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 September 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
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.
10,949,283 SHARES OF COMMON STOCK OUTSTANDING AS OF OCTOBER 31, 2003
This page left blank intentionally.
Page 2
SUFFOLK BANCORP AND SUBSIDIARIES
xx Page
Part I - Financial Information (unaudited)
Item 1
Financial Statements
Consolidated Statements of Condition 4
Consolidated Statements of Income, For the Three
Months Ended September 30, 2003 and 2002 5
Consolidated Statements of Income, For the Nine
Months Ended September 30, 2003 and 2002 6
Statements of Cash Flows, For the Nine Months
Ended September 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 INCOME
(in thousands of dollars except for share and per share data)
September 30, 2003 December 31, 2002
------------------ -----------------
ASSETS unaudited
Cash & Due From Banks $ 75,718 $ 48,000
Federal Funds Sold 31,800 17,500
Investment Securities:
Available for Sale, at Fair Value 363,733 359,903
Held to Maturity (Fair Value of $12,930 and $17,643, respectively)
Obligations of States & Political Subdivisions 9,911 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 375,917 376,886
Total Loans 827,607 788,557
Less: Allowance for Possible Loan Losses 8,559 8,695
--------------- ---------------
Net Loans 819,048 779,862
Premises & Equipment, Net 22,499 20,437
Accrued Interest Receivable, Net 5,095 5,946
Excess of Cost Over Fair Value of Net Assets Acquired 814 814
Other Assets 22,123 23,272
--------------- ---------------
TOTAL ASSETS $ 1,353,014 $ 1,272,717
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Demand Deposits $ 386,594 $ 314,714
Saving, N.O.W. & Money Market Deposits 601,299 557,967
Time Certificates of $100,000 or more 23,156 23,495
Other Time Deposits 221,467 246,406
--------------- ---------------
Total Deposits 1,232,516 1,142,582
Dividend Payable on Common Stock 2,079 1,956
Accrued Interest Payable 865 1,335
Other Liabilities 18,271 18,052
--------------- ---------------
TOTAL LIABILITIES 1,253,731 1,163,925
--------------- ---------------
STOCKHOLDERS' EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized;
10,943,652 and 11,489,481 shares outstanding at
September 30, 2003 and December 31, 2002, respectively) 33,858 33,838
Surplus 19,300 19,230
Treasury Stock at Par (2,599,766 and 2,045,737 shares, respectively) (6,499) (5,114)
Undivided Profits 45,559 52,453
--------------- ---------------
92,218 100,407
Accumulated Other Comprehensive Income, Net of Tax 7,065 8,385
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 99,283 108,792
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,353,014 $ 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
September 30, 2003 September 30, 2002
------------------ ------------------
INTEREST INCOME unaudited unaudited
Federal Funds Sold $ 109 $ 240
United States Treasury Securities 104 103
Obligations of States & Political Subdivisions (tax exempt) 148 138
Mortgage-Backed Securities 2,223 3,234
U.S. Government Agency Obligations 963 766
Corporate Bonds & Other Securities 14 22
Loans 13,619 15,327
--------------- ---------------
Total Interest Income 17,180 19,830
INTEREST EXPENSE
Saving, N.O.W & Money Market Deposits 777 1,765
Time Certificates of $100,000 or more 115 191
Other Time Deposits 1,332 1,987
Federal Funds Purchased -- --
Interest on Other Borrowings 1 --
--------------- ---------------
Total Interest Expense 2,225 3,943
Net-interest Income 14,955 15,887
Provision for Possible Loan Losses 180 360
--------------- ---------------
Net-interest Income After Provision for Possible Loan Losses 14,775 15,527
OTHER INCOME
Service Charges on Deposit Accounts 1,380 1,494
Other Service Charges, Commissions & Fees 739 748
Fiduciary Fees 312 282
Net Security Gains 464 --
Other Operating Income 246 283
--------------- ---------------
Total Other Income 3,141 2,807
OTHER EXPENSE
Salaries & Employee Benefits 5,544 5,266
Net Occupancy Expense 668 730
Equipment Expense 480 679
Other Operating Expense 2,324 2,416
--------------- ---------------
Total Other Expense 9,016 9,091
Income Before Provision for Income Taxes 8,900 9,243
Provision for Income Taxes 3,533 3,666
--------------- ---------------
NET INCOME $ 5,367 $ 5,577
=============== ===============
Average: Common Shares Outstanding 10,967,478 11,631,041
Dilutive Stock Options 39,567 43,884
--------------- ---------------
Average Total Common Shares and Diluted Options 11,007,045 11,674,925
EARNINGS PER COMMON SHARE Basic $ 0.49 $ 0.48
Diluted $ 0.49 $ 0.48
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 Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
INTEREST INCOME unaudited unaudited
Federal Funds Sold $ 191 $ 508
United States Treasury Securities 312 367
Obligations of States & Political Subdivisions (tax exempt) 401 425
Mortgage-Backed Securities 8,059 8,987
U.S. Government Agency Obligations 2,614 2,073
Corporate Bonds & Other Securities 85 68
Loans 42,034 46,584
--------------- ---------------
Total Interest Income 53,696 59,012
INTEREST EXPENSE
