[PHOTO]
[LOGO OF SUFFOLK BANCORP]
2002 ANNUAL REPORT on FORM 10-K
[PHOTO] On The Cover
Porpoise Channel to
Stony Brook Harbor on
Long Island's North Shore
Porpoise Channel and Stony Brook Harbor divide the Townships of Brookhaven (to
the east, or left, of the channel) and Smithtown (to the right, or west, of the
channel). SCNB currently maintains seven offices in Brookhaven Town and two in
Smithtown: one in the Village of the Branch, and one in Hauppauge. Each is
located in the sweep of land beyond the harbor. This township and points west
represent new opportunities for SCNB in lending, deposits, and other financial
services to compliment our traditional markets on Eastern Long Island.
Corporate Profile ..........................................................1
Financial Highlights .......................................................1
To Our Shareholders ........................................................2
Price Range of Common Stock and Dividends ..................................4
Summary of Selected Financial Data .........................................4
Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................5
Summary of Recent Developments and Current Trends ..........................5
Suffolk's Business .........................................................5
General Economic Conditions ................................................6
Results of Operations ......................................................6
Net Income .................................................................6
Net Interest Income ........................................................6
Average Assets, Liabilities, and Stockholders' Equity, Rate
Spread, and Effective Interest Rate Differential ........................7
Analysis of Changes in Net Interest Income .................................8
Interest Income ............................................................8
Investment Securities ......................................................8
Loan Portfolio .............................................................9
Non-Performing Loans ......................................................10
Summary of Loan Losses and Allowance for Loan Losses ......................10
Interest Expense ..........................................................11
Deposits ..................................................................11
Short-Term Borrowings .....................................................12
Other Income ..............................................................12
Other Expense .............................................................12
Interest Rate Sensitivity .................................................12
Market Risk ...............................................................13
Interest Rate Risk ........................................................13
Asset/Liability Management & Liquidity ....................................14
Off Balance-Sheet Obligations .............................................14
Capital Resources .........................................................14
Risk-Based Capital and Leverage Guidelines ................................15
Discussion of New Accounting Pronouncements ...............................15
Critical Accounting Policies, Judgments, and Estimates ....................16
Business Risks and Uncertainties ..........................................17
Consolidated Statements of Condition ......................................18
Consolidated Statements of Income .........................................19
Consolidated Statements of Changes in Stockholders' Equity ................20
Consolidated Statements of Cash Flows .....................................21
Notes to Consolidated Financial Statements ................................22
Report of Independent Public Accountants ..................................35
Report of Management ......................................................35
Annual Report on Form 10-K ................................................36
Certifications of Periodic Report .........................................36
Directors and Officers -- Suffolk Bancorp .................................45
Directors and Officers -- Suffolk County National Bank ...................46
Directory of Offices and Departments ......................................48
Corporate Profile
Suffolk Bancorp does commercial banking through its wholly owned subsidiary,
Suffolk County National Bank. "SCNB" is a full-service, nationally chartered
commercial bank. Organized in 1890, SCNB is the second largest independent
commercial bank headquartered on Long Island. Most of SCNB's revenue comes from
net interest income, and the remainder from charges for a variety of services.
SCNB has built a good reputation for personal, attentive service, resulting in a
loyal and growing clientele. SCNB operates 26 full-service offices throughout
Suffolk County, New York.
The staff at SCNB works hard to develop and maintain ties to the communities it
serves. Most of SCNB's business is retail, and includes loans to individual
consumers, to professionals, and to small and medium-sized commercial
enterprises. It has special expertise in indirect retail lending, evaluating and
buying loans generated by automobile dealers. In recent years, however,
commercial loans of all types have increased as a percentage of the loan
portfolio and have made substantial contributions to SCNB's profitability. Long
Island, New York. Long Island is home to more than 2.6 million people outside of
the limits of New York City and is increasingly suburban in nature. Nassau
County and the western end of Suffolk County are a center for commerce and are
highly developed, supporting a diversified economy. The economy on eastern Long
Island is based on services that support retirement, tourism, and agriculture.
Together, they generate family incomes greater than the national average,
providing Suffolk Bancorp with a steady and growing demand for loans and other
services, and a reliable, reasonably priced supply of deposits.
Financial Highlights
(dollars in thousands, except ratios, share, and per-share information)
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December 31, 2003 2002
- -------------------------------------------------------------------------------------------
EARNINGS FOR THE YEAR Net income $ 21,336 $ 21,269
Net interest income 61,194 62,340
Net income-per-share 1.92 1.82
Cash dividends-per-share 0.76 0.68
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BALANCES AT YEAR END Assets $ 1,328,757 $ 1,272,717
Net loans 830,510 779,862
Investment securities 390,830 376,886
Deposits 1,187,496 1,142,582
Equity 100,170 108,793
Shares outstanding 10,949,283 11,489,481
Book value per common share $ 9.15 $ 9.47
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RATIOS Return on average equity 21.93% 21.12%
Return on average assets 1.64 1.72
Average equity to average assets 7.50 8.13
Net interest margin (taxable-equivalent) 5.13 5.45
Efficiency ratio 49.91 49.36
Net charge-offs to average net loans 0.13 0.19
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Suffolk Bancorp Annual Meeting Trading Independent Auditors
Tuesday, April 13, 2004, 1:00 P.M. Suffolk Bancorp's common stock is Grant Thornton LLP
Suffolk County National Bank traded over-the-counter, and is listed on Two Commerce Square
Administrative Center the NASDAQ National Market System Suite 3100
Lower Level under the symbol "SUBK." 2001 Market Street
Four West Second Street Philadelphia, Pennsylvania 19103
Riverhead, New York Registrar and Transfer Agent
Any questions about the registration or General Counsel
S.E.C. Form 10-K transfer of shares, the payment, Smith, Finkelstein, Lundberg,
The Annual Report to the Securities reinvestment, or direct deposit of Isler & Yakaboski
and Exchange Commission on Form dividends can be answered by: 456 Griffing Avenue
10-K and documents incorporated by Riverhead, New York 11901
reference can be obtained, without American Stock Transfer
charge, by writing to the Secretary, & Trust Co. FDIC Rules and Regulations, Part
Suffolk Bancorp, 4 West Second Street, 59 Maiden Lane 350.4(d)
Riverhead, New York 11901, or call New York, New York 10038 This statement has not been reviewed,
(631) 727-5667, fax to (631) 727-3214, 1-800-937-5449 or confirmed for accuracy or relevance,
or e-mail to by the Federal Deposit Insurance
invest@suffolkbancorp.com Corporation.
1
Dear Shareholder:
The year 2003 was successful for Suffolk Bancorp and for its wholly owned
subsidiary, Suffolk County National Bank.
Net income was $21,336,000, up 0.3 percent from last year. Earnings-per-share
were $1.92 compared to $1.82, an increase of 5.5 percent. Net interest income
decreased by 1.8 percent to $61,194,000 from $62,340,000. Income other than from
interest increased by 12.3 percent, to $11,310,000 from $10,073,000. Expense
other than for interest increased by 1.2 percent, to $36,190,000 from
$35,744,000. Our efficiency ratio was stable from year to year at 49.91 percent
compared to 49.36 percent. Return on assets decreased slightly to 1.64 percent
from 1.72 percent. Finally, our return on average common equity increased to
21.93 percent from 21.12 percent.
We are pleased with these results, particularly in light of the challenges we
and others in the industry faced during the past year. Central to understanding
Suffolk's performance are interest rates, which remained at historic lows
throughout the year. This means that older, higher yielding loans and securities
have amortized or paid off, and those funds have been reinvested at today's
lower rates. On the other side of the ledger, rates on the deposits that fund
our loans and investments have also dropped, but by less than rates on loans and
investments primarily because rates are so low in absolute terms. Although this
put pressure on our net interest margin, we have actually been able to achieve a
slight increase in return on average equity, to 21.93 percent for the year, and
to improve earnings-per-share over the same period a year ago.
Management and your Board of Directors are responsive as a matter of habit and
practice. This is true not only from a strategic point of view, where we remain
alert to the dynamics of our market and modify our game plan in response, but
also from the point of view of our customers, by listening to what they have to
say to us about their needs and desires, and using that insight to put ourselves
first in line to serve them.
Key to maintaining our performance was close management of the balance sheet.
First, we have redirected the flow of cash from our consumer portfolio,
comprised primarily of indirect automobile paper, to our commercial and
commercial real estate and investment portfolios. While historically profit-
able, consumer loans have come under increasing pressure with regard to both
rate and volume in the face of the incentive programs of the major manufac-
turers. Times change, and we believe that this is a structural rather than
cyclical development. We expect that our consumer loan balances will continue to
decline.
However, during 2003, commercial credits extended to professionals and small and
middle-market businesses, as well as home equity loans, more than made up for
that decline. This is another area in which it pays to be responsive. As the
banking industry consolidates into fewer and fewer institutions, this has
offered Suffolk with increased opportunity because we have been able to provide
small entrepreneurs and companies that cannot utilize the capital markets with
2
the credit they need to help their businesses grow. Unlike the financial
behemoths, we have not developed centralized decision-making that is remote from
our customers. The needs of our customers come first, and in a pinch, we can
underwrite a loan, make a decision, and set up a closing date before a major
regional or money center bank has even asked about the details of the customer's
request. In fact, one of our current initiatives has been to assign lenders
specifically to support our branch office managers in generating new loans in
their community, staying as close to the customer as we can. While we expect
that residential lending will slow during the year to come, we remain optimistic
for commercial loans and new mortgages as the economy recovers.
We also responded to opportunities to expand both personal and commercial demand
deposits, while we have allowed more expensive time deposits to decline. Demand
deposits increased 15.7 percent year to year, while more expensive time deposits
of less than $100,000 declined by 13.2 percent.
What has allowed earnings-per-share to outpace net income was our ongoing
program of capital management which applies leverage to our investment by means
of the selective repurchase of shares, while maintaining our "well-capitalized"
status with regulatory agencies. During the year we repurchased approximately 5
percent of the shares outstanding at the beginning of 2003.
Non-interest income continues to grow both in dollars and as a percentage of
total revenues (from 9.1 percent five years ago to 13.7 percent last year) and
net interest income (from 14.5 percent five years ago to 18.5 percent last
year). We hope to continue to diversify our sources of revenue going forward.
Finally, further control of expenses also contributed to profitability. While
average assets increased by 4.8 percent from year to year, non-interest expense
increased by only 1.2 percent. Net charge-offs remained below industry averages,
at 13 basis points of average net loans.
Our basic business model is sound, and has been throughout our 114-year history
as it has evolved to respond to changing times, changing markets, and changing
opportunities. We have been able to prosper in an unusual environment by
following that comparatively straightforward and uncomplicated business plan,
year in and out. We take the long view of the big picture, and make an ongoing
series of incremental adjustments to improve performance, while avoiding
dramatic gestures which grab headlines but are of questionable outcome over
time. Our commitment is to build shareholder value for the long run,
consistently, one dollar at a time.
Please take some time to study Management's Discussion and Analysis of Financial
Condition and Results of Operations, which starts on page 5.
Sincerely,
/s/ Thomas S. Kohlmann
----------------------------------
Thomas S. Kohlmann
President & Chief Executive Officer
3
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Suffolk's common stock is traded in the over-the-counter market, and is quoted
on the NASDAQ National Market System under the symbol "SUBK." Following are
quarterly high and low prices of Suffolk's common stock as reported by NASDAQ.
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2003 High Low Dividends 2002 High Low Dividends
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First Quarter $33.09 $30.75 $0.19 First Quarter $29.60 $26.50 $0.17
Second Quarter 34.73 29.40 0.19 Second Quarter 37.60 28.50 0.17
Third Quarter 37.00 31.07 0.19 Third Quarter 36.40 28.25 0.17
Fourth Quarter 37.58 32.25 0.19 Fourth Quarter 36.11 30.50 0.17
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At February 1, 2004, there were approximately 1,900 equity holders of record and
approximately 1,600 beneficial shareholders of the Company's common stock.
SUMMARY OF SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY: (dollars in thousands except per-share amounts)
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For the years 2003 2002 2001 2000 1999
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Interest income $ 70,995 $ 78,428 $ 79,565 $ 76,853 $ 67,908
Interest expense 9,801 16,088 24,342 24,348 21,121
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Net interest income 61,194 62,340 55,223 52,505 46,787
Provision for loan losses 932 1,380 1,544 1,200 1,070
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Net interest income after provision 60,262 60,960 53,679 51,305 45,717
Other income 11,310 10,073 9,548 7,788 6,771
Other expense 36,190 35,744 32,307 31,977 30,789
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Income before income taxes 35,382 35,289 30,920 27,116 21,699
Provision for income taxes 14,046 14,020 12,235 10,884 8,570
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Net Income $ 21,336 $ 21,269 $ 18,685 $ 16,232 $ 13,129
===========================================================================================================================
BALANCE AT DECEMBER 31:
Federal funds sold $ 4,300 $ 17,500 $ 17,600 $ 3,700 $ --
Investment securities -- available for sale 376,189 359,903 241,061 149,186 132,484
Investment securities -- held to maturity 14,641 16,983 13,559 16,785 32,886
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Total investment securities 390,830 376,886 254,620 165,971 165,370
Net loans 830,510 779,862 787,285 768,248 720,255
Total assets 1,328,757 1,272,717 1,164,947 1,049,580 980,799
Total deposits 1,187,496 1,142,582 1,051,712 942,436 877,303
Other borrowings 20,000 -- -- -- 13,500
Stockholders' equity $ 100,170 $ 108,793 $ 96,837 $ 88,053 $ 77,334
- ---------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS:
Performance:
Return on average equity 21.93% 21.12% 20.55% 20.42% 17.91%
Return on average assets 1.64 1.72 1.73 1.60 1.41
Net interest margin (taxable-equivalent) 5.13 5.45 5.62 5.84 5.66
Efficiency ratio 49.91 49.36 49.88 53.04 57.49
Average equity to average assets 7.50 8.13 8.41 7.86 7.87
Dividend pay-out ratio 38.74 34.70 33.89 33.41 37.48
Asset quality:
Non-performing assets to total loans, net of discount 0.22 0.22 0.25 0.35 0.22
Non-performing assets to total assets 0.14 0.14 0.17 0.26 0.16
Allowance to non-performing assets 470.09 494.60 448.42 287.00 451.55
Allowance to loans, net of discount 1.02 1.10 1.11 1.00 1.00
Net charge-offs to average net loans 0.13 0.19 0.06 0.10 0.11
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PER-SHARE DATA:
Net income (basic) 1.92 1.82 1.58 1.35 1.08
Cash dividends 0.76 0.68 0.56 0.46 0.42
Book value at year-end 9.15 9.47 8.23 7.39 6.39
Highest market value 37.58 39.60 29.13 15.69 14.50
Lowest market value 29.40 26.50 15.13 12.82 11.44
Average shares outstanding 11,055,897 11,657,984 11,822,452 12,015,912 12,137,556
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Number of full-time-equivalent employees 377 391 381 388 389
Number of branch offices 26 27 26 26 26
Number of automatic teller machines 24 23 20 20 18
===========================================================================================================================
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion that follows analyzes Suffolk Bancorp's ("Suffolk") operations
for each of the past three years and its financial condition as of December 31,
2003 and 2002, respectively. Selected tabular data are presented for each of the
past five years.
Summary of Recent Developments and Current Trends
Suffolk Bancorp is a one-bank holding company engaged in the commercial banking
business through Suffolk County National Bank, a full service commercial bank
headquartered in Riverhead, New York. "SCNB" is Suffolk Bancorp's wholly owned
subsidiary. Organized in 1890, Suffolk County National Bank is the second
largest independent commercial bank headquartered on Long Island, with 26
offices in Suffolk County, New York.
Recent Developments
Interest rates remained at historic lows throughout the year. This put pressure
on Suffolk's net interest margin, which declined to 5.13 percent from 5.45
percent, year to year.
Return on average equity increased slightly, to 21.93 percent for the year from
21.12 percent during 2002, and earnings-per-share improved over the same period
a year ago to $1.92 from $1.82 during 2002.
Key to maintaining performance was close management of the balance sheet. Steps
included:
o Redirecting flow of investment from the consumer portfolio, comprised
primarily of indirect automobile paper to the commercial and
commercial real estate portfolios.
o 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. During the year, Suffolk repurchased approximately 5 percent
of the shares outstanding at the beginning of 2003.
o Continuing emphasis on both personal and commercial demand deposits,
while allowing more expensive time deposits to decline. Demand
deposits increased 15.7 percent year to year, while time deposits of
less than $100,000 declined by 13.2 percent.
o Further controlling expenses to maintain profitability: average assets
increased by 4.8 percent from year to year, non-interest expense
increased by 1.2 percent.
Net loan charge-offs remained below industry averages, at 13 basis points of
average net loans.
Current Trends
o Consumer loans have come under increasing pressure with regard to both
rate and volume in the face of the incentive programs of the major
manufacturers.
o Commercial credits extended to professionals, and small and
middle-market businesses, as well as home equity loans, have more than
made up for that decline.
Suffolk's Business
Nearly all of Suffolk's business is to provide banking services to its
commercial and retail customers in Suffolk County, on Long Island, New York.
Suffolk is a one-bank holding company. Its banking subsidiary, Suffolk County
National Bank (the "Bank"), operates 26 full-service offices in Suffolk County,
New York. It offers a full line of domestic, retail, and commercial banking
services, and trust services. The Bank's primary lending area includes all of
Suffolk County, New York. The Bank also makes loans for automobiles in Nassau
and
5
Queens Counties, New York. The Bank serves as an indirect lender to the
customers of many automobile dealers. The Bank also lends to small
manufacturers, wholesalers, builders, farmers, and retailers, and finances
dealers' inventory. The Bank makes loans secured by real estate, including
residential mortgages, of which most are sold to investors; real estate
construction loans; and loans that are secured by commercial real estate and
float with the prime rate, which are retained in the Bank's portfolio. The Bank
offers both fixed and floating rate second mortgage loans with a variety of
plans for repayment.
