Suffolk Bancorp (SCNB) 10-Q 2004 Q2 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 June 30, 2004

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 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. Yesx No¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act). 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.

10,866,219 SHARES OF COMMON STOCK OUTSTANDING AS OF JULY 30, 2004

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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 June 30, 2004 and 2003	5
		Consolidated Statements of Income, For the Six Months Ended June 30, 2004 and 2003	6
		Statements of Cash Flows, For the Six Months Ended June 30, 2004 and 2003	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 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	14
	Item 6.	Exhibits and Reports on Form 8-K	15
	Signatures		15
	Certifications of Periodic Report		16

Page 3

SUFFOLK BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

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

	June 30, 2004			December 31, 2003
	unaudited
ASSETS
Cash & Due From Banks	$	83,417		$	52,053
Federal Funds Sold		78,400			4,300
Investment Securities:
Available for Sale, at Fair Value		377,652			376,188
Held to Maturity (Fair Value of $12,369 and $13,047, respectively)
Obligations of States & Political Subdivisions		9,300			12,369
Federal Reserve Bank Stock		638			638
Federal Home Loan Bank Stock		1,823			1,535
Corporate Bonds & Other Securities		100			100
Total Investment Securities		389,513			390,830
Total Loans		833,185			839,061
Less: Allowance for Loan Losses		9,851			8,551
Net Loans		823,334			830,510
Premises & Equipment, Net		22,562			22,780
Accrued Interest Receivable, Net		5,197			5,869
Excess of Cost Over Fair Value of Net Assets Acquired		814			814
Other Assets		21,128			21,601
TOTAL ASSETS	$	1,424,365		$	1,328,757
LIABILITIES & STOCKHOLDERS’ EQUITY
Demand Deposits	$	446,261		$	364,219
Saving, N.O.W. & Money Market Deposits		642,841			587,553
Time Certificates of $100,000 or more		18,350			21,947
Other Time Deposits		200,099			213,777
Total Deposits		1,307,551			1,187,496
Federal Home Loan Bank Borrowings		—			20,000
Dividend Payable on Common Stock		2,069			2,080
Accrued Interest Payable		726			800
Other Liabilities		14,381			18,211
TOTAL LIABILITIES		1,324,727			1,228,587
STOCKHOLDERS’ EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized; 10,883,719 and 10,949,283 shares outstanding at June 30, 2004 and December 31, 2003, respectively)		33,879			33,879
Surplus		19,375			19,375
Treasury Stock at Par (2,667,899 and 2,602,335 shares, respectively)		(6,670	)		(6,506	)
Retained Earnings		52,547			48,888
		99,131			95,636
Accumulated Other Comprehensive Income, Net of Tax		507			4,534
TOTAL STOCKHOLDERS’ EQUITY		99,638			100,170
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	1,424,365		$	1,328,757

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME

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

	For the Three Months Ended
	June 30, 2004		June 30, 2003
	unaudited		unaudited
INTEREST INCOME
Federal Funds Sold	$	79	$	55
United States Treasury Securities		104		104
Obligations of States & Political Subdivisions (tax exempt)		215		124
Mortgage-Backed Securities		2,548		2,648
U.S. Government Agency Obligations		966		825
Corporate Bonds & Other Securities		17		36
Loans		12,950		14,037
Total Interest Income		16,879		17,829
INTEREST EXPENSE
Saving, N.O.W & Money Market Deposits		664		1,036
Time Certificates of $100,000 or more		88		126
Other Time Deposits		1,058		1,473
Interest on Other Borrowings		5		24
Total Interest Expense		1,815		2,659
Net-interest Income		15,064		15,170
Provision for Loan Losses		1,298		270
Net-interest Income After Provision for Loan Losses		13,766		14,900
OTHER INCOME
Service Charges on Deposit Accounts		1,419		1,488
Other Service Charges, Commissions & Fees		645		609
Fiduciary Fees		308		283
Net Securities Gains		1,219		—
Other Operating Income		183		368
Total Other Income		3,774		2,748
OTHER EXPENSE
Salaries & Employee Benefits		5,340		5,338
Net Occupancy Expense		829		745
Equipment Expense		510		487
Other Operating Expense		2,512		2,563
Total Other Expense		9,191		9,133
Income Before Provision for Income Taxes		8,349		8,515
Provision for Income Taxes		3,316		3,384
NET INCOME	$	5,033	$	5,131
Average:Common Shares Outstanding		10,887,087		11,046,136
Dilutive Stock Options		33,080		43,164
Average Total Common Shares and Dilutive Options		10,920,167		11,089,300
EARNINGS PER COMMON SHARE
Basic	$	0.46	$	0.46
Diluted	$	0.46	$	0.46

