disciplined credit culture. Early delinquencies (30-89 days past due), which we manage aggressively as a harbinger of future credit issues, remain extremely low at $1.2 million, or 0.07% of total loans, at December 31, 2016, compared to $2.0 million, or 0.12% of total loans, at September 30, 2016. Given the continuous improvement we have seen in our credit profile, we also believe we are well reserved. Our allowance for loan losses at December 31, 2016 was $20.1 million, or 1.20% of total loans and 362% of total non-accrual loans."

Performance and Other Highlights

  • Asset Quality – Total non-accrual loans were $5.6 million or 0.33% of loans outstanding at December 31, 2016 versus $5.5 million or 0.33% of loans outstanding at December 31, 2015. Total accruing loans delinquent 30 days or more were $1.2 million or 0.07% of loans outstanding at December 31, 2016 compared to $1.0 million or 0.06% of loans outstanding at December 31, 2015. The Company recorded net loan recoveries of $52 thousand in the fourth quarter of 2016 versus net loan charge-offs of $150 thousand in the third quarter of 2016 and net loan recoveries of $370 thousand in the fourth quarter of 2015. The allowance for loan losses totaled $20.1 million at December 31, 2016 versus $20.7 million at December 31, 2015, representing 1.20% and 1.24% of total loans, respectively, at such dates. The allowance for loan losses as a percentage of non-accrual loans was 362% and 374% at December 31, 2016 and 2015, respectively. The Company held OREO amounting to $650 thousand at December 31, 2016. The Company held no OREO at December 31, 2015.
  • Capital Strength – The Company's capital ratios continue to exceed all regulatory requirements, including the individual minimum capital requirements that the OCC established for the Bank. The Company's tier 1 leverage ratio was 10.31% at December 31, 2016 versus 9.77% at December 31, 2015. The Company's tier 1 risk-based capital ratio was 13.50% at December 31, 2016 versus 11.68% at December 31, 2015. The Company's total risk-based capital ratio was 14.73% at December 31, 2016 as compared to 12.89% at December 31, 2015. The Company's total stockholders' equity to total assets ratio and the Company's tangible common equity to tangible assets ratio ("TCE ratio") were 10.34% and 10.22%, respectively, at December 31, 2016 versus 9.10% and 8.98%, respectively, at December 31, 2015. The ratio of total stockholders' equity to total assets is the most comparable U.S. GAAP measure to the non-GAAP TCE ratio presented herein.
  • Core Deposits – Core deposits, consisting of demand, N.O.W., savings and money market accounts, totaled $1.64 billion at December 31, 2016 versus $1.56 billion at December 31, 2015. Core deposits represented 89% and 87% of total deposits at December 31, 2016 and 2015, respectively. Demand deposits were $867 million at December 31, 2016, reflecting an increase of 10.1% from $788 million at December 31, 2015. Demand deposits represented 47% and 44% of total deposits at December 31, 2016 and 2015, respectively.
  • Loans – Loans outstanding at December 31, 2016 increased by $10 million, or 0.6%, to $1.68 billion when compared to December 31, 2015.
  • Net Interest Margin – Net interest margin was 3.68% in the fourth quarter of 2016 versus 3.72% in the third quarter of 2016 and 3.84% in the fourth quarter of 2015. Adjusting for the impact of net non-accrual interest received in each period, the Company's core net interest margin was 3.66% in the fourth quarter of 2016 as compared to 3.71% in the third quarter of 2016 and 3.82% in the fourth quarter of 2015. The average cost of funds was 0.18% in the fourth quarter of 2016 versus 0.19% in the third quarter of 2016 and 0.21% in the fourth quarter of 2015.
  • Performance Ratios – Return on average assets and return on average common stockholders' equity were 0.68% and 6.90%, respectively, in the fourth quarter of 2016 versus 0.99% and 10.21%, respectively, in the third quarter of 2016, and 0.69% and 7.33%, respectively, in the fourth quarter of 2015. Excluding merger-related charges, net non-accrual interest received and OREO expenses incurred, fourth quarter 2016 core return on average assets was 0.91% and core return on average stockholders' equity was 9.18%.

