10-Q 1 d10q.htm FOR QUARTER ENDED MARCH 31, 2006 For Quarter Ended March 31, 2006
Table of Contents

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, 2006

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

incorporation or organization)

 

(I.R.S. Employer

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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.    YES  ¨    NO  x

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

The aggregate market value of the common equity held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed first fiscal quarter was $351.9 million.

10,300,606 SHARES OF COMMON STOCK OUTSTANDING AS OF May 1, 2006

 



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SUFFOLK BANCORP AND SUBSIDIARIES

 

                 Page

Part I - Financial Information (unaudited)

  
  Item 1. Financial Statements   
   

Consolidated Statements of Condition

   4
   

Consolidated Statements of Income, For the Three Months Ended March 31, 2006 and 2005

   5
   

Consolidated Statements of Cash Flows, For the Three Months Ended March 31, 2006 and 2005

   6
   

Notes to the Unaudited Consolidated Financial Statements

   7
     

(1) Basis of Presentation

   7
     

(2) Stock-based Compensation

   7
     

(3) Recent Accounting Pronouncements

   9
 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   10
 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   15
 

Item 4. Controls and Procedures

   15

Part II - Other Information

  
 

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

   15
 

Item 4. Submission of Matters to a Vote of Security Holders

   16
 

Item 6. Exhibits and Reports on Form 8-K

   16
 

Signatures

   16
 

Certifications of Periodic Report

  

 

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SUFFOLK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

(in thousands of dollars except for share and per share data)

 

     March 31, 2006     December 31, 2005  
     unaudited        

ASSETS

    

Cash & Due From Banks

   $ 50,975     $ 48,530  

Investment Securities:

    

Available for Sale, at Fair Value

     393,384       400,038  

Held to Maturity (Fair Value of $18,437 and $17,885, respectively) Obligations of States & Political Subdivisions

     11,313       11,378  

Federal Reserve Bank Stock

     638       638  

Federal Home Loan Bank Stock

     5,851       5,158  

Corporate Bonds & Other Securities

     100       100  
                

Total Investment Securities

     411,286       417,312  
                

Total Loans

     924,256       905,037  

Less: Allowance for Loan Losses

     10,150       9,828  
                

Net Loans

     914,106       895,209  
                

Premises & Equipment, Net

     22,571       22,792  

Accrued Interest Receivable, Net

     7,041       6,747  

Excess of Cost Over Fair Value of Net Assets Acquired

     814       814  

Other Assets

     18,117       16,879  
                

TOTAL ASSETS

   $ 1,424,910     $ 1,408,283  
                

LIABILITIES & STOCKHOLDERS’ EQUITY

    

Demand Deposits

   $ 401,498     $ 424,320  

Saving, N.O.W. & Money Market Deposits

     509,110       521,156  

Time Certificates of $100,000 or more

     21,943       15,825  

Other Time Deposits

     201,252       197,406  
                

Total Deposits

     1,133,803       1,158,707  

Federal Funds Purchased

     8,000       7,700  

Federal Home Loan Bank Borrowings

     98,400       83,000  

Repurchase Agreements

     64,675       37,275  

Dividend Payable on Common Stock

     2,272       2,081  

Accrued Interest Payable

     2,303       1,722  

Other Liabilities

     14,540       15,797  
                

TOTAL LIABILITIES

     1,323,993       1,306,282  
                

STOCKHOLDERS’ EQUITY

    

Common Stock (par value $2.50; 15,000,000 shares authorized; 10,328,706 and 10,406,721 shares outstanding at March 31, 2006 and December 31, 2005, respectively)

     33,884       33,884  

Surplus

     19,769       19,440  

Treasury Stock at Par (3,255,030 and 3,147,015 shares, respectively)

     (8,062 )     (7,868 )

Retained Earnings

     59,180       58,823  
                
     104,771       104,279  

Accumulated Other Comprehensive Loss, Net of Tax

     (3,854 )     (2,278 )
                

TOTAL STOCKHOLDERS’ EQUITY

     100,917       102,001  
                

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 1,424,910     $ 1,408,283  
                

See accompanying notes to consolidated financial statements.

