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| SUBK > SEC Filings for SUBK > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
Recent Developments
During the second quarter of 2009, the availability of credit stabilized somewhat as banks and investors came to understand better the effects of losses in the sub-prime mortgage lending and derivative securities based on those loans. However, weakness continued to develop in loans for commercial real estate, and consumer spending remained well below the levels of recent years. Residential real estate continued to decline in value, but at a slower rate than in previous quarters, and has been reported to have actually stopped declining in certain markets after the end of the quarter but previous to this filing. Very short-term rates remained near zero, while longer-term rates increased resulting in a steeper "yield curve" which added to most banks' net interest margin. This was primarily the result of continuing, low short-term targets for interest rates by the Federal Reserve Board for federal funds and discount rates, but an offsetting concern in the marketplace about the possibility of inflation over the longer term as a result of deficit spending by the federal government, some of which was intended to stimulate the sluggish economy. Rates of unemployment continued to increase throughout the period.
During the past quarter, equity markets recovered significantly from their lows, but did not result in either capital spending or hiring on the part of the private sector. At Suffolk, interest income was flat despite an increase in total net loans, but net interest income increased because of lesser interest expense. The net interest margin increased to 5.14 percent in the second quarter of 2009, up from 4.71 percent, in the second quarter of 2008. The net interest margin on a year to date basis increased to 5.05 percent in 2009, up from 4.75 percent for the comparable period in 2008. Increased net interest income was offset, however, by higher rates and a substantial special assessment by the FDIC that increased expense for deposit insurance by 35 times in comparison with the second quarter of 2008. Consistent application of a methodology to determine the allowance for loan losses resulted in a provision that was 2.5 times that made in comparable quarter of 2008.
Return on average equity decreased to 18.94 percent for the second quarter in 2009, down from 19.95 percent during the second quarter of 2008, and earnings-per-share decreased from $.60 in the second quarter of 2008 to $.59 in the second quarter of 2009. For the first six months of 2009, return on average equity decreased to 19.27 percent, down from 23.62 percent during the comparable period of 2008, and earnings per share decreased to $1.18 for the first six months of 2009, down from $1.39 for the same period last year. The decrease in return on average equity and earnings-per-share for the first six months of 2009 is the result of a net gain on sale of securities during the first quarter of 2008, the proceeds of which were realized from the sale of shares issued by Visa, Inc. in connection with its initial public offering. The Bank was a member of the former Visa, Inc. payments organization and was issued shares when Visa, Inc. was organized. Approximately 39 percent of those shares were redeemed in connection with the initial public offering. The remaining shares remain restricted because of unsettled litigation pending against Visa, Inc. Visa, Inc., at its discretion, may redeem additional restricted shares in order to resolve pending litigation. The restriction expires upon resolution of the pending litigation. Accordingly, Suffolk has recorded these shares at zero in the accompanying statement of condition. Upon expiration of the restriction, Suffolk expects to record the fair value of the remaining shares.
Key to maintaining performance was close management of the balance sheet. Steps included:
• Consistent underwriting for lending to preserve both credit quality and yields throughout the business cycle. Emphasis was on preservation of margins over less profitable growth, and on allocation of capital to credits that would result in a relationship with a long-term customer rather than on a single transaction which might itself be profitable but not lead to further business.
• Maintaining emphasis on both commercial and personal demand deposits, and non-maturity time deposits as a key part of relationships with customers while responding as necessary to demand in Suffolk's market for certificates of deposit of all sizes. In light of increased demand for loans from customers unable to obtain financing from other banks whose capital losses reduced their lending capacity, Suffolk redoubled its emphasis on the profitability of the whole relationship of it customers with the Bank, seeking when possible to both make loans to and obtain funding from qualified customers.
• Managing net loan charge-offs aggressively. During the second quarter of 2009, net charge-offs amounted to 6 basis points of average net loans, on an annualized basis, although non-performing assets, those more than 90 days past due, and those that had been restructured but were more than 30 days past due increased substantially. Lending
• Managing of the investment portfolio to provide downside protection from falling rates, and continued purchases of municipal securities, currently providing liquidity as well as higher returns net of taxes, and some protection from falling interest rates.