Earnings Summary for the Quarter Ended December 31, 2016

The Company recorded net income of $3.7 million during the fourth quarter of 2016 versus $3.6 million in the comparable quarter a year ago. Excluding merger-related charges, net non-accrual interest received and OREO expenses incurred, core net income was $5.0 million in the fourth quarter of 2016. The 2.6% improvement in reported fourth quarter 2016 net income versus the comparable 2015 period resulted from a $239 thousand increase in net interest income and a $400 thousand reduction in the provision for loan losses. The Company recorded a $400 thousand credit to the provision for loan losses in the fourth quarter of 2016. Partially offsetting these positive factors was a $378 thousand increase in total operating expenses in the fourth quarter of 2016 versus 2015. The Company's effective tax rate was 26.8% in the fourth quarter of 2016 versus 24.8% a year ago.

The $239 thousand or 1.3% improvement in fourth quarter 2016 net interest income resulted from a $101 million (5.3%) increase in average total interest-earning assets. Partially offsetting the earning asset growth was a 16 basis point decline in the Company's net interest margin to 3.68% in 2016 from 3.84% in 2015. The Company's fourth quarter 2016 average total interest-earning asset yield was 3.85% versus 4.05% in the comparable 2015 quarterly period. The decrease in the interest-earning asset yield in 2016 resulted from a two basis point decline in the average loan yield to 4.15% in 2016 along with a shift in the average asset mix to a greater percentage of Fed funds sold, securities purchased under agreements to resell and interest-bearing deposits due from banks (short-term investments) in 2016. Average loans increased by $95 million (6.0%) versus fourth quarter 2015. The average securities portfolio decreased by $107 million to $204 million in the fourth quarter of 2016 versus the comparable 2015 period. The average yield on the investment portfolio was 3.54% in 2016 versus 3.62% a year ago. At December 31, 2016, mortgage-backed securities, at 44%, made up the largest component of the Company's investment portfolio. The available for sale securities portfolio had an unrealized pre-tax gain of $172 thousand and the entire securities portfolio had an estimated weighted average life of 3.4 years at December 31, 2016. Average short-term investments grew by $115 million in 2016 at an average yield of 0.49%.

The Company's average cost of total interest-bearing liabilities decreased by four basis points to 0.33% in the fourth quarter of 2016 versus 0.37% in the comparable 2015 quarter. The Company's total cost of funds, among the lowest in the industry, was 0.18% in the fourth quarter of 2016 versus 0.21% a year ago. Average core deposits increased $146 million (9.3%) to $1.7 billion during the fourth quarter of 2016 versus the fourth quarter of 2015, with average demand deposits representing 46% of fourth quarter 2016 average total deposits. Total deposits increased by $58 million or 3.2% to $1.8 billion at December 31, 2016 versus the comparable 2015 date. Core deposit balances, which represented 89% of total deposits at December 31, 2016, grew by $85 million or 5.5% during the same period. Average borrowings decreased by $49 million (76.4%) during the fourth quarter of 2016 compared to 2015. Total borrowings at December 31, 2016 were $15 million versus $165 million at the comparable 2015 date.

Non-interest income was unchanged in the fourth quarter of 2016 versus the comparable 2015 period. A reduction in service charges on deposit accounts (down $187 thousand) was offset by increases in other service charges, commissions and fees (up $117 thousand) and net gain on sale of securities available for sale (up $70 thousand).

