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 June 30, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
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.
10,990,021 SHARES OF COMMON STOCK OUTSTANDING AS OF July 31, 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 June 30, 2003 and 2002 5
Consolidated Statements of Income, For the Six Months Ended June 30, 2003 and 2002 6
Statements of Cash Flows, For the Six Months Ended June 30, 2003 and 2002 7
Notes to the Unaudited Consolidated Financial Statements 8
(1) Basis of Presentation 8
(2) Stock-based Compensation 8
(3) Recent Accounting Pronouncements 8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Certifications of Periodic Report 15
Page 3
SUFFOLK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands of dollars except for share and per share data)
June 30, 2003 December 31, 2002
------------- -----------------
ASSETS unaudited
Cash & Due From Banks $ 100,298 $ 48,000
Federal Funds Sold 65,300 17,500
Investment Securities:
Available for Sale, at Fair Value 331,250 359,903
Held to Maturity (Fair Value of $13,047 and $17,643, respectively)
Obligations of States & Political Subdivisions 9,986 14,884
Federal Reserve Bank Stock 638 638
Federal Home Loan Bank Stock 1,535 1,361
Corporate Bonds & Other Securities 100 100
----------- -----------
Total Investment Securities 343,509 376,886
Total Loans 823,551 788,557
Less: Allowance for Possible Loan Losses 8,704 8,695
----------- -----------
Net Loans 814,847 779,862
Premises & Equipment, Net 21,924 20,437
Accrued Interest Receivable, Net 5,697 5,946
Excess of Cost Over Fair Value of Net Assets Acquired 814 814
Other Assets 21,794 23,272
----------- -----------
TOTAL ASSETS $ 1,374,183 $ 1,272,717
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Demand Deposits $ 384,050 $ 314,714
Saving, N.O.W. & Money Market Deposits 617,771 557,967
Time Certificates of $100,000 or more 23,622 23,495
Other Time Deposits 230,500 246,406
----------- -----------
Total Deposits 1,255,943 1,142,582
Dividend Payable on Common Stock 2,095 1,956
Accrued Interest Payable 994 1,335
Other Liabilities 17,108 18,052
----------- -----------
TOTAL LIABILITIES 1,276,140 1,163,925
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized;
11,018,181 and 11,489,481 shares outstanding at
June 30, 2003 and December 31, 2002, respectively) 33,838 33,838
Surplus 19,230 19,230
Treasury Stock at Par (2,517,037 and 2,045,737 shares, respectively) (6,293) (5,114)
Undivided Profits 44,944 52,453
----------- -----------
91,719 100,407
Accumulated Other Comprehensive Income, Net of Tax 6,324 8,385
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 98,043 108,792
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,374,183 $ 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
June 30, 2003 June 30, 2002
------------- -------------
INTEREST INCOME unaudited unaudited
Federal Funds Sold $ 55 $ 137
United States Treasury Securities 104 125
Obligations of States & Political Subdivisions (tax exempt) 124 146
Mortgage-Backed Securities 2,648 2,997
U.S. Government Agency Obligations 825 653
Corporate Bonds & Other Securities 36 31
Loans 14,037 15,633
----------- -----------
Total Interest Income 17,829 19,722
INTEREST EXPENSE
Saving, N.O.W & Money Market Deposits 1,036 1,824
Time Certificates of $100,000 or more 126 202
Other Time Deposits 1,473 2,208
Federal Funds Purchased -- 1
Interest on Other Borrowings 24 --
----------- -----------
Total Interest Expense 2,659 4,235
Net-interest Income 15,170 15,487
Provision for Possible Loan Losses 270 360
----------- -----------
Net-interest Income After Provision for Possible Loan Losses 14,900 15,127
OTHER INCOME
Service Charges on Deposit Accounts 1,488 1,422
Other Service Charges, Commissions & Fees 609 474
Fiduciary Fees 283 293
Other Operating Income 368 126
----------- -----------
Total Other Income 2,748 2,315
OTHER EXPENSE
Salaries & Employee Benefits 5,338 5,027
Net Occupancy Expense 745 674
Equipment Expense 487 625
Other Operating Expense 2,563 2,321
----------- -----------
Total Other Expense 9,133 8,647
Income Before Provision for Income Taxes 8,515 8,795
Provision for Income Taxes 3,384 3,501
----------- -----------
NET INCOME $ 5,131 5,294
=========== ===========
Average: Common Shares Outstanding 11,046,136 11,713,901
Dilutive Stock Options 43,164 45,790
----------- -----------
Average Total Common Shares and Dilutive Options 11,089,300 11,759,691
EARNINGS PER COMMON SHARE Basic $ 0.46 $ 0.45
Diluted $ 0.46 $ 0.45
See accompanying notes to consolidated financial statements.