• Managing capital closely, already in excess of the 10.00 percent total risk-based capital ("TRBC") required to be considered "well-capitalized" from a regulatory point of view, but allowing it to grow somewhat above recent averages 1) to position Suffolk to absorb unanticipated losses should the economy stall further, and 2) to position Suffolk, if possible, to respond to the possibility of higher capital requirements now under discussion among regulators using retained earnings having no marginal costs of distribution rather than secondary offerings of stock with attendant investment banking, syndication, legal, accounting, and other fees which would dilute the earnings of current shareholders. Growth in the core business during the quarter was sufficient to employ retained earnings, and no shares were repurchased.
Net Income
Net income was $5,708,000 for the quarter, down .1 percent from $5,714,000 posted during the same period last year. Earnings-per-share for the quarter were $0.59 versus $0.60, a decrease of 1.7 percent. Net income was $11,367,000 for the six months ended June 30, 2009, down from $13,273,000 posted during the same period last year. Earnings per share were $1.18 for the six month period ended June 30, 2009, down from $1.39 posted last year. Included in net income of the first quarter of 2008, is $2,429,000 attributed to the Visa, Inc. transaction, net of income taxes. Accordingly, to compare the first six months of 2009 to the prior comparable period of 2008, exclusive of the Visa, Inc. transaction, earnings-per-share were $1.18, an increase of 4.4 percent from $1.13 during the comparable period of 2008. Without the Visa, Inc. transaction, return on average equity decreased to 18.94 percent from 19.30 percent last year.
Interest Income
Interest income was $22,025,000 for the second quarter of 2009, up .2 percent from $21,986,000 posted for the same quarter in 2008. Average net loans during the second quarter of 2009 totaled $1,117,737,000 compared to $1,014,318,000 for the same period of 2008. During the second quarter of 2009, the yield on a fully taxable-equivalent basis was 5.94 percent on average earning assets of $1,543,857,000 down from 6.23 percent on average earning assets of $1,462,422,000 during the second quarter of 2008. Interest income remained relatively flat from quarter to quarter. Interest income was $43,724,000 for the first six months of 2009, down .5 percent from $43,953,000 recorded in the first six months of 2008. During the first six months of 2009, the yield on a fully taxable-equivalent basis was 5.92 percent on average earning assets of $1,537,029,000, down from 6.38 percent on average earning assets of $1,427,982,000 during the first six months of 2008.
Interest Expense
Interest expense for the second quarter of 2009 was $3,119,000, down 43.8 percent from $5,548,000 for the same period of 2008. During the second quarter of 2009, the cost of funds was 1.22 percent on average interest-bearing liabilities of $1,023,111,000, down from 2.23 percent on average interest-bearing liabilities of $995,869,000 during the second quarter of 2008. Interest expense decreased due to decreased rates paid for Savings, N.O.W. and Money Market deposits, time certificates and borrowings, in addition to a decrease in average borrowings outstanding. Interest expense was $6,680,000 for the first six months of 2009, down 42.7 percent from $11,652,000 recorded last year to date. During the first six months of 2009, the cost of funds was 1.29 percent on average interest-bearing liabilities of $1,034,142,000, down from 2.40 percent on average interest-bearing liabilities of $970,198,000 during the first six months of 2008.
A portion of the Bank's demand deposits are reclassified as savings accounts on a daily basis. The purpose of the reclassification is to reduce the non-interest-bearing reserve balances that the Bank is required to maintain with the Federal Reserve Bank, and thereby increase funds available for investment. Although these balances are classified as savings accounts for regulatory purposes, they are included in demand deposits in the accompanying consolidated statements of condition.