 

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SUFFOLK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands of dollars except for share and per share data)

 

     For the Three Months Ended
     March 31, 2006    March 31, 2005
     unaudited    unaudited

INTEREST INCOME

     

Federal Funds Sold

   $ 8    $ 10

United States Treasury Securities

     95      96

Obligations of States & Political Subdivisions

     829      409

Mortgage-Backed Securities

     2,030      2,657

U.S. Government Agency Obligations

     1,222      1,223

Corporate Bonds & Other Securities

     94      31

Loans

     16,261      13,382
             

Total Interest Income

     20,539      17,808

INTEREST EXPENSE

     

Saving, N.O.W. & Money Market Deposits

     1,047      822

Time Certificates of $100,000 or more

     197      117

Other Time Deposits

     1,454      1,013

Federal Funds Purchased and Repurchase Agreements

     662      102

Interest on Other Borrowings

     1,024      260
             

Total Interest Expense

     4,384      2,314

Net-interest Income

     16,155      15,494

Provision for Loan Losses

     300      300
             

Net-interest Income After Provision for Loan Losses

     15,855      15,194

OTHER INCOME

     

Service Charges on Deposit Accounts

     1,398      1,358

Other Service Charges, Commissions & Fees

     566      559

Fiduciary Fees

     292      284

Other Operating Income

     130      137
             

Total Other Income

     2,386      2,338

OTHER EXPENSE

     

Salaries & Employee Benefits

     6,058      5,524

Net Occupancy Expense

     1,032      1,019

Equipment Expense

     504      559

Other Operating Expense

     2,266      2,191
             

Total Other Expense

     9,860      9,293

Income Before Provision for Income Taxes

     8,381      8,239

Provision for Income Taxes

     3,157      3,107
             

NET INCOME

   $ 5,224    $ 5,132
             

Average: Common Shares Outstanding

     10,355,554      10,764,150

Dilutive Stock Options

     34,697      32,393
             

Average Total Common Shares and Dilutive Options

     10,390,251      10,796,543

EARNINGS PER COMMON SHARE

     

Basic

   $ 0.50    $ 0.48

Diluted

   $ 0.50    $ 0.48

See accompanying notes to consolidated financial statements.

 

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SUFFOLK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of dollars)

 

     For the Three Months Ended  
     March 31, 2006     March 31, 2005  
     unaudited     unaudited  

NET INCOME

   $ 5,224     $ 5,132  

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH

    

CASH FLOWS FROM OPERATING ACTIVITIES

    

Provision for Loan Losses

     300       300  

Depreciation & Amortization

     529       564  

Stock Based Compensation

     55       —    

Accretion of Discounts

     (62 )     (74 )

Amortization of Premiums

     757       982  

Increase in Accrued Interest Receivable

     (293 )     (49 )

(Increase) Decrease in Other Assets

     (963 )     2,327  

Increase in Accrued Interest Payable

     580       49  

(Decrease) Increase in Other Liabilities

     (161 )     2,779  
                

Net Cash Provided by Operating Activities

     5,966       12,010  
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Principal Payments on Investment Securities Available for Sale

     9,548       14,863  

Purchases of Investment Securities; Available for Sale

     (6,263 )     (11,618 )

Maturities of Investment Securities; Held to Maturity

     85       84  

Purchases of Investment Securities; Held to Maturity

     (713 )     (677 )

Loan Disbursements & Repayments, Net

     (19,197 )     (35,222 )

Purchases of Premises & Equipment, Net

     (308 )     (236 )
                

Net Cash Used in Investing Activities

     (16,848 )     (32,806 )
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net Decrease in Deposit Accounts

     (24,903 )     (28,101 )

Dividends Paid to Shareholders

     (2,081 )     (2,061 )

Treasury Shares Acquired

     (2,789 )     (6,939 )

Net Proceeds from Other Borrowings

     43,100       60,875  
                

Net Cash Provided by Financing Activities

     13,327       23,774  
                

Net Increase in Cash & Cash Equivalents

     2,445       2,978  

Cash & Cash Equivalents Beginning of Period

     48,530       40,053  
                

Cash & Cash Equivalents End of Period

   $ 50,975     $ 43,031  
                

See accompanying notes to consolidated financial statements.

 

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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, 2005.