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 Six Months Ended
	June 30, 2004		June 30, 2003
	unaudited		unaudited
INTEREST INCOME
Federal Funds Sold	$	87	$	82
United States Treasury Securities		208		208
Obligations of States & Political Subdivisions (tax exempt)		391		253
Mortgage-Backed Securities		4,986		5,836
U.S. Government Agency Obligations		2,044		1,651
Corporate Bonds & Other Securities		38		71
Loans		25,972		28,415
Total Interest Income		33,726		36,516
INTEREST EXPENSE
Saving, N.O.W. & Money Market Deposits		1,310		2,226
Time Certificates of $100,000 or more		182		261
Other Time Deposits		2,168		3,077
Federal Funds Purchased		—		12
Interest on Other Borrowings		40		32
Total Interest Expense		3,700		5,608
Net-interest Income		30,026		30,908
Provision for Loan Losses		1,523		540
Net-interest Income After Provision		28,503		30,368
OTHER INCOME
Service Charges on Deposit Accounts		2,827		2,900
Other Service Charges, Commissions & Fees		1,218		1,119
Fiduciary Fees		621		563
Net Security Gains		1,219		—
Other Operating Income		341		683
Total Other Income		6,226		5,265
OTHER EXPENSE
Salaries & Employee Benefits		10,848		10,786
Net Occupancy Expense		1,682		1,552
Equipment Expense		1,080		1,195
Other Operating Expense		4,700		4,734
Total Other Expense		18,310		18,267
Income Before Provision for Income Taxes		16,419		17,366
Provision for Income Taxes		6,522		6,896
NET INCOME	$	9,897		10,470
Average: Common Shares Outstanding		10,907,715		11,172,393
Dilutive Stock Options		34,760		43,024
Average Total Common Shares and Dilutive Options		10,942,475		11,215,417
EARNINGS PER COMMON SHARE
Basic	$	0.91	$	0.94
Diluted	$	0.90	$	0.93

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 Six Months Ended
	June 30, 2004			June 30, 2003
	unaudited			unaudited
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME	$	9,897		$	10,470
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Loan Losses		1,523			540
Depreciation & Amortization		1,041			1,153
Accretion of Discounts		(170	)		(143	)
Amortization of Premiums		2,418			2,498
Decrease in Accrued Interest Receivable		672			249
Decrease in Other Assets		472			1,478
Decrease in Accrued Interest Payable		(73	)		(341	)
(Decrease) Increase in Other Liabilities		(1,033	)		490
Net Security Gains		(1,219	)		—
Net Cash Provided by Operating Activities		13,528			16,394
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities Available for Sale		38,421			38,570
Proceeds from Sale of Investment Securities Available for Sale		43,604			—
Maturities of Investment Securities; Available for Sale		—			—
Purchases of Investment Securities; Available for Sale		(91,344	)		(15,767	)
Maturities of Investment Securities; Held to Maturity		5,918			8,177
Purchases of Investment Securities; Held to Maturity		(3,136	)		(3,451	)
Loan Disbursements & Repayments, Net		5,654			(35,525	)
Purchases of Premises & Equipment, Net		(823	)		(2,640	)
Net Cash Used in Investing Activities		(1,706	)		(10,636	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposit Accounts		120,056			113,361
Dividends Paid to Shareholders		(4,155	)		(4,092	)
Treasury Shares Acquired		(2,259	)		(14,929	)
Net Payments for Other Borrowings		(20,000	)		—
Net Cash Provided by Financing Activities		93,642			94,340
Net Increase in Cash & Cash Equivalents		105,464			100,098
Cash & Cash Equivalents Beginning of Period		56,353			65,500
Cash & Cash Equivalents End of Period	$	161,817		$	165,598

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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, 2003.