Net Interest Income
Net interest income, before the provision for loan losses, is the largest component of Suffolk's earnings. It was $18,906,000 for the second quarter of 2009, up 15.0 percent from $16,438,000 during the same period of 2008. The net interest margin for the quarter, on a fully taxable-equivalent basis, was 5.14 percent compared to 4.71 percent for the same period of 2008.
The following table details the components of Suffolk's net interest income for the quarter on a taxable-equivalent basis: (in thousands)
Quarters ending June 30,
2009 2008
Average Average Average Average
Balance Interest Rate Balance Interest Rate
INTEREST-EARNING ASSETS
U.S. Treasury securities $ 10,013 $ 101 4.03 % $ 9,995 $ 101 4.04 %
Collateralized mortgage obligations 119,918 1,703 5.68 158,001 2,121 5.37
Mortgage backed securities 605 10 6.61 695 12 6.91
Obligations of states and political
subdivisions 192,882 2,668 5.53 161,776 2,333 5.77
U.S. govt. agency obligations 94,446 656 2.78 106,683 1,035 3.88
Corporate bonds and other securities 8,256 153 7.41 10,653 200 7.51
Federal funds sold and securities
purchased under agreements to resell - - - 301 2 2.66
Loans, including non-accrual loans
Commercial, financial & agricultural
loans 244,157 3,596 5.89 235,809 3,779 6.41
Commercial real estate mortgages 364,245 6,203 6.81 322,543 5,658 7.02
Real estate construction loans 136,265 2,358 6.92 99,599 1,992 8.00
Residential mortgages (1st and 2nd
liens) 207,743 3,148 6.06 190,332 2,971 6.24
Home equity loans 77,302 837 4.33 66,774 896 5.37
Consumer loans 86,219 1,505 6.98 97,161 1,684 6.93
Other loans (overdrafts) 1,806 - - 2,100 - -
Total interest-earning assets $ 1,543,857 $ 22,938 5.94 % $ 1,462,422 $ 22,784 6.23 %
Cash and due from banks $ 58,589 $ 48,697
Other non-interest-earning assets 54,888 43,562
Total assets $ 1,657,334 $ 1,554,681
INTEREST-BEARING LIABILITIES
Saving, N.O.W. and money market
deposits $ 569,756 $ 867 0.61 % $ 436,614 $ 1,438 1.32 %
Time deposits 321,824 1,526 1.90 312,983 2,451 3.13
Total saving and time deposits 891,580 2,393 1.07 749,597 3,889 2.08
Federal funds purchased and
securities sold under agreement to
repurchase - - - 56,791 370 2.61
Other borrowings 131,531 726 2.21 189,481 1,289 2.72
Total interest-bearing liabilities $ 1,023,111 $ 3,119 1.22 % $ 995,869 $ 5,548 2.23 %
Rate spread 4.72 % 4.00 %
Non-interest-bearing deposits $ 473,051 $ 429,139
Other non-interest-bearing
liabilities 40,631 15,124
Total liabilities $ 1,536,793 $ 1,440,132
Stockholders' equity 120,541 114,549
Total liabilities and stockholders'
equity $ 1,657,334 $ 1,554,681
Net-interest income
(taxable-equivalent basis) and
effective interest rate differential $ 19,819 5.14 % $ 17,236 4.71 %
Less: taxable-equivalent basis
adjustment (913 ) (798 )
Net-interest income $ 18,906 $ 16,438
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For the six months ended June 30, 2009, net interest income was $37,044,000, up 14.7 percent from $32,301,000 during the same period of 2008. The net interest margin on a fully taxable-equivalent basis was 5.05 percent compared to 4.75 percent for the same period of 2008.