Page 5
SUFFOLK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except for share and per share data)
For the Six Months Ended
June 30, 2003 June 30, 2002
------------- -------------
INTEREST INCOME unaudited unaudited
Federal Funds Sold $ 82 $ 268
United States Treasury Securities 208 264
Obligations of States & Political Subdivisions (tax exempt) 253 287
Mortgage-Backed Securities 5,836 5,753
U.S. Government Agency Obligations 1,651 1,307
Corporate Bonds & Other Securities 71 46
Loans 28,415 31,257
----------- -----------
Total Interest Income 36,516 39,182
INTEREST EXPENSE
Saving, N.O.W. & Money Market Deposits 2,226 3,437
Time Certificates of $100,000 or more 261 457
Other Time Deposits 3,077 4,805
Federal Funds Purchased 12 1
Interest on Other Borrowings 32 --
----------- -----------
Total Interest Expense 5,608 8,700
Net-interest Income 30,908 30,482
Provision for Possible Loan Losses 540 660
----------- -----------
Net-interest Income After Provision 30,368 29,822
OTHER INCOME
Service Charges on Deposit Accounts 2,900 2,751
Other Service Charges, Commissions & Fees 1,119 796
Fiduciary Fees 563 578
Other Operating Income 683 410
----------- -----------
Total Other Income 5,265 4,535
OTHER EXPENSE
Salaries & Employee Benefits 10,786 10,072
Net Occupancy Expense 1,552 1,349
Equipment Expense 1,195 1,221
Other Operating Expense 4,734 4,519
----------- -----------
Total Other Expense 18,267 17,161
Income Before Provision for Income Taxes 17,366 17,196
Provision for Income Taxes 6,896 6,841
----------- -----------
NET INCOME $ 10,470 $ 10,355
=========== ===========
Average: Common Shares Outstanding 11,172,393 11,740,791
Dilutive Stock Options 43,024 43,410
----------- -----------
Average Total Common Shares and Dilutive Options 11,215,417 11,784,201
EARNINGS PER COMMON SHARE Basic $ 0.94 $ 0.88
Diluted $ 0.93 $ 0.88
See accompanying notes to consolidated financial statements.
Page 6
SUFFOLK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Six Months Ended
June 30, 2003 June 30, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES unaudited unaudited
NET INCOME $ 10,470 $ 10,355
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Possible Loan Losses 540 660
Depreciation & Amortization 1,153 1,069
Accretion of Discounts (143) (352)
Amortization of Premiums 2,498 906
Decrease in Accrued Interest Receivable 249 43
Decrease (Increase) in Other Assets 1,478 (1,466)
Decrease in Accrued Interest Payable (341) (1,004)
Increase (Decrease) in Other Liabilities 490 (169)
--------- ---------
Net Cash Provided by Operating Activities 16,394 10,042
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities 38,570 12,089
Maturities of Investment Securities; Available for Sale 6,000
Purchases of Investment Securities; Available for Sale (15,767) (58,048)
Maturities of Investment Securities; Held to Maturity 8,177 3,285
Purchases of Investment Securities; Held to Maturity (3,451) (3,481)
Loan Disbursements & Repayments, Net (35,525) (11,112)
Purchases of Premises & Equipment, Net (2,640) (5,117)
--------- ---------
Net Cash Used in Investing Activities (10,636) (56,384)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposit Accounts 113,361 81,716
Dividends Paid to Shareholders (4,092) (3,413)
Treasury Shares Acquired (14,929) (2,617)
--------- ---------
Net Cash Provided by Financing Activities 94,340 75,686
Net Increase in Cash & Cash Equivalents 100,098 29,344
Cash & Cash Equivalents Beginning of Period 65,500 78,526
--------- ---------
Cash & Cash Equivalents End of Period $ 165,598 $ 107,870
========= =========
See accompanying notes to consolidated financial statements.