The results of operations for the three months ended June 30, 2004 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

(2) Stock-based Compensation

At June 30, 2004, 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 following table provides the disclosures required by Statement of Financial Accounting Standards No. 123 “Accounting for Stock Based Compensation” (“SFAS No. 123”) and illustrates the effect on net income and earnings per share if Suffolk had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation, and should be read in conjunction with “Capital Resources” on Page 12 in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Quarter Ended June 30,		2004			2003
Net income (in thousands)	As reported	$	5,033		$	5,131
	Stock-based compensation
	costs determined under fair
	value method for all awards		(14	)		(10	)
	pro-forma		5,019			5,121
Earnings per share (Basic)	As reported		0.46			0.46
	pro forma		0.46			0.46
Earnings per share (Diluted)	As reported		0.46			0.46
	pro-forma		0.46			0.46

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued a proposed Statement,Share-Based Payment an Amendment of FASB Statements No. 123 and APB No. 95, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. Under the FASB’s proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25,Accounting for Stock Issued to Employees. The Company is currently evaluating this proposed statement and its effects on its results of operations.

(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

Page 8

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 June 30, 2004 is $5,804,000 and they expire as follows:

2004	$	1,786,000
2005		3,917,000
2007		101,000
	$	5,804,000

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 $9,000 for possible loan losses based on the letters of credit outstanding on June 30, 2004.

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. Subsequent to the issuance of FIN 46, the FASB issued a revised interpretation, FIN 46(R), the provisions of which must be applied to certain variable interest entities by March 31, 2004. Suffolk implemented FIN 46(R) on January 1, 2004. The adoption of the provisions of FIN 46 did not materially impact its financial condition or results of operations.

The SEC recently released Staff Accounting Bulletin No. 105, “Application of Accounting Principles to Loan Commitments” (“SAB 105”). SAB 105 provides guidance about the measurement of loan commitments recognized at fair value under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105 also requires companies to disclose their accounting policy for those loan commitments including methods and assumptions used to estimate fair value and associated hedging strategies. SAB 105 is effective for all loan commitments accounted for as derivatives that are entered into after March 31, 2004. The adoption of SAB 105 did not have a material effect on Suffolk’s consolidated financial statements.

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

For the Three-Month Periods ended June 30, 2004 and 2003

Net Income

Net income was $5,033,000 for the quarter, down 1.9 percent from $5,131,000 posted during the same period last year. Earnings per share were $0.46 for the second quarter of 2004 and 2003.

Interest Income

Interest income was $16,879,000 for the second quarter of 2004, down 5.3 percent from $17,829,000 posted for the same quarter in 2003. Average net loans during the second quarter of 2004 totaled $827,163,000 compared to $809,908,000 for the same period of 2003. During the second quarter of 2004, the yield was 5.47 percent (taxable-equivalent) on average earning assets of $1,241,680 down from 6.02 percent on average earning assets of $1,188,514 during the second quarter of 2003. 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 second quarter of 2004 was $1,815,000, down 31.7 percent from $2,659,000 for the same period of 2003. During the second quarter of 2004, the cost of funds was .88 percent on average interest-bearing liabilities of $824,810,000 down from 1.28 percent on average interest-bearing liabilities of $833,603,000 during the second quarter of 2003. Interest expense decreased primarily as a result of decreases in market rates of interest, and as average demand deposits comprised 32.9 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 $15,064,000 for the second quarter of 2004, down .7 percent from $15,170,000 during the same period of 2003. The net interest margin for the quarter, on a fully taxable-equivalent basis, was 4.89 percent compared to 5.13 percent for the same period of 2003.

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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)