Total operating expenses increased by $378 thousand or 2.5% in the fourth quarter of 2016 versus 2015 principally the result of $1.8 million of merger-related expenses incurred in 2016. Excluding these merger-related costs and $1.4 million in systems conversion expenses recorded in the fourth quarter of 2015, core operating expenses increased by $31 thousand or 0.2% in 2016 when compared to the fourth quarter of 2015. Growth in employee compensation and benefits of $1.0 million was the primary reason for the nominal increase in core operating expenses in 2016. Partially offsetting this increase were reductions in 2016 in other operating expenses, data processing costs and FDIC assessment expenses of $328 thousand, $291 thousand and $214 thousand, respectively, versus the comparable 2015 period. Consulting and professional fees were also lower by $118 thousand in the fourth quarter of 2016 from the year ago period. The increase in employee compensation and benefits expense in 2016 resulted principally from an increase in incentive compensation expense coupled with a higher deferred expense credit in 2015 due to last year's increased fourth quarter loan production. The improvement in data processing costs resulted from lower core systems expenses in 2016 resulting from the conversion to Fiserv in the second quarter of 2016. The Company's operating efficiency ratio was 73.6% in the fourth quarter of 2016 versus 71.9% a year ago. Excluding merger-related expenses, systems conversion expenses, net non-accrual interest received and OREO related expenses, the Company's core operating efficiency ratio was 65.3% in 2016 versus 65.2% in 2015.

The Company recorded a $400 thousand credit to the provision for loan losses in the fourth quarter of 2016. The Company did not record a provision for loan losses in the fourth quarter of 2015.

The Company recorded income tax expense of $1.4 million in the fourth quarter of 2016 resulting in an effective tax rate of 26.8% versus an income tax expense of $1.2 million and an effective tax rate of 24.8% in the comparable period a year ago.

Earnings Summary for the Year Ended December 31, 2016

The Company recorded net income of $19.8 million during the full year ended December 31, 2016 versus $17.7 million in the comparable 2015 period. Excluding merger-related charges, net non-accrual interest received and OREO expenses incurred, core net income was $21.5 million for the full year of 2016. The improvement in reported 2016 net income resulted principally from a $4.3 million increase in net interest income coupled with a $1.1 million reduction in the provision for loan losses. Partially offsetting these positive factors was a $1.4 million increase in total operating expenses, a $111 thousand reduction in non-interest income, and an increase in the Company's effective tax rate in 2016. Excluding merger-related expenses incurred in 2016 and systems conversion expenses incurred in 2015, total operating expenses increased by $375 thousand or 0.7% versus 2015.

The $4.3 million or 6.1% improvement in full year 2016 net interest income resulted from a $201 million increase in average total interest-earning assets, offset in part by a 21 basis point contraction of the Company's net interest margin to 3.77% in 2016 from 3.98% in 2015. The Company's full year 2016 average total interest-earning asset yield was 3.96% versus 4.15% in the comparable 2015 period. A lower average yield on the Company's loan portfolio in 2016 versus the comparable 2015 period, down 13 basis points to 4.17%, was the primary driver of the reduction in the interest-earning asset yield. Excluding the impact of net non-accrual interest received in each full year period, the Company's core net interest margin was 3.71% in 2016 versus 3.91% in 2015. The Company's average loan portfolio increased by $230 million (15.6%) versus 2015 while the average securities portfolio decreased by $86 million (25.4%) to $251 million in the same period. The average yield on the investment portfolio was 3.58% in 2016 versus 3.71% a year ago.

The Company's average cost of total interest-bearing liabilities increased by three basis points to 0.35% in 2016 versus 0.32% in the comparable 2015 full year period. The Company's total cost of funds increased by two basis points to 0.20% in 2016 versus 2015. Average core deposits increased by $214 million (14.6%) to $1.7 billion during the 2016 full year period compared to 2015, with average demand deposits representing 44% of full year 2016 average total deposits. Average total deposits increased by $205 million or 12.1% to $1.9 billion during in 2016 versus 2015. Average core deposit balances represented 88% of average total deposits in 2016 compared to 86% in the year ago period.

The Company recorded a $500 thousand credit to the provision for loan losses during 2016 versus a provision expense of $600 thousand a year ago.

Total operating expenses increased by $1.4 million (2.5%) in the full year 2016 versus 2015 principally due to $2.4 million in merger-related expenses coupled with growth in employee compensation and benefits expense (up $1.6 million), offset in part by reductions in non-recurring project costs (systems conversion expenses) and data processing costs of $1.4 million and $1.3 million, respectively. The Company's operating efficiency ratio improved to 64.5% in 2016 from 65.6% a year ago. Excluding merger-related costs, systems conversion costs, net non-accrual interest received and OREO related expenses, the Company's core operating efficiency ratio improved to 61.9% in 2016 versus 64.9% a year ago.