Other investments are made in short-term United States Treasury debt, high
quality obligations of municipalities in New York State, issues of agencies of
the United States government, collateralized mortgage obligations,
mortgage-backed securities, and stock in the Federal Reserve Bank and the
Federal Home Loan Bank of New York, required as a condition of membership.
The Bank finances most of its activities with deposits, including demand,
saving, N.O.W., and money market accounts, as well as term certificates. To a
much lesser degree, it relies on other short-term sources of funds, including
interbank, overnight loans, and, when needed, sale-repurchase agreements.
General Economic Conditions
The economy on Long Island stabilized and started to expand slightly during
2003. During the year, interest rates remained at 40-year lows. Volatility in
some share prices in the stock market continued, but equities gained
substantially after three years of declines. Demand for finance, information,
transportation, and tourism appeared to recover somewhat, and employment was
relatively stable in the region. Long Island has a highly educated and skilled
work force and a diverse industrial base. It is adjacent to New York City, one
of the world's largest centers of distribution and a magnet for finance and
culture. The island's economic cycles vary from those of the national economy.
In general, Long Island's economy seems to have been more stable than the
national economy, owing in part to its comparative diversity, although reliable
and accurate data are difficult to develop.
Results of Operations
Net Income
Net income was $21,336,000 compared to $21,269,000 last year and $18,685,000 in
2001. These figures represent increases of .3 percenst and 13.8 percent,
respectively. Basic earnings-per-share were $1.92, compared to $1.82 last year
and $1.58 in 2001.
Net Interest Income
Net interest income during 2003 was $61,194,000, down 1.8 percent from
$62,340,000 in 2002, which was up 12.9 percent from $55,223,000 in 2001. Net
interest income is the most important part of the net income of Suffolk. The
effective interest rate differential, on a taxable-equivalent basis, was 5.13
percent in 2003, 5.45 percent during 2002, and 5.62 percent in 2001. Average
rates on average interest-earning assets decreased to 5.95 percent in 2003 from
6.84 percent in 2002, and 8.08 percent in 2001. Average rates on average
interest-bearing liabilities decreased to 1.19 percent in 2003 from 2.01 percent
in 2002, and 3.50 percent in 2001. The interest rate differential decreased
slightly in 2003 from 2002 and 2001. Demand deposits remained a significant
source of funds as a percentage of total liabilities.
6
Average Assets, Liabilities, Stockholders' Equity, Rate Spread, and Effective
Interest Rate Differential (on a taxable-equivalent basis)
The following table illustrates the average composition of Suffolk's statement
of condition. It presents an analysis of net interest income on a
taxable-equivalent basis, listing each major category of interest-earning assets
and interest-bearing liabilities, as well as other assets and liabilities:
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------
Interest-earning assets
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 9,960 $ 424 4.26% $ 9,958 $ 481 4.83%
Collateralized mortgage obligations 244,547 9,936 4.06 215,506 11,651 5.41
Mortgage-backed securities 12,871 460 3.57 9,928 492 4.95
Obligations of states & political subdivisions 14,397 837 5.81 14,730 862 5.85
U.S. government agency obligations 85,743 3,691 4.30 74,052 2,895 3.91
Corporate bonds & other securities 2,190 94 4.29 2,057 84 4.09
Federal funds sold & securities purchased
under agreements to resell 20,365 221 1.09 42,674 707 1.66
Loans, including non-accrual loans
Commercial, financial & agricultural loans 158,950 8,504 5.35 132,841 8,427 6.34
Commercial real estate mortgages 200,829 14,794 7.37 177,543 14,876 8.38
Real estate construction loans 36,892 3,332 9.03 33,253 3,144 9.46
Residential mortgages (1st and 2nd liens) 102,128 7,125 6.98 90,003 6,989 7.77
Home equity loans 52,489 2,798 5.33 35,224 2,101 5.97
Consumer loans 253,126 19,060 7.53 308,401 26,023 8.44
Other loans 3,016 -- -- 4,256 -- --
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Total interest-earning assets $1,197,503 $71,276 5.95% $1,150,426 $78,732 6.84%
==================================================================================================================
Cash & due from banks $ 50,241 $ 50,512
Other non-interest-earning assets 50,105 37,533
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Total assets $1,297,849 $1,238,471
- ------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
- ------------------------------------------------------------------------------------------------------------------
Saving, N.O.W. & money market deposits $ 569,262 $ 3,659 0.64% $ 514,839 $ 6,645 1.29%
Time deposits 253,044 6,081 2.40 287,064 9,442 3.29
- ------------------------------------------------------------------------------------------------------------------
Total Saving & time deposits 822,306 9,740 1.18 801,903 16,087 2.01
Federal funds purchased & securities 560 12 2.14 34 1 1.83
Other borrowings 3,941 49 1.24 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 826,807 $ 9,801 1.19% $ 801,937 $16,088 2.01%
==================================================================================================================
Rate spread 4.77% 4.83%
Non-interest-bearing deposits $ 352,588 $ 311,948
Other non-interest-bearing liabilities 21,179 23,862
- ------------------------------------------------------------------------------------------------------------------
Total liabilities $1,200,574 $1,137,747
Stockholders' equity 97,275 100,724
- ------------------------------------------------------------------------------------------------------------------
Total liabilities & stockholders' equity $1,297,849 $1,238,471
Net interest income (taxable-equivalent basis) $61,475 5.13% $62,644 5.45%
& effective interest rate differential
Less: taxable-equivalent basis adjustment (281) (304)
- ------------------------------------------------------------------------------------------------------------------
Net interest income $61,194 $62,340
==================================================================================================================
- --------------------------------------------------------------------------------
Year ended December 31, 2001
- --------------------------------------------------------------------------------
Average Average
Balance Interest Rate
- --------------------------------------------------------------------------------
Interest-earning assets
- --------------------------------------------------------------------------------
U.S. Treasury securities $ 18,769 $ 1,113 5.93%
Collateralized mortgage obligations 93,778 6,245 6.66
Mortgage-backed securities 487 27 5.54
Obligations of states & political subdivisions 11,149 805 7.22
U.S. government agency obligations 42,230 2,218 5.26
Corporate bonds & other securities 2,757 183 6.64
Federal funds sold & securities purchased
under agreements to resell 42,644 1,261 2.96
Loans, including non-accrual loans
Commercial, financial & agricultural loans 134,850 11,375 8.43
Commercial real estate mortgages 162,396 14,557 8.96
Real estate construction loans 29,924 3,088 10.32
Residential mortgages (1st and 2nd liens) 89,258 7,777 8.71
Home equity loans 24,955 2,002 8.02
Consumer loans 334,450 29,210 8.73
Other loans 1,103 -- --
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Total interest-earning assets $ 988,750 $ 79,861 8.08%
================================================================================
Cash & due from banks $ 52,873
Other non-interest-earning assets 39,419
- --------------------------------------------------------------------------------
Total assets $1,081,042
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Interest-bearing liabilities
- --------------------------------------------------------------------------------
Saving, N.O.W. & money market deposits $ 387,893 $ 8,492 2.19%
Time deposits 296,281 15,203 5.13
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Total Saving & time deposits 684,174 23,695 3.46
Federal funds purchased & securities 2,129 98 4.60
Other borrowings 9,888 548 5.54
- --------------------------------------------------------------------------------
Total interest-bearing liabilities $ 696,191 $ 24,341 3.50%
================================================================================
Rate spread 4.58%
Non-interest-bearing deposits $ 270,530
Other non-interest-bearing liabilities 23,386
- --------------------------------------------------------------------------------
Total liabilities $ 990,107
Stockholders' equity 90,935
- --------------------------------------------------------------------------------
Total liabilities & stockholders' equity $1,081,042
Net interest income (taxable-equivalent basis) $ 55,520 5.62%
& effective interest rate differential
Less: taxable-equivalent basis adjustment (297)
- --------------------------------------------------------------------------------
Net interest income $ 55,223
================================================================================
Interest income on a taxable-equivalent basis includes the additional amount of
interest income that would have been earned if Suffolk's investment in
nontaxable U.S. Treasury securities and state and municipal obligations had been
subject to New York State and federal income taxes yielding the same after-tax
income. The rate used for this adjustment was approximately 34 percent for
federal income taxes and 9 percent for New York State income taxes for all
periods. For each of the years 2003, 2002, and 2001, $1.00 of nontaxable income
from obligations of states and political subdivisions equates to fully taxable
income of $1.52. In addition, in 2003, 2002, and 2001, $1.00 of nontaxable
income on U.S. Treasury securities equates to $1.02 of fully taxable income. The
amortization of loan fees is included in interest income.
7
Analysis of Changes in Net Interest Income
The table below presents a summary of changes in interest income, interest
expense, and the resulting net interest income on a taxable-equivalent basis for
the periods presented, each as compared with the preceding period. Because of
numerous, simultaneous changes in volume and rate during the period, it is not
possible to allocate precisely the changes between volumes and rates. In this
table changes not due solely to volume or to rate have been allocated to these
categories based on percentage changes in average volume and average rate as
they compare to each other: (in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
In 2003 over 2002 In 2002 over 2001
Changes Due to Changes Due to
Volume Rate Net Change Volume Rate Net Change
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
- --------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ -- $ (57) $ (57) $ (453) $ (179) $ (632)
Collateralized mortgage obligations 1,433 (3,148) (1,715) 6,774 (1,368) 5,406
Mortgage-backed securities 125 (157) (32) 468 (3) 465
Obligations of states & political subdivisions (57) 32 (25) 228 (171) 57
U.S. government agency obligations 485 311 796 1,352 (675) 677
Corporate bonds & other securities 6 4 10 (39) (60) (99)
Federal funds sold & securities purchased
under agreement to resell (293) (193) (486) 1 (555) (554)
Loans, including non-accrual loans 1,987 (7,934) (5,947) 399 (6,848) (6,449)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 3,686 $(11,142) $(7,456) $8,730 $(9,859) $(1,129)
- --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
- --------------------------------------------------------------------------------------------------------------------------------
Saving, N.O.W., & money market deposits $ 641 $ (3,627) $(2,986) $2,273 $(4,120) $(1,847)
Time deposits (1,027) (2,334) (3,361) (459) (5,302) (5,761)
Federal funds purchased & securities 11 -- 11 (71) (26) (97)
Other borrowings 25 24 49 (274) (274) (548)
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ (350) $ (5,937) $(6,287) $1,469 $(9,722) $(8,253)
- --------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income (taxable-equivalent basis) $ 4,036 $ (5,205) $(1,169) $7,261 $ (137) $ 7,124
================================================================================================================================
Interest Income
Interest income decreased to $70,995,000 in 2003, down 9.5 percent from
$78,428,000 in 2002, which was 1.4 percent from $79,565,000 in 2001.
Investment Securities
Average investment in U.S. Treasury securities remained flat at $9,960,000
compared to $9,958,000 in 2002, which decreased from $18,769,000 in 2001,
representing no change from 2003 to 2002 and a decrease of 46.9 percent, from
2002 to 2001. These balances decreased as funds were shifted into collateralized
mortgage obligations ("CMO's") as the spread between Treasury and non-Treasury
yields widened during the period. Average balances of CMO's increased to
$244,547,000 in 2003 from $215,506,000 in 2002, and $93,778,000 in 2001. U.S.
Treasury, U.S. government agency, collateralized mortgage obligations, and
municipal securities provide collateral for various liabilities to municipal
depositors. Securities are Suffolk's. The following table summarizes Suffolk's
primary source of liquidity investment securities available for sale and held to
maturity as of the dates indicated: (in thousands)
- -----------------------------------------------------------------------------------------
December 31, 2003 2002 2001
- -----------------------------------------------------------------------------------------
Investment securities available for sale, at fair value:
U.S. Treasury securities $ 9,840 $ 10,020 $ 9,805
U.S. government agency debt securities 102,554 74,740 48,970
Collateralized mortgage obligations agency issues 245,917 249,914 148,327
Collateralized mortgage obligations private issues 1,590 6,307 23,309
Mortgage-backed securities 9,399 15,361 9,364
Obligations of states & political subdivisions 6,889 3,561 1,286
- -----------------------------------------------------------------------------------------
Total investment securities available for sale 376,189 359,903 241,061
- -----------------------------------------------------------------------------------------
Investment securities held to maturity:
Obligations of states & political subdivisions 12,369 14,884 11,709
Corporate bonds & other securities 2,272 2,099 1,850
- -----------------------------------------------------------------------------------------
Total investment securities held to maturity 14,641 16,983 13,559
- -----------------------------------------------------------------------------------------
Total investment securities $390,830 $376,886 $254,620
=========================================================================================
Fair value of investment securities held to maturity $ 15,365 $ 17,643 $ 13,872
Unrealized gains 733 660 388
Unrealized losses 9 -- 75
=========================================================================================
8
The amortized cost, maturities, and approximate weighted average yields, on a
taxable-equivalent basis, at December 31, 2003 are as follows: (in thousands)
- --------------------------------------------------------------------------------------------
Available for Sale
- --------------------------------------------------------------------------------------------
U.S. Obligations of
U.S. Treasury Govt. Agency States & Political
Securities Debt Subdivisions
- --------------------------------------------------------------------------------------------
Fair Fair Fair
Maturity (in years) Value Yield Value Yield Value Yield
- --------------------------------------------------------------------------------------------
Within 1 $3,643 5.87% $ -- -- $ -- --
After 1 but within 5 6,197 4.49% 102,554 4.37% -- --
After 5 but within 10 -- -- -- -- -- --
After 10 -- -- -- -- 6,889 4.77%
Other securities -- -- -- -- -- --
- --------------------------------------------------------------------------------------------
Subtotal $9,840 5.00% $102,554 4.37% $6,889 4.77%
Collateralized mortgage obligations
Mortgage-backed securities
- --------------------------------------------------------------------------------------------
Total $9,840 5.00% $102,554 4.37% $6,889 4.77%
============================================================================================
- -----------------------------------------------------------------------------------------------
Held to Maturity
- -----------------------------------------------------------------------------------------------
Obligations of Corporate Bonds
States & Political &
Subdivisions Other Securities
- -----------------------------------------------------------------------------------------------
Amortized Amortized
Maturity (in years) Cost Yield Cost Yield Total Yield
- -----------------------------------------------------------------------------------------------
Within 1 $ 6,409 1.26% $ -- -- $ 10,052 2.93%
After 1 but within 5 856 4.40% -- -- $109,607 4.38%
After 5 but within 10 -- -- -- -- -- --
After 10 5,104 5.59% -- -- $ 11,993 5.12%
Other securities -- -- 2,272 -- $ 2,272 --
- -----------------------------------------------------------------------------------------------
Subtotal $12,369 3.26% $2,272 -- $133,924 4.26%
Collateralized mortgage obligations $247,507 3.68%
Mortgage-backed securities $ 9,399 2.53%
- -----------------------------------------------------------------------------------------------
Total $12,369 3.26% $2,272 -- $390,830 3.85%
===============================================================================================
As a member of the Federal Reserve System, the Bank owns Federal Reserve Bank
stock with a book value of $638,000. Being an equity investment, the stock has
no maturity. There is no public market for this investment. The last dividend
was 6.00 percent.
As a member of the Federal Home Loan Bank of New York, the Bank owns Federal
Home Loan Bank of New York stock with a book value of $1,535,000. Being an
equity investment, the stock has no maturity. There is no public market for this
investment. The last declared dividend was 5.05 percent.
Loan Portfolio
Loans, net of unearned discounts but before the allowance for loan losses,
totaled $839,061,000.
Consumer loans are the largest component of Suffolk's loan portfolio. Net of
unearned discounts, they totaled $229,711,000 at the end of 2003, down 17.3
percent from $277,633,000 at year-end 2002. Consumer loans include primarily
indirect, dealer-generated automobile loans. Competition among commercial banks
and with captive finance companies of automobile manufacturers has reduced
yields and volume. Commercial real estate mortgages closed the year at
$232,119,000 up 26.5 percent from $183,501,000 last year. Commercial and
industrial loans followed at $171,616,000, up 14.3 percent from $150,130,000 at
the end of 2002. As commerce on Long Island stagnated, commercial mortgages, and
to a lesser extent, commercial loans, offered continuing opportunity. However,
competition forced concessions on rates in order to maintain the quality of
Suffolk's commercial portfolio. These loans are made to small local businesses
throughout Suffolk County. Loan balances are seasonal, particularly in the
Hamptons where retail inventories rise in the spring and decline by autumn.
The remaining significant components of the loan portfolio are residential
mortgages at $113,979,000 up 20.1 percent from $94,864,000; home equity loans at
$60,397,000, up 36.2 percent from $44,349,000; and construction loans at
$30,461,000, down 16.7 percent from 36,558,000.
