10-Q 1 d50632_10-q.txt QUARTERLY REPORT 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, 2002 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) 6 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. 11,723,500 SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 31, 2002 1 This page left blank intentionally. 2 SUFFOLK BANCORP AND SUBSIDIARIES Part I - Financial Information (unaudited) page Consolidated Statements of Condition 4 Consolidated Statements of Income, For the Three Months Ended March 31, 2002 and 2001 5 Statements of Cash Flows, For the Three Months Ended March 31, 2002 and 2001 6 Notes to the Unaudited Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II - Other Information 11 Signatures 11 3 SUFFOLK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (March 31,2002 unaudited, in thousands of dollars, except share and per share data)
March 31, December 31, 2002 2001 ----------- ----------- ASSETS Cash & Due From Banks $ 38,389 $ 60,926 Federal Funds Sold 22,600 17,600 Investment Securities: Available for Sale, at Fair Value 254,657 241,061 Held to Maturity: Obligations of States & Political Subdivisions 11,709 11,709 Corporate Bonds & Other Securities 2,099 1,850 ----------- ----------- Total Investment Securities 268,465 254,620 Total Loans 792,588 796,110 Less: Allowance for Possible Loan Losses 8,834 8,825 ----------- ----------- Net Loans 783,754 787,285 Premises & Equipment, Net 15,732 13,801 Accrued Interest Receivable, Net 5,712 5,557 Excess of Cost Over Fair Value of Net Assets Acquired 814 814 Other Assets 22,431 24,344 ----------- ----------- TOTAL ASSETS 1,157,897 1,164,947 =========== =========== LIABILITIES & STOCKHOLDERS' EQUITY Demand Deposits 263,822 294,190 Savings, N.O.W.'s & Money Market Deposits 487,478 453,922 Time Certificates of $100,000 or more 30,756 30,038 Other Time Deposits 261,242 273,562 ----------- ----------- Total Deposits 1,043,298 1,051,712 Dividend Payable on Common Stock 1,766 1,648 Accrued Interest Payable 1,640 2,513 Other Liabilities 13,809 12,237 ----------- ----------- TOTAL LIABILITIES 1,060,513 1,068,110 ----------- ----------- STOCKHOLDERS' EQUITY Common Stock (par value $2.50; 15,000,000 shares authorized; 11,723,500 and 11,770,596 shares outstanding at March 31, 2002 and December 31, 2001, respectively) 33,826 33,826 Surplus 19,165 19,165 Treasury Stock at Par (1,806,718 and 1,759,622 shares, respectively) (4,517) (4,399) Undivided Profits 49,183 47,149 ----------- ----------- 97,657 95,741 Accumulated Other Comprehensive (Loss) Income, Net of Tax (273) 1,096 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 97,384 96,837 TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,157,897 $ 1,164,947 =========== ===========
See accompanying notes to consolidated financial statements. 4 SUFFOLK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited, in thousands of dollars, except share and per share data)
For the Three Months Ended March 31, March 31, 2002 2001 ----------- ----------- INTEREST INCOME Federal Funds Sold $ 131 $ 12 United States Treasury Securities 139 398 Obligations of States & Political Subdivisions (tax exempt) 141 157 Mortgage-Backed Securities 2,756 1,445 U.S. Government Agency Obligations 654 545 Corporate Bonds & Other Securities 15 72 Loans 15,624 17,264 ----------- ----------- Total Interest Income 19,460 19,893 INTEREST EXPENSE Savings, N.O.W.'s & Money Market Deposits 1,613 2,121 Time Certificates of $100,000 or more 255 345 Other Time Deposits 2,597 3,632 Federal Funds Purchased -- 70 Interest on Other Borrowings -- 375 ----------- ----------- Total Interest Expense 4,465 6,543 Net-interest Income 14,995 13,350 Provision for Possible Loan Losses 300 405 ----------- ----------- Net-interest Income After Provision for Possible Loan Losses 14,695 12,945 OTHER INCOME Service Charges on Deposit Accounts 1,329 1,281 Other Service Charges, Commissions & Fees 322 311 Fiduciary Fees 285 240 Other Operating Income 284 193 Net Gain on Sale of Securities -- 148 ----------- ----------- Total Other Income 2,220 2,173 OTHER EXPENSE Salaries & Employee Benefits 5,045 4,654 Net Occupancy Expense 675 719 Equipment Expense 596 562 Other Real Estate Expense -- 10 Other Operating Expense 2,198 1,983 ----------- ----------- Total Other Expense 8,514 7,928 Income Before Provision for Income Taxes 8,401 7,190 Provision for Income Taxes 3,340 2,787 ----------- ----------- NET INCOME $ 5,061 $ 4,403 =========== =========== Average: Common Shares Outstanding 11,767,980 11,900,940 Dilutive Stock Options 40,656 29,816 ----------- ----------- Average Total Common Shares and Dilutive Options 11,808,636 11,930,756 EARNINGS PER COMMON SHARE Basic $ 0.43 $ 0.37 Diluted $ 0.43 $ 0.37