Page 7
SUFFOLK BANCORP AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
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 on Form 10-K, for the year ended December 31,
2002.
The results of operations for the three months ended June 30, 2003 are not
necessarily indicative of the results of operations to be expected for the
remainder of the year.
(2) Stock-based Compensation
At June 30, 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.
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, and should be read in conjunction with "Capital
Resources" on page 12 in Management's Discussion And Analysis Of Financial
Condition And Results Of Operations.
- --------------------------------------------------------------------------------------------------------------
Quarter ended June 30, 2003 2002
- --------------------------------------------------------------------------------------------------------------
Net income (in thousands) As reported $ 5,131 $ 5,294
Stock-based compensation
costs determined under fair
value method for all awards $ 10 $ 7
pro-forma $ 5,121 $ 5,287
Earnings per share (Basic) As reported $ 0.46 $ 0.45
pro forma $ 0.46 $ 0.45
Earnings per share (Diluted) As reported $ 0.46 $ 0.45
pro-forma $ 0.46 $ 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.
(3) Recent Accounting Pronouncements
Suffolk implemented SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002. As of June 30, 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 second quarter of 2003, Suffolk determined that there was
no impairment of the goodwill recorded on its books and no expense was recorded.
Page 8
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 June 30, 2003 is $6,880,000 and
they expire as follows:
- --------------------------------------------------------------------------------
2003 $ 2,898,000
2004 2,675,000
2005 727,000
2006 479,000
2007 101,000
- --------------------------------------------------------------------------------
$ 6,880,000
================================================================================
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 $10,320 for possible loan losses based on the
letters of credit outstanding on June 30, 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
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.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. All provisions of
this Statement shall be applied prospectively. Based on current business
operations, management expects that the provisions of SFAS No. 149 will not
materially impact Suffolk's financial condition, results of operations, or
disclosures.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. Based on current
business operations, management expects that the provisions of SFAS No. 150 will
not impact the Suffolk's financial condition, results of operations, or
disclosures.
Page 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
For the Three-Month Periods ended June 30, 2003 and 2002
Net Income
Net income was $5,131,000 for the quarter, down 3.1 percent from $5,294,000
posted during the same period last year. Earnings per share for the quarter were
$0.46 versus $0.45, a gain of 2.2 percent.
Interest Income
Interest income was $17,829,000 for the second quarter of 2003, down 9.6 percent
from $19,722,000 posted for the same quarter in 2002. Average net loans during
the second quarter of 2003 totaled $809,908,000 compared to $793,906,000 for the
same period of 2002. During the second quarter of 2003, the yield was 6.02
percent (taxable-equivalent) on average earning assets of $1,188,514,000 down
from 7.11 percent on average earning assets of $1,114,219,000 during the second
quarter of 2002. Decreases in interest income were attributable primarily to
decrease in interest income on loans.
Interest Expense
Interest expense for the second quarter of 2003 was $2,659,000, down 37.2
percent from $4,235,000 for the same period of 2002. During the second quarter
of 2003, the cost of funds was 1.28 percent (taxable-equivalent) on average
interest-bearing liabilities of $833,603,000 down from 2.14 percent on average
interest-bearing liabilities of $791,392,000 during the second quarter of 2002.