	2004							2003
June 30,	Average Balance		Interest			Average Rate		Average Balance		Interest			Average Rate
INTEREST-EARNING ASSETS
U.S. Treasury securities	$	9,746	$	106		4.35	%	$	10,035	$	106		4.23	%
Collateralized mortgage obligations		245,623		2,518		4.10			246,301		2,519		4.09
Mortgage backed securities		7,430		30		1.62			13,810		130		3.76
Obligations of states and political subdivisions		23,704		314		5.30			12,539		190		6.06
U.S. govt. agency obligations		92,146		966		4.19			75,035		824		4.39
Corporate bonds and other securities		2,557		17		2.66			2,269		35		6.17
Federal funds sold and securities purchased under agreements to resell		33,311		79		0.95			18,617		55		1.19
Loans, including non-accrual loans
Commercial, financial & agricultural loans		182,949		2,354		5.15			168,309		2,257		5.36
Commercial real estate mortgages		234,498		4,071		6.94			193,647		3,607		7.45
Real estate construction loans		32,794		564		6.88			37,983		834		8.79
Residential mortgages (1st and 2nd liens)		109,605		1,721		6.28			97,237		1,151		4.73
Home equity loans		65,353		818		5.01			50,891		688		5.40
Consumer loans		199,738		3,422		6.85			259,957		5,500		8.46
Other loans (overdrafts)		2,226		—		—			1,884		—		—
Total interest-earning assets	$	1,241,680	$	16,980		5.47	%	$	1,188,514	$	17,896		6.02	%
Cash and due from banks	$	54,625						$	51,997
Other non-interest-earning assets		80,365							45,233
Total assets	$	1,376,670						$	1,285,744
INTEREST-BEARING LIABILITIES
Saving, N.O.W. and money market deposits	$	599,495	$	664		0.44	%	$	568,565	$	1,036		0.73	%
Time deposits		223,576		1,146		2.05			257,355		1,599		2.49
Total saving and time deposits		823,071		1,810		0.88			825,920		2,635		1.28
Federal funds purchased and securities sold under agreement to repurchase		57		—		—			—		—		—
Other borrowings		1,682		5		1.19			7,683		24		1.28
Total interest-bearing liabilities	$	824,810	$	1,815		0.88	%	$	833,603	$	2,659		1.28	%
Rate spread						4.59	%						4.75	%
Non-interest-bearing deposits	$	402,680						$	337,645
Other non-interest-bearing liabilities		50,513							17,897
Total liabilities	$	1,278,003						$	1,189,145
Stockholders’ equity		98,667							96,599
Total liabilities and stockholders’ equity	$	1,376,670						$	1,285,744
Net-interest income (taxable-equivalent basis) and effective interest rate differential			$	15,165		4.89	%			$	15,237		5.13	%
Less: taxable-equivalent basis adjustment				(101	)						(67	)
Net-interest income			$	15,064						$	15,170

Other Income

Other income increased to $3,774,000 for the three months compared to $2,748,000 the previous year. Service charges on deposits were down 4.6 percent. Service charges, including commissions and fees other than for deposits, increased by 5.9 percent. Trust revenue was up 8.8 percent. There was a repositioning of the securities portfolio to take advantage of a steeper yield curve. Suffolk sold securities of shorter remaining maturities and reinvested the proceeds in securities with longer maturities, resulting in a pre-tax net securities gain of $1,219,000. Other operating income decreased by 50.3 percent.

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Other Expense

Other expense for the second quarter of 2004 was $9,191,000, up .6 percent from $9,133,000 for the comparable period in 2003. Employee compensation remained flat, net occupancy expense increased 11.3 percent, equipment expense increased by 4.7 percent, and other operating expense decreased by 2.0 percent.

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 June 30, 2004 and 2003, including the following components:

	2004			2003
Service cost	$	282,110		$	242,406
Interest cost		290,790			276,365
Expected return on plan assets		(352,111	)		(315,675	)
Amortization of prior service cost		(14,492	)		(14,492	)
Amortization of unrecognized net actuarial loss		60,515			63,456
Net periodic benefit expense	$	266,812		$	252,059

A contribution of approximately $1,064,000 was made to the pension plan in June of 2004. Management is currently evaluating the impact of the Pension Funding Equity Act enacted in April 2004 on projected funding. There were no other contributions required to be made to the plan in the three months ended June 30, 2004.

Capital Resources

Stockholders’ equity totaled $99,638,000 on June 30, 2004, a decrease of .5 percent from $100,170,000 on December 31, 2003. The ratio of equity to assets was 7.0 percent at June 30, 2004 and 7.5 percent at December 31, 2003. 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 June 30, 2004
Total Capital (to risk-weighted assets)	$	108,055	11.28	%	$	76,625	8.00	%	$	95,781	10.00	%
Tier 1 Capital (to risk-weighted assets)		98,204	10.25	%		38,313	4.00	%		57,469	6.00	%
Tier 1 Capital (to average assets)		98,204	7.14	%		55,030	4.00	%		68,787	5.00	%
As of December 31, 2003
Total Capital (to risk-weighted assets)	$	108,374	11.68	%	$	74,242	8.00	%	$	92,802	10.00	%
Tier 1 Capital (to risk-weighted assets)		99,822	10.76	%		37,121	4.00	%		55,681	6.00	%
Tier 1 Capital (to average assets)		99,822	7.70	%		51,869	4.00	%		64,836	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 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.

