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In a rough-and-tumble market, Suffolk County National Bank battles to top tier in its class
June 11, 2009
By
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, executive editor
Local relationships key to success Suffolk County National maintains 29 branches, all of them solely in Long Island’s Suffolk County. Long Island contains two counties of New York City (Queens and Brooklyn), densely populated Nassau County, and the largest of the four by area, Suffolk. J. Gordon Huszagh, president and CEO, says that part of the bank’s success comes from attitude. “It’s other people’s money,” says Huszagh (pron. Huz-zack), who has been with the bank for 25 years. “We realize we are stewards of our shareholders’ holdings in the company.” As a result, the bank practices a blend of strategies that could be labeled “aggressive conservatism.” An excerpt from the bank’s annual report, from a section detailing the bank’s balance sheet strategies, illustrates this in regard to capital: “Pursuing ongoing program of capital management, maintaining total risk-based capital at a modest margin above 10%, which qualifies as ‘well-capitalized’ with regulatory agencies and affords certain advantages to the banking subsidiary. Maximum prudent leverage is thus applied to the shareholder’s investment by means of selected repurchases of shares when capital exceeds the target, and through the retention of earnings when assets are growing. Growth in the core business during the year was sufficient to provide leverage to all retained earnings, and no shares were repurchased after the first quarter.” What separates Suffolk County National’s commercial real estate efforts from those of some other institutions is focus and familiarity. The bank is not a spec commercial real estate lender, making a bunch of one-off deals with comparative strangers. Huszagh explains that the typical property financed is an owner-occupied structure, where the owner is an individual or business that the bank has known for years, and likely has been banking all that time. In addition to knowing its customers, the bank sticks to the basics. “We lend on the borrower’s capacity to repay,” says Huszagh, “not on the value of the collateral.” Elaborating, Huszagh explains that, “we’re not venture capitalists. We’re here to provide credit to those who can afford it.” As a result, Suffolk County’s growth strategy has been to follow its existing customers, rather than to aggressively move its lending into Long Island’s other counties. When a customer of the bank decides to expand its operations into Nassau, say, the bank will follow. But it doesn’t court new customers out of its market area. The bank started on the main street of Riverhead, N.Y., situated at the base of the rough “fishtail” formed by the twin forks of Long Island’s eastern end. The North Fork is known for fishing, wineries, and tourism, while the South Fork is home to the Hamptons, summer playground of the rich and famous. In many ways, while it has expanded far beyond Riverhead, Huszagh says the bank at heart remains a lender to “mom and pop types of operations.” The island’s tourism, plethora of second homes, and increasingly dense suburban profile have been relatively steady business generators. Growth right at home For some Long Island institutions, the “westward ho!” strategy of expanding towards and into New York City, either through branching or aggressive lending efforts, produced notable results in past years. North Fork, now part of Capital One, began as a small Suffolk County bank and grew into an attractive acquisition target reaching as far as New Jersey. But for Suffolk County National, the home turf continues to have the most appeal. Huszagh says plenty of opportunity remains right in Suffolk County. While the bank has emphasized the value of relationship banking—it stresses service, not price, and is not a place bargain hunters go. The bank saw loan balances increase by 14.2% in 2008. “We attribute this in part to good, solid borrowers whose former banks have not been in a position to lend to them as the credit crisis developed,” Huszagh wrote in the holding company’s 2008 annual report. “This led to a substantial increase in commercial real estate loans which have been underwritten on the basis of reasonable ratios of loan-to-value, conservative evaluations of projected cash flows, and guarantees for permanent financing in place when granting an interim credit. We are optimistic that we will be able to develop many of these credits into well-rounded, long-standing relationships with stable customers of the sort who have always been our bread and butter.” In a sense, the large New York City banks’ credit crunch poison has been Suffolk County National’s poisson, and the bank has been enjoying the snack, in moderation. “Our growth has been coming from the inability of the big New York banks to meet these customer’s credit needs,” Huszagh says, and this factor is expected to continue to favor his bank through the rest of 2009. Finding financial fuel Suffolk County National considered taking TARP money when the program was unveiled, but decided against it. It enjoys a decent share of county deposits for its size—typically between 3%-4%—and Huszagh says that management’s preference is to remain a generator of local loans funded by local deposits. “There’s no such thing as cheap capital,” says Huszagh in reference to TARP. “Our best way to generate capital is to earn it”—tapping retained earnings. In an age where bank branching reached pandemic proportions—and Long Island was a casebook example—Suffolk County National has been quite conservative. The bank opened four new branches over the past five years. “We don’t want to wind up with a bunch of funding, and asking, where do we find a home for this?” Huszagh explains. “Once I know what my opportunity is,” he adds, “I can figure out how to fund it, at lower costs than the competition.” Indeed, while the bank’s net interest margin declined in 2008, to 4.75% from 5.06%, it continues to be strong. The bank emphasizes maintenance of margins over growth that would be less profitable. One added expense that the bank has opted for, though, is extra charges for optional FDIC coverage levels. “That is something you can’t afford not to do,” says Huszagh. People factors and teamwork With an emphasis on service quality over price, Suffolk County National can’t turn its branches into glorified ATMs. But the bank has been careful about letting staffing levels get out of hand. Huszagh notes, with some obvious pride, that while the bank has opened four new branches, its head count has remained stable. The bank has done this by leveraging technology, he says, where this can be done without affecting service. When it does hire, the bank balances between hiring talent from the considerable pool of bank and finance workers in the area, and developing from within. “The key is understanding our standards and our culture,” says Huszagh, “though I personally find that the culture is best developed from within.” (Huszagh worked for a thrift institution prior to coming to Suffolk County National in 1983 as an auditor, and worked his way up.) Indeed, the bank’s attitude towards teamwork and culture has recently had a test, a successful one, by all signs. Late last summer, veteran banker and America’s Community Bankers Council member Thomas Kohlmann, the bank’s chairman, president, and CEO since 1999, fell seriously ill. The company made acting appointments to his posts. The bank’s lead director, Edgar Goodale, stepped up as acting chairman, and Huszagh, then EVP and CFO, became acting president and CEO. Subsequently, Kohlmann opted to retire from his executive posts and become solely a company director, and the acting appointments became permanent appointments. Huszagh says that the transition has been smooth because the bank’s operations have never been built around any one person. Indeed, in the 2008 shareholder letter, he wrote: “The ease of this transition … speaks of something very important about your company, which is that we are a team, and rely on no one individual for our success. I will consider it one of my most important obligations to keep it that way.” BJ [This article was posted on June 11, 2009 on the website of ABA Banking Journal, www.ababj.com, and is copyright 2009 by the American Bankers Association.]
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