Saving, N.O.W. & Money Market Deposits 3,003 5,202
Time Certificates of $100,000 or more 376 648
Other Time Deposits 4,409 6,792
Federal Funds Purchased 12 1
Interest on Other Borrowings 33 --
--------------- ---------------
Total Interest Expense 7,833 12,643
Net-interest Income 45,863 46,369
Provision for Possible Loan Losses 720 1,020
--------------- ---------------
Net-interest Income After Provision 45,143 45,349
OTHER INCOME
Service Charges on Deposit Accounts 4,280 4,245
Other Service Charges, Commissions & Fees 1,858 1,544
Fiduciary Fees 875 860
Net Security Gains 464 --
Other Operating Income 929 693
--------------- ---------------
Total Other Income 8,406 7,342
OTHER EXPENSE
Salaries & Employee Benefits 16,330 15,338
Net Occupancy Expense 2,220 2,079
Equipment Expense 1,675 1,900
Other Operating Expense 7,058 6,935
--------------- ---------------
Total Other Expense 27,283 26,252
Income Before Provision for Income Taxes 26,266 26,439
Provision for Income Taxes 10,429 10,507
--------------- ---------------
NET INCOME $ 15,837 $ 15,932
=============== ===============
Average: Common Shares Outstanding 11,105,303 11,703,306
Dilutive Stock Options 38,327 42,023
--------------- ---------------
Average Total Common Shares and Diluted Options 11,143,630 11,745,329
EARNINGS PER COMMON SHARE Basic $ 1.43 $ 1.36
Diluted $ 1.42 $ 1.36
See accompanying notes to consolidated financial statements.
Page 6
SUFFOLK BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES unaudited unaudited
NET INCOME $ 15,837 $ 15,932
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Possible Loan Losses 720 1,020
Depreciation & Amortization 1,635 1,673
Accretion of Discounts (284) (518)
Amortization of Premiums 3,931 1,574
Decrease (Increase) in Accrued Interest Receivable 851 (56)
Decrease in Other Assets 1,149 2,105
Decrease in Accrued Interest Payable (469) (1,064)
Increase in Other Liabilities 1,137 70
Net Security Gains (464) --
--------------- ---------------
Net Cash Provided by Operating Activities 24,043 20,736
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities 83,030 20,591
Proceeds from Sale of Investment Securities, Available for Sale 39,109 --
Maturities of Investment Securities; Available for Sale -- 6,000
Purchases of Investment Securities; Available for Sale (131,390) (105,786)
Maturities of Investment Securities; Held to Maturity 8,627 3,510
Purchases of Investment Securities; Held to Maturity (3,827) (4,391)
Loan Disbursements & Repayments, Net (39,906) 9,759
Purchases of Premises & Equipment, Net (3,697) (7,368)
--------------- ---------------
Net Cash Used in Investing Activities (48,054) (77,685)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposit Accounts 89,934 93,080
Dividends Paid to Shareholders (6,187) (5,407)
Treasury Shares Acquired (17,718) (6,298)
--------------- ---------------
Net Cash Provided by Financing Activities 66,029 81,375
Net Increase in Cash & Cash Equivalents 42,018 24,426
Cash & Cash Equivalents Beginning of Period 65,500 78,526
--------------- ---------------
Cash & Cash Equivalents End of Period $ 107,518 $ 102,952
=============== ===============
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 September 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 September 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 ("SFAS") No. 148 "Accounting for Stock-Based Compensation
- --Transition and Disclosure" 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 September 30, 2003 2002
- ----------------------------------------------------------------------------------------------------
Net income (in thousands) As reported $ 5,367 $ 5,577
Stock-based compensation
costs determined under fair
value method for all awards $ 10 $ 7
pro-forma $ 5,357 $ 5,570
Earnings per share (Basic) As reported $ 0.49 $ 0.48
pro forma $ 0.49 $ 0.48
Earnings per share (Diluted) As reported $ 0.49 $ 0.48
pro-forma $ 0.49 $ 0.48
====================================================================================================
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 September 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 third 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 September 30, 2003 is
$6,290,000 and they expire as follows:
- --------------------------------------------------------------------------------
2003 $1,719,000
2004 3,097,000
2005 895,000
2006 478,000
2007 101,000
- --------------------------------------------------------------------------------
$6,290,000
================================================================================
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 $9,435 for possible loan
losses based on the letters of credit outstanding on September 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 has determined the
adoption of the provisions of FIN 46 do not materially impact its financial
condition 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 September 30,
2003 and for hedging relationships designated after September 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 has determined that the provisions of SFAS No.