Interest expense decreased primarily as a result of decreases in market rates of
interest, and as average demand deposits comprised 29.0 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, before the provision for possible loan losses, is the
largest component of Suffolk's earnings. It was $15,170,000 for the second
quarter of 2003, down 2.0 percent from $15,487,000 during the same period of
2002. The net interest margin for the quarter, on a fully taxable-equivalent
basis, was 5.13 percent compared to 5.59 percent for the same period of 2002.
Page 10
The following table details the components of Suffolk's net interest income on a
taxable-equivalent basis: (in thousands of dollars)
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June 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 10,035 $ 106 4.23% $ 10,314 $ 126 4.91%
Collateralized mortgage obligations 246,301 2,519 4.09 204,011 2,875 5.64
Mortgage backed securities 13,810 130 3.76 8,981 122 5.42
Obligations of states and political subdivisions 12,539 190 6.06 14,844 222 5.99
U.S. govt. agency obligations 75,035 824 4.39 49,004 653 5.33
Corporate bonds and other securities 2,269 35 6.17 2,099 32 6.03
Federal funds sold and securities purchased
under agreements to resell 18,617 55 1.19 31,060 137 1.77
Loans, including non-accrual loans
Commercial, financial & agricultural loans 168,309 2,257 5.36 142,223 2,224 6.25
Commercial real estate mortgages 193,647 3,607 7.45 174,482 3,657 8.38
Real estate construction loans 37,983 834 8.79 34,135 789 9.25
Residential mortgages (1st and 2nd liens) 97,237 1,151 4.73 88,113 1,859 8.44
Home equity loans 50,891 688 5.40 34,162 503 5.89
Consumer loans 259,957 5,500 8.46 315,517 6,601 8.37
Other loans (overdrafts) 1,884 -- -- 5,274 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $1,188,514 $ 17,896 6.02% $1,114,219 $ 19,800 7.11%
====================================================================================================================================
Cash and due from banks $ 51,997 $ 55,429
Other non-interest-earning assets 45,233 71,285
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,285,744 $1,240,933
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INTEREST-BEARING LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Saving, N.O.W. and money market deposits $ 568,565 $ 1,036 0.73% $ 506,851 $ 1,825 1.44%
Time deposits 257,355 1,599 2.49 284,498 2,409 3.39
- ------------------------------------------------------------------------------------------------------------------------------------
Total saving and time deposits 825,920 2,635 1.28 791,349 4,234 2.14
Federal funds purchased and securities
sold under agreement to repurchase -- -- -- 43 -- 2.20
Other borrowings 7,683 24 1.28 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 833,603 $ 2,659 1.28% $ 791,392 $ 4,234 2.14%
====================================================================================================================================
Rate spread 4.75% 4.91%
Non-interest-bearing deposits $ 337,645 $ 304,528
Other non-interest-bearing liabilities 17,897 49,432
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities $1,189,145 $1,145,352
Stockholders' equity 96,599 95,581
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,285,744 $1,240,933
Net-interest income (taxable-equivalent basis)
and effective interest rate differential $ 15,237 5.13% $ 15,566 5.59%
Less: taxable-equivalent basis adjustment (67) (79)
- ------------------------------------------------------------------------------------------------------------------------------------
Net-interest income $ 15,170 $ 15,487
====================================================================================================================================
Other Income
Other income increased to $2,748,000 for the three months compared to $2,315,000
the previous year. Service charges on deposits were up 4.6 percent. Service
charges, including commissions and fees other than for deposits, increased by
28.5 percent. Trust revenue was down 3.4 percent. Other operating income
increased by 192.1 percent.
Page 11
Other Expense
Other expense for the second quarter of 2003 was $9,133,000, up 5.6 percent from
$8,647,000 for the comparable period in 2002. Employee compensation increased by
6.2 percent, net occupancy increased 10.5 percent, equipment expense decreased
by 22.1 percent, while other operating expense increased by 10.4 percent.