The Company recorded income tax expense of $7.6 million in the 2016 full year period resulting in an effective tax rate of 27.8% versus income tax expense of $5.9 million and an effective tax rate of 25.0% in the comparable 2015 period.

Asset Quality

Non-accrual loans totaled $5.6 million or 0.33% of loans outstanding at December 31, 2016 versus $5.5 million or 0.33% of loans outstanding at December 31, 2015. The allowance for loan losses as a percentage of total non-accrual loans amounted to 362% and 374% at December 31, 2016 and December 31, 2015, respectively. Total accruing loans delinquent 30 days or more amounted to $1.2 million or 0.07% of loans outstanding at December 31, 2016 compared to $1.0 million or 0.06% of loans outstanding at December 31, 2015.

Total criticized and classified loans were $30 million at December 31, 2016 versus $21 million at December 31, 2015. Criticized loans are those loans that are not classified but require some degree of heightened monitoring. Classified loans were $25 million at December 31, 2016 as compared to $12 million at December 31, 2015. The allowance for loan losses as a percentage of total classified loans was 82% and 170%, respectively, at the same dates.

At December 31, 2016, the Company had $12 million in troubled debt restructurings ("TDRs"), primarily consisting of commercial and industrial loans, commercial real estate loans, residential mortgages and home equity loans totaling $4 million, $2 million, $5 million and $1 million, respectively. The Company had TDRs amounting to $12 million at December 31, 2015.

At December 31, 2016, the Company's allowance for loan losses amounted to $20.1 million or 1.20% of period-end total loans outstanding. The allowance as a percentage of loans outstanding was 1.24% at December 31, 2015. The Company recorded net loan recoveries of $52 thousand in the fourth quarter of 2016 versus net loan charge-offs of $150 thousand in the third quarter of 2016 and net loan recoveries of $370 thousand in the fourth quarter of 2015. As a percentage of average total loans outstanding, these net amounts represented, on an annualized basis, (0.01%) for the fourth quarter of 2016, 0.03% for the third quarter of 2016 and (0.09%) for the fourth quarter of 2015.

The Company held OREO amounting to $650 thousand at December 31, 2016. The Company held no OREO at December 31, 2015.

Capital

Total stockholders' equity was $216 million at December 31, 2016 compared to $197 million at December 31, 2015. The increase in stockholders' equity versus December 31, 2015 was due principally to net income recorded during 2016, net of dividends paid. The Company's return on average common stockholders' equity was 6.90% and 9.54% for the three and twelve months ended December 31, 2016 versus 7.33% and 9.27%, respectively, for the comparable 2015 periods. Excluding merger-related expenses, net non-accrual interest received and OREO related expenses, the Company's 2016 core return on average common stockholders' equity was 9.18% and 10.32%, respectively, for the three and twelve-month periods ended December 31, 2016.

The Bank's tier 1 leverage, common equity tier 1 risk-based, tier 1 risk-based and total risk-based capital ratios were 10.25%, 13.42%, 13.42% and 14.65%, respectively, at December 31, 2016. Each of these ratios exceeds the regulatory guidelines for a "well capitalized" institution, the highest regulatory capital category.

The Company's capital ratios also exceeded all regulatory requirements, including the individual minimum capital requirements that the OCC established for the Bank, at December 31, 2016. The Company's total stockholders' equity to total assets ratio and the Company's TCE ratio were 10.34% and 10.22%, respectively, at December 31, 2016 versus 9.10% and 8.98%, respectively, at December 31, 2015. The ratio of total stockholders' equity to total assets is the most comparable U.S. GAAP measure to the non-GAAP TCE ratio presented herein.

Corporate Information

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

Non-GAAP Disclosure

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

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

    Three Months Ended December 31,     Years Ended December 31,
(in thousands) 2016   2015 2016   2015

CORE NET INCOME:

Net income, as reported $ 3,733   $ 3,637   $ 19,831   $ 17,687  
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