The following table categorizes total loans (net of unearned discounts) at
December 31: (in thousands)
- --------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Commercial, financial & agricultural loans $171,616 20.5% $150,130 19.0% $133,076 16.7% $133,524 17.2% $131,429 18.1%
Commercial real estate mortgages 232,119 27.7% 183,501 23.3% 173,092 21.7% 158,443 20.4% 162,321 22.3%
Real estate -- construction loans 30,461 13.6% 36,558 4.6% 27,365 3.4% 34,393 4.4% 17,956 2.5%
Residential mortgages (1st and 2nd liens) 113,979 13.6% 94,864 12.0% 95,424 12.0% 89,337 11.5% 82,411 11.3%
Home equity loans 60,397 7.2% 44,349 5.6% 31,699 4.0% 21,82 2.8% 20,834 2.9%
Consumer loans 229,711 27.4% 277,633 35.2% 334,849 42.1% 335,679 43.3% 309,653 42.6%
Other loans 778 0.1% 1,522 0.2% 605 0.1% 2,797 0.4% 2,921 0.4%
- --------------------------------------------------------------------------------------------------------------------------
Total loans (net of unearned discounts) $839,061 100% $788,557 100% $796,110 100% $775,997 100% $727,525 100%
==========================================================================================================================
9
Non-Performing Loans
Generally, recognition of interest income is discontinued where reasonable doubt
exists as to whether interest can be collected. Ordinarily, loans no longer
accrue interest when 90 days past due. When a loan stops accruing interest, all
interest accrued in the current year, but not collected, is reversed against
interest income in the current year. Any interest accrued in prior years is
charged against the allowance for loan losses. Loans start accruing interest
again when they become current as to principal and interest, and when, in the
opinion of management, they can be collected in full. All non-performing loans,
of a material amount, are reflected in the foregoing tables. The following table
shows non-accrual, past due, and restructured loans at December 31: (in
thousands)
- --------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------
Loans accruing but past due contractually
90 days or more $1,286 $ 349 $1,505 $ 949 $1,741
Loans not accruing interest 1,784 1,560 1,912 2,469 1,132
Restructured loans 35 198 56 56 275
- --------------------------------------------------------------------------------------
Total $3,105 $2,107 $3,473 $3,474 $3,148
======================================================================================
Interest on loans that are restructured or are no longer accruing interest would
have amounted to about $71,000 for 2003 under the contractual terms of those
loans. Suffolk records the payment of interest on such loans as a reduction of
principal. Interest income recognized on restructured and non-accrual loans was
immaterial for the years 2003, 2002, and 2001. Suffolk has a formal procedure
for internal credit review to more precisely identify risk and exposure in the
loan portfolio.
Summary of Loan Losses and Allowance for Loan Losses
The allowance for loan losses is determined by continuous analysis of the loan
portfolio. That analysis includes changes in the size and composition of the
portfolio, historical loan losses, industry-wide losses, current and anticipated
economic trends, and details about individual loans. It also includes estimates
of the actual value of collateral and other possible sources of repayment. There
can be no assurance that the allowance is, in fact, adequate. When a loan, in
full or in part, is deemed uncollectible, it is charged against the allowance.
This happens when it is well past due and the borrower has not shown the ability
or intent to make the loan current, or the borrower does not have enough assets
to pay the debt, or the value of the collateral is less than the balance of the
loan and not likely to improve soon. Residential real estate and consumer loans
are not analyzed individually because of the large number of loans, small
balances, and historically low losses. In the future, the provision for loan
losses may change as a percentage of total loans. The percentage of net
charge-offs to average net loans during 2003 was 0.13, compared to 0.19 percent
in 2002, and 0.06 percent during 2001. The ratio of the allowance for loan
losses to loans, net of discounts, was 1.02 percent at the end of 2003, down
from 1.10 percent in 2002 and 1.11 percent in 2001. A summary of transactions
follows: (in thousands)
- ---------------------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------
Allowance for loan losses, January 1, $8,695 $8,825 $7,749 $7,270 $6,955
Loans charged-off:
Commercial, financial & agricultural loans 110 27 111 130 320
Commercial real estate mortgages -- -- -- -- --
Real estate -- construction loans -- -- -- -- --
Residential mortgages (1st and 2nd liens) -- -- -- -- 9
Home equity loans 62 -- -- -- --
Consumer loans 1,835 1,826 691 750 605
Lease finance -- -- -- -- --
Other loans 5 -- 4 17 --
- ---------------------------------------------------------------------------------------
Total Charge-offs $2,012 $1,853 $ 806 $ 897 $ 934
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Loans recovered after being charged-off 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------
Commercial, financial & agricultural loans 23 33 178 25 22
Commercial real estate mortgages -- -- -- -- --
Real estate -- construction loans -- -- -- -- --
Residential mortgages (1st and 2nd liens) -- -- -- -- 1
Home equity loans -- -- -- 9 --
Consumer loans 913 310 160 142 156
Lease finance -- -- -- -- --
Other loans -- -- -- -- --
- ---------------------------------------------------------------------------------------
Total recoveries $ 936 $ 343 $ 338 $ 176 $ 179
- ---------------------------------------------------------------------------------------
Net loans charged-off 1,076 1,510 468 721 755
Provision for loan losses 932 1,380 1,544 1,200 1,070
- ---------------------------------------------------------------------------------------
Allowance for loan losses, December 31, $8,551 $8,695 $8,825 $7,749 $7,270
=======================================================================================
10
The following table summarizes the allowance for loan losses allocated by loan
type: (dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
As of December 31, 2003 Total 2002 Total 2001 Total 2000 Total 1999 Total
- -------------------------------------------------------------------------------------------------------------------------------
Commercial, financial & agricultural loans $3,220 37.7% $3,315 38.1% $3,994 45.3% $1,863 24.0% $1,666 22.9%
Commercial real estate mortgages 2,877 33.6% 2,731 31.4% 2,235 25.3% 3,592 46.4% 2,665 36.7%
Real estate -- construction loans 208 2.4% 305 3.5% 202 2.3% 235 3.0% 135 1.9%
Residential mortgages (1st and 2nd liens) 228 2.7% 136 1.6% 132 1.5% 129 1.7% 87 1.2%
Home equity loans 480 5.6% 411 4.7% 377 4.3% 337 4.3% 312 4.3%
Consumer loans 1,379 16.1% 1,589 18.3% 1,858 21.1% 1,573 20.3% 1,750 24.1%
Unallocated allowance 159 1.9% 208 2.4% 27 0.3% 20 0.3% 655 9.0%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses $8,551 100.0% $8,695 100.0% $8,825 100.0% $7,749 100.0% $7,270 100.0%
===============================================================================================================================
The following table presents information concerning loan balances and asset
quality: (dollars in thousands)
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Loans, net of discounts:
Average $807,430 $781,521 $776,936 $735,721 $676,810
At end of period 839,061 788,557 796,110 775,997 727,525
Non-performing assets/total loans, net of discounts 0.22% 0.22% 0.25% 0.35% 0.22%
Non-performing assets/total assets 0.14 0.14 0.17 0.26 0.16
Ratio of net charge-offs/average net loans 0.13 0.19 0.06 0.10 0.11
Net charge-offs/net loans at December 31, 0.13 0.19 0.06 0.09 0.10
Allowance for loan losses/loans, net of discounts 1.02 1.10 1.11 1.00 1.00
==========================================================================================================
Interest Expense
Interest expense in 2003 was $9,801,000, down from $16,088,000 the year before,
which was down from $24,342,000 during 2001. Most interest was paid for the
deposits of individuals, businesses, and various governments and their agencies.
Short-term borrowings, which may include federal funds purchased (short-term
lending by other banks), securities sold under agreements to repurchase, Federal
Home Loan Bank borrowings, and the Federal Reserve Bank discount window, were
used occasionally. Short-term borrowings averaged $4,501,000 during 2003,
$34,000 during 2002, and $12,017,000 during 2001.
Deposits
Average interest-bearing deposits increased to $822,306,000 in 2003, up 2.5
percent from $801,903,000 in 2002. Saving, N.O.W., and money market deposits
increased during 2003, averaging $569,262,000, up 10.6 percent from 2002 when
they averaged $514,839,000. Average time certificates of less than $100,000
totaled $230,222,000, down 10.2 percent from $256,316,000 in 2002. Average time
certificates of $100,000 or more totaled $22,822,000, down 25.8 percent from
$30,748,000 during 2002. 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 saving
accounts for regulatory purposes, they are included in demand deposits in the
accompanying consolidated statements of condition.
The following table classifies average deposits for each of the periods
indicated: (in thousands)
- --------------------------------------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
Average Average Average
Average Rate Paid Average Rate Paid Average Rate Paid
- -------------------------------------------------------------------------------------------------------------
Demand deposits $ 352,588 $ 311,948 $270,530
Saving deposits 381,971 0.64% 349,141 1.36% 273,565 2.48%
N.O.W. & money market deposits 187,291 0.65 165,698 1.14 114,328 1.50
Time certificates of $100,000 or more 22,822 2.09 30,748 2.75 28,978 4.89
Other time deposits 230,222 2.43 256,316 3.35 267,303 5.16
- --------------------------------------------------------------------------------------------------------------
Total deposits $1,174,894 $1,113,851 $954,704
==============================================================================================================
11
At December 31, 2003, the remaining maturities of time certificates of $100,000
or more were as follows: (in thousands)
- --------------------------------------------------------------------------------
3 months or less $ 9,376
Over 3 through 6 months 6,869
Over 6 through 12 months 2,132
Over 12 months 3,569
- --------------------------------------------------------------------------------
Total $21,946
================================================================================
Short-Term Borrowings
Occasionally, Suffolk uses short-term funding. This includes lines of credit for
federal funds with correspondent banks, retail sale-repurchase agreements, the
Federal Reserve Bank discount window, and the Federal Home Loan Bank. Average
balances of federal funds purchased were $560,000 and $34,000 for 2003 and 2002,
respectively. Average balances of Federal Home Loan Bank borrowings were
$3,941,000 during 2003. There were no Federal Home Loan Bank borrowings and
retail repurchase agreements during 2002.
Other Income
Other income increased to $11,310,000 during 2003, up 12.3 percent from
$10,073,000 during 2002 which was up 5.5 percent from $9,548,000 during 2001.
Service charges on deposit accounts remained flat from 2002 to 2003, and up 7.8
percent from 2001 to 2002. Other service charges were up 21.9 percent and 27.5
percent for the same periods, respectively. Fiduciary fees in 2003 totaled
$1,199,000, up 5.1 percent from 2002 when they amounted to $1,141,000 which was
up 2.3 percent from 2001, at $1,115,000.
Other Expense
Other expense during 2003 was $36,190,000, up 1.2 percent from 2002 when it was
$35,744,000 which was up 10.6 percent from $32,307,000 in 2001. Increases were
primarily due to increase in compensation expense, up 4.2 percent from 2002 to
2003 and in outside services, up 13.5 percent from 2002 to 2003. During 2003,
non-interest expense grew at 1.2 percent while average assets grew by 4.8
percent, further increasing efficiency.
Interest Rate Sensitivity
Interest rate "sensitivity" is determined by the date when each asset and
liability in Suffolk's portfolio can be repriced. Sensitivity increases when
interest-earning assets and interest-bearing liabilities cannot be repriced at
the same time. While this analysis presents the volume of assets and liabilities
repricing in each period of time, it does not consider how quickly various
assets and liabilities might actually be repriced in response to changes in
interest rates. Management reviews its interest rate sensitivity regularly and
adjusts its asset/liability strategy accordingly. Because the interest rates of
assets and liabilities vary according to their maturity, management may
selectively mismatch the repricing of assets and liabilities to take advantage
of temporary or projected differences between short- and long-term interest
rates. The following table reflects the sensitivity of Suffolk's assets and
liabilities at December 31, 2003: (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Less than 3 to 6 7 to 12 More Than Not Rate
Maturity 3 Months Months Months 1 Year Sensitive Total
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
- ---------------------------------------------------------------------------------------------------------------------------
Domestic loans (1) (net of unearned discount) $296,973 $ 67,077 $ 99,077 $ 373,372 $ 2,562 $ 839,061
Investment securities (2) 20,027 28,198 48,355 291,978 2,272 390,830
Federal funds sold 4,300 -- -- -- -- 4,300
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $321,300 $ 95,275 $147,432 $ 665,350 $ 4,834 $1,234,191
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits and interest-bearing liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Demand deposits (3) $ 18,426 $ 18,426 $ 36,852 $ 290,515 $ -- $ 364,219
N.O.W. & money market accounts (4) 10,365 10,365 20,730 165,843 -- 207,303
Borrowings 20,000 -- -- -- -- 20,000
Interest-bearing deposits (5) 62,753 42,539 55,717 454,965 -- 615,974
- ---------------------------------------------------------------------------------------------------------------------------
Total demand deposits & interest-bearing liabilities $111,544 $ 71,330 $113,299 $ 911,323 $ -- $1,207,496
===========================================================================================================================
Gap $209,756 $ 23,945 $ 34,133 $(245,973) $ 4,834 $ 26,695
===========================================================================================================================
Cumulative difference between interest-earning
assets and interest-bearing liabilities $209,756 $233,701 $267,834 $ 21,861 $26,695
===========================================================================================================================
Cumulative difference/total assets 15.79% 17.59% 20.16% 1.65% 2.01%
===========================================================================================================================
12
Footnotes to Interest Rate Sensitivity
(1) Based on contractual maturity and instrument repricing date, if applicable;
projected prepayments and prepayments of principal based on experience.
(2) Based on contractual maturity, and projected prepayments based on
experience. FRB and FHLB stock is not considered rate-sensitive.
(3) Based on experience of historical stable core deposit relationships.
(4) N.O.W. and money market accounts are assumed to decline over a period of
five years.
(5) Fixed-rate deposits and deposits with fixed pricing intervals are reflected
as maturing in the period of contactual maturity. Saving accounts are
assumed to decline over a period of five years.
As of December 31, 2003, interest-earning assets with maturities of less than
one year exceed interest-bearing liabilities of similar maturity. This
cumulative gap might result in increased net interest income if interest rates
increase. If interest rates decline, net interest income might decrease.
Market Risk
Market risk is the risk that a financial instrument will lose value as the
result of adverse changes in market prices, interest rates, foreign currency
exchange rates, commodity prices, or the prices of equity securities. Suffolk's
primary exposure to market risk is to changing interest rates.
Monitoring and managing this risk is an important part of Suffolk's
asset/liability management process. It is governed by policies established by
its Board of Directors. These policies are reviewed and approved annually. The
Board delegates responsibility for asset/liability management to the
Asset/Liability Committee ("ALCO"). ALCO then develops guidelines and strategies
to implement the policy.
Interest Rate Risk
Interest rate risk is the sensitivity of earnings to changes in interest rates.
As interest rates change, interest income and expense also change, thereby
changing net interest income ("NII"). NII is the primary component of Suffolk's
earnings. ALCO uses a detailed and dynamic model to quantify the effect of
sustained changes in interest rates on NII. While ALCO routinely monitors
simulated NII sensitivity two years into the future, it uses other tools to
monitor longer term interest rate risk.
The model measures the effect of changing interest rates on both interest income
and interest expense for all assets and liabilities, as well as for derivative
financial instruments that do not appear on the balance sheet. The results are
compared to ALCO policy limits that specify a maximum effect on NII one year in
the future, assuming no growth in assets or liabilities, and a 2 percent or 200
basis point ("bp") change in interest rates upward and a 1 percent or 100 basis
point change in interest rates downward. Following is Suffolk's NII senstivity
as of December 31, 2003. Suffolk's Board has approved a policy limit of 12.5
percent.
- --------------------------------------------------------------------------------
Estimated NII
Rate Change Sensitivity
- --------------------------------------------------------------------------------
+200 basis point rate shock 1.57%
- -100 basis point rate shock (1.46%)
================================================================================
These estimates should not be interpreted as Suffolk's forecast, and should not
be considered as indicative of management's exceptation for operating results.
They are hypothetical estimates that are based on many assumptions including:
the nature and time of changes in interest rates, the shape of the "yield
curve"(variations in interest rates for financial instruments of varying
maturity at a given moment in time), prepayments on loans and securities,
deposit outflows, pricing on loans and deposits, and the reinvestment of cash
flows from assets and liabilities, among other things. While these assumptions
are based on management's best estimate of current economic conditions, Suffolk
cannot give any assurance that they will actually predict results, nor can they
anticipate how the behavior of customers and competitors may change in the
future.
Factors that may affect actual results include: prepayment and refinancing of
loans other than as assumed, interest rate change caps and floors, repricing
intervals on adjustable rate instruments, changes in debt service on adjustable
rate loans, and early withdrawal of deposits. Actual results may also be
affected by actions ALCO takes in response to changes in interest rates, actual
or anticipated.
When appropriate, ALCO may use off-balance-sheet instruments such as interest
rate floors, caps, and swaps to hedge its position with regard to interest rate
risk. The Board of Directors has approved a hedging policy statement that
governs the use of such instruments. As of December 31, 2003, there were no
derivative financial instruments outstanding.
13
The following table illustrates the contractual sensitivity to changes in
interest rates of the Company's total loans, net of discounts, not including
overdrafts and loans not accruing interest, together totaling $2,562,000 at
December 31, 2003: (in thousands)
- -------------------------------------------------------------------------------
Due Within After 1 but After
Interest rate provision 1 Year Before 5 Years 5 Years Total
- -------------------------------------------------------------------------------
Predetermined rates $156,072 $189,361 $25,893 $371,326
Floating or adjustable rates 307,055 153,713 4,405 465,173
- -------------------------------------------------------------------------------
Total $463,127 $343,074 $30,298 $836,499
===============================================================================
The following table illustrates the contractual sensitivity to changes in
interest rates on the Company's commercial, financial, agricultural, and real
estate construction loans not including non-accrual loans totaling approximately
$231,000 at December 31, 2003: (in thousands)
- ---------------------------------------------------------------------------------------
Due Within After 1 but After
1 Year Before 5 Years 5 Years Total
- ---------------------------------------------------------------------------------------
Commercial, financial & agricultural $155,207 $16,002 $231 $171,440
Real estate construction 30,461 -- -- 30,461
- ---------------------------------------------------------------------------------------
Total $185,668 $16,002 $231 $201,901
=======================================================================================
Asset/Liability Management & Liquidity
The asset/liability management committee reviews Suffolk's financial performance
and compares it to the asset/liability management policy. The committee includes
two outside directors, executive management, the comptroller, and the heads of
lending and retail banking. It uses computer simulations to quantify interest
rate risk and to project liquidity. The simulations also help the committee to
develop contingent strategies to increase net interest income. The committee
always assesses the impact of any change in strategy on Suffolk's ability to
make loans and repay deposits. Only strategies and policies that meet regulatory
guidelines and that are appropriate under the economic and competitive
circumstances are considered by the committee. Suffolk has not used forward
contracts or interest rate swaps to manage interest rate risk.