Capital Resources
Stockholders' equity totaled $98,043,000 on June 30, 2003, a decrease of 9.9
percent from $108,792,000 on December 31, 2002. The ratio of equity to assets
was 7.1 percent at June 30, 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 June 30, 2003
Total Capital (to risk-weighted assets) $ 99,476 10.59% $ 75,170 8.00% $ 93,962 10.00%
Tier 1 Capital (to risk-weighted assets) 90,772 9.66% 37,585 4.00% 56,377 6.00%
Tier 1 Capital (to average assets) 90,772 7.07% 51,392 4.00% 64,240 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 second
quarter of 2003:
- ------------------------------------------------------------------------------------------------------------------------
Period ending Total shares repurchased Average price per share Aggregate cost
- ------------------------------------------------------------------------------------------------------------------------
June 30, 2003 66,000 $ 31.62 $ 2,086,658
========================================================================================================================
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.
Page 12
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 June 30 Mar. 31 Dec. 31 Sept. 30
months 2003 2003 2002 2002
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
Beginning balance $ 8,957 $ 8,552 $ 8,695 $ 9,076 $ 8,957
Total charge-offs 2,125 404 561 825 335
Total recoveries 612 286 148 84 94
Provision for possible loan losses 1,260 270 270 360 360
- --------------------------------------------------------------------------------------------------------------------------------
Ending balance $ 8,704 $ 8,704 $ 8,552 $ 8,695 $ 9,076
================================================================================================================================
Coverage ratios
Loans, net of discounts: average $787,761 $809,908 $781,474 $769,877 $789,784
at end of period 800,117 823,551 802,777 788,557 785,582
Non-performing assets 1,566 1,480 1,272 1,758 1,753
Non-performing assets/total loans (net of discount) 0.20% 0.18% 0.16% 0.22% 0.22%
Net charge-offs/average net loans (annualized) 0.19% 0.06% 0.21% 0.38% 0.12%
Allowance/non-accrual, restructured, & OREO 568.19% 588.11% 672.33% 494.60% 517.74%
Allowance for loan losses/net loans 1.10% 1.06% 1.07% 1.10% 1.16%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
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.
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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 as defined in Rules 13a-15(e) of the
Securities Exchange Act of 1934 for Suffolk. Based upon their evaluation of
these controls and procedures as of June 30, 2003, the Certifying Officers have
concluded that Suffolk's disclosure controls and procedures are effective.
In addition, there has been no significant change in Suffolk's internal controls
over financial reporting that occurred during Suffolk's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, Suffolk's internal controls over financial reporting.
Page 14
PART II
Item 6.
Exhibits and Reports on Form 8-K.
CERTIFICATION OF PERIODIC REPORT - Exhibit 31.1
CERTIFICATION OF PERIODIC REPORT - Exhibit 31.2
CERTIFICATION OF PERIODIC REPORT - Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT - Exhibit 32.2
Current Report on Form 8-K - May 27, 2003 - Press Release of May 28, 2003,
"Suffolk Bancorp Announces Regular Quarterly Dividend."
Current Report on Form 8-K - June 23, 2003 - Press Release of June 23, 2003,
"Suffolk Bancorp Elects Ralph Gibson, M.D., M.B.A. and David A. Kandell, C.P.A.
as Directors."
Current Report on Form 8-K - July 15, 2003 - Press Release of July 15, 2003,
"Suffolk Bancorp Announces Second Quarter Earnings" - Earnings release for the
three months ended June 30, 2003.
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: August 11, 2003 /s/ Thomas S. Kohlmann
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Thomas S. Kohlmann
President & Chief Executive Officer
Date: August 11, 2003 /s/ J. Gordon Huszagh
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J. Gordon Huszagh
Executive Vice President & Chief Financial Officer
Page 15