The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

(2) Stock-based Compensation

At March 31 2006, Suffolk had one stock-based employee compensation plan, a Stock Option Plan (“the Plan”), under which 1,200,000 shares of Suffolk’s common stock were originally reserved for issuance to key employees, and of which 1,061,500 remained available at that date. Options are awarded by a committee appointed by the Board of Directors. The Plan provides that the option price shall not be less than the fair value of the common stock on the date the option is granted. All options are exercisable for a period of ten years or less. The Plan provides for but does not require the grant of stock appreciation rights that the holder may exercise instead of the underlying option. When the stock appreciation right is exercised, the underlying option is canceled. The optionee receives shares of common stock with a fair market value equal to the excess of the fair value of the shares subject to the option at the time of exercise (or the portion thereof so exercised) over the aggregate option price of the shares set forth in the option agreement. The exercise of stock appreciation rights is treated as the exercise of the underlying option. Options vest after one year and expire after not more than ten years. Prior to January 1, 2006, Suffolk accounted for that plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations. No stock-based employee compensation costs were 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.

On January 1, 2006 Suffolk adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). This statement supersedes APB No. 25. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. This statement was adopted using the modified prospective method of application, which requires the recognition of compensation expense on a prospective basis. Accordingly, prior periods have not been restated. This statement also revised SFAS No. 123 “Accounting for Stock-Based Compensation”, which superseded “APB No. 25”. SFAS 123 required the disclosure of the effect on net income and earnings per share using fair value recognition provisions. During the three months ended March 31, 2006, $32,000 of compensation expense, net of a tax benefit of $23,000, was recorded for stock-based compensation. As of March 31, 2006, there was $197,000 of total unrecognized compensation cost, net of estimated forfeitures, related to non-vested options under the Plan. That cost is expected to be recognized over a weighted-average period of 6.59 months.

The following table illustrates the effect on net income under the fair value recognition provisions of SFAS 123:

 

Quarter Ended March 31,

        2005  

Net income (in thousands)

   As reported    $ 5,132  
  

Stock-based compensation

costs determined under fair

value method for all awards

     (17 )
           
   pro-forma      5,115  

Earnings per share (Basic)

   As reported      0.48  
   pro forma      0.48  

Earnings per share (Diluted)

   As reported      0.48  
   pro-forma      0.47  
           

 

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The following table presents the options granted, exercised, or expired during the quarter ended March 31, 2006:

 

      Shares    Wtd. Avg. Exercise

Balance at December 31, 2005

   110,500    $ 23.32

Options granted

   25,000      34.95

Options exercised

   —        —  

Options expired or terminated

   —        —  
           

Balance at March 31, 2006

   135,500    $ 25.46
           

The following table presents certain information about the valuation of options granted during the quarter ended March 31, 2006 and the year ended December 31, 2005:

 

At, or during,

   Quarter ended
3/31/06
    Year ended
12/31/05
 

Average remaining contractual life in years

     6.73       6.28  

Exercisable options (vested)

     110,500       87,500  

Weighted average fair value of options (Black-Scholes model) at date of grant:

   $ 9.44     $ 8.11  

Black-Scholes Assumptions:

    

Risk-free interest rate

     4.36 %     4.19 %

Expected dividend yield

     2.36 %     2.24 %

Expected life in years

     10       10  

Expected volatility

     22.00 %     20.50 %

The following table details contractual weighted-average lives of outstanding options at various prices:

 

     By range of exercise prices

from

     13.13      31.25      34.39

to

     15.50      31.83      34.95
                    

Outstanding stock options

     56,000      38,500      41,000

Weighted-average remaining life

     4.14      8.05      9.05

Weighted-average exercise price

   $ 14.54    $ 31.48    $ 34.73

Exercisable stock options

     56,000      38,500      16,000

Weighted-average remaining life

     4.14      8.05      7.84

Weighted-average exercise price

   $ 14.54    $ 31.48    $ 34.39
          Weighted-average

At all prices

   Options    price    life (yrs)

Total outstanding

     135,500    $ 25.46      6.73

Total exerciseable

     110,500    $ 23.32      6.03

 

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(3) Recent Accounting Pronouncements

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, 2003. The maximum potential undiscounted amount of future payments of these letters of credit as of March 31, 2006 is $7,279,000 and they expire as follows:

 

    2006

     5,260,000

    2007

     1,533,000

    2010

     312,000

    2011

     102,000

Thereafter

     72,000
      
   $ 7,279,000
      

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 $11,000 for loan losses based on the letters of credit outstanding on March 31, 2006.