The following table details the components of Suffolk's net interest income for the first six months of the year on a taxable-equivalent basis: (in thousands)
Year to date ending June 30,
2009 2008
Average Average Average Average
Balance Interest Rate Balance Interest Rate
INTEREST-EARNING ASSETS
U.S. Treasury securities $ 10,053 $ 202 4.02 % $ 10,006 $ 202 4.04 %
Collateralized mortgage obligations 124,418 3,526 5.67 148,046 3,939 5.32
Mortgage backed securities 600 20 6.67 764 26 6.81
Obligations of states and political
subdivisions 187,862 5,239 5.58 160,711 4,627 5.76
U.S. govt. agency obligations 101,483 1,443 2.84 106,323 2,093 3.94
Corporate bonds and other securities 9,338 211 4.52 9,910 381 7.69
Federal funds sold and securities
purchased under agreements to resell 53 0 0.10 203 3 2.96
Loans, including non-accrual loans
Commercial, financial & agricultural
loans 233,969 6,911 5.91 223,464 7,592 6.79
Commercial real estate mortgages 359,967 12,326 6.85 321,963 11,482 7.13
Real estate construction loans 135,074 4,663 6.90 93,868 3,891 8.29
Residential mortgages (1st and 2nd
liens) 208,435 6,321 6.07 186,650 5,857 6.28
Home equity loans 75,874 1,602 4.22 66,536 2,026 6.09
Consumer loans 88,707 3,053 6.88 97,400 3,417 7.02
Other loans (overdrafts) 1,196 - - 2,138 - -
Total interest-earning assets $ 1,537,029 $ 45,517 5.92 % $ 1,427,982 $ 45,536 6.38 %
Cash and due from banks $ 49,542 $ 47,632
Other non-interest-earning assets 55,538 48,079
Total assets $ 1,642,109 $ 1,523,693
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INTEREST-BEARING LIABILITIES Saving, N.O.W. and money market deposits $ 560,524 $ 1,798 0.64 % $ 425,466 $ 2,756 1.30 % Time deposits 307,089 3,049 1.99 315,963 5,467 3.46 Total saving and time deposits 867,613 4,847 1.12 741,429 8,223 2.22 Federal funds purchased and securities sold under agreement to repurchase 9,799 120 2.45 56,968 886 3.11 Other borrowings 156,730 1,713 2.19 171,801 2,543 2.96 Total interest-bearing liabilities $ 1,034,142 $ 6,680 1.29 % $ 970,198 $ 11,652 2.40 % Rate spread 4.63 % 3.98 % Non-interest-bearing deposits $ 451,175 $ 419,871 Other non-interest-bearing liabilities 38,840 21,255 Total liabilities $ 1,524,157 $ 1,411,324 Stockholders' equity 117,952 112,369 Total liabilities and stockholders' equity $ 1,642,109 $ 1,523,693 Net-interest income (taxable-equivalent basis) and effective interest rate differential $ 38,837 5.05 % $ 33,884 4.75 % Less: taxable-equivalent basis adjustment (1,793 ) (1,583 ) Net-interest income $ 37,044 $ 32,301 |
The table below presents a summary of changes in interest income, interest expense, and the resulting net interest income on a taxable-equivalent basis for the quarterly periods presented. Because of numerous, simultaneous changes in volume and rate during the period, it is not possible to allocate precisely the changes between volumes and rates. In this table changes not due solely to volume or to rate have been allocated to these categories based on percentage changes in average volume and average rate as they compare to each other: (in thousands)
In Second Quarter of 2009 over
Second Quarter of 2008, Changes Due to
Volume Rate Net Change
Interest-earning assets
U.S. Treasury securities $ - $ - $ -
Collateralized mortgage obligations (535 ) 117 (418 )
Mortgage-backed securities (2 ) - (2 )
Obligations of states & political
subdivisions 431 (96 ) 335
U.S. government agency obligations (109 ) (270 ) (379 )
Corporate bonds & other securities (44 ) (3 ) (47 )
Federal funds sold & securities purchased
under agreements to resell (1 ) (1 ) (2 )
Loans, including non-accrual loans 1,668 (1,001 ) 667
Total interest-earning assets $ 1,408 $ (1,254 ) $ 154
Interest-bearing liabilities
Saving, N.O.W., & money market deposits $ 353 $ (924 ) $ (571 )
Time deposits 67 (992 ) (925 )
Federal funds purchased & securities sold
under agreements to repurchase (185 ) (185 ) (370 )
Other borrowings (348 ) (215 ) (563 )
Total interest-bearing liabilities $ (113 ) $ (2,316 ) $ (2,429 )
Net change in net interest income