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During the quarter, there was a provision for the allowance for possible loan and lease losses of $1,298,000 for the quarter in comparison to $270,000 in the same period last year. This provision was occasioned by the deterioration of a single credit, the circumstances of which are particular to that loan. Management does not believe that it is reflective of systemic weakness in Suffolk’s loan portfolio or of its underwriting standards and procedures

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

	For the last 12 months			For the three months ended
				June 30 2004			Mar. 31 2004			Dec. 31 2003			Sept. 30 2003
Allowance for loan losses
Beginning balance	$	8,704		$	8,487		$	8,551		$	8,559		$	8,704
Total charge-offs		1,706			145			514			503			544
Total recoveries		938			211			225			283			219
Provision for loan losses		1,915			1,298			225			212			180
Ending balance	$	9,851		$	9,851		$	8,487		$	8,551		$	8,559
Coverage ratios
Loans, net of discounts: average	$	828,532		$	827,163		$	831,919		$	836,921		$	818,124
at end of period		834,563			833,185			838,397			839,061			827,607
Non-performing assets		1,992			3,682			1,430			1,819			1,038
Non-performing assets/total loans (net of discount)		0.24	%		0.44	%		0.17	%		0.22	%		0.13	%
Net charge-offs/average net loans (annualized)		0.09	%		-0.03	%		0.14	%		0.11	%		0.16	%
Allowance/non-accrual, restructured, & OREO		538.93	%		267.54	%		593.50	%		470.09	%		824.57	%
Allowance for loan losses/net loans		1.06	%		1.18	%		1.01	%		1.02	%		1.03	%

Critical Accounting Policies, Judgments and Estimates

Suffolk’s accounting and reporting policies conform to the accounting principles generally accepted in the United States of America and general practices within the financial services industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Allowance for Credit Losses

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

Income Taxes

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

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Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Suffolk originates and invests in interest-earning assets and solicits interest-bearing deposit accounts. Suffolk’s operations are subject to market risk resulting from fluctuations in interest rates to the extent that there is a difference between the amounts of interest-earning assets and interest-bearing liabilities that are prepaid, withdrawn, mature, or re-priced in any given period of time. Suffolk’s earnings or the net value of its portfolio (the present value of expected cash flows from liabilities) will change when interest rates change. The principal objective of Suffolk’s asset/liability management program is to maximize net interest income while keeping risks acceptable. These risks include both the effect of changes in interest rates, and risks to liquidity. The program also provides guidance to management in funding Suffolk’s investment in loans and securities. Suffolk’s exposure to interest-rate risk has not changed substantially since December 31, 2003.

Business Risks and Uncertainties

This report contains some statements that look to the future. These may include remarks about Suffolk Bancorp, the banking industry, and the economy in general. Factors affecting Suffolk Bancorp include particularly, but are not limited to: changes in interest rates; increases or decreases in retail and commercial economic activity in Suffolk’s market area; variations in the ability and propensity of consumers and businesses to borrow, repay, or deposit money, or to use other banking and financial services. Further, it could take Suffolk longer than anticipated to implement its strategic plans to increase revenue and manage non-interest expense, or it may not be possible to implement those plans at all. Finally, new and unanticipated legislation, regulation, or accounting standards may require Suffolk to change its practices in ways that materially change the results of operation. Each of the factors may change in ways that management does not now foresee. These remarks are based on current plans and expectations. They are subject, however, to a variety of uncertainties that could cause future results to vary materially from Suffolk’s historical performance, or from current expectations.

Item 4.

Controls and Procedures

Suffolk’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934 for Suffolk. Based upon their evaluation of these controls and procedures as of June 30, 2004, 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 second quarter of 2004:

Quarter ending	Total shares repurchased	Average price per share		Aggregate cost
June 30, 2004	16,750	$	34.60	$	579,498

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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 June 30, 2004.

Current Report on Form 8-K – April 13, 2004 – Press Release of April 13, 2004, “Suffolk Bancorp Announces First Quarter Earnings” - Earnings release for the first quarter of 2004.

Current Report on Form 8-K – May 25, 2004 – Press Release of May 25, 2004, “Suffolk Bancorp Announces Regular Quarterly Dividend.”

Current Report on Form 8-K – June 30, 2004 – Press Release of June 30, 2004, “Suffolk Bancorp Elects Thomas S. Kohlmann Vice Chairman.”

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SUFFOLK BANCORP

Date: August 5, 2004	/s/ Thomas S. Kohlmann
	Thomas S. Kohlmann President & Chief Executive Officer
Date: August 5, 2004	/s/ J. Gordon Huszagh
	J. Gordon Huszagh Executive Vice President & Chief Financial Officer

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