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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2003
Commission file number 0-13580
SUFFOLK BANCORP
(exact name of registrant as specified in its charter)
New York State 11-2708279
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4 West Second Street, Riverhead, New York 11901
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (631) 727-5667
NOT APPLICABLE
(former name, former address and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No|_|.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
11,041,981 SHARES OF COMMON STOCK OUTSTANDING AS OF MAY 12, 2003
This page left blank intentionally.
Page 2
SUFFOLK BANCORP AND SUBSIDIARIES
page
Part I - Financial Information (unaudited)
Item 1. Financial Statements
Consolidated Statements of Condition 4
Consolidated Statements of Income, For the Three Months
Ended March 31, 2003 and 2002 5
Statements of Cash Flows, For the Three Months Ended
March 31, 2003 and 2002 6
Notes to the Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 6. Exhibits and Reports on Form 8-K. 13
Signatures 13
Certifications of Periodic Report 14
Page 3
SUFFOLK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands of dollars except for share and per share data)
March 31, December 31,
2003 2002
----------- -----------
unaudited
ASSETS
Cash & Due From Banks $ 44,078 $ 48,000
Federal Funds Sold 2,700 17,500
Investment Securities:
Available for Sale, at Fair Value 362,594 359,903
Held to Maturity (Fair Value of $10,907 and $14,115, respectively)
Obligations of States & Political Subdivisions 8,178 14,884
Federal Reserve Bank Stock 638 638
Federal Home Loan Bank Stock 1,361 1,361
Corporate Bonds & Other Securities 100 100
----------- -----------
Total Investment Securities 372,871 376,886
Total Loans 802,777 788,557
Less: Allowance for Possible Loan Losses 8,552 8,695
----------- -----------
Net Loans 794,225 779,862
Premises & Equipment, Net 21,283 20,437
Accrued Interest Receivable, Net 5,443 5,946
Excess of Cost Over Fair Value of Net Assets Acquired 814 814
Other Assets 20,617 23,272
----------- -----------
TOTAL ASSETS 1,262,031 1,272,717
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Demand Deposits 301,835 314,714
Saving, N.O.W. & Money Market Deposits 559,226 557,967
Time Certificates of $100,000 or more 22,697 23,495
Other Time Deposits 238,071 246,406
----------- -----------
Total Deposits 1,121,829 1,142,582
Federal Home Loan Bank Borrowings 18,500 --
Dividend Payable on Common Stock 2,136 1,956
Accrued Interest Payable 1,047 1,335
Other Liabilities 20,021 18,052
----------- -----------
TOTAL LIABILITIES 1,163,533 1,163,925
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized;
11,084,181 and 11,489,481 shares outstanding at
March 31, 2003 and December 31, 2002, respectively) 33,838 33,838
Surplus 19,230 19,230
Treasury Stock at Par (2,451,037 and 2,045,737 shares, respectively) (6,128) (5,114)
Undivided Profits 43,828 52,453
----------- -----------
90,768 100,407
Accumulated Other Comprehensive Income, Net of Tax 7,730 8,385
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 98,498 108,792
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,262,031 $ 1,272,717
=========== ===========
See accompanying notes to consolidated financial statements.
Page 4
SUFFOLK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except for share and per share data)
For the Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
unaudited unaudited
INTEREST INCOME
Federal Funds Sold $ 27 $ 131
United States Treasury Securities 104 139
Obligations of States & Political Subdivisions (tax exempt) 129 141
Mortgage-Backed Securities 3,188 2,756
U.S. Government Agency Obligations 826 654
Corporate Bonds & Other Securities 35 15
Loans 14,378 15,624
----------- -----------
Total Interest Income 18,687 19,460
INTEREST EXPENSE
Saving, N.O.W.'s & Money Market Deposits 1,190 1,613
Time Certificates of $100,000 or more 135 255
Other Time Deposits 1,604 2,597
Federal Funds Purchased 12 --
Interest on Other Borrowings 8 --
----------- -----------
Total Interest Expense 2,949 4,465
Net-interest Income 15,738 14,995
Provision for Possible Loan Losses 270 300
----------- -----------
Net-interest Income After Provision for Possible Loan Losses 15,468 14,695
OTHER INCOME
Service Charges on Deposit Accounts 1,412 1,329
Other Service Charges, Commissions & Fees 510 322
Fiduciary Fees 280 285
Other Operating Income 315 284
----------- -----------
Total Other Income 2,517 2,220
OTHER EXPENSE
Salaries & Employee Benefits 5,448 5,045
Net Occupancy Expense 807 675
Equipment Expense 708 596
Other Operating Expense 2,171 2,198
----------- -----------
Total Other Expense 9,134 8,514
Income Before Provision for Income Taxes 8,851 8,401
Provision for Income Taxes 3,512 3,340
----------- -----------
NET INCOME $ 5,339 $ 5,061
=========== ===========
Average: Common Shares Outstanding 11,311,275 11,767,980
Dilutive Stock Options 42,882 40,656
----------- -----------
Average Total Common Shares and Dilutive Options 11,354,157 11,808,636
EARNINGS PER COMMON SHARE Basic $ 0.47 $ 0.43
Diluted $ 0.47 $ 0.43
See accompanying notes to consolidated financial statements.