Off Balance-Sheet Obligations
Following is a table describing certain liabilities not included in Suffolk's
consolidated statement of condition in the period in which they are due: (in
thousands of dollars)
- ----------------------------------------------------------------------------------------------------------------------------
Contractual obligations Total Less than 1 year 1 - 3 years 3-5 years More than 5 years
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations -- -- -- -- --
Operating lease obligations 4,331 698 1,267 928 1,438
Purchase obligations 2,150 400 843 907 --
Other long-term liabilities reflected on Suffolk's
balance sheet under GAAP -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total $6,481 $1,098 $2,110 $1,835 $1,438
============================================================================================================================
Amounts listed as purchase obligations represent agreements to purchase services
for Suffolk's core banking system.
Capital Resources
Primary capital, including stockholders' equity, not including the net
unrealized gain on securities available for sale, net of tax, and the allowance
for loan losses, amounted to $104,187,000 at year-end 2003, compared to
$109,103,000 at year-end 2002 and $104,566,000 at year-end 2001. During 2003,
Suffolk repurchased 556,598 shares for an aggregate price of $17,718,362.
Management determined that this would increase leverage while preserving capital
ratios well above regulatory requirements.
The following table presents Suffolk's capital ratio and other related ratios
for each of the past five years: (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
2003 (1) 2002 (1) 2001 (1) 2000 (1) 1999 (1)
- ---------------------------------------------------------------------------------------------------------------
Primary capital at year-end $104,187 $109,103 $104,566 $94,978 $86,442
Primary capital at year-end as a percentage of year-end:
Total assets plus allowance for loan losses 7.79% 8.51% 8.91% 8.98% 8.75%
Loans, net of unearned discounts 12.42% 13.84% 13.13% 12.24% 11.88%
Total deposits 8.77% 9.55% 9.94% 10.08% 9.85%
===============================================================================================================
(1) Capital ratios do not include the effect of SFAS No. 115 "Accounting for
Certain Investments in Debt and Investment Securities."
14
In 2000, the Board adopted a policy whereby management will maximize both return
on average equity and earnings-per-share, and therefore shareholder value, while
maintaining the regulatory standard of "well-capitalized." That standard is 10
percent Total Risk-based Capital, 6 percent Tier 1 Capital, and 5 percent
Leverage Capital. When capital exceeds that standard by more than a small
cushion over what is expected to be required to maintain the "well-capitalized"
standard during the current quarter, shares may be repurchased as they become
available at prices that remain accretive to earnings per share in transactions
under SEC rule 10-b 18 and in private purchases. When capital expected to be
required during the current quarter does not exceed the standard, repurchases
will not be made. Further, the dividend reinvestment program will automatically
follow the same standard, purchasing shares in the market when Suffolk is in the
market to repurchase shares, and issuing from the reserve when it is not. Each
of these replaces the prior practice of authorizing the repurchase of a specific
number of shares by Suffolk, or the purchase or issuance of shares by the
dividend reinvestment program without specific reference to capital ratios.
The following table details repurchases during 2003:
- ---------------------------------------------------------------------------------------
Year ending Total shares repurchased Average price per share Aggregate cost
- ---------------------------------------------------------------------------------------
December 31, 2003 556,598 $31.83 $17,718,362
=======================================================================================
Suffolk measures how effectively it uses capital by two widely accepted
performance ratios: return on average assets and return on average common
stockholders' equity. The returns in 2003 on average assets of 1.64 percent and
average common equity of 21.93 percent fluctuated slightly from 2002 when
returns were 1.72 percent and 21.12 percent, respectively.
All dividends must conform to applicable statutory requirements. Suffolk
Bancorp's ability to pay dividends depends on Suffolk County National Bank's
ability to pay dividends. Under 12 USC 56-9, a national bank may not pay a
dividend on its common stock if the dividend would exceed net undivided profits
then on hand. Further, under 12 USC 60, a national bank must obtain prior
approval from the Office of the Comptroller of the Currency to pay dividends on
either common or preferred stock that would exceed the bank's net profit for the
current year combined with retained net profits (net profits minus dividends
paid during that period) of the prior two years. The amount the Bank currently
has available to pay dividends is approximately $35,765,000.
Risk-Based Capital and Leverage Guidelines
The Federal Reserve Bank's risk-based capital guidelines call for bank holding
companies to require minimum ratios of capital to risk-weighted assets, which
include certain off-balance-sheet activities, such as standby letters of credit.
The guidelines define capital as being "core," or "Tier 1" capital, which
includes common stockholders' equity; a limited amount of perpetual preferred
stock; minority interest in unconsolidated subsidiaries, less goodwill; or
"supplementary" or "Tier 2" capital, which includes subordinated debt,
redeemable preferred stock, and a limited amount of the allowance for loan
losses. All bank holding companies must meet a minimum ratio of total qualifying
capital to risk-weighted assets of 8.00 percent, of which at least 4.00 percent
should be in the form of Tier 1 capital. At December 31, 2003 Suffolk's ratios
of core capital and total qualifying capital (core capital plus Tier 2 capital)
to risk-weighted assets were 10.15 percent and 11.06 percent, respectively.
Discussion of New Accounting Pronouncements
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 excepted
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 plans to adopt the provisions under the revised
interpretation in the first quarter of 2004.
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 as defined in the agreements. Performance
letters of credit require Suffolk to make payments if the customer fails to
perform certain nonfinancial 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
15
Suffolk issues or modifies subsequent to December 31, 2002. The maximum
potential undiscounted amount of the future payments of these letters of credit
as of December 31, 2003 is $5,754,000, and they expire as follows:
- --------------------------------------------------------------------------------
2004 $4,266,000
2005 909,000
2006 478,000
2007 101,000
================================================================================
$5,754,000
================================================================================
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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 is
generally effective for contracts entered into or modified after September 30,
2003 and for hedging relationships designated after September 30, 2003. All
provisions of this Statement shall be applied prospectively. Based on current
business operations, management has determined that the provisions of SFAS No.
149 do not materially impact Suffolk's financial condition, results of
operations, or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. Based on current
business operations, management has determined that the provisions of SFAS No.
150 do not materially impact Suffolk's financial condition, results of
operations, or disclosures.
In October 2003, the AICPA issued SOP 03-3, "Accounting for Loans or Certain
Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 applies to a loan
with the evidence of deterioration of credit quality since origination acquired
by completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows excepted at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.
Critical Accounting Policies, Judgments, and Estimates
The accounting and reporting policies of Suffolk conform to accounting
principles generally accepted in the United States of America and general
practices in the financial services industry. The preparation of financial
statements in conformity with these accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results in the future could differ
from those estimates.
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 allowance for loan losses is calculated to maintain a
reserve believed by management to be sufficient to absorb estimated credit
losses. Management's determination of the adequacy of the allowance is based on
periodic evaluations of the loan portfolio and other relevant factors. This
evaluation is inherently subjective as it requires material estimates,
including, among others, the expected probability of default; the amount of loss
in the event of default; the expected usage of loan commitments; the amounts and
timing of cash flows expected in the future from impaired loans and mortgages;
and an additional factor for potential loan losses based on historical
experience. Management also considers economic conditions, uncertainties in
estimating losses, and inherent risks in the loan portfolio. All of these
factors may change significantly in the future. To the extent that actual
results differ from management's estimates, additional provisions for loan
losses may be required that could reduce earnings in future periods.
Suffolk recognizes deferred-tax assets and liabilities. Deferred income taxes
occur when income taxes are allocated through time. Some items are temporary
resulting from differences in the timing of a transaction under generally
accepted accounting principles ("GAAP"), and for the computation of income tax.
Examples would include the future tax effects of temporary differences for such
items as deferred compensation and the provision for loan losses. Estimates of
deferred tax assets are based upon evidence available to management that future
realization is more likely than not. If management determines that Suffolk may
be unable to realize all or part of 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 that management expects to realize.
16
Business Risks and Uncertainties
This annual 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 operations. 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.
17
CONSOLIDATED STATEMENTS OF CONDITION
December 31,
-------------------------------
2003 2002
-------------- --------------
ASSETS
Cash and Due From Banks $ 52,052,913 $ 48,000,138
Federal Funds Sold 4,300,000 17,500,000
Investment Securities:
Available for Sale, at Fair Value 376,188,513 359,902,409
Held to Maturity (Fair Value of $15,364,849 and $17,643,000, respectively)
Obligations of States and Political Subdivisions 12,368,959 14,884,444
Federal Reserve Bank Stock 637,849 637,849
Federal Home Loan Bank Stock 1,534,600 1,361,000
Corporate Bonds and Other Securities 100,000 100,000
-------------- --------------
Total Investment Securities 390,829,921 376,885,702
Total Loans 839,169,491 788,835,165
Less: Unearned Discounts 108,035 277,799
Allowance for Loan Losses 8,551,225 8,695,408
-------------- --------------
Net Loans 830,510,231 779,861,958
Premises and Equipment, Net 22,780,151 20,437,150
Accrued Interest Receivable 5,869,073 5,945,568
Excess of Cost Over Fair Value of Net Assets Acquired 814,445 814,445
Other Assets 21,600,052 23,272,229
-------------- --------------
TOTAL ASSETS $1,328,756,786 $1,272,717,190
============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Demand Deposits $ 364,219,256 $ 314,714,256
Saving, N.O.W., and Money Market Deposits 587,553,204 557,967,262
Time Certificates of $100,000 or more 21,946,480 23,495,058
Other Time Deposits 213,776,563 246,405,358
-------------- --------------
Total Deposits 1,187,495,503 1,142,581,934
Federal Home Loan Bank Borrowings 20,000,000 --
Dividend Payable on Common Stock 2,080,361 1,956,187
Accrued Interest Payable 799,503 1,334,336
Other Liabilities 18,211,169 18,052,041
-------------- --------------
TOTAL LIABILITIES 1,228,586,536 1,163,924,498
-------------- --------------
Commitments and Contingent Liabilities
STOCKHOLDERS' EQUITY
Common Stock (par value $2.50; 15,000,000 shares authorized, 10,949,283
and 11,489,481 shares outstanding at December 31, 2003 & 2002, respectively) 33,879,045 33,838,045
Surplus 19,374,972 19,230,182
Retained Earnings 48,887,980 52,453,451
Treasury Stock at Par (2,602,335 shares and 2,045,737 shares, respectively) (6,505,842) (5,114,347)
Accumulated Other Comprehensive Income, Net of Tax 4,534,095 8,385,361
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 100,170,250 108,792,692
-------------- --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,328,756,786 $1,272,717,190
============== ==============
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED STATEMENTS OF INCOME
For the Years ended December 31,
---------------------------------------
2003 2002 2001
----------- ----------- -----------
INTEREST INCOME
Federal Funds Sold $ 220,708 $ 706,856 $ 1,260,540
United States Treasury Securities 415,957 471,611 1,091,359
Obligations of States and Political Subdivisions (tax exempt) 563,281 567,214 529,737
Mortgage-Backed Securities 10,396,009 12,143,135 6,244,987
U.S. Government Agency Obligations 3,690,831 2,895,198 2,245,450
Corporate Bonds and Other Securities 94,064 84,189 183,266
Loans 55,613,709 61,559,406 68,009,265
----------- ----------- -----------
Total Interest Income 70,994,559 78,427,609 79,564,604
INTEREST EXPENSE
Saving, N.O.W., and Money Market Deposits 3,658,406 6,645,241 8,492,498
Time Certificates of $100,000 or more 477,522 846,096 1,417,903
Other Time Deposits 5,603,758 8,596,137 13,785,445
Federal Funds Purchased 12,384 625 98,077
Interest on Other Borrowings 49,091 -- 547,937
----------- ----------- -----------
Total Interest Expense 9,801,161 16,088,099 24,341,860
Net Interest Income 61,193,398 62,339,510 55,222,744
Provision for Loan Losses 931,500 1,380,000 1,544,000
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 60,261,898 60,959,510 53,678,744
OTHER INCOME
Service Charges on Deposit Accounts 5,693,454 5,690,926 5,277,701
Other Service Charges, Commissions & Fees 2,537,068 2,081,541 1,632,279
Fiduciary Fees 1,199,117 1,141,024 1,115,377
Other Operating Income 1,416,818 1,160,121 1,127,383
Net Gain on Sale of Securities Available for Sale 464,262 -- 395,294
----------- ----------- -----------
Total Other Income 11,310,719 10,073,612 9,548,034
OTHER EXPENSE
Salaries & Employee Benefits 21,669,863 20,788,300 18,424,087
Net Occupancy Expense 2,856,024 2,788,880 2,849,827
Equipment Expense 2,181,295 2,616,714 2,320,014
Outside Services 1,929,695 1,699,879 1,552,769
FDIC Assessments 189,631 184,208 176,759
Amortization of Excess Cost
Over Fair Value of Net Assets Acquired -- -- 361,932
Other Operating Expense 7,363,774 7,666,297 6,621,820
----------- ----------- -----------
Total Other Expense 36,190,282 35,744,278 32,307,208
Income Before Provision for Income Taxes 35,382,335 35,288,844 30,919,570
Provision for Income Taxes 14,046,091 14,020,154 12,234,773
----------- ----------- -----------
NET INCOME $21,336,244 $21,268,690 $18,684,797
=========== =========== ===========
Average: Common Shares Outstanding 11,055,897 11,657,984 11,822,452
Dilutive Stock Options 34,205 42,457 16,750
----------- ----------- -----------
Average Total Common Shares and Dilutive Options 11,090,102 11,700,441 11,839,202
EARNINGS PER COMMON SHARE Basic $ 1.92 $ 1.82 $ 1.58
Diluted $ 1.92 $ 1.82 $ 1.58
See accompanying notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Retained Treasury
Stock Surplus Earnings Stock
- -----------------------------------------------------------------------------------------
Balance, December 31, 2000 $19,026,050 $18,456,432 $ 53,873,370 $(4,126,144)
Net Income -- -- 18,684,797 --
Dividend - Cash -- -- (6,607,498) --
Dividend - Stock 14,713,245 -- (14,713,245) --
Purchase of Treasury Stock -- -- (3,486,027) (234,880)
Stock Options Exercised 86,250 708,750 (602,029) (38,035)
Net Change in Unrealized Gain on
Securities Available for Sale -- -- -- --
Comprehensive Income
- -----------------------------------------------------------------------------------------
Balance, December 31, 2001 $33,825,545 $19,165,182 $ 47,149,368 $(4,399,059)
Net Income -- -- 21,268,690 --
Dividend - Cash -- -- (7,684,592) --
Purchase of Treasury Stock -- -- (8,207,991) (709,490)
Stock Options Exercised 12,500 65,000 (71,680) (5,798)
Other -- -- (344) --
Net Change in Unrealized Gain on
Securities Available for Sale -- -- -- --
Comprehensive Income
- -----------------------------------------------------------------------------------------
Balance, December 31, 2002 $33,838,045 $19,230,182 $ 52,453,451 $(5,114,347)
Net Income -- -- 21,336,244 --
Dividend - Cash -- -- (8,390,512) --
Purchase of Treasury Stock -- -- (16,340,067) (1,378,295)
Stock Options Exercised 41,000 144,790 (172,562) (13,200)
Other -- -- 1,426 --
Net Change in Unrealized Loss on
Securities Available for Sale -- -- -- --
Comprehensive Income
- -----------------------------------------------------------------------------------------
Balance, December 31, 2003 $33,879,045 $19,374,972 $ 48,887,980 $(6,505,842)
Accumulated
Other Comprehensive
Income,
Gain (Loss) Comprehensive
Net of Tax Total Income
- --------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 822,824 $ 88,052,532
Net Income -- 18,684,797 $18,684,797
Dividend - Cash -- (6,607,498)
Dividend - Stock -- --
Purchase of Treasury Stock -- (3,720,907)
Stock Options Exercised -- 154,936
Net Change in Unrealized Gain on
Securities Available for Sale 272,920 272,920 272,920
-----------
Comprehensive Income $18,957,717
- --------------------------------------------------------------------------===========
Balance, December 31, 2001 $ 1,095,744 $ 96,836,780
Net Income -- 21,268,690 $21,268,690
Dividend - Cash -- (7,684,592)
Purchase of Treasury Stock -- (8,917,481)
Stock Options Exercised -- 22
Other -- (344)
Net Change in Unrealized Gain on
Securities Available for Sale 7,289,617 7,289,617 7,289,617
-----------
Comprehensive Income $28,558,307
- --------------------------------------------------------------------------===========
Balance, December 31, 2002 $ 8,385,361 $108,792,692
Net Income -- 21,336,244 $21,336,244
Dividend - Cash -- (8,390,512)
Purchase of Treasury Stock -- (17,718,362)
Stock Options Exercised -- 28
Other -- 1,426
Net Change in Unrealized Loss on
Securities Available for Sale (3,851,266) (3,851,266) (3,851,266)
-----------
Comprehensive Income $17,484,978
- --------------------------------------------------------------------------===========
Balance, December 31, 2003 $ 4,534,095 $100,170,250
See accompanying notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years ended December 31,
---------------------------------------------
2003 2002 2001
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 21,336,244 $ 21,268,690 $ 18,684,797
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
Provision for Loan Losses 931,500 1,380,000 1,544,000
Depreciation and Amortization 2,146,385 2,282,028 2,005,021
Amortization of Cost Over Fair Value of Net Assets Acquired -- -- 361,932
Accretion of Discounts (292,237) (569,557) (564,956)
Amortization of Premiums 5,294,635 2,545,950 533,577
Decrease (Increase) in Accrued Interest Receivable 76,495 (388,643) 741,209
Decrease (Increase) in Other Assets 1,672,177 1,072,313 (3,362,937)
Decrease in Accrued Interest Payable (534,832) (1,179,110) (811,115)
Increase (Decrease) in Income Taxes Payable 1,909,390 (702,142) (242,622)
Increase (Decrease) in Other Liabilities 927,532 1,454,142 (2,108,511)
Net Gain on Sale of Securities (464,262) -- (395,294)
------------- ------------- -------------
Net Cash Provided by Operating Activities 33,003,027 27,163,671 16,385,101
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal Payments on Investment Securities 100,805,657 31,962,165 6,855,533
Proceeds from Sale of Investment Securities; Available for Sale 39,108,805 -- 7,856,398
Maturities of Investment Securities; Available for Sale -- 6,000,000 83,250,000
Purchases of Investment Securities; Available for Sale (167,267,856) (146,425,841) (188,943,787)
Maturities of Investment Securities; Held to Maturity 9,500,000 6,241,000 11,833,400
Purchases of Investment Securities; Held to Maturity (7,156,595) (9,664,300) (8,605,650)
Loan Disbursements and Repayments, Net (51,579,772) 6,043,155 (20,580,950)
Purchases of Premises and Equipment, Net (4,489,386) (8,918,033) (2,360,914)
Disposition of Other Real Estate Owned -- -- 175,114
------------- ------------- -------------
Net Cash Used in Investing Activities (81,079,147) (114,761,854) (110,520,856)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase in Deposit Accounts 44,913,567 90,869,926 109,275,868
Federal Home Loan Bank Borrowings 20,000,000 -- --
Dividends Paid to Shareholders (8,266,338) (7,379,688) (6,332,706)
Stock Options Exercised 28 22 154,936
Treasury Shares Acquired (17,718,362) (8,917,481) (3,720,907)
------------- ------------- -------------
Net Cash Provided by Financing Activities 38,928,895 74,572,779 99,377,191
------------- ------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents (9,147,225) (13,025,404) 5,241,436
Cash and Cash Equivalents Beginning of Year 65,500,138 78,525,542 73,284,106
------------- ------------- -------------
Cash and Cash Equivalents End of Year $ 56,352,913 $ 65,500,138 $ 78,525,542
============= ============= =============
Supplemental Disclosure of Cash Flow Information
Cash Received During the Year for Interest $ 71,071,054 $ 78,038,966 $ 80,305,813
============= ============= =============
Cash Paid During the Year for:
Interest $ 10,335,993 $ 17,267,209 $ 25,152,975
Income Taxes 12,697,665 15,162,619 12,974,528
------------- ------------- -------------
Total Cash Paid During Year for Interest & Income Taxes $ 23,033,658 $ 32,429,828 $ 38,127,503
============= ============= =============
Non-Cash Investing and Financing:
(Decrease) Increase in Market Value of Investments 6,527,570 12,355,283 688,652
Decrease (Increase) in Deferred Tax Liability Related to Market Value
of Investments Available for Sale 2,676,304 (5,065,666) (282,347)
Dividends Declared But Not Paid 2,080,361 1,956,187 1,647,883
Stock Options Exercised for Stock 185,790 77,500 369,500
Stock Dividends Declared But Not Paid -- -- 14,713,245
See accompanying notes to consolidated financial statements.