In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed its staff to issue proposed FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final. The final FSP will supersede EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The final FSP (re-titled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”) will replace the guidance set forth in paragraphs 10-18 of Issue 03-1 with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities;” SEC Staff Accounting Bulletin No. 59, “Accounting for Non-current Marketable Equity Securities;” and APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” FASB Staff Position No. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (the “FSP”), were issued on November 3, 2005 and addresses the determination of when an investment is considered impaired; whether the impairment is other than temporary; and how to measure an impairment loss. The FSP replaces the impairment guidance in EITF Issue No. 03-1 with references to existing authoritative literature concerning other-than-temporary determinations, principally Statement of Financial Accounting Standards (“SFAS”) No. 115 and SEC Staff Accounting Bulletin 59. Under the FSP, impairment losses must be recognized in earnings equal to the entire difference between the security’s cost and its fair value at the financial statement date, without considering partial recoveries subsequent to that date. The FSP also requires that an investor recognize an other-than-temporary impairment loss when a decision to sell a security has been made and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale. The FSP is effective for reporting periods beginning after December 15, 2005. Suffolk has adopted the provisions of FSP EITF 03-1a which did not have a material impact on its consolidated financial condition, consolidated results of operations, or consolidated financial statement disclosures.

In May 2005, FASB issued Statement No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement changes the requirements for the accounting for and reporting of a change in accounting principle. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new principle. Statement No. 154 requires retrospective application to prior periods financial statements of changes in accounting principle, where practicable, and limits retrospective application of a change to direct effects of the change in accounting principle. Indirect effects of a change in accounting principle should be recognized in the period of accounting change. This statement is effective for accounting changes made in fiscal years after December 15, 2005. Suffolk has adopted the provisions of FAS. No. 154 which did not have a material effect on either its consolidated financial position or consolidated results of operations.

 

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In March 2006, FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140”. This statement addresses the recognition and measurement of separately recognized servicing assets and liabilities. It requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations. Statement No. 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. An entity is permitted to choose from two measurement methods for each class of separately recognized servicing assets and servicing liabilities: an amortization method or fair value measurement method. This statement also permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights. Separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities are required. This statement is effective for fiscal years beginning after September 15, 2006. Suffolk is currently evaluating the impact of FAS. No. 156 on its financial condition, results of operations and disclosures.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

For the Three-Month Periods ended March 31, 2006 and 2005

Recent Developments

Interest rates have increased throughout the year. This lead to an increase in net interest margin, which increased to 5.05 percent in the first quarter of 2006, from 4.93 percent, in the first quarter of 2005.

Return on average equity increased, to 21.07 percent for the first quarter in 2006, up from 20.11 percent during the first quarter of 2005, and earnings-per-share increased from $.48 in the first quarter of 2005 to $.50 in the first quarter of 2006.

Key to maintaining performance was close management of the balance sheet. Steps included:

 

    Redirecting flow of investment from the consumer portfolio, comprised primarily of indirect automobile paper to the commercial and commercial real estate portfolios, as well as residential mortgages and construction loans.

 

    Pursuing ongoing program of capital management, which applies leverage to shareholders’ investment by means of the selective repurchase of shares, while maintaining “well-capitalized” status with regulatory agencies.

 

    Continuing emphasis on both personal and commercial demand deposits, in an unusually competitive environment. Demand deposits increased 8.6 percent quarter to quarter, while savings, N.O.W. and money market deposits declined by 13.1 percent.

Current Trends

 

    Consumer loans continue to come under increasing pressure with regard to term, rate, and volume in the face of the incentive programs of the major manufacturers.

 

    Commercial mortgages, commercial loans, as well as residential mortgages and construction loans, have more than made up for that decline.

 

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Net Income

Net income was $5,224,000 for the quarter, up 1.8 percent from $5,132,000 posted during the same period last year. Earnings per share for the quarter were $0.50 versus $0.48, an increase of 4.2 percent.