Page 5
SUFFOLK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
unaudited unaudited
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 5,339 $ 5,061
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Possible Loan Losses 270 300
Depreciation & Amortization 662 506
Accretion of Discounts (51) (214)
Amortization of Premiums 1,105 421
Decrease (Increase) in Accrued Interest Receivable 502 (155)
Decrease in Other Assets 2,656 1,914
Decrease in Accrued Interest Payable (287) (873)
Increase in Other Liabilities 2,424 2,521
----------- -----------
Net Cash Provided by Operating Activities 12,620 9,481
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities 10,909 5,337
Purchases of Investment Securities; Available for Sale (15,767) (249)
Maturities of Investment Securities; Held to Maturity 6,707 --
Purchases of Investment Securities; Held to Maturity -- (21,459)
Loan Disbursements & Repayments, Net (14,633) 3,231
Purchases of Premises & Equipment, Net (1,507) (2,437)
----------- -----------
Net Cash Used in Investing Activities (14,291) (15,577)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Decrease in Deposit Accounts (20,753) (8,414)
Dividends Paid to Shareholders (1,956) (1,648)
Treasury Shares Acquired (12,842) (1,379)
Net Proceeds from Other Borrowings 18,500 --
----------- -----------
Net Cash Used In Financing Activities (17,051) (11,441)
Net Decrease in Cash & Cash Equivalents (18,722) (17,537)
Cash & Cash Equivalents Beginning of Period 65,500 78,526
----------- -----------
Cash & Cash Equivalents End of Period $ 46,778 $ 60,989
=========== ===========
See accompanying notes to consolidated financial statements.
Page 6
SUFFOLK BANCORP AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) General
In the opinion of management, the accompanying unaudited consolidated
financial statements of Suffolk Bancorp (Suffolk) and its consolidated
subsidiaries have been prepared to reflect all adjustments (consisting solely of
normally recurring accruals) necessary for a fair presentation of the financial
condition and results of operations for the periods presented. Certain
information and footnotes normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles ("GAAP")
have been condensed or omitted. Notwithstanding, management believes that the
disclosures are adequate to prevent the information from misleading the reader,
particularly when the accompanying consolidated financial statements are read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Registrant's annual report and on Form 10-K, for the year ended
December 31, 2002.
The results of operations for the three months ended March 31, 2003 are
not necessarily indicative of the results of operations to be expected for the
remainder of the year.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the Three-Month Periods ended March 31, 2003 and 2002
Net Income
Net income was $5,339,000 for the quarter, ahead 5.5 percent from
$5,061,000 posted during the same period last year. Earnings per share for the
quarter were $0.47 versus $0.43, a gain of 9.3 percent.
Interest Income
Interest income was $18,687,000 for the first quarter of 2003, down 4.0
percent from $19,460,000 posted for the same quarter in 2002. Average net loans
during the first quarter of 2003 totaled $781,474,000 compared to $781,643,000
for the same period of 2002. During the first quarter of 2003, the yield was
6.43 percent (taxable-equivalent) on average earning assets of $1,166,228,000
down from 7.30 percent on average earning assets of $1,070,705,000 during the
first quarter of 2002. Decreases in interest income were attributable primarily
to decrease in interest income on loans, offset by increases in investment
income as a result of a change in the composition of the investment portfolio
emphasizing high-quality, higher-yielding collateralized mortgage obligations.