21
Notes to Consolidated Financial Statements
Note 1 -- Summary of Significant Accounting Policies
The accounting and reporting policies of Suffolk Bancorp and its subsidiary
conform to generally accepted accounting principles and general practices within
the banking industry. The following footnotes describe the most significant of
these policies.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported assets and liabilities
as of the date of the consolidated statements of condition. The same is true of
revenues and expenses reported for the period. Actual results could differ
significantly from those estimates.
(A) Consolidation -- The consolidated financial statements include the accounts
of Suffolk and its wholly owned subsidiary, Suffolk County National Bank (the
"Bank"). In 1998, the Bank formed a Real Estate Investment Trust named Suffolk
Greenway, Inc. All intercompany transactions have been eliminated in
consolidation.
(B) Investment Securities -- Suffolk reports debt securities and mortgage-backed
securities in one of the following categories: (i) "held to maturity"
(management has the intent and ability to hold to maturity), which are to be
reported at amortized cost; (ii) "trading" (held for current resale), which are
to be reported at fair value, with unrealized gains and losses included in
earnings; and (iii) "available for sale" (all other debt securities and
mortgage-backed securities), which are to be reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. Accordingly, Suffolk classified all of its
holdings of debt securities and mortgage-backed securities as either "held to
maturity" or "available for sale." At the time a security is purchased, a
determination is made as to the appropriate classification.
Premiums and discounts on debt and mortgage-backed securities are amortized as
expense and accreted as income over the estimated life of the respective
security using a method that approximates the level-yield method. Gains and
losses on the sales of investment securities are recognized upon realization,
using the specific identification method and shown separately in the
consolidated statements of income.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 is
generally effective for contracts entered into or modified after September 30,
2003 and for hedging relationships designated after September 30, 2003. All
provisions of this statement shall be applied prospectively. Based on current
business operations, management expects that the provisions of SFAS No. 149 will
not materially impact Suffolk's financial condition, results of operations, or
disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 is generally effective for financial instruments entered
into or modified after May 31, 2003, and otherwise effective at the beginning of
the first interim period beginning after June 15, 2003. Based on current
business operations, management has determined that the provisions of SFAS No.
150 do not materially impact Suffolk's financial condition, results of
operations, or disclosures.
Suffolk adopted EITF 03-1, "The Meaning of Other than Temporary Impairment and
Its Application to Certain Investments," as of December 31, 2003. EITF 03-1
includes certain disclosures regarding quantitative and qualitative disclosures
for investment securities accounted for under FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," that are impaired at the balance
sheet date, but an other-than-temporary impairment has not been recognized. The
disclosures under EITF 03-1 are required for financial statements for years
ending after December 15, 2003 and are included in these financial statements.
(C) Loans and Loan Interest Income Recognition -- Loans are stated at the
principal amount outstanding. Interest on loans not made on a discounted basis
is credited to income, based upon the principal amount outstanding during the
period. Unearned discounts on installment loans are credited to income using
methods that approximate a level yield. Recognition of interest income is
discontinued when reasonable doubt exists as to whether interest due can be
collected. Loans generally no longer accrue interest when 90 days past due. When
a loan is placed on non-accrual status, all interest previously accrued in the
current year, but not collected, is reversed against current year interest
income. Any interest accrued in prior years is charged against the allowance for
loan losses. Loans and leases start accruing interest again when they become
current as to principal and interest, and when, in the opinion of management,
the loans can be collected in full.
(D) Allowance for Loan Losses -- The balance of the allowance for loan losses is
determined by managements' estimate of the amount of financial risk in the loan
portfolio and the likelihood of loss. The analysis also considers the Bank's
loan loss experience and may be adjusted in the future depending on economic
conditions. Additions to the allowance are made by charges to expense, and
actual losses, net of recoveries, are charged to the allowance. Regulatory
examiners may require the Bank to add to the allowance based upon their judgment
of information available to them at the time of their examination.
In accordance with SFAS 114, titled "Accounting by Creditors for Impairment of a
Loan," as amended by Statement No. 118, titled "Accounting by Creditors for
Impairment of Loan-Income
22
Recognition and Disclosures," an allowance is maintained for impaired loans to
reflect the difference, if any, between the principal balance of the loan and
the present value of projected cash flows, observable fair value, or collateral
value. SFAS 114 defines an impaired loan as a loan for which it is probable that
the lender will not collect all amounts due under the contractual terms of the
loan.
The Bank accounts for its transfers and servicing financial assets in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 revises the
standards for accounting for the securitizations and other transfers of
financial assets and collateral. Transfers of financial assets for which the
Bank has surrendered control of the financial assets are accounted for as sales
to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. Retained interests in a sale or
securitization of financial assets are measured at the date of transfer by
allocating the previous carrying amount between the assets transferred and based
on their relative estimated fair values. The fair values of retained servicing
rights and any other retained interests are determined based on the present
value of expected future cash flows associated with those interests and by
reference to market prices for similar assets. There were no transfers of
financial assets to related or affiliated parties. At December 31, 2003 and
2002, the Bank's servicing loan portfolio approximated $94,444,000, and
$78,416,000, respectively. The estimated fair value of mortgage servicing rights
was $1,074,000 and $833,000 as of December 31, 2003 and 2002, respectively.
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 nonfinancial contractual obligations.
Suffolk previously did not record a liability when guaranteeing obligations
unless it became probable that Suffolk would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees Suffolk issues or modifies
subsequent to December 31, 2002. The maximum potential undiscounted amount of
the future payments of these letters of credit as of December 31, 2003 is
$5,754,000 and they expire as follows:
- --------------------------------------------------------------------------------
2004 $4,266,000
2005 909,000
2006 478,000
2007 101,000
- --------------------------------------------------------------------------------
$5,754,000
================================================================================
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 $8,631 for loan losses based on the letters of
credit outstanding on December 31, 2003.
In October 2003, the AICPA issued SOP 03-3, "Accounting for Loans or Certain
Debt Securities Acquired in a Transfer" ("SOP 03-3"). SOP 03-3 applies to loans
with evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows excepted at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual,
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB")No. 102, "Selected Loan Loss Allowance Methodology
and Documentation Issues." SAB No. 102 provides guidance on the development,
documentation, and application of a systematic methodology for determining the
allowance for loans and leases in accordance with U.S. GAAP and is effective
upon issuance. The adoption of SAB No. 102 did not have a material impact on the
Bank's financial position or results of operations.
(E) Premises and Equipment -- Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated by the
declining-balance or straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized using the straight-line method over
the term of the lease or the estimated life of the asset, whichever is shorter.
On January 1, 2002, the Bank adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. SFAS No. 144 changes the
requirements relating to reporting the effects of a disposal or discontinuation
of a segment of a business. The adoption of this statement did not have an
impact on the financial condition or results of operations of the Bank.
(F) Other Real Estate Owned -- Property acquired through foreclosure (other real
estate owned or "OREO"), is stated at the lower of cost or fair value less
selling costs. Credit losses arising at the time of the acquisition of property
are charged
23
against the allowance for loan losses. Any additional write-downs to the
carrying value of these assets that may be required, as well as the cost of
maintaining and operating these foreclosed properties, are charged to expense.
Additional write-downs are recorded in a valuation reserve account that is
maintained asset by asset.
(G) Excess of Cost Over Fair Value of Net Assets Acquired and Other Intangible
Assets-- Through December 31, 2001, the excess of cost over fair value of net
assets acquired (goodwill) was amortized on a straight-line basis over a period
of ten years. Effective with the adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002, the Bank ceased amortizing goodwill and,
instead, tests goodwill for impairment on a periodic basis.
(H) Income Taxes -- Suffolk uses an asset and liability approach to accounting
for income taxes. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. Deferred tax assets are recognized if it is more likely than
not that a future benefit will be realized. It is management's position that no
valuation is necessary against any of Suffolk's deferred tax assets.
(I) Summary of Retirement Benefits Accounting -- Suffolk's retirement plan is
noncontributory and covers substantially all eligible employees. The plan
conforms to the provisions of the Employee Retirement Income Security Act of
1974, as amended. Suffolk's policy is to accrue for all pension costs and to
fund the maximum amount allowable for tax purposes. Actuarial gains and losses
that arise from changes in assumptions concerning future events are amortized
over a period that reflects the long-term nature of pension expense used in
estimating pension costs.
Suffolk accrues for post-retirement benefits other than pensions by accruing the
cost of providing those benefits to an employee during the years that the
employee serves.
(J) Cash and Cash Equivalents -- For purposes of the consolidated statement of
cash flows, cash and due from banks, and federal funds sold are considered to be
cash equivalents. Generally, federal funds are sold for one-day periods.
(K) Stock-Based Compensation -- At December 31, 2003, the Bank had one
stock-based employee compensation plan, which is more fully described in Note 7.
The bank accounts for that plan under the recognition and measurement principles
of APB No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, as an accepted alternative under FASB No. 123, "Accounting for
Stock-Based Compensation." 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 illustrates the effect on net income and earnings-per-share
if the Bank had applied the fair value recognition provisions of FASB No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation:
(in thousands, except per-share amounts)
- --------------------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------------------
Net Income: As Reported $21,336 $21,269 $18,685
Pro Forma 21,279 21,242 18,656
- --------------------------------------------------------------------------------
Basic EPS: As Reported 1.92 1.82 1.58
Pro Forma 1.92 1.82 1.58
- --------------------------------------------------------------------------------
(L) Treasury Stock -- The balance of treasury stock is computed at par value.
The excess cost over par is subtracted from undivided profits.
(M) Stock Dividend -- On November 26, 2001, Suffolk declared a 2-for-1 stock
split in the form of a 100 percent stock dividend, to shareholders of record on
December 14, 2001, payable on January 2, 2002. All share and per-share
information has been restated to reflect the split.
(N) Earnings-per-share -- Basic earnings-per-share is computed by dividing net
income by the number of weighted-average shares outstanding during the period.
Diluted earnings-per-share reflect the dilution that would occur if stock
options were exercised in return for common stock that would then share in
Suffolk's earnings. It is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding and the weighted-average
number of stock options exercisable during the period. Suffolk has no other
securities that could be converted into common stock, nor any contracts that
would result in the issuance of common stock.
(O) Comprehensive Income -- Comprehensive income includes net income and all
other changes in equity during a period except those resulting from investments
by owners and distributions to owners. Other comprehensive income includes
revenues, expenses, gains, and losses that under generally accepted accounting
principles are included in comprehensive income but excluded from net income.
Comprehensive income and accumulated other comprehensive income are reported net
of related income taxes. Accumulated other comprehensive income for the Bank
consists solely of unrealized holding gains or losses on securities available
for sale.
(P) Segment Reporting -- SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," requires that public companies report
certain information about operating segments. It also requires that public
companies report certain information about their products and services, the
geographic areas in which they operate, and their major customers. Suffolk is a
regional bank, which offers a wide array of products and services to its
customers. Pursuant to its banking strategy, emphasis is placed on building
relationships with its customers, as opposed to building specific lines of
business. As a result, at December 31, 2003 and 2002, Suffolk is not organized
24
around discernible lines of business and prefers to work as an integrated unit
to customize solutions for its customers, with business line emphasis and
product offerings changing over time as needs and demands change. Thus, all
necessary requirements of SFAS No. 131 have been met by Suffolk as of December
31, 2003.
(Q) Variable Interest Entities (VIE's) -- 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' 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 plans to adopt the
provisions under the revised interpretation in the first quarter of 2004.
Suffolk has determined the adoption of the provisions of FIN 46 do not
materially impact its financial condition or results of operation.
(R) Reclassification of Prior Year Consolidated Financial Statements -- Certain
reclassifications have been made to the prior year's consolidated financial
statements that conform with the current year's presentation.
Note 2 -- Investment Securities
The amortized cost, estimated fair values, and gross unrealized gains and losses
of Suffolk's investment securities available for sale and held to maturity at
December 31, 2003 and 2002 were (in thousands)
- ------------------------------------------------------------------------------------------------------
2003
- ------------------------------------------------------------------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
- ------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury securities $ 9,393 $ 9,840 $ 447 $ --
U.S. government agency debt 98,337 102,554 4,345 (128)
Collateralized mortgage obligations agency issue 243,403 245,917 4,004 (1,462)
Collateralized mortgage obligations private issue 1,561 1,590 29 --
Mortgage-backed securities 9,126 9,399 273 --
Obligations of states and political subdivisions 6,682 6,889 224 (17)
- ------------------------------------------------------------------------------------------------------
Balance at end of year 368,502 376,189 9,322 (1,607)
- ------------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of states and political subdivisions 12,369 13,093 733 (9)
Other securities 2,272 2,272 -- --
- ------------------------------------------------------------------------------------------------------
Balance at end of year 14,641 15,365 733 (9)
- ------------------------------------------------------------------------------------------------------
Total investment securities $383,143 $391,554 $10,055 $(1,616)
======================================================================================================
- ------------------------------------------------------------------------------------------------------
2002
- ------------------------------------------------------------------------------------------------------
Estimated Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
- ------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury securities $ 9,393 $ 10,020 $ 627 $ --
U.S. government agency debt 69,250 74,740 5,490 --
Collateralized mortgage obligations agency issue 242,167 249,914 7,920 (173)
Collateralized mortgage obligations private issue 6,218 6,307 89 --
Mortgage-backed securities 15,168 15,361 193 --
Obligations of states and political subdivisions 3,494 3,561 82 (15)
- ------------------------------------------------------------------------------------------------------
Balance at end of year 345,690 359,903 14,401 (188)
- ------------------------------------------------------------------------------------------------------
Held to maturity:
Obligations of states and political subdivisions 14,884 15,544 660 --
Other securities 2,099 2,099 -- --
- ------------------------------------------------------------------------------------------------------
Balance at end of year 16,983 17,643 660 --
- ------------------------------------------------------------------------------------------------------
Total investment securities $362,673 $377,546 $15,061 $(188)
======================================================================================================
The amortized cost, maturities, and approximate fair value of Suffolk's
investment securities at December 31, 2003 are as follows: (in thousands)
- ----------------------------------------------------------------------------------------------------
Available for Sale
- ----------------------------------------------------------------------------------------------------
U.S. Obligations of
U.S. Treasury Govt. Agency States & Political
Securities Debt Subdivisions
- ----------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
(1) Maturity (in years) Cost Value Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------
Within 1 $ -- $ -- $ -- $ -- $ -- $ --
After 1 but within 5 9,393 9,840 98,337 102,554 -- --
After 5 but within 10 -- -- -- -- -- --
After 10 -- -- -- -- 6,682 6,889
Other Securities -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------
Subtotal $9,393 $9,840 $98,337 $102,554 $6,682 $6,889
Collateralized mortgage obligations
Mortgage-backed securities
- ----------------------------------------------------------------------------------------------------
Total
====================================================================================================
- -----------------------------------------------------------------------------------------------------
Held to Maturity
- -----------------------------------------------------------------------------------------------------
Obligations of Total Total
States & Political Other Amortized Fair
Subdivisions Securities Cost Value
- -----------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
(1) Maturity (in years Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------
Within 1 $ 6,409 $ 6,408 $ -- $ -- $ 6,409 $ 6,408
After 1 but within 5 856 906 -- -- 108,586 113,300
After 5 but within 10 -- -- -- -- -- --
After 10 5,104 5,779 -- -- 11,786 12,668
Other Securities -- -- 2,272 2,272 2,272 2,272
- -----------------------------------------------------------------------------------------------------
Subtotal $12,369 $13,093 $2,272 $2,272 $129,053 $134,648
Collateralized mortgage obligations 244,964 247,507
Mortgage-backed securities 9,126 9,399
- -----------------------------------------------------------------------------------------------------
Total $383,143 $391,554
=====================================================================================================
(1) Maturities shown are stated maturities. Securities backed by mortgages are
expected to have substantial periodic prepayments resulting in weighted
average lives considerably less than what would be surmised from the table
above.
