Suffolk Bancorp (SCNB) 10-Q 2006 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31, 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

Page 3

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.

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
	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.

Page 6

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.

Page 9

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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