Form 8-K SUFFOLK BANCORP For: Jan 27

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The Company's average cost of total interest-bearing liabilities declined by four basis points to 0.27% in the fourth quarter of 2014 versus 0.31% in the fourth quarter of 2013. The Company's total cost of funds, among the lowest in the industry, declined to 0.15% in the fourth quarter of 2014 from 0.18% a year ago, largely as a result of the Company's focus on lower-cost core deposits. Average core deposits increased $80 million to $1.4 billion during the fourth quarter of 2014 as compared to the fourth quarter of 2013, with average demand deposits representing 44.2% of fourth quarter 2014 average total deposits. Total deposits increased by $46 million or 3.0% to $1.6 billion at December 31, 2014 versus December 31, 2013. Core deposit balances, which represented 85.9% of total deposits at December 31, 2014, grew by $52 million or 4.1% during the same period. Average borrowings increased $44 million during the fourth quarter of 2014 compared to 2013 and were used to fund the growth in the Company's loan portfolio which increased $264 million on average during that same period.

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The Company recorded net income of $15.3 million for the full year ended December 31, 2014 versus $12.7 million in the comparable 2013 period. The 20.3% improvement in 2014 net income resulted principally from a $5.8 million increase in net interest income, a $5.1 million reduction in total operating expenses, a $250 thousand reduction in the provision for loan losses and a lower effective tax rate in 2014. Partially offsetting these positive factors was an $8.6 million reduction in non-interest income in 2014 versus 2013, primarily due to the 2013 gain of $7.8 million on the sale of Visa Class B shares.

The $5.8 million or 10.2% improvement in 2014 net interest income resulted from an $89 million (5.8%) increase in average total interest-earning assets, coupled with a 16 basis point improvement in the Company's net interest margin to 4.07% in 2014 versus 3.91% in 2013. The Company's average total interest-earning asset yield in 2014 was 4.23% versus 4.10% for the comparable 2013 period. Despite a lower average yield on the Company's loan portfolio, down 62 basis points, in 2014 versus 2013, the Company's average balance sheet mix continued to improve as average loans increased by $286 million (31.5%) versus the comparable 2013 period and low-yielding overnight interest-bearing deposits and federal funds sold declined by $164 million (78.3%) during the same period. Federal funds sold and interest-bearing deposits represented 3% of average total interest-earning assets in 2014 versus 14% a year ago. The average securities portfolio decreased by $33 million or 7.8% to $391 million in 2014 versus 2013 while the average portfolio yield improved by one basis point to 3.73% in 2014.

The Company's average cost of total interest-bearing liabilities declined by six basis points to 0.28% in 2014 versus 0.34% in the same 2013 period. The Company's total cost of funds declined to 0.16% in 2014 from 0.20% a year ago, largely as a result of the Company's focus on lower-cost core deposits. Average core deposits increased $93 million to $1.3 billion during the year ended December 31, 2014 versus 2013, with average demand deposits representing 42.5% of average total deposits in 2014. Average total deposits increased by $77 million or 5.2% in 2014 versus 2013. Average core deposit balances represented 85.4% of total deposits during the year ended 2014 versus 83.5% during 2013.

The $1.0 million provision for loan losses recorded in 2014 was due to the continued growth in the loan portfolio experienced throughout the past year. The Company recorded a $1.3 million provision for loan losses in the comparable 2013 period. The higher 2013 provision resulted from $1.8 million in net loan charge-offs in 2013, principally due to the sale of $8 million in non-performing and classified loans during the fourth quarter of 2013. The Company recorded $937 thousand in net loan recoveries in 2014.

Non-interest income declined by $8.6 million in 2014 versus the year ago period. This decline was principally due to $7.8 million in gains on the sale of Visa Class B shares recorded in 2013. No Visa shares were sold in 2014. Also contributing to the lower level of non-interest income in 2014 versus 2013 were reductions in net gain on the sale of mortgage loans originated for sale (down $779 thousand), net gain on sale of securities available for sale (down $384 thousand) and net gain on sale of portfolio loans (down $228 thousand). Offsetting a portion of these reductions in 2014 were improvements in income from bank owned life insurance (up $600 thousand) and net gain on the sale of premises and equipment (up $347 thousand).

Total operating expenses declined by $5.1 million (8.8%) in 2014 versus 2013 as the result of reductions in several categories, most notably branch consolidation costs (down $2.5 million), occupancy (down $961 thousand), other operating expenses (down $825 thousand), reserve and carrying costs related to Visa shares sold (down $750 thousand), equipment (down $680 thousand) and FDIC assessment (down $614 thousand). The reduction in branch consolidation costs in 2014 resulted from better than expected outcomes on lease termination negotiations for two of the Bank's closed branches where an expense had previously been recorded in the fourth quarter of 2013 and a credit was recorded in 2014. The reductions in occupancy and equipment expenses are directly attributable to the six branch offices closed since October 2013. The lower FDIC assessment expense in 2014 versus 2013 reflected the Bank's lower assessment rate as it is no longer under a regulatory formal agreement and its credit metrics have significantly improved. Other operating expenses improved in 2014 versus 2013 as the result of the outsourcing of the Company's investment sales function in 2014 coupled with lower expenses for telecommunications, fees and subscriptions, postage, appraisal fees and OREO in the current year. Largely offsetting the foregoing improvements was a $1.5 million increase in employee compensation and benefits expense due principally to a $1.7 million benefit recorded in 2013 due to the termination of a post-retirement life insurance plan in that period which effectively reduced 2013 compensation and benefits expense by that amount. Excluding the impact of this 2013 expense credit, employee compensation and benefits expenses declined by $189 thousand or 0.5% in 2014 versus 2013.

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

Financial Highlights Follow

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