Interest Income

Interest income was $20,539,000 for the first quarter of 2006, up 15.3 percent from $17,808,000 posted for the same quarter in 2005. Average net loans during the first quarter of 2006 totaled $893,487,000 compared to $829,335,000 for the same period of 2005. During the first quarter of 2006, the yield was 6.39 percent (taxable-equivalent) on average earning assets of $1,308,590,000 up from 5.66 percent on average earning assets of $1,271,682,000 during the first quarter of 2005. Increases in interest income were attributable primarily to an increase in interest income on loans and obligations of states and political subdivisions.

Interest Expense

Interest expense for the first quarter of 2006 was $4,384,000, up 89.5 percent from $2,314,000 for the same period of 2005. During the first quarter of 2006, the cost of funds was 2.00 percent on average interest-bearing liabilities of $877,032,000, up from 1.09 percent on average interest-bearing liabilities of $850,072,000 during the first quarter of 2005. Interest expense increased primarily as a result of increases in market rates of interest, and increased interest on Federal funds purchased, repurchase agreements and other borrowings.

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 loan losses, is the largest component of Suffolk’s earnings. It was $16,155,000 for the first quarter of 2006, up 4.3 percent from $15,494,000 during the same period of 2005. The net interest margin for the quarter, on a fully taxable-equivalent basis, was 5.05 percent compared to 4.93 percent for the same period of 2005.

 

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The following table details the components of Suffolk’s net interest income on a taxable-equivalent basis: (in thousands of dollars)

 

March 31,

   2006     2005  
   Average
Balance
   Interest     Average
Rate
    Average
Balance
   Interest     Average
Rate
 

INTEREST-EARNING ASSETS

              

U.S. Treasury securities

   $ 9,323    $ 97     4.16 %   $ 9,471    $ 98     4.14 %

Collateralized mortgage obligations

     189,123      2,002     4.23       254,546      2,618     4.11  

Mortgage backed securities

     1,627      28     6.88       3,711      39     4.20  

Obligations of states and political subdivisions

     84,884      1,203     5.67       43,412      596     5.49  

U.S. govt. agency obligations

     123,182      1,222     3.97       126,334      1,223     3.87  

Corporate bonds and other securities

     6,348      94     5.92       3,086      31     4.02  

Federal funds sold and securities purchased under agreements to resell

     616      8     5.19       1,787      10     2.24  

Loans, including non-accrual loans

              

Commercial, financial & agricultural loans

     180,543      3,450     7.64       161,026      2,445     6.07  

Commercial real estate mortgages

     306,632      5,595     7.30       270,475      4,547     6.72  

Real estate construction loans

     68,509      1,590     9.28       51,771      1,014     7.83  

Residential mortgages (1st and 2nd liens)

     129,134      2,073     6.42       113,078      1,793     6.34  

Home equity loans

     80,778      1,510     7.48       74,135      1,066     5.75  

Consumer loans

     126,359      2,043     6.47       154,929      2,516     6.50  

Other loans (overdrafts)

     1,532      —       —         3,921      —       —    
                                          

Total interest-earning assets

   $ 1,308,590    $ 20,915     6.39 %   $ 1,271,682    $ 17,996     5.66 %
                                          

Cash and due from banks

   $ 46,870        $ 48,305     

Other non-interest-earning assets

     57,798          56,617     
                      

Total assets

   $ 1,413,258        $ 1,376,604     
                      

INTEREST-BEARING LIABILITIES

              

Saving, N.O.W. and money market deposits

   $ 502,803    $ 1,047     0.83 %   $ 587,015    $ 822     0.56 %

Time deposits

     222,238      1,651     2.97       207,973      1,130     2.17  
                                          

Total saving and time deposits

     725,041      2,698     1.49       794,988      1,952     0.98  

Federal funds purchased and securities sold under agreement to repurchase

     61,408      662     4.31       2,078      15     2.89  

Other borrowings

     90,583      1,024     4.52       53,006      347     2.62  
                                          

Total interest-bearing liabilities

   $ 877,032    $ 4,384     2.00 %   $ 850,072    $ 2,314     1.09 %
                                          

Rate spread

        4.39 %        4.57 %

Non-interest-bearing deposits

   $ 411,013        $ 394,773     

Other non-interest-bearing liabilities

     26,032          29,685     
                      

Total liabilities

   $ 1,314,077        $ 1,274,530     

Stockholders’ equity

     99,181          102,074     
                      

Total liabilities and stockholders’ equity

   $ 1,413,258        $ 1,376,604     

Net-interest income (taxable-equivalent basis) and effective interest rate differential