(taxable-equivalent basis) $ 1,521 $ 1,062 $ 2,583
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The table below presents a summary of changes in interest income, interest expense, and the resulting net interest income on a taxable-equivalent basis for the six month periods presented: (in thousands)
In First Six Months of 2009 over
First Six Months of 2008, Changes Due to
Volume Rate Net Change
Interest-earning assets
U.S. Treasury securities $ 1 $ (1 ) $ -
Collateralized mortgage obligations (658 ) 245 (413 )
Mortgage-backed securities (5 ) (1 ) (6 )
Obligations of states & political
subdivisions 760 (148 ) 612
U.S. government agency obligations (92 ) (558 ) (650 )
Corporate bonds & other securities (21 ) (149 ) (170 )
Federal funds sold & securities purchased
under agreements to resell (1 ) (2 ) (3 )
Loans, including non-accrual loans 3,656 (3,045 ) 611
Total interest-earning assets $ 3,640 $ (3,659 ) $ (19 )
Interest-bearing liabilities
Saving, N.O.W., & money market deposits $ 704 $ (1,662 ) $ (958 )
Time deposits (150 ) (2,268 ) (2,418 )
Federal funds purchased & securities sold
under agreements to repurchase (610 ) (156 ) (766 )
Other borrowings (208 ) (622 ) (830 )
Total interest-bearing liabilities $ (264 ) $ (4,708 ) $ (4,972 )
Net change in net interest income
(taxable-equivalent basis) $ 3,904 $ 1,049 $ 4,953
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Other Income
Other income increased to $2,827,000 for the quarter compared to $2,692,000 the previous year, up 5.0 percent. Service charges on deposits were down 6.8 percent. Service charges, including commissions and fees other than for deposits, increased by 17.1 percent. Fiduciary fees were down 31.9 percent. Other operating income increased by 146.2 percent, mainly attributable to the sale of residential mortgage loans to the secondary market. Other income for the six months ended June 30, 2009 was $5,591,000, down 38.2 percent from $9,042,000 for the comparable year to date period. Service charges
on deposits were down 5 percent. Service charges, including commissions and fees other than for deposits, increased 14.6 percent. Fiduciary fees were down 27.5 percent. Other operating income increased by 138.4 percent, mainly attributable to the sale of residential mortgage loans to the secondary market. Proceeds received in connection with shares redeemed as part of the Visa, Inc. Inc. initial public offering resulted in a net securities gain of $3,737,000 during the second quarter of 2008. There were no sales of securities during the six months ended June 30, 2009.
Other Expense
Other expense for the second quarter of 2009 was $12,531,000, up 20.1 percent from $10,435,000 for the comparable period in 2008. Employee compensation increased by 8.7 percent, net occupancy expense increased 15.8 percent, equipment expense increased by 8.1 percent, and other operating expense increased by 4.5 percent. FDIC assessments increased by $1,226,000 or 3,502.9 percent. There were two significant items contributing to the increase in the category. One is increased net assessments by the FDIC for deposit insurance made in response to the current unrest in the banking industry. This amounted to $1,261,000 in 2009 compared to $35,000 in 2008. The increased assessment is a result of the FDIC's anticipation of greater demands on the Bank Insurance Fund in the future. Included in the FDIC assessments for the second quarter of 2009 is a special assessment of approximately $800,000 charged by the FDIC. Also increasing reported expense was the expiration during 2008 of a one-time credit previously granted by the FDIC. The second significant item is additional expense for the employee pension plan necessary after the value of plan assets declined during 2008 at the same time that the rate at which the future payments are discounted declined, resulting in a greater current liability. This amounted to $796,000 in the second quarter of 2009 compared to $223,000 in the comparable period of 2008, an increase of 257 percent.
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