See accompanying notes to consolidated financial statements. 5 SUFFOLK BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands of dollars, except share and per share data)
For the Three Months Ended March 31, March 31, 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES NET INCOME $ 5,061 $ 4,403 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH Provision for Possible Loan Losses 300 405 Depreciation & Amortization 506 486 Amortization of Excess Cost Over Fair Value of Net Assets Acquired -- 90 Accretion of Discounts (214) (290) Amortization of Premiums 421 105 (Increase) Decrease in Accrued Interest Receivable (155) 428 Decrease (Increase) in Other Assets 1,914 (1,931) Decrease in Accrued Interest Payable (873) (765) Increase (Decrease) in Other Liabilities 2,521 (400) Net Security Gains -- (148) -------- -------- Net Cash Provided by Operating Activities 9,481 2,383 CASH FLOWS FROM INVESTING ACTIVITIES Principal Payments on Investment Securities 5,337 346 Proceeds from Sale of Investment Securities, Available for Sale -- 715 Maturities of Investment Securities; Available for Sale -- 1,160 Purchases of Investment Securities; Available for Sale (249) (834) Maturities of Investment Securities; Held to Maturity -- 25,000 Purchases of Investment Securities; Held to Maturity (21,459) (22,946) Loan Disbursements & Repayments, Net 3,231 (20,537) Purchases of Premises & Equipment, Net (2,437) (448) Disposition of Other Real Estate Owned -- 175 -------- -------- Net Cash Used in Investing Activities (15,577) (17,369) CASH FLOWS FROM FINANCING ACTIVITIES Net Decrease in Deposit Accounts (8,414) (40,810) Net Payments for Other Borrowings -- 44,900 Dividends Paid to Shareholders (1,648) (1,664) Treasury Shares Acquired (1,379) (1,234) Stock Options Exercised -- 51 -------- -------- Net Cash (Used In) Provided by Financing Activities (11,441) 1,243 Net Decrease in Cash & Cash Equivalents (17,537) (13,743) Cash & Cash Equivalents Beginning of Period 78,526 73,284 -------- -------- Cash & Cash Equivalents End of Period $ 60,989 $ 59,541 ======== ========
See accompanying notes to consolidated financial statements. 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 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, 2001. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results of operations to be expected for the remainder of the year. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the Three-Month Periods ended March 31, 2002 and 2001 Net Income Net income was $5,061,000 for the quarter, ahead 14.9 percent from $4,403,000 posted during the same period last year. Earnings per share for the quarter were $0.43 versus $0.37, a gain of 16.2 percent. Interest Income Interest income was $19,460,000 for the first quarter of 2002, down 2.2 percent from $19,893,000 posted for the same quarter in 2001. Average net loans during the first quarter of 2002 totaled $781,643,000 compared to $770,283,000 for the same period of 2001. During the first quarter of 2002, the yield was 7.30 percent (taxable-equivalent) on average earning assets of $1,070,705,000 down from 8.44 percent on average earning assets of $939,119,000 during the first quarter of 2001. 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 2002 was $4,465,000, down 31.8 percent from $6,543,000 for the same period of 2001. During the first quarter of 2002, the cost of funds was 2.34 percent (taxable-equivalent) on average interest-bearing liabilities of $764,115,000 down from 3.90 percent on average interest-bearing liabilities of $670,561,000 during the first quarter of 2001. Interest expense decreased primarily as a result of decreases in market rates of interest, and as average demand deposits comprised 27.2 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. 7 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 2002 was $14,695,000, up 13.5 percent from $12,945,000 during the same period of 2001. The net interest margin for the quarter, on a fully taxable-equivalent basis, was 5.63 percent compared to 5.68 percent for the same period of 2001. The following table details the components of Suffolk's net interest income on a taxable-equivalent basis: (dollars in thousands)
