10-Q 1 d57318_10q.txt 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