25
As a member of the Federal Reserve system, the Bank owns Federal Reserve Bank
stock with a book value of $638,000. The stock has no maturity and there is no
public market for the investment.
As a member of the Federal Home Loan Bank of New York, the bank owns Federal
Home Loan Bank of New York stock with a book value of $1,535,000. The stock has
no maturity and there is no public market for the investment.
At December 31, 2003 and 2002, investment securities carried at $149,969,000 and
$189,496,000 respectively, were pledged to secure trust deposits and public
funds on deposit.
During 2003, proceeds from sales of securities available for sale were
$39,109,000 resulting in net realized gains of $464,000. During 2002 there were
no sales of securities available for sale.
The table below indicates the length of time individual securities, both
held-to-maturity and available-for-sale, have been held in a continuous
unrealized loss position at December 31, 2003: (in thousands)
- ------------------------------------------------------------------------------------------------------------------
Less than 12 months 12 months or longer
- ------------------------------------------------------------------------------------------------------------------
Number of
Type of securities Securities Fair value Unrealized losses Fair value Unrealized losses
- ------------------------------------------------------------------------------------------------------------------
U. S. government agency securities 1 $ 29,810 $ 128 $-- $--
Municipal securities 12 6,357 26 -- --
Collateralized mortgage obligations 12 106,410 1,395 -- --
- ------------------------------------------------------------------------------------------------------------------
Total 25 $142,577 $1,549 $-- $--
==================================================================================================================
- --------------------------------------------------------------------
Total
- --------------------------------------------------------------------
Type of securities Fair value Unrealized losses
- --------------------------------------------------------------------
U. S. government agency securities $ 29,810 $ 128
Municipal securities 6,357 26
Collateralized mortgage obligations 106,410 1,395
- --------------------------------------------------------------------
Total $142,577 $1,549
====================================================================
Management has considered factors regarding other than temporarily impaired
securities and determined that there are no impaired securities as of December
31, 2003.
Note 3 -- Loans
At December 31, 2003 and 2002, loans included the following: (in thousands)
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Commercial, financial, and agricultural $171,616 $150,130
Commercial real estate 232,119 183,501
Real estate construction loans 30,461 36,558
Residential mortgages (1st and 2nd liens) 113,979 94,864
Home equity loans 60,397 44,349
Consumer loans 229,819 277,911
Other loans 778 1,522
- --------------------------------------------------------------------------------
839,169 788,835
Unearned discounts (108) (278)
Allowance for loan losses (8,551) (8,695)
- --------------------------------------------------------------------------------
Balance at end of year $830,510 $779,862
================================================================================
Restructured loans, loans not accruing interest, and loans contractually past
due 90 days or more with regard to payment of principal and/or interest amounted
to $3,105,000 and $2,107,000 at December 31, 2003 and 2002, respectively.
Interest on loans that have been restructured or are no longer accruing interest
would have amounted to $71,000 during 2003, $129,000 during 2002, and $214,000
during 2001, under the contractual terms of those loans. Interest income
recognized on restructured and non-accrual loans was immaterial for the years
2003, 2002, and 2001.
Suffolk makes loans to its directors and executives, as well as to other related
parties in the ordinary course of its business. Loans made to directors and
executives, either directly or indirectly, which exceed $60,000 in aggregate for
any one director, totaled $20,049,000 and $17,368,000 at December 31, 2003 and
2002, respectively. Unused portions of lines of credit to directors and
executives, directly or indirectly, totaled $6,722,000 and $12,035,000. New
loans totaling $46,260,000 were granted and payments of $42,688,000 were
received during 2003. Loan balances outstanding for new directors appointed
during 2003 were $1,146,000 at time of appointment. Loan balances outstanding
for retired directors during 2003 were $2,037,000 at time of retirement.
Note 4 -- Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses follows: (in
thousands)
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Balance at beginning of year $ 8,695 $ 8,825 $7,749
Provision for loan losses 932 1,380 1,544
Loans charged-off (2,012) (1,853) (806)
Recoveries on loans 936 343 338
- -------------------------------------------------------------------------------
Balance at end of year $ 8,551 $ 8,695 $8,825
===============================================================================
At December 31, 2003 and 2002, respectively, the Bank's recorded investment in
impaired loans and the related valuation allowance calculated under SFAS No. 114
and SFAS No. 118 are as follows: (in thousands)
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Recorded investment $478 $476
Valuation allowance 221 109
- --------------------------------------------------------------------------------
This valuation allowance is included in the allowance for loan losses on the
statements of condition. The average investment in impaired loans in 2003 was
$392,000, compared to $557,000 in 2002.
26
Note 5 -- Premises and Equipment
The following table details premises and equipment: (in thousands)
- -------------------------------------------------------------------------------
Estimated
Useful Lives 2003 2002
- -------------------------------------------------------------------------------
Land Indefinite $ 3,399 $ 3,399
Premises 30 - 40 years 18,001 15,281
Furniture, fixtures & equipment 3 - 7 years 20,077 18,834
Leasehold improvements 1 - 15 years 1,714 1,356
- -------------------------------------------------------------------------------
43,191 38,870
Accumulated depreciation
and amortization (20,411) (18,433)
- -------------------------------------------------------------------------------
Balance at end of year $ 22,780 $ 20,437
===============================================================================
Depreciation and amortization charged to operations amounted to $2,146,000,
$2,282,000, and $2,005,000 during 2003, 2002, and 2001, respectively.
Note 6 -- Short - Term Borrowings
Presented below is information concerning short-term interest-bearing
liabilities, principally Federal Home Loan Bank Borrowings with maturities of
less than one year, and their related weighted-average interest rates for the
years 2003 and 2002: (dollars in thousands)
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Daily average outstanding $ 4,501 $ 34
Total interest cost 61 1
Average interest rate paid 1.36% 1.83%
Maximum amount outstanding at any
month-end $28,000 $ --
December 31, balance 20,000 --
Weighted-average interest rate
on balances outstanding at December 31 1.04% --%
===============================================================================
Suffolk has no assets pledged as collateral to the Federal Reserve Bank as of
December 31, 2003. Assets pledged as collateral to the Federal Home Loan Bank as
of December 31, 2003 totaled $70,331,000.
Note 7 -- Stockholders' Equity
Suffolk has a Dividend Reinvestment Plan. Stockholders can reinvest dividends in
common stock of Suffolk at a 3 percent discount from market value on newly
issued shares. Shareholders may also make additional cash purchases. No shares
were issued in 2003, 2002, or 2001.
At December 31, 2003, Suffolk has a Stock Option Plan ("the Plan") under which
600,000 shares of Suffolk's common stock were reserved for issuance to key
employees. 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 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 ten years. Compensation expense related to
stock appreciation rights amounted to approximately $226,000, $309,000, and
$259,000 for the years ended December 31, 2003, 2002, and 2001, respectively.
The following table presents the options granted, exercised, or expired during
each of the past three years:
- --------------------------------------------------------------------------------
Shares Wtd. Avg. Exercise
- --------------------------------------------------------------------------------
Balance at December 31, 2000 110,400 $11.65
Options granted 40,000 15.50
Options exercised (69,000) 11.52
Options expired or terminated -- --
- --------------------------------------------------------------------------------
Balance at December 31, 2001 81,400 $14.00
Options granted --
Options exercised (5,000) 15.50
Options expired or terminated -- --
- --------------------------------------------------------------------------------
Balance at December 31, 2002 76,400 $14.00
Options granted 15,500 31.83
Options exercised (16,400) 11.33
Options expired or terminated -- --
- --------------------------------------------------------------------------------
Balance at December 31, 2003 75,500 $13.90
================================================================================
The following table presents additional information:
- -------------------------------------------------------------------------------
At, or during,
year ended December 31, 2003 2002 2001
- -------------------------------------------------------------------------------
Average remaining
contractual life in years 6.99 7.34 7.89
Exercisable options (vested) 60,000 81,400 41,400
Weighted average fair value of
options (Black-Scholes model)
at date of grant: $ 8.80 na $ 3.40
Black-Scholes Assumptions:
Risk-free interest rate 3.96% na 5.17%
Expected dividend yield 2.60% na 2.93%
Expected life in years 10 na 10
Expected volatility 26.50% na 14.80%
===============================================================================
All dividends must conform to applicable statutory requirements. Under 12 USC
56-9, a national bank may not pay a dividend on its common stock if the dividend
would exceed net undivided profits then on hand. Further, under 12 USC 60, a
national bank must obtain prior approval from the Office of the Comptroller of
the Currency ("OCC") to pay dividends on either common or preferred stock that
would exceed the bank's net profits for the current year combined with retained
net profits (net profits minus dividends paid during that period) from the prior
two years. At December 31, 2003, approximately $35,765,000 was available for
dividends from the Bank to Suffolk Bancorp without prior approval of the OCC.
27
On October 23, 1995, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one right per common share. Each right, if made
exercisable by certain events, entitles the holder to acquire one-half of a
share of common stock for $17.50, adjustable to prevent dilution. The rights
expire in 2005 if they are not redeemed before then. The Plan protects
stockholders from possible, unsolicited attempts to acquire Suffolk. In the
event of the acquisition by any potential acquirer of 10 percent of the
outstanding stock, the rights then entitle the holder to purchase the acquiring
company's stock at a 50 percent discount upon a subsequent merger with that
acquirer. In the event of the acquisition of 20 percent or more of Suffolk's
common stock, they entitle the holder to purchase Suffolk's common stock at a 50
percent discount. Following the acquisition of 20 percent but less than 50
percent of the common shares, the Board can exchange one-half of a share of
Suffolk for each valid right.
On November 26, 2001, Suffolk split the stock 2-for-1 in the form of a 100
percent stock dividend to shareholders of record on December 14, 2001, effective
on January 2, 2002. All share and per-share information have been restated to
reflect this split.
Note 8 -- Income Taxes
The following table presents the provision for income taxes in the consolidated
statements of income which is comprised of the following: (in thousands)
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Current: Federal $11,437 $11,909 $10,556
State 2,251 3,143 2,240
- -------------------------------------------------------------------------------
13,688 15,052 12,796
Deferred: Federal 2,146 159 (25)
State (1,788) (1,191) (536)
- -------------------------------------------------------------------------------
358 (1,032) (561)
- -------------------------------------------------------------------------------
Total $14,046 $14,020 $12,235
===============================================================================
The total tax expense was greater than the amounts computed by applying the
federal income tax rate because of the following:
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Federal income tax expense
at statutory rates 35% 35% 35%
Tax-exempt interest 0% (1%) (1%)
Amortization of excess cost over
fair value of net assets acquired 0% 0% 1%
State income taxes net of
federal benefit 4% 5% 4%
Other 1% 1% 1%
- -------------------------------------------------------------------------------
Total 40% 40% 40%
===============================================================================
The effects of temporary differences between tax and financial accounting that
create significant deferred-tax assets and liabilities at December 31, 2003 and
2002, and the recognition of income and expense for purposes of tax and
financial reporting, that resulted in a net increase to Suffolk's net deferred
tax (liability) asset for the years ended December 31, 2003, 2002, and 2001 are
presented below: (in thousands)
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Deferred tax assets:
Provision for possible
loan losses $3,495 $3,610 $3,607
Post-retirement benefits 930 915 881
Deferred compensation 1,676 1,603 913
Other 410 820 633
- -------------------------------------------------------------------------------
Total deferred tax assets
before valuation allowance 6,511 6,948 6,034
Valuation allowance -- -- --
- -------------------------------------------------------------------------------
Total deferred tax assets
net of valuation allowance 6,511 6,948 6,034
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Pension 1,526 1,604 1,722
Securities available for sale 3,151 5,827 761
- -------------------------------------------------------------------------------
Total deferred tax liabilities 4,677 7,431 2,483
- -------------------------------------------------------------------------------
Net deferred tax asset (liability) $1,834 $ (483) $3,551
===============================================================================
Note 9 -- Employee Benefits
(A) Retirement Plan -- Suffolk has a noncontributory defined benefit pension
plan available to all full-time employees who are at least 21 years old and have
completed at least one year of employment. The plan is governed by the rules and
regulations in the Prototype Plan of the New York Bankers Association Retirement
System and the Retirement System Adoption Agreement executed by the Bank. For
purpose of investment, the plan contributions are pooled with those of other
participants in the system.
The following tables set forth the status of Suffolk combined plan as of
September 30, 2003 and September 30, 2002, the time at which the annual
valuation of the plan is made.
The following table sets forth the plan's change in benefit obligation:
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Benefit obligation at beginning of year $16,716,664 $14,614,955
Service cost 969,625 881,106
Interest cost 1,105,458 966,983
Actuarial loss 1,776,534 933,816
Benefits paid (756,405) (680,196)
- -------------------------------------------------------------------------------
Benefit obligation at end of year $19,811,876 $16,716,664
===============================================================================
The following table sets forth the plan's change in plan assets:
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $14,934,761 $16,376,205
Actual return on plan assets 2,659,246 (886,316)
Employer contribution 878,904 125,068
Benefits paid (756,405) (680,196)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year $17,716,506 $14,934,761
===============================================================================
Suffolk will be required to make an annual minimum contribution of $1,064,363 by
June 14, 2004 for the plan year ending September 30, 2003 and $1,207,091 by June
15, 2005 for the plan year ending September 30, 2004.
28
The following table summarizes the funded status of the plan:
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Funded status $(2,095,370) $(1,781,903)
Unrecognized net transition liability (64,388) (118,376)
Unrecognized prior service cost (36,578) (40,557)
Unrecognized net loss 5,843,504 5,717,337
- -------------------------------------------------------------------------------
Prepaid cost $ 3,647,168 $ 3,776,501
===============================================================================
The following table summarizes the net periodic pension cost:
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Service cost $ 1,128,438 $ 969,625 $ 901,874
Interest cost on projected
benefit obligations 1,163,160 1,105,458 991,645
Expected return on plan assets (1,408,445) (1,262,701) (1,373,214)
Net amortization & deferral 184,093 195,855 22,691
- -------------------------------------------------------------------------------
Net periodic pension cost $ 1,067,246 $ 1,008,237 $ 542,996
===============================================================================
Weighted-average
discount rate 6.75% 6.75% 6.75%
Rate of increase
in future compensation 3.00% 4.00% 4.00%
Expected long-term rate
of return on assets 8.00% 8.50% 8.50%
===============================================================================
Plan Assets
Suffolk's pension plan weighted-average asset allocations at September 30, 2003
and 2002, by asset category are as follows:
at September 30,
- --------------------------------------------------------------------------------
Asset category 2003 2002
- --------------------------------------------------------------------------------
Equity Securities 59.70% 55.30%
Debt Securities 34.50% 36.30%
Other 5.80% 8.40%
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
Investment Policies
The New York State Bankers Retirement System (the "System") was established in
1938 to provide for the payment of benefits to employees of participating banks.
The System is overseen by a Board of Trustees who meets quarterly and sets the
investment policy guidelines.
The System utilizes two investment management firms (which will be referred to
as Firm I and Firm II), each investing approximately 50% of the total portfolio.
The System's Investment objective is to exceed the investment benchmarks in each
asset category. Each firm operates under a separate written investment policy
approved by the Trustees and designed to achieve an allocation approximating 60%
invested in equity securities and 40% invested in debt securities.
Each Firm shall report at least quarterly to the Investment Committee and
semiannually to the Board.
Equity Securities
The target allocation percentage for equity securities is 60% but may vary from
50%-70% at the investment manager's discretion. Firm I is employed for its
expertise as a Value Manager. It is allowed to invest a certain amount of the
equity portfolio under its management in international securities and to hedge
said international securities so as to protect against currency devaluations.
The equities managed by Firm II are in a commingled Large Cap Equity Fund. The
Fund is invested in a diversified portfolio of common or capital stocks, or
bonds, debentures, notes, or preferred stocks convertible into common or capital
stocks, or in other types of equity investments whether foreign or domestic.
Short-term obligations of the U.S. government or other short-term investments
may be purchased and held pending the selection and purchase of suitable
investments which meet the guidelines above. Investments may include units of
participation in any other Fund established within this Fund which consists of
assets of the nature described in the preceding paragraph.