      $ 16,531     5.05 %      $ 15,682     4.93 %

Less: taxable-equivalent basis adjustment

        (376 )          (188 )  
                                          

Net-interest income

      $ 16,155          $ 15,494    
                                          

Other Income

Other income increased to $2,386,000 for the three months compared to $2,338,000 the previous year. Service charges on deposits were up 2.9 percent. Service charges, including commissions and fees other than for deposits, increased by 1.3 percent. Trust revenue was up 2.8 percent. Other operating income decreased by 5.1 percent. There were no net gains on the sale of securities for the first quarter of 2006 and 2005.

Other Expense

Other expense for the first quarter of 2006 was $9,860,000, up 6.1 percent from $9,293,000 for the comparable period in 2005. Employee compensation increased by 9.7 percent, net occupancy expense increased 1.3 percent owing primarily to increased rent and building maintenance, equipment expense decreased by 9.8 percent, and other operating expense increased by 3.4 percent.

 

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In accordance with the requirements of Statement of Financial Accounting Standards 132R (“SFAS 132R”), Suffolk presents information concerning net periodic defined benefit pension expense for the three months ended March 31, 2006 and 2005, including the following components:

 

     3 months
3/31/2006
    3 months
3/31/2005
 

Service cost

   $ 350,337     $ 298,660  

Interest cost

     339,996       312,648  

Expected return on plan assets

     (444,960 )     (392,810 )

Amortization of prior service cost

     (995 )     (3,595 )

Amortization of unrecognized net actuarial loss

     66,802       48,787  
                

Net periodic benefit expense

   $ 311,180     $ 263,690  
                

Management currently expects to contribute approximately $1,431,000 to the pension plan in 2006. Management is currently evaluating the impact of the Pension Funding Equity Act enacted in April 2004 on projected funding. There were no contributions required to be made to the plan in the three months ended March 31, 2006.

Capital Resources

Stockholders’ equity totaled $100,917,000 on March 31, 2006, a decrease of 1.1 percent from $102,001,000 on December 31, 2005. The ratio of equity to assets was 7.1 percent at March 31, 2006 and 7.2 percent at December 31, 2005. The following table details amounts and ratios of Suffolk’s regulatory capital: (in thousands of dollars except ratios)

 

     Actual     For capital
adequacy
   

To be well capitalized

under prompt corrective
action provisions

 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  

As of March 31, 2006

               

Total Capital (to risk-weighted assets)

   $ 113,665    10.37 %   $ 87,672    8.00 %   $ 109,590    10.00 %

Tier 1 Capital (to risk-weighted assets)

     103,837    9.48 %     43,836    4.00 %     65,754    6.00 %

Tier 1 Capital (to average assets)

     103,837    7.35 %     56,493    4.00 %     70,616    5.00 %
                                       

As of December 31, 2005

               

Total Capital (to risk-weighted assets)

   $ 113,172    10.91 %   $ 82,984    8.00 %   $ 103,730    10.00 %

Tier 1 Capital (to risk-weighted assets)

     103,344    9.96 %     41,492    4.00 %     62,238    6.00 %

Tier 1 Capital (to average assets)

     103,344    7.52 %     54,943    4.00 %     68,679    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 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 loan losses.

The provision for the allowance for loan losses was $300,000 for the first quarter of 2006, and the comparable period in 2005.

 

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The following table presents information about the allowance for loan losses: (in thousands of dollars except for ratios)

 

     For the
last 12
months
    For the three months ended  
       Mar. 31
2006
    Dec. 31
2005
    Sept. 30
2005
    June 30
2005
 

Allowance for loan losses

          

Beginning balance

   $ 8,442     $ 9,828     $ 9,384     $ 8,887     $ 8,442  

Total charge-offs

     (482 )     (151 )     (111 )     (125 )     (95 )

Total recoveries

     615       173       105       172       165  

Provision for loan losses

     1,575       300       450       450       375  
                                        

Ending balance

   $ 10,150     $ 10,150     $ 9,828     $ 9,384     $ 8,887  
                                        

Coverage ratios

          