Interest Expense
Interest expense for the first quarter of 2003 was $2,949,000, down 34.0
percent from $4,465,000 for the same period of 2002. During the first quarter of
2003, the cost of funds was 1.44 percent (taxable-equivalent) on average
interest-bearing liabilities of $817,803,000 down from 2.34 percent on average
interest-bearing liabilities of $764,115,000 during the first quarter of 2002.
Interest expense decreased primarily as a result of decreases in market rates of
interest, and as average demand deposits comprised 28.8 percent of total
deposits.
Each of the Bank's demand deposit accounts has a related
non-interest-bearing sweep account. The sole purpose of the sweep accounts 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 the sweep accounts 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, net of the provision for possible loan losses, is the
largest component of Suffolk's earnings. Net interest income for the first
quarter of 2003 was $15,738,000, up 5.0 percent from $14,995,000 during the same
period of 2002. The net interest margin for the quarter, on a fully
taxable-equivalent basis, was 5.42 percent compared to 5.63 percent for the same
period of 2002.
Page 7
The following table details the components of Suffolk's net interest income on a
taxable-equivalent basis: (in thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------------
March 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
U.S. treasury securities $ 10,005 $ 106 4.24% $ 9,781 $ 142 5.82%
Collateralized mortgage obligations 261,896 3,027 4.62 175,222 2,626 6.00
Mortgage backed securities 15,040 161 4.27 9,301 130 5.60
Obligations of states and political subdivisions 12,105 195 6.45 13,701 214 6.24
U.S. govt. agency obligations 74,674 826 4.43 49,143 654 5.32
Corporate bonds and other securities 2,099 36 6.75 1,850 15 3.15
Federal funds sold and securities purchased
under agreements to resell 8,935 27 1.18 30,064 131 1.75
Loans, including non-accrual loans
Commercial, financial & agricultural loans 150,516 2,078 5.52 132,328 2,152 6.51
Commercial real estate mortgages 183,235 3,774 8.24 167,926 3,614 8.61
Real estate construction loans 37,435 910 9.72 29,725 689 9.27
Residential mortgages (1st and 2nd liens) 92,759 1,732 7.47 91,202 1,851 8.12
Home equity loans 45,758 634 5.54 32,373 508 6.28
Consumer loans 268,856 5,250 7.81 325,627 6,810 8.37
Other loans (overdrafts) 2,915 -- -- 2,462 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $1,166,228 $ 18,756 6.43% $1,070,705 $ 19,536 7.30%
==============================================================================================================================
Cash and due from banks $ 56,880 $ 51,635
Other non-interest-earning assets 53,057 50,017
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $1,276,165 $1,172,357
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------
Saving, N.O.W.'s and money market deposits $ 547,421 $ 1,190 0.87% $ 464,241 $ 1,613 1.39%
Time deposits 265,767 1,739 2.62 299,779 2,852 3.81
- ------------------------------------------------------------------------------------------------------------------------------
Total saving and time deposits 813,188 2,929 1.44 764,020 4,465 2.34
Federal funds purchased and securities
sold under agreement to repurchase 2,225 12 2.07 95 -- 1.63
Other borrowings 2,390 8 1.38 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 817,803 $ 2,949 1.44% $ 764,115 $ 4,465 2.34%
==============================================================================================================================
Rate spread 4.99% 4.96%
Non-interest-bearing deposits $ 328,367 $ 286,010
Other non-interest-bearing liabilities 27,632 25,617
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities $1,173,802 $1,075,742
Stockholders' equity 102,363 96,615
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,276,165 $1,172,357
Net-interest income (taxable-equivalent basis)
and effective interest rate differential $ 15,807 5.42% $ 15,071 5.63%
Less: taxable-equivalent basis adjustment (69) (76)
- ------------------------------------------------------------------------------------------------------------------------------
Net-interest income $ 15,738 $ 14,995
==============================================================================================================================
Other Income
Other income increased to $2,517,000 for the three months compared to
$2,220,000 the previous year. Service charges on deposits were up 6.2 percent.
Service charges, including commissions and fees other than for deposits,
increased by 58.4 percent. Trust revenue was down 1.8 percent. Other operating
income increased by 10.9 percent.
