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President's Message“FOCUS—DISCIPLINE—CONSISTENCY”
It is gratifying to have encouraging news to report for a period of time when financial markets were so unpredictable. Suffolk Bancorp and its wholly owned subsidiary, Suffolk County National Bank, were able to perform consistently and well during 2007, a year during which the markets for credit and housing took sharp downturns and a number of financial institutions performed poorly. This resulted in something of a crisis in liquidity, and much more expensive funding than during the previous year. Key results at Suffolk include the following: Net income was $22,128,000, down 2.2 percent from $22,628,000 last year. However, earnings-per-share were $2.24, up 1.8 percent compared to $2.20 during 2006, owing to tight management of capital to the regulatory standard of “well-capitalized,” while also maximizing profitability for our shareholders. Net interest income decreased by 2.7 percent, to $63,964,000 from $65,710,000. Our average loan portfolio grew slightly from last year, by 1.4 percent. As liquidity contracted both domestically and globally as a result of recent losses in the subprime mortgage markets, deposits were flat and there was migration from non-maturity time deposits to higher yielding certificates of deposit. Average borrowings increased, resulting in a substantial increase in interest expense and small declines in net interest income margin. Income other than from interest was essentially flat, with decreases in service charges offset by a 12.5 percent increase in trust revenue. We kept a tight rein on non-interest expense, which increased slightly, by 1.0 percent, to $40,392,000 from $39,975,000. To put that in perspective, return on average equity (“ROE”) was 21.47, down slightly from 22.16 percent last year, thus making seven consecutive years that this measure has exceeded 20 percent. That compares to ROE of 8.40 percent for banks in the New York metropolitan area at September 30, 2007, the date of the most recently available information (source: SNL Securities). We expect the spread between Suffolk’s performance and that of our region to be even wider once fourth quarter results are fully known. Return on average assets decreased to 1.57 percent from 1.61 percent, again compared to 0.80 percent for the New York metro area. Our net interest margin decreased to 5.06 percent from 5.16 percent, compared to 3.59 percent in greater New York. The quality of our assets remains high, with net recoveries of 0.01 percent for the year compared to net charge-offs of 0.30 percent for New York metropolitan banks. The Allowance for Loan Losses is 4.66 times non-performing loans. While the provision for possible loan losses was increased during the fourth quarter to reflect our historic methodology in computing the allowance, it was down 61 percent for the year. Our efficiency ratio did increase from year to year to 54.17 percent compared to 52.34 percent, but was, again, substantially better than the 68.62 percent recently posted by our regional competitors. The biggest challenges in the past year remained in funding our operations, as major players in worldwide markets have bid up the price of funds as they wrote down a significant portion of their investments in mortgages and mortgage-backed securities, as well as other exotic financial instruments. They were forced to finance their losses in the same markets we draw upon for our own funding. If the following remarks sound familiar to those I have made in the past, they are and should be. Banking is an incremental business, built on margins. Achievement in this industry is based on a disciplined and careful approach to maintaining those margins. We build our balance sheet one, carefully underwritten loan at a time; one, thoughtfully considered security at a time; and one, correctly priced deposit at a time. Key is the ability to adhere to consistent and well-considered standards, in both boom times and in times like these. The true value in our business lies in the relationships we build with our customers over months and years. There are no sudden pops or sizzle at a well-run bank, just a steady accumulation of value based on the time value of money over the long-run. Success lies in doing a great number of small things well while avoiding major mistakes. As an example, once again, I would like to remind investors that we have maintained our standards, both in the loans we make directly, and by investing in collateralized mortgage obligations the quality and structure of which we have evaluated just as carefully as we underwrite our loans. We want to preserve our place among the higher performing banks in the nation. 2008 will be a difficult year as financial markets and the economy in general sort themselves out. We are ready, clearly and sharply focused on our shareholders’, customers’, and employees’ common interests, today, tomorrow, and in the years to come.
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