-------------------------------------------------------------------------------------------------------------------- March 31, 2002 2001 -------------------------------------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS -------------------------------------------------------------------------------------------------------------------- U.S. treasury securities $ 9,781 $ 142 5.82 % $ 29,536 $ 406 5.50 % Collateralized mortgage obligations 175,222 2,626 6.00 82,646 1,445 6.99 Mortgage backed securities 9,301 130 5.60 -- -- -- Obligations of states and political subdivisions 13,701 214 6.24 12,628 239 7.56 U.S. govt. agency obligations 49,143 654 5.32 39,730 545 5.48 Corporate bonds and other securities 1,850 15 3.15 3,468 71 8.23 Federal funds sold and securities purchased under agreements to resell 30,064 131 1.75 828 12 5.86 Loans, including non-accrual loans Commercial, financial agricultural loans 132,328 2,152 6.51 135,636 3,212 9.17 Commercial real estate mortgages 167,926 3,614 8.61 156,154 3,502 8.89 Real estate construction loans 29,725 689 9.27 34,747 912 10.50 Residential mortgages (1st and 2nd liens) 91,202 1,851 8.12 87,973 1,897 8.61 Home equity loans 32,373 508 6.28 21,733 549 9.94 Consumer loans 325,627 6,810 8.37 333,552 7,192 8.58 Other loans (overdrafts) 2,462 -- -- 488 -- -- -------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $1,070,705 $ 19,536 7.30 % $ 939,119 $ 19,982 8.44 % ==================================================================================================================== Cash and due from banks $ 51,635 $ 62,989 Other non-interest-earning assets 50,017 47,767 -------------------------------------------------------------------------------------------------------------------- Total assets $1,172,357 $1,049,875 -------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES -------------------------------------------------------------------------------------------------------------------- Savings, N.O.W.'s and money market deposits $ 464,241 $ 1,613 1.39 % $ 360,916 $ 2,121 2.35 % Time deposits 299,779 2,852 3.81 277,511 3,976 5.73 -------------------------------------------------------------------------------------------------------------------- Total savings and time deposits 764,020 4,465 2.34 638,427 6,097 3.82 Federal funds purchased and securities sold under agreement to repurchase 95 -- 1.63 6,182 70 4.52 Other borrowings -- -- -- 25,952 375 5.79 -------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 764,115 $ 4,465 2.34 % $ 670,561 $ 6,542 3.90 % ==================================================================================================================== Rate spread 4.96 % 4.54 % Non-interest-bearing deposits $ 286,010 $ 248,561 Other non-interest-bearing liabilities 25,617 43,226 -------------------------------------------------------------------------------------------------------------------- Total liabilities $1,075,742 $ 962,348 Stockholders' equity 96,615 87,527 -------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,172,357 $1,049,875 Net-interest income (taxable-equivalent basis) and effective interest rate differential $ 15,071 5.63 % $ 13,440 5.68 % Less: taxable-equivalent basis adjustment (76) (90) -------------------------------------------------------------------------------------------------------------------- Net-interest income $ 14,995 $ 13,350 ====================================================================================================================
8 Other Income Other income increased to $2,220,000 for the three months compared to $2,173,000 the previous year. Service charges on deposits were up 3.7 percent. Service charges, including commissions and fees other than for deposits, increased by 3.5 percent. Trust revenue was up 18.8 percent. Other operating income increased by 47.2 percent. Other Expense Other expense for the first quarter of 2002 was $8,514,000, up 7.4 percent from $7,928,000 for the comparable period in 2001. Employee compensation increased by 8.4 percent, net occupancy decreased by 6.1 percent, equipment expense increased by 6.0 percent, while other operating expense increased by 10.8 percent. Capital Resources Stockholders' equity totaled $97,384,000 on March 31, 2002, an increase of 0.6 percent from $96,837,000 on December 31, 2001. The ratio of equity to assets was 8.4 percent at March 31, 2002 and 8.3 percent at December 31, 2001. 