Page 8
Other Expense
Other expense for the first quarter of 2003 was $9,134,000, up 7.3 percent
from $8,514,000 for the comparable period in 2002. Employee compensation
increased by 8.0 percent, net occupancy increased 19.6 percent, equipment
expense increased by 18.8 percent, while other operating expense decreased by
1.2 percent.
Capital Resources
Stockholders' equity totaled $98,498,000 on March 31, 2003, a decrease of
9.5 percent from $108,792,000 on December 31, 2002. The ratio of equity to
assets was 7.8 percent at March 31, 2003 and 8.5 percent at December 31, 2002.
The following table details amounts and ratios of Suffolk's regulatory capital:
(in thousands of dollars except ratios)
- --------------------------------------------------------------------------------------------------------------
To be well capitalized
For capital under prompt corrective
Actual adequacy action provisions
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
As of March 31, 2003
Total Capital (to risk-weighted assets) $ 93,378 10.99% $ 71,604 8.00% $ 89,506 10.00%
Tier 1 Capital (to risk-weighted assets) 89,826 10.04% 35,802 4.00% 53,703 6.00%
Tier 1 Capital (to average assets) 89,826 7.04% 51,009 4.00% 63,761 5.00%
==============================================================================================================
As of December 31, 2002
Total Capital (to risk-weighted assets) $ 117,251 13.39% $ 70,079 8.00% $ 87,599 10.00%
Tier 1 Capital (to risk-weighted assets) 108,556 12.39% 35,039 4.00% 52,559 6.00%
Tier 1 Capital (to average assets) 108,556 8.77% 49,490 4.00% 61,863 5.00%
==============================================================================================================
The following table details repurchases of common stock during the first quarter
of 2003:
Period ending Total shares repurchased Average price per share Aggregate cost
- ----------------------------------------------------------------------------------------
March 31, 2003 405,300 $ 31.69 $ 12,842,093
========================================================================================
Stock-Based Compensation
At March 31, 2003, Suffolk had one stock-based employee compensation plan.
Suffolk accounts for that plan under the recognition and measurement principles
of APB 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation costs are reflected in net
income, as all options granted under the plan had an exercise price equal to the
market value of the underlying common stock on the date of grant.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based Compensation
- --Transition and Disclosure" ("SFAS No. 148") in December 2002. SFAS No. 148
amends the disclosure and certain transition provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS No. 123"). The new disclosure provisions are effective for financial
statements for fiscal years ending after December 15, 2002 and for financial
reports containing condensed financial statements for interim periods beginning
after December 15, 2002.
Page 9
The following table provides the disclosures required by SFAS No. 148 and
illustrates the effect on net income and earnings per share if Suffolk had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net income (in thousands) As reported $ 5,339 $ 5,061
Stock-based compensation
costs determined under fair
value method for all awards $ 10 $ 7
pro-forma $ 5,329 $ 5,054
Earnings per share (Basic) As reported $ 0.47 $ 0.45
pro forma $ 0.47 $ 0.45
Earnings per share (Diluted) As reported $ 0.47 $ 0.45
pro-forma $ 0.47 $ 0.45
================================================================================
The fair value of the options granted in 2003 was $13,640. No options were
granted during 2002. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2003: dividend yield of 2.60%;
expected volatility of 26.5%; risk-free interest rate of 3.96%, and an expected
life of 10.0 years.
Credit Risk
Suffolk makes loans based on the best evaluation possible of the
creditworthiness of the borrower. Even with careful underwriting, some loans may
not be repaid as originally agreed. To provide for this possibility, Suffolk
maintains an allowance for possible loan losses, based on an analysis of the
performance of the loans in its portfolio. The analysis includes subjective
factors based on management's judgment as well as quantitative evaluation.
Prudent, conservative estimates should produce an allowance that will provide
for a range of losses. According to generally accepted accounting principles
("GAAP") a financial institution should record its best estimate. Appropriate
factors contributing to the estimate may include changes in the composition of
the institution's assets, or potential economic slowdowns or downturns. Also
important is the geographical or political environment in which the institution
operates. Suffolk's management considers all of these factors when determining
the provision for possible loan losses.