Debt Securities
For both investment portfolios, the target allocation percentage for debt
securities is 40% but may vary from 30%-50% at the investment manager's
discretion
The Fixed Income Portfolio managed by Firm I operates with guidelines relating
to types of debt securities, quality ratings, maturities, and maximum single and
sector allocations.
The portfolio may trade foreign currencies in both spot and forward markets to
effect securities transactions and to hedge underlying asset positions. The
purchase and sale of futures and options on futures on foreign currencies and on
foreign and domestic bonds, bond indices, and short-term securities is
permitted; however, purchases may not be used to leverage the portfolio.
Currency transactions may only be used to hedge 0-100% of currency exposure of
foreign securities.
The Fixed Income managed by Firm II is in a commingled Fixed Income Fund. This
style of fixed income management focuses of high quality securities drawn from
various market sectors, including U.S. Treasuries and government sponsored
agencies, sovereigns, supranationals, residential mortgage backed securities
(MBS), corporates, commercial mortgage backed securities (CMBS), asset backed
securities (ABS), and municipals as set forth in its guidelines and the System's
investment policy.
Expected Long-Term Rate-of-Return
The expected long-term rate-of-return on plan assets reflects long-term earnings
expectations on existing plan assets and those contributions expected to be
received during the current plan year. In estimating that rate, appropriate
consideration was given to historical returns earned by plan assets in the fund
and the rates of return expected to be available for reinvestment. Average rates
of return over the past 1, 3, 5, and 10 year periods were determined and
subsequently adjusted to reflect current capital market assumptions and changes
in investment allocations.
29
(B) Director's Retirement Income Agreement of the Bank of the Hamptons -- On
April 11, 1994, Suffolk acquired Hamptons Bancshares, Inc., which had a
director's deferred compensation plan. The liability for this plan was
approximately $324,000 and $357,000 on December 31, 2003 and 2002. Interest
(approximately $25,000 in 2003 and $36,000 in 2002) is accrued over the term of
the plan. In 2003, the Bank paid approximately $63,000 to participants.
(C) Deferred Compensation Plan -- During 1986, the Board approved a deferred
compensation plan. Under the plan, certain employees and Directors of Suffolk
elected to defer compensation aggregating approximately $177,000 in exchange for
stated future payments to be made at specified dates. The rate of return on the
initial deferral was guaranteed. For purposes of financial reporting, interest
(approximately $135,000 in 2003, $279,000 in 2002, and $280,000 in 2001) at the
plan's contractual rate is being accrued on the deferral amounts over the
expected plan term. During 2003, Suffolk made payments of approximately $155,000
to participants of the plan. Suffolk has purchased life insurance policies on
the plan's participants based upon reasonable actuarial benefit and other
financial assumptions where the present value of the projected cash flows from
the insurance proceeds approximates the present value of the projected cost of
the employee benefit. Suffolk is the named beneficiary on the policies. Net
insurance income (expense) related to the policies aggregated approximately
$47,000, ($56,000), and $58,000, in 2003, 2002, and 2001, respectively.
(D) Post-Retirement Benefits Other Than Pension -- The following table sets
forth the post-retirement benefit liability included in other liabilities in the
accompanying consolidated statements of condition as of December 31, 2003 and
2002:
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation
(the "APBO"):
Retirees $ (714,233) $ (625,953)
Fully eligible active plan participants (584,706) (434,491)
Other active participants (220,904) (165,898)
- -------------------------------------------------------------------------------
Total APBO $(1,519,843) $(1,226,342)
Unrecognized net gain (672,302) (901,633)
Unrecognized transition obligation 7,374 8,282
- -------------------------------------------------------------------------------
Post-retirement benefit liability $(2,184,771) $(2,119,693)
===============================================================================
Net periodic post-retirement benefit cost (the "net periodic cost") for the
years ended December 31, 2003, 2002, and 2001 includes the following components:
- -------------------------------------------------------------------------------
2003 2002 2001
- -------------------------------------------------------------------------------
Service cost of benefits earned $ 34,284 $ 27,950 $ 13,740
Interest cost on liability 81,807 74,954 54,435
Unrecognized (gain) loss (44,950) (52,129) (73,074)
- -------------------------------------------------------------------------------
Net periodic cost $ 71,141 $ 50,775 $ (4,899)
===============================================================================
Benefit assumptions are based on sponsor contributions of $13.65 per month per
retiree for medical expenses and $0.27 per participant per month per $1,000 of
life insurance. The retiree is responsible for the premiums, less sponsor
contributions.
(E) Deferred Bonus Plans -- During 1999, the Board approved a non-qualified
deferred compensation plan. Under this plan, certain employees and Directors of
Suffolk may elect to defer some or all of their compensation in exchange for a
future payment of the compensation deferred, with accrued interest, at
retirement. During 2003, participants deferred compensation totaling $386,000.
No payments have been made to any of the participants.
Note 10 -- Commitments and Contingent Liabilities
In the normal course of business, there are various outstanding commitments and
contingent liabilities, such as standby letters-of-credit and commitments to
extend credit, which are not reflected in the accompanying consolidated
financial statements. No material losses are anticipated as a result of these
transactions. Suffolk is contingently liable under standby letters-of-credit in
the amount of $5,719,000 and $8,471,000 at December 31, 2003 and 2002,
respectively. Suffolk has commitments to make or to extend credit in the form of
revolving open-end lines secured by one to four family residential properties,
commercial real estate, construction and land development loans, and lease
financing arrangements in the amount of $92,300,000 and $61,639,000, and
commercial loans of $26,591,000 and $18,560,000 as of December 31, 2003 and
2002, respectively.
In the opinion of management, based upon legal counsel, liabilities arising from
legal proceedings against Suffolk would not have a significant effect on the
financial position of Suffolk.
During 2003, Suffolk was required to maintain balances with the Federal Reserve
Bank of New York for reserve and clearing requirements. These balances averaged
$3,605,000 in 2003.
Total rental expense for the years ended December 31, 2003, 2002, and 2001
amounted to $653,000, $807,000, and $756,000, respectively.
At December 31, 2003, Suffolk was obligated under a number of noncancelable
operating leases for land and buildings used for bank purposes. Minimum annual
rentals, exclusive of taxes and other charges under noncancelable operating
leases, are summarized as follows: (in thousands)
- --------------------------------------------------------------------------------
Minimum Rentals
- --------------------------------------------------------------------------------
2004 $ 698
2005 644
2006 623
2007 530
2008 398
2009 and thereafter 1,438
================================================================================
30
Note 11 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital requirements that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2003, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 2003, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. Management believes that since that
notification no circumstances have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the following
table: (dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
Minimum Minimum to be
for capital "Well Capitalized" under prompt
Actual capital ratios adequacy corrective action provisions
- -----------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
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%
=======================================================================================================================
As of December 31, 2002
Total Capital (to risk-weighted assets) $117,251 13.39% $70,079 8.00% $87,599 10.00%
Tier 1 Capital (to risk-weighted assets) 108,556 12.39% 35,039 4.00% 52,559 6.00%
Tier 1 Capital (to average assets) 108,556 8.77% 49,490 4.00% 61,863 5.00%
=======================================================================================================================
Note 12 -- Credit Concentrations
Suffolk's principal investment are loans and a portfolio of short- and
medium-term debt of the United States Treasury, states and other political
subdivisions, U.S. government agencies, corporations, and mortgage-backed
securities and CMO's.
Consumer loans, net of unearned discounts, comprised 27.4 percent of Suffolk's
loan portfolio and 17.3 percent of assets. A majority are indirect
dealer-generated loans secured by automobiles. Most of these loans are made to
residents of Suffolk's primary lending area. Each loan is small in amount.
Borrowers represent a cross-section of the population and are employed in a
variety of industries. The risk presented by any one loan is correspondingly
small, and therefore, the risk that this portion of the portfolio presents to
Suffolk depends on the financial stability of the population as a whole, not any
one entity or industry. Loans secured by real estate comprise 52.1 percent of
the portfolio and 32.9 percent of assets, 27.7 percent of which are for
commercial real estate. Commercial real estate loans present greater risk than
residential mortgages. Suffolk has attempted to minimize the risks of these
loans by considering several factors, including the creditworthiness of the
borrower, location, condition, value, and the business prospects for the
security property. Commercial, financial, and agricultural loans, unsecured or
secured by collateral other than real estate, comprise 20.5 percent of the loan
portfolio and 12.9 percent of assets. These loans present significantly greater
risk than other types of loans. Average credits are greater in size than
consumer loans, and unsecured loans may be more difficult to collect. Suffolk
obtains, whenever possible, both the personal guarantees of the principal(s) and
cross-guarantees among the principals' business enterprises. U.S. Treasury
securities represented 2.5 percent of the investment portfolio and .7 percent of
assets. U.S. government agency debt securities represented 26.2 percent of the
investment portfolio and 7.7 percent of assets. These offer little or no
financial risk. Collateralized mortgage obligations represented 63.3 percent of
the investment portfolio and 18.6 percent of assets. Mortgage-backed securities
represented 2.4 percent of the investment portfolio and .7 percent of assets.
Municipal obligations constitute 5 percent of the investment portfolio and 1.4
percent of assets. These obligations present slightly greater risk than U.S.
Treasury securities, or those secured by the U.S. government, but significantly
less risk than loans because they are backed by the full faith and taxing power
of the issuer, each of which is located in the state of New York. Suffolk
usually holds these securities to maturity.
31
Note 13 -- Fair Value of Financial Instruments
The following table presents the carrying amounts and fair values of Suffolk's
financial instruments. SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation: (in thousands)
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
Cash & cash equivalents $ 56,353 $ 56,353 $ 65,500 $ 65,500
Investment securities
available for sale 376,189 376,189 359,903 359,903
Investment securities
held to maturity 14,641 15,365 16,983 17,643
Loans, net 839,061 853,238 788,557 802,586
Accrued interest receivable 5,869 5,869 5,946 5,946
Deposits 1,187,396 1,193,439 1,142,582 1,148,007
Accrued interest payable 800 800 1,334 1,334
===============================================================================
Limitations
The following estimates are made at a specific point in time and may be based on
judgments regarding losses expected in the future, risk, and other factors that
are subjective in nature. The methods and assumptions used to produce the fair
value estimates follow.
Short-Term Instruments
Short-term financial instruments are valued at the carrying amounts included in
the statements of condition, which are reasonable estimates of fair value due to
the relatively short term of the instruments. This approach applies to cash and
cash equivalents; federal funds purchased; accrued interest receivable;
non-interest-bearing demand deposits; N.O.W., money market, and saving accounts;
accrued interest payable; and other borrowings.
Loans
Fair values are estimated for portfolios of loans with similar characteristics.
Loans are segregated by type.
The fair value of performing loans was calculated by discounting scheduled cash
flows through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk of the loan. Estimated maturity is
based on the Bank's history of repayments for each type of loan and an estimate
of the effect of the current economy.
Fair value for significant non-performing loans is based on recent external
appraisals of collateral, if any. If appraisals are not available, estimated
cash flows are discounted using a rate commensurate with the associated risk.
Assumptions regarding credit risk, cash flows, and discount rates are made using
available market information and specific borrower information. The carrying
amount and fair value of loans were as follows at December 31, 2003 and 2002:
(in thousands)
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Commercial, financial
& agricultural $171,616 $145,570 $150,130 $129,055
Commercial real estate 232,119 244,772 183,501 200,475
Real estate
construction loans 30,461 28,873 36,558 27,686
Residential mortgages
(1st & 2nd liens) 113,979 116,984 94,864 96,493
Home equity loans 60,397 60,397 44,349 44,673
Consumer loans 229,711 255,864 277,633 302,682
Other loans 778 778 1,522 1,522
- --------------------------------------------------------------------------------
Totals $839,061 $853,238 $788,557 $802,586
================================================================================
Investment Securities
The fair value of the investment portfolio, including mortgage-backed
securities, was based on quoted market prices or market prices of similar
instruments.
Deposit Liabilities
The fair value of certificates of deposit less than $100,000 was calculated by
discounting cash flows with applicable origination rates. At December 31, 2003,
the fair value of certificates of deposit less than $100,000 totaling
$215,117,000 had a carrying value of $213,777,000. At December 31, 2003, the
fair value of certificates of deposit more than $100,000 totaling $22,367,000
had a carrying value of $21,946,000.
Commitments to Extend Credit, Standby Letters-of-Credit, and Written Financial
Guarantees
The fair value of commitments to extend credit was estimated by either
discounting cash flows or using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
current creditworthiness of the counterparties.
Credit in the form of revolving open-end lines secured by one-to-four family
residential properties, commercial real estate, construction and land
development loans, and lease financing arrangements were $92,300,000 and
$61,639,000 as of December 31, 2003 and 2002, respectively.
The estimated fair value of written financial guarantees and letters-of-credit
is based on fees currently charged for similar agreements. The contractual
amounts of these commitments were $32,310,000 and $27,031,000 at December 31,
2003 and 2002. The fees charged for the commitments were not material in amount.
32
Note 14 -- Selected Quarterly Financial Data (Unaudited)
The comparative results for the four quarters of 2003 and 2002 are as follows:
(in thousands of dollars except for share and per-share data)
- -------------------------------------------------------------------------------------------
2003
- -------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -------------------------------------------------------------------------------------------
Interest income $ 18,687 $ 17,829 $ 17,180 $ 17,299
Interest expense 2,949 2,659 2,225 1,968
- -------------------------------------------------------------------------------------------
Net interest income 15,738 15,170 14,955 15,331
Provision for loan losses 270 270 180 212
- -------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 15,468 14,900 14,775 15,119
Other income 2,517 2,748 3,141 2,904
Other expense 9,134 9,133 9,016 8,907
Provision for income taxes 3,512 3,384 3,533 3,617
- -------------------------------------------------------------------------------------------
Net income $ 5,339 $ 5,131 $ 5,367 $ 5,499
===========================================================================================
Basic per-share data:
- -------------------------------------------------------------------------------------------
Net income $ 0.47 $ 0.46 $ 0.49 $ 0.50
Cash dividends $ 0.19 $ 0.19 $ 0.19 $ 0.19
Average shares 11,311,275 11,043,670 10,967,478 10,948,579
===========================================================================================
- -------------------------------------------------------------------------------------------
2002
- -------------------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -------------------------------------------------------------------------------------------
Interest income $ 19,460 $ 19,722 $ 19,830 $ 19,416
Interest expense 4,465 4,235 3,943 3,445
- -------------------------------------------------------------------------------------------
Net interest income 14,995 15,487 15,887 15,971
Provision for loan losses 300 360 360 360
- -------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 14,695 15,127 15,527 15,611
Other income 2,220 2,315 2,807 2,731
Other expense 8,514 8,647 9,091 9,492
Provision for income taxes 3,340 3,501 3,666 3,513
- -------------------------------------------------------------------------------------------
Net income $ 5,061 $ 5,294 $ 5,577 $ 5,337
===========================================================================================
Basic per-share data:
- -------------------------------------------------------------------------------------------
Net income $ 0.43 $ 0.45 $ 0.48 $ 0.46
Cash dividends $ 0.17 $ 0.17 $ 0.17 $ 0.17
Average shares 11,767,980 11,715,577 11,632,079 11,519,318
===========================================================================================
Note 15 -- Suffolk Bancorp (Parent Company Only) Condensed Financial Statements
(in thousands)
- ------------------------------------------------------------------------------------
Condensed Statements of Condition as of December 31, 2003 2002 2001
- ------------------------------------------------------------------------------------
Assets
Due From Banks $ 2,083 $ 1,973 $ 1,758
Investment in Subsidiaries: SCNB 100,636 109,370 97,125
Other Assets 285 386 264
- ------------------------------------------------------------------------------------
Total Assets $103,004 $111,729 $99,147
====================================================================================
Liabilities and Stockholders' Equity
Dividends Payable $ 2,080 $ 1,956 $ 1,648
Other Liabilities 754 980 662
Stockholders' Equity 100,170 108,793 96,837
- ------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $103,004 $111,729 $99,147
====================================================================================
- ----------------------------------------------------------------------------------------------
Condensed Statements of Income for the Years Ended December 31, 2003 2002 2001
- ----------------------------------------------------------------------------------------------
Income
Net Security Gains $ -- $ -- $ 208
Other Income -- 2 14
Dividends From Subsidiary Bank 26,258 16,706 9,350
- ----------------------------------------------------------------------------------------------
26,258 16,708 9,572
Expense
Other Expense 40 394 312
- ----------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Net Income of Subsidiaries 26,218 16,314 9,260
Equity in Undistributed Earnings of Subsidiaries (4,882) 4,955 9,425
- ----------------------------------------------------------------------------------------------
Net Income $21,336 $21,269 $18,685
==============================================================================================
33
Note 15 (continued) -- Suffolk Bancorp (Parent Company Only) Condensed
Financial Statements (in thousands)
- ---------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows for the Years Ended December 31, 2003 2002 2001
- ---------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net Income $ 21,336 $ 21,269 $18,685
Less: Equity in Undistributed Earnings of Subsidiaries 4,882 (4,955) (9,425)
Other, Net (124) 198 146
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 26,094 16,512 9,406
- ---------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Maturities of Investment Securities; Available for Sale -- -- 796
- ---------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities -- -- 796
- ---------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Stock Options Exercised -- -- 155
Repurchase of Common Stock (17,718) (8,917) (3,721)
Dividends Paid (8,266) (7,380) (6,333)
- ---------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (25,984) (16,297) (9,899)
- ---------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 110 215 303
Cash and Cash Equivalents, Beginning of Year 1,973 1,758 1,455
- ---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 2,083 $ 1,973 $ 1,758
===================================================================================================
Note: No income tax provision has been recorded on the books of Suffolk Bancorp
since it files a return consolidated with its subsidiaries.