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, 2002 Total capital (to risk-weighted assets) $105,544 11.99% $70,438 8.00% $88,048 10.00% Tier 1 capital (to risk-weighted assets) 96,710 10.98% 35,219 4.00% 52,829 6.00% Tier 1 capital (to average assets) 96,710 8.26% 46,856 4.00% 58,571 5.00% --------------------------------------------------------------------------------------------------------- As of December 31, 2001 Total capital (to risk-weighted assets) $105,136 11.91% $70,641 8.00% $88,301 10.00% Tier 1 capital (to risk-weighted assets) 96,311 10.91% 35,320 4.00% 52,980 6.00% Tier 1 capital (to average assets) 96,311 8.92% 43,194 4.00% 53,992 5.00% =========================================================================================================
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. 9 The following table presents information about the allowance for possible loan losses: (in thousands of dollars except ratios)
----------------------------------------------------------------------------------------------------------- For the For the three months ended last 12 Mar. 31 Dec. 31 Sept. 30 June 30 months 2002 2001 2001 2001 ----------------------------------------------------------------------------------------------------------- Allowance for possible loan losses Beginning balance 8,061 8,825 8,750 8,446 8,061 Total charge-offs 1,048 386 291 169 202 Total recoveries 382 95 37 68 182 Provision for possible loan losses 1,439 300 329 405 405 ----------------------------------------------------------------------------------------------------------- Ending balance 8,834 8,834 8,825 8,750 8,446 =========================================================================================================== Coverage ratios Loans, net of discounts: average 781,961 781,643 784,435 777,266 784,498 at end of period 793,841 792,588 796,110 789,692 796,974 Non-performing assets 2,289 2,319 1,968 2,290 2,578 Non-performing assets/total loans (net of discount) 0.29% 0.29% 0.25% 0.29% 0.32% Net charge-offs/average net loans (annualized) 0.09% 0.15% 0.13% 0.05% 0.01% Allowance/non-accrual, restructured, & OREO 384.77% 380.94% 448.42% 382.10% 327.62% Allowance for loan losses/net loans 1.10% 1.11% 1.11% 1.11% 1.06% -----------------------------------------------------------------------------------------------------------
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 repriced 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, 2001. 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. Recent Accounting Pronouncements Suffolk implemented SFAS No. 142, "Goodwill and Other Intangible Assets" on January 1, 2002. As of March 31, 2002, 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 2002, Suffolk determined that there was no impairment of the goodwill recorded on its books and no expense was recorded. Suffolk recorded expense of $90,483 to amortize goodwill during the first quarter of 2001. 10 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 9, 2002 at the East Wind in Wading River, New York. Three directors were elected for a term of three years and the appointment of Arthur Andersen, L.L.P. as independent auditors for the fiscal year ending December 31, 2002 was ratified. The following table details the vote: Shares Voted ---------------------------------- Nominees for Director For Withheld --------------------- --- -------- Bruce Collins 9,969,129 61,866 --------- ------ Joseph A. Deerkoski 9,976,207 54,788 --------- ------ Edward J. Merz 9,539,800 491,195 --------- ------- Ratification of Independent Auditors For Against Abstain ------------------------------------ --- ------- ------- Arthur Andersen, L.L.P. 6,922,506 2,711,701 396,777 ----------------------- --------- --------- ------- Summary ----------------------------------- outstanding # voted % voted ----------- ------- ------- at record date 11,770,596 10,030,995 85.2% -------------- ---------- ---------- ----- Item 6. Exhibits and Reports on Form 8-K. None 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, 2002 /s/ Thomas S. Kohlmann ----------------------------- Thomas S. Kohlmann President & Chief Executive Officer Date: May 14, 2002 /s/ J. Gordon Huszagh ------------------------------ J. Gordon Huszagh Executive Vice President & Chief Financial Officer 11