The following table presents information about the allowance for possible loan
losses: (in thousands of dollars except for ratios)
- -----------------------------------------------------------------------------------------------------------------------
For the For the three months ended
last 12 Mar. 31 Dec. 31 Sept. 30 June 30
months 2003 2002 2002 2002
- -----------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
Beginning balance $ 8,834 $ 8,695 $ 9,076 $ 8,957 $ 8,834
Total charge-offs 2,028 561 825 335 307
Total recoveries 396 148 84 94 70
Provision for possible loan losses 1,350 270 360 360 360
- -----------------------------------------------------------------------------------------------------------------------
Ending balance $ 8,552 $ 8,552 $ 8,695 $ 9,076 $ 8,957
=======================================================================================================================
Coverage ratios
Loans, net of discounts: average $ 785,982 $ 781,474 $ 769,877 $ 789,784 $ 802,794
at end of period 795,903 802,777 788,557 785,582 806,694
Non-performing assets 1,943 1,272 1,758 1,753 2,987
Non-performing assets/total loans (net of discount) 0.24% 0.16% 0.22% 0.22% 0.37%
Net charge-offs/average net loans (annualized) 0.21% 0.21% 0.38% 0.12% 0.12%
Allowance/non-accrual, restructured, & OREO 496.13% 672.33% 494.60% 517.74% 299.87%
Allowance for loan losses/net loans 1.11% 1.07% 1.10% 1.16% 1.11%
- -----------------------------------------------------------------------------------------------------------------------
Page 10
Critical Accounting Policies, Judgments and Estimates
Suffolk's accounting and reporting policies conform to the accounting principles
generally accepted in the United States of America and general practices within
the financial services industry. The preparation of the financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and the accompanying notes. Actual
results could differ from those estimates.
Allowance for Credit Losses
Suffolk considers that the determination of the allowance for loan losses
involves a higher degree of judgment and complexity than its other significant
accounting policies. The balance in the allowance for loan losses is determined
based on management's review and evaluation of the loan portfolio in relation to
past loss experience, the size and composition of the portfolio, current
economic events and conditions, and other pertinent factors, including
management's assumptions as to future delinquencies, recoveries and losses. All
of these factors may change significantly. To the extent actual performance
differs from management's estimates, additional provisions for loan losses may
be required that would reduce earnings in future periods.
Income Taxes
Under the liability method, deferred tax assets and liabilities are determined
by the difference between the financial statement, and the tax bases of assets
and liabilities. Deferred tax assets are subject to management's judgment of
available evidence that future realization is more likely than not. If
management determines that Suffolk may be unable to realize all or part of the
net deferred tax assets in the future, a direct charge to income tax expense may
be required to reduce the recorded value of the net deferred tax asset to the
amount management expects can be realized.
Recent Accounting Pronouncements
Suffolk implemented SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. As of March 31, 2003, the balance of excess cost over the fair
value of net assets acquired recorded on Suffolk's statement of condition was
$814,000. During the first quarter of 2003, Suffolk determined that there was no
impairment of the goodwill recorded on its books and no expense was recorded.
Suffolk adopted FASB Interpretation 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others," on January 1, 2003. FIN 45 requires a guarantor entity,
at the inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. Suffolk has financial and performance
letters of credit. Financial letters of credit require Suffolk to make payment
if the customer's financial condition deteriorates, as defined in the
agreements. Performance letters of credit require Suffolk to make payments if
the customer fails to perform certain non-financial contractual obligations.
Suffolk previously did not record a liability when guaranteeing obligations
unless it became probable that Suffolk would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees Suffolk issues or modifies
subsequent to December 31, 2002. The maximum potential undiscounted amount of
future payments of these letters of credit as of March 31, 2003 is $8,166,000
and they expire as follows:
- --------------------------------------------------------------------------------
2003 $ 5,146,000
2004 2,341,000
2005 100,000
2006 478,000
2007 101,000
- --------------------------------------------------------------------------------
$ 8,166,000
================================================================================
Amounts due under these letters of credit would be reduced by any proceeds that
Suffolk would be able to obtain in liquidating the collateral for the loans,
which varies depending on the customer. The valuation of the allowance for loan
losses includes a provision of $12,249 for possible loan losses based on the
letters of credit outstanding on March 31, 2003.