150 do not materially impact 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 September 30, 2003 and 2002
Net Income
Net income was $5,367,000 for the quarter, down 3.8 percent from $5,577,000
posted during the same period last year. Earnings per share for the quarter were
$0.49 versus $0.48, a gain of 2.1 percent.
Interest Income
Interest income was $17,180,000 for the third quarter of 2003, down 13.4 percent
from $19,830,000 posted for the same quarter in 2002. Average net loans during
the third quarter of 2003 totaled $809,451,000 compared to $780,796,000 for the
same period of 2002. During the third quarter of 2003, the yield was 5.71
percent (taxable-equivalent) on average earning assets of $1,208,383,000 down
from 6.82 percent on average earning assets of $1,167,019,000 during the third
quarter of 2002. Decreases in interest income were attributable primarily to a
decrease in interest income on loans and a decrease in interest income on
mortgage-backed securities.
Interest Expense
Interest expense for the third quarter of 2003 was $2,225,000, down 43.6 percent
from $3,943,000 for the same period of 2002. During the third quarter of 2003,
the cost of funds was 1.07 percent (taxable-equivalent) on average
interest-bearing liabilities of $828,526,000 down from 1.94 percent on average
interest-bearing liabilities of $813,798,000 during the third quarter of 2002.
Interest expense decreased primarily as a result of decreases in market rates of
interest, and as average demand deposits comprised 31.1 percent of total average
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 $14,955,000 for the third
quarter of 2003, down 5.9 percent from $15,887,000 during the same period of
2002. The net interest margin for the quarter, on a fully taxable-equivalent
basis, was 4.97 percent compared to 5.47 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)
- ---------------------------------------------------------------------------------------------------------------------------
September 30, 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 9,928 $ 106 4.27% $ 9,783 $ 106 4.34%
Collateralized mortgage obligations 227,349 2,125 3.74 231,157 3,141 5.43
Mortgage backed securities 12,251 99 3.22 8,251 93 4.53
Obligations of states and political subdivisions 15,514 216 5.58 14,113 210 5.95
U.S. govt. agency obligations 90,032 963 4.28 65,199 766 4.70
Corporate bonds and other securities 2,272 14 2.48 2,099 22 4.11
Federal funds sold and securities purchased
under agreements to resell 41,585 109 1.05 55,621 240 1.73
Loans, including non-accrual loans
Commercial, financial & agricultural loans 158,561 2,113 5.33 127,406 2,048 6.43
Commercial real estate mortgages 203,839 3,508 6.88 184,153 3,847 8.36
Real estate construction loans 35,081 886 10.10 33,715 788 9.35
Residential mortgages (1st and 2nd liens) 106,239 1,320 4.97 91,086 1,638 7.19
Home equity loans 55,043 727 5.28 35,029 514 5.87
Consumer loans 247,730 5,065 8.18 305,891 6,492 8.49
Other loans (overdrafts) 2,959 -- -- 3,516 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $1,208,383 $ 17,251 5.71% $1,167,019 $ 19,905 6.82%
===========================================================================================================================
Cash and due from banks $ 50,223 $ 47,776
Other non-interest-earning assets 55,262 43,369
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,313,868 $1,258,164
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------
Saving, N.O.W. and money market deposits $ 580,024 $ 778 0.54% $ 533,751 $ 1,765 1.32%
Time deposits 248,502 1,447 2.33 280,047 2,179 3.11
- ---------------------------------------------------------------------------------------------------------------------------
Total saving and time deposits 828,526 2,225 1.07 813,798 3,944 1.94
Federal funds purchased and securities
sold under agreement to repurchase -- -- -- -- -- --
Other borrowings -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 828,526 $ 2,225 1.07% $ 813,798 $ 3,944 1.94%
===========================================================================================================================
Rate spread 4.64% 4.88%
Non-interest-bearing deposits $ 373,826 $ 334,679
Other non-interest-bearing liabilities 17,336 6,826
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities $1,219,688 $1,155,303
Stockholders' equity 94,180 102,861
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,313,868 $1,258,164
Net-interest income (taxable-equivalent basis)
and effective interest rate differential $ 15,026 4.97% $ 15,961 5.47%
Less: taxable-equivalent basis adjustment (71) (74)
- ---------------------------------------------------------------------------------------------------------------------------
Net-interest income $ 14,955 $ 15,887
===========================================================================================================================
Other Income
Other income increased to $3,141,000 for the three months compared to $2,807,000
the previous year. Service charges on deposits were down 7.6 percent. Service
charges, including commissions and fees other than for deposits, decreased by
1.2 percent. Trust revenue was up 10.6 percent. Other operating income decreased
by 13.1 percent. Net gains on the sale of securities amounted to $464,000.