Loans, net of discounts: average

   $ 879,408     $ 903,490     $ 878,617     $ 867,818     $ 867,705  

at end of period

     898,408       924,256       905,037       883,321       881,017  

Non-performing assets

     4,660       4,182       4,459       5,168       4,831  

Non-performing assets/total loans (net of discount)

     0.52 %     0.45 %     0.49 %     0.59 %     0.55 %

Net charge-offs/average net loans (annualized)

     (0.05 )%     (0.14 )%     0.00 %     (0.02 )%     -0.03 %

Allowance/non-accrual, restructured, & OREO

     207.16 %     242.71 %     220.41 %     181.58 %     183.96 %

Allowance for loan losses/net loans

     1.06 %     1.10 %     1.09 %     1.06 %     1.01 %

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 Loan Losses

Suffolk considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The balance in the allowance for loan losses is determined based on management’s review and evaluation of the loan portfolio in relation to past loss experience, the size and composition of the portfolio, current economic events and conditions, and other pertinent factors, including management’s assumptions as to future delinquencies, recoveries and losses. All of these factors may change significantly. To the extent actual performance differs from management’s estimates, additional provisions for loan losses may be required that would reduce earnings in future periods.

Income Taxes

Under the liability method, deferred tax assets and liabilities are determined by the difference between the financial statement, and the tax bases of assets and liabilities. Deferred tax assets are subject to management’s judgment of available evidence that future realization is more likely than not. If management determines that Suffolk may be unable to realize all or part of the net deferred tax assets in the future, a direct charge to income tax expense may be required to reduce the recorded value of the net deferred tax asset to the amount management expects can be realized.

 

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Suffolk originates and invests in interest-earning assets and solicits interest-bearing deposit accounts. Suffolk’s operations are subject to market risk resulting from fluctuations in interest rates to the extent that there is a difference between the amounts of interest-earning assets and interest-bearing liabilities that are prepaid, withdrawn, mature, or re-priced in any given period of time. Suffolk’s earnings or the net value of its portfolio (the present value of expected cash flows from liabilities) will change when interest rates change. The principal objective of Suffolk’s asset/liability management program is to maximize net interest income while keeping risks acceptable. These risks include both the effect of changes in interest rates, and risks to liquidity. The program also provides guidance to management in funding Suffolk’s investment in loans and securities. Suffolk’s exposure to interest-rate risk has not changed substantially since December 31, 2005.

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 March 31, 2006, 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.

PART II

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table details repurchases of common stock during the first quarter of 2006:

 

Quarter ending

   Total shares repurchased    Average price per share    Aggregate cost

March 31, 2006

   78,015    $ 35.75    $ 2,788,736
                  

 

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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 11, 2006 at the Administrative Center of the Suffolk County National Bank in Riverhead, New York. Three directors were elected for a term of three years and one for a term of one year; and the appointment of Grant Thornton, L.L.P. as independent auditors for the fiscal year ending December 31, 2006 was ratified. The following table details the vote:

 

     Shares Voted  

Nominees for Director for a term of 3 years

   For    Withheld       

James E. Danowski

   7,897,549    67,663   

Thonas S. Kohlmann

   7,901,375    63,837   

Terence X. Meyer

   7,672,633    292,580   

Ratification of Independent Auditors

   For    Against    Abstain  

Grant Thornton, L.L.P.

   7,771,505    79,009    114,698  
                
     Summary  
     Outstanding    # Voted    % Voted  

At Date of Record

   10,336,906    7,965,212    77.1 %
                

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

The following reports were filed on Form 8-K during the three month period ended March 31, 2006.

Current Report on Form 8-K – January 17, 2006 – Press Release of January 17, 2006, “Bancorp Announces Earnings for the Fourth Quarter and the Full Year” - Earnings release for the three months ended December 31, 2005.

Current Report on Form 8-K – February 28, 2006 – Press Release of February 28, 2006, “Suffolk Bancorp Announces Regular Quarterly Dividend”.

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 5, 2006  

/s/ Thomas S. Kohlmann

  Thomas S. Kohlmann
  President & Chief Executive Officer
Date: May 5, 2006  

/s/ J. Gordon Huszagh

  J. Gordon Huszagh
  Executive Vice President & Chief Financial Officer

 

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