In January 2003, the FASB issued FASB Interpretation 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
Page 11
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is
determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Suffolk is in the process of
determining what effects, if any, the adoption of the provisions of FIN 46 will
have upon its financial condition or results of operations. Suffolk does not
anticipate FIN 46 to have a material impact on the consolidated financial
position or results of operations.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Suffolk originates and invests in interest-earning assets and solicits
interest-bearing deposit accounts. Suffolk's operations are subject to market
risk resulting from fluctuations in interest rates to the extent that there is a
difference between the amounts of interest-earning assets and interest-bearing
liabilities that are prepaid, withdrawn, mature, or re-priced in any given
period of time. Suffolk's earnings or the net value of its portfolio (the
present value of expected cash flows from liabilities) will change when interest
rates change. The principal objective of Suffolk's asset/liability management
program is to maximize net interest income while keeping risks acceptable. These
risks include both the effect of changes in interest rates, and risks to
liquidity. The program also provides guidance to management in funding Suffolk's
investment in loans and securities. Suffolk's exposure to interest-rate risk has
not changed substantially since December 31, 2002.
Business Risks and Uncertainties
This report contains some statements that look to the future. These may include
remarks about Suffolk Bancorp, the banking industry, and the economy in general.
Factors affecting Suffolk Bancorp include particularly, but are not limited to:
changes in interest rates; increases or decreases in retail and commercial
economic activity in Suffolk'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. Further, it could take Suffolk 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 Suffolk to change its practices in ways that materially change the
results of operation. Each of the factors may change in ways that management
does not now foresee. These remarks are based on current plans and expectations.
They are subject, however, to a variety of uncertainties that could cause future
results to vary materially from Suffolk's historical performance, or from
current expectations.
Item 4.
Controls and Procedures
Suffolk's Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for Suffolk. Based upon their evaluation of
these controls and procedures as of a date within ninety (90) days of the filing
of this report, the Certifying Officers have concluded that Suffolk's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by Suffolk in this report is accumulated and communicated to Suffolk's
management, including its principal executive officers as appropriate, to allow
timely decisions regarding required disclosure.
The Certifying Officers also have indicated that there were no significant
changes in Suffolk's internal controls or other factors that could significantly
affect these controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Page 12
PART II
Item 4.
Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders was held at 1:00 PM on April 8, 2003 at
the Administrative and Lending Center of the Suffolk County National Bank in
Riverhead, New York. Three directors were elected for a term of three years and
the appointment of Grant Thornton, L.L.P. as independent auditors for the fiscal
year ending December 31, 2003 was ratified. The following table details the
vote:
- --------------------------------------------------------------------------------
Shares Voted
Nominees for Director For Withheld
- --------------------------------------------------------------------------------
James E. Danowski 7,798,003 707,678
Thomas S. Kohlmann 7,798,003 707,678
Terence X. Meyer 7,797,465 708,215
Ratification of Independent Auditors For Against Abstain
- --------------------------------------------------------------------------------
Grant Thornton, L.L.P. 7,881,237 528,588 95,855
- --------------------------------------------------------------------------------
Summary
Outstanding # Voted % Voted
- --------------------------------------------------------------------------------
At Date of Record 11,239,481 8,505,681 75.7%
================================================================================
Item 6.
Exhibits and Reports on Form 8-K.
Current Report on Form 8-K - April 22, 2003 - Press Release of April 8, 2003,
"Suffolk Bancorp Announces 9.3 Percent Increase in Earnings Per Share."
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SUFFOLK BANCORP
Date: May 14, 2003 /s/ Thomas S. Kohlmann
----------------------
Thomas S. Kohlmann
President & Chief Executive Officer
Date: May 14, 2003 /s/ J. Gordon Huszagh
---------------------
J. Gordon Huszagh
Executive Vice President &
Chief Financial Officer
Page 13
CERTIFICATION OF PERIODIC REPORT
I, Thomas S. Kohlmann, Chief Executive Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Suffolk Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within ninety (90) days prior to the filing date
of this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 14, 2003
/s/ Thomas S. Kohlmann
- ----------------------
Thomas S. Kohlmann
President & Chief Executive Officer
Page 14
CERTIFICATION OF PERIODIC REPORT
I, J. Gordon Huszagh, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Suffolk Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within ninety (90) days prior to the filing date
of this quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: May 14, 2003
/s/ J. Gordon Huszagh
- ---------------------
J. Gordon Huszagh
Executive Vice President & Chief Financial Officer
Page 15