Page 11
Other Expense
Other expense for the third quarter of 2003 was $9,016,000, down .8 percent from
$9,091,000 for the comparable period in 2002. Employee compensation increased by
5.3 percent, net occupancy decreased 8.5 percent, equipment expense decreased by
29.3 percent, and other operating expense decreased by 3.8 percent.
Capital Resources
Stockholders' equity totaled $99,283,000 on September 30, 2003, a decrease of
8.7 percent from $108,792,000 on December 31, 2002. The ratio of equity to
assets was 7.3 percent at September 30, 2003 and 8.5 percent at December 31,
2002. The decrease was primarily attributable to substantial repurchases of
common shares during the period, as well as regular cash dividends, offset by
net income. 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 September 30, 2003
Total Capital (to risk-weighted assets) $ 99,840 10.68% $ 74,786 8.00% $ 93,483 10.00%
Tier 1 Capital (to risk-weighted assets) 91,281 9.76% 37,393 4.00% 56,090 6.00%
Tier 1 Capital (to average assets) 91,281 6.95% 52,517 4.00% 65,647 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 third quarter
of 2003:
- --------------------------------------------------------------------------------------------------
Period ending Total shares repurchased Average price per share Aggregate cost
- --------------------------------------------------------------------------------------------------
September 30, 2003 82,729 $ 33.72 $ 2,789,611
==================================================================================================
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 Sept. 30 June 30 Mar. 31 Dec. 31
months 2003 2003 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses
Beginning balance $ 9,076 $ 8,704 $ 8,552 $ 8,695 $ 9,076
Total charge-offs 2,334 544 404 561 825
Total recoveries 737 219 286 148 84
Provision for possible loan losses 1,080 180 270 270 360
- -----------------------------------------------------------------------------------------------------------------
Ending balance $ 8,559 $ 8,559 $ 8,704 $ 8,552 $ 8,695
=================================================================================================================
Coverage ratios
Loans, net of discounts: average $792,678 $809,451 $809,908 $781,474 $769,877
at end of period 810,623 827,607 823,551 802,777 788,557
Non-performing assets 1,387 1,038 1,480 1,272 1,758
Non-performing assets/total loans (net of discount) 0.17% 0.13% 0.18% 0.16% 0.22%
Net charge-offs/average net loans (annualized) 0.20% 0.16% 0.06% 0.21% 0.38%
Allowance/non-accrual, restructured, & OREO 644.90% 824.57% 588.11% 672.33% 494.60%
Allowance for loan losses/net loans 1.06% 1.03% 1.06% 1.07% 1.10%
=================================================================================================================
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.
Page 13
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 September 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 - October 15, 2003 - Press Release of October 15,
2003, "Suffolk Bancorp Announces Third Quarter Earnings" - Earnings release for
the three months ended September 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: November 7, 2003 /s/ Thomas S. Kohlmann
----------------------
Thomas S. Kohlmann
President & Chief Executive Officer
Date: November 7, 2003 /s/ J. Gordon Huszagh
---------------------
J. Gordon Huszagh
Executive Vice President & Chief
Financial Officer
Page 15