34
[Grant Thornton LOGO]
Report of Independent Public Accountants
Board of Directors
Suffolk Bancorp
We have audited the accompanying consolidated statements of condition of
Suffolk Bancorp and its subsidiary as of December 31, 2003 and 2002 and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for the years ended December 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Suffolk Bancorp as of December 31, 2001
and for the year then ended, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements in their report dated January 16, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Suffolk Bancorp
as of December 31, 2003 and 2002, and the consolidated results of its operations
and its consolidated cash flows for the years ended December 31, 2003 and 2002
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Grant Thornton, LLP
----------------------------------------
GRANT THORNTON, LLP
Philadelphia, Pennsylvania
January 26, 2004
- --------------------------------------------------------------------------------
[SUFFOLK BANCORP LOGO]
Report of Management
To the Stockholders and Board of Directors of Suffolk Bancorp:
The management of Suffolk Bancorp is responsible for the preparation and
integrity of the consolidated financial statements and all other information in
this annual report, whether audited or unaudited. The financial statements have
been prepared in accordance with generally accepted accounting principles and,
where necessary, are based on management's best estimates and judgment. The
financial information contained elsewhere in this annual report is consistent
with that in the consolidated financial statements.
Suffolk Bancorp's independent auditors have been engaged to perform an audit of
the consolidated financial statements in accordance with auditing standards
generally accepted in the United States of America, and the auditors' report
expresses their opinion as to the fair presentation of the consolidated
financial statements and conformity with generally accepted accounting
principles.
Suffolk Bancorp maintains systems of internal controls that provide reasonable
assurance that assets are safeguarded and keeps reliable financial records for
preparing financial statements. Internal audits are conducted to continually
evaluate the adequacy and effectiveness of such internal controls, policies, and
procedures.
The audit committee of the Board of Directors, which is composed entirely of
directors who are not employees of Suffolk Bancorp, meets periodically with the
independent auditors, internal auditors, and management to discuss audit and
internal accounting controls, regulatory audits, and financial reporting
matters.
/s/ Thomas S. Kohlmann /s/ J. Gordon Huszagh
- ------------------------------------- ----------------------------------------
Thomas S. Kohlmann J. Gordon Huszagh
President & Chief Executive Officer Executive Vice President & Chief
Financial Officer
Riverhead, New York
January 26, 2004
35
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003 Commission File Number 0-13580
SUFFOLK BANCORP
(Exact name of registrant as specified in its charter)
New York 11-2708279
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4 West Second Street, Riverhead, New York 11901
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 727-5667
- --------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2.50 Par Value
(Title of Class)
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 |_|
Class of Common Stock Number of Shares Outstanding as of February 20, 2004
- --------------------- ----------------------------------------------------
$2.50 Par Value 10,949,269
The aggregate market value of the Registrant's Common Stock (based on the most
recent sale at $31.94 on February 20, 2004) held by non-affiliates was
approximately $358,383,000.
36
PART I
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held April 13, 2004, filed on March 12, 2004. (Part III)
ITEM 1. Business
Suffolk Bancorp ("Suffolk")
Suffolk was incorporated on January 2, 1985 as a bank holding company. On that
date, Suffolk acquired, and currently owns, all of the outstanding capital stock
of Suffolk County National Bank. On July 14, 1988, Suffolk acquired all the
outstanding capital stock of Island Computer Corporation of New York, Inc. The
business of Suffolk consists primarily of the ownership, supervision, and
control of its subsidiaries. On April 11, 1994, Suffolk acquired all the
outstanding capital stock of Hamptons Bancshares, Inc. and merged it into a
subsidiary. During 1996, the operations of Island Computer Corporation of New
York, Inc. were assumed by Suffolk County National Bank.
Suffolk's chief competition includes local banks with main or branch offices in
the service area of Suffolk County National Bank, including North Fork Bank and
Bridgehampton National Bank. Additionally, New York City money center banks and
regional banks provide competition. These banks include primarily the Bank of
New York, Citibank, Fleet Bank, and J.P. Morgan Chase.
Suffolk and its subsidiaries had 346 full-time and 62 part-time employees on
December 31, 2003.
Suffolk County National Bank ("Bank")
The Suffolk County National Bank of Riverhead was organized under the National
Banking laws of the United States of America on January 6, 1890. The Bank is a
member of the Federal Reserve System, and its deposits are insured by the
Federal Deposit Insurance Corporation to the extent provided by law.
Directed by members of the communities it serves, the Bank's main service area
includes the towns of Babylon, Brookhaven, East Hampton, Islip, Riverhead,
Smithtown, Southampton, and Southold. The main office of the Bank is situated at
6 West Second Street, Riverhead, New York. Its branch offices are located at
Bohemia, Center Moriches, Cutchogue, East Hampton, Hampton Bays, Hauppauge,
Manorville, Mattituck, Medford, Miller Place, Montauk, Port Jefferson,
Riverhead, Sag Harbor, Sayville, Shoreham, Smithtown, Southampton, Wading River,
Water Mill, West Babylon, and Westhampton Beach, New York.
The Bank is a full-service bank serving the needs of the local residents of
Suffolk County. Most of the Bank's business is devoted to serving those residing
in the immediate area of the Bank's main and branch offices. Among the services
offered by the Bank are checking accounts, savings accounts, time and savings
certificates, money market accounts, negotiable-order-of-withdrawal accounts,
holiday club accounts, and individual retirement accounts; secured and unsecured
loans, including commercial loans to individuals, partnerships, and
corporations, agricultural loans to farmers, installment loans to finance small
businesses, mobile home loans, automobile loans; home equity and real estate
mortgage loans; safe deposit boxes; trust and estate services; the sale of
mutual funds and annuities; and the maintenance of a master pension plan for
self-employed individuals' participation. The business of the Bank is only
mildly seasonal.
AVAILABLE INFORMATION
Suffolk files Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, Proxy Statements on Form 14(a), and any amendments
to those reports, with the United States Securities and Exchange Commission
("SEC"). The public may read and copy any of these materials at the SEC's Public
reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. Information on
the operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330 (1-800-732-0330). The SEC also maintains an Internet site
(http:// www.sec.gov) that contains reports, proxy, and information statements,
and other information regarding issuers, including Suffolk, that file
electronically with the SEC. Suffolk also makes these reports available free of
charge through its Internet website (http:// www.suffolkbancorp.com) as soon as
practicably possible after Suffolk files these reports electronically with the
SEC.
SUPERVISION AND REGULATION
References in this section to applicable statutes and regulations are brief
summaries only, and do not purport to be complete. The reader should consult
such statutes and regulations themselves for a full understanding of the details
of their operation.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of Suffolk and its subsidiaries are particularly
susceptible to federal and state legislation that may have the effect of
increasing or decreasing the cost of doing business, modifying permissible
activities, or enhancing Bank's the competitive position of other financial
institutions.
Suffolk is a bank holding company registered under the Bank Holding Company Act
("BHC" Act) and is subject to supervision and regulation by the Federal Reserve
Board. Federal laws subject bank holding companies to particular restrictions on
the types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violation of laws and policies.
Activities "Closely Related" to Banking
The BHC Act prohibits a bank holding company, with certain limited exceptions,
from acquiring direct or indirect ownership or control of any voting shares of
any company that is not a bank or
37
from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve Board, by order or regulation, to be closely
related to banking, or managing or controlling banks. If a bank holding company
has become a "financial holding company" (an "FHC"), it may engage in activities
that are jointly determined by the Federal Reserve Board and the Treasury
Department to be "financial in nature or incidental to such financial activity."
FHCs may also engage in activities that are determined by the Federal Reserve to
be "complementary to financial activities." See "Gramm-Leach-Bliley Act" for a
brief summary of the statutory provisions relating to FHCs.
Safe and Sound Banking Practices
Bank holding companies are not permitted to engage in unsafe and unsound banking
practices. The Federal Reserve Board may order a bank holding company to
terminate an activity or control of a nonbank subsidiary if such activity or
control constitutes a significant risk to the financial safety, soundness, or
stability of a subsidiary bank and is inconsistent with sound banking
principles. Regulation Y also requires a holding company to give the Federal
Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding year, is equal to 10
percent or more of the company's consolidated net worth.
The Federal Reserve Board has broad authority to prohibit activities of bank
holding companies and their non-banking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations.
Notably, the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") provides that the Federal Reserve Board can assess civil money
penalties for such practices or violations, which can be as high as $1 million
per day. FIRREA contains expansive provisions regarding the scope of individuals
and entities against which such penalties may be assessed.
Annual Reporting and Examinations
Suffolk is required to file an annual report with the Federal Reserve Board, and
such additional information as the Federal Reserve Board may require pursuant to
the BHC Act. The Federal Reserve Board may examine a bank holding company or any
of its subsidiaries, and charge the company for the cost of such an examination.
Suffolk is also subject to reporting and disclosure requirements under state and
federal securities laws.
Imposition of Liability for Undercapitalized Subsidiaries
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
required each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk, and the risks of nontraditional activities, as
well as reflect the actual performance and expected risk of loss on multifamily
mortgages. In accordance with the law, each federal banking agency has
specified, by regulation, the levels at which an insured institution would be
considered "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under these
regulations, as of December 31, 2003, the Bank would be deemed to be "well
capitalized."
FDICIA requires bank regulators to take "prompt corrective action" to resolve
problems associated with insured depository institutions. In the event an
institution becomes "undercapitalized," it must submit a capital restoration
plan. If an institution becomes "significantly undercapitalized" or "critically
undercapitalized," additional and significant limitations are placed on the
institution. The capital restoration plan of an undercapitalized institution
will not be accepted by the regulators unless each company "having control of"
the undercapitalized institution "guarantees" the subsidiary's compliance with
the capital restoration plan until it becomes "adequately capitalized." Suffolk
has control of the Bank for purpose of this statute.
Additionally, Federal Reserve Board policy discourages the payment of dividends
by a bank holding company from borrowed funds as well as payments that would
adversely affect capital adequacy. Failure to meet the capital guidelines may
result in supervisory or enforcement actions by the Federal Reserve Board.
Acquisition by Bank Holding Companies
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve Board before it may acquire all or substantially all of the
assets of any bank, or ownership or control of any voting shares of any bank, if
after such acquisition it would own or control, directly or indirectly, more
than 5 percent of the voting shares of such bank. In approving bank acquisitions
by bank holding companies, the Federal Reserve Board is required to consider the
financial and managerial resources and future prospects of the bank holding
company and banks concerned, the convenience and needs of the communities to be
served, and the effect on competition. The Attorney General of the United States
may, within 30 days after approval of an acquisition by the Federal Reserve
Board, bring an action challenging such acquisition under the federal antitrust
laws, in which case the effectiveness of such approval is stayed pending a final
ruling by the courts. Under certain circumstances, the 30-day period may be
shortened to 15 days.
Interstate Acquisitions
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,
beginning September 29, 1995, bank holding companies may acquire banks in any
state subject to limited restrictions including bank age and deposit
concentration limits, notwithstanding contrary state law. All banks owned in
common by a bank holding company may act as agents for one another. An agent
bank may receive deposits, renew time deposits, accept payments, and
38
close and service loans for its principal bank and not be considered to be a
branch of the principal banks.
Banks also may merge with banks in another state and operate either office as a
branch, preexisting contrary state law notwithstanding. This law became
effective automatically in all states on June 1, 1997, unless a state, by
legislation enacted before June 1, 1997, opted out of coverage by the interstate
branching provision. Upon consummation of an interstate merger, the resulting
bank may acquire or establish branches on the same basis that any participant in
the merger could have if the merger had not taken place.
Banks may also merge with branches of banks in other states without merging with
the banks themselves, or may establish de novo branches in other states if the
laws of the other states expressly permit such mergers or such interstate de
novo branching.
Banking Regulation
The Bank is a national bank, which is subject to regulation and supervision
primarily by the Office of the Comptroller of the Currency (the "OCC") and
secondarily by the Federal Reserve Board and the FDIC. The Bank is subject to
the requirements and restrictions under federal law, including requirements to
maintain reserves against deposits, restrictions on the types and amounts of
loans that may be granted and the interest that may be charged thereon, and
limitations on the types of investments that may be made and the types of
services that may be offered. Various consumer laws and regulations also affect
the operations of the Bank.
Restrictions on Transactions with Affiliates
Section 23A of the Federal Reserve Act imposes quantitative and qualitative
limits on transactions between a bank and any affiliate, and requires certain
levels of collateral for such loans. It also limits the amount of advances to
third parties which are collateralized by the securities or obligations of
Suffolk or its subsidiaries.
Section 23B requires that certain transactions between the Bank and its
affiliates must be on terms substantially the same, or at least as favorable, as
those prevailing at the time for comparable transactions with or involving other
nonaffiliated companies. In the absence of such comparable transactions, any
transaction between the Bank and its affiliates must be on terms and under
circumstances, including credit standards, that in good faith would be offered
to or would apply to nonaffiliated companies.
Examinations
The OCC regularly examines the Bank and records of the Bank. The FDIC may also
periodically examine and evaluate insured banks. In addition, the Federal
Reserve Board regularly examines the Bank and records of Suffolk.
Standards for Safety and Soundness
As part of the FDICIA's efforts to promote the safety and soundness of
depository institutions and their holding companies, appropriate federal banking
regulators are required to have in place regulations specifying operational and
management standards (addressing internal controls, loan documentation, credit
underwriting, and interest rate risk), asset quality, and earnings. In addition,
the Federal Reserve Board, the OCC, and FDIC have extensive authority to police
unsafe or unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may
terminate the deposit insurance of any institution that it determines has
engaged in an unsafe or unsound practice. The agencies can also assess civil
money penalties of up to $1 million per day, issue cease-and-desist or removal
orders, seek injunctions, and publicly disclose such actions.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, effective on March 11, 2000, permits bank holding
companies to become FHCs and, by doing so, affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature
or complementary thereto. A bank holding company may become an FHC, if each of
its subsidiary banks is well capitalized under the FDICIA prompt corrective
action provisions, is well managed, and has at least a satisfactory rating under
the Community Reinvestment Act, by filing a declaration that the bank holding
company wishes to become an FHC and meets all applicable requirements.
No prior regulatory approval is required for an FHC to acquire a company, other
than a bank or savings association, engaged in activities permitted under the
Gramm-Leach-Bliley Act. Activities specified in the Gramm-Leach-Bliley Act as
being "financial in nature" include securities underwriting and dealing, and
insurance underwriting and agency activities. Activities that the Federal
Reserve Board has determined to be closely related to banking are also deemed to
be financial in nature.
A national bank also may engage, subject to limitations on investment, in
activities that are financial in nature, other than insurance underwriting,
merchant banking, real estate development, and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed,
and has at least a satisfactory Community Reinvestment Act rating. Subsidiary
banks of an FHC or national bank with financial subsidiaries must continue to be
well capitalized and well managed in order to continue to engage in such
activities without regulatory actions or restrictions, which could include
divestiture of the financial subsidiary or subsidiaries. In addition, an FHC or
a bank may not acquire a company that is engaged in such activities unless each
of the subsidiary banks of the FHC or the bank has at least a satisfactory
Community Reinvestment Act rating.
In July of 2001, provisions of the Gramm-Leach-Bliley Act became effective that
impose additional requirements on financial institutions with respect to
customer privacy. These provisions generally prohibit disclosure of customer
information to nonaffiliated third parties unless the customer has been given
the opportunity to object, and has not objected, to such disclosure. Financial
insti-
39
tutions are also required to disclose their privacy policies to customers
annually and may be required to comply with provisions of applicable state law
if such provisions are more protective of customer privacy than those contained
in the Gramm-Leach-Bliley Act.
Governmental Monetary Policies and Economic Conditions
The principal sources of funds essential to the business of banks and bank
holding companies are deposits, stockholders' equity, and borrowed funds. The
availability of these various sources of funds and other potential sources, such
as preferred stock or commercial paper, and the extent to which they are
utilized, depends on many factors, the most important of which are the Federal
Reserve Board's monetary policies and the relative costs of different types of
funds. An important function of the Federal Reserve Board is to regulate the
national supply of bank credit in order to combat recession and curb
inflationary pressure. Among the instruments of monetary policy used by the
Federal Reserve Board to implement these objectives are open market operations
in United States government securities, changes in the discount rate on bank
borrowings, and changes in reserve requirements against bank deposits. The
monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future. In view of the recent changes in regulations
affecting commercial banks and other actions and proposed actions by the federal
government and its monetary and fiscal authorities, including proposed changes
in the structure of banking in the United States, no prediction can be made as
to future changes in interest rates, availability of credit, deposit balances,
or the overall performance of banks generally or of Suffolk and its subsidiaries
in particular.
STATISTICAL DISCLOSURE
ITEM 2. Properties
Registrant
Suffolk as such has no physical properties. Office facilities of Suffolk are
located at 4 West Second Street, Riverhead, New York.
Bank
The Bank's main office campus, with three buildings, is located at 6 West Second
Street, Riverhead, New York, title to which is held by the Town of Riverhead,
New York Industrial Development Agency for reasons of tax abatement, but to
which the Bank has all other rights of ownership. The Bank also owns a total of
12 properties with 12 buildings in fee, and holds 16 buildings under lease
agreements. The decision was made to consolidate a number of offices housing
central operations in the new campus facility on property then already owned by
the Bank in Riverhead, New York, in the interest of operational efficiency.
Construction began late in 2001 under a contract with a revised guaranteed
maximum price of $8,570,000. Capitalized costs through December 31, 2003 totaled
$8,389,000. Depreciation commenced during the first quarter of 2003. Management
anticipates that costs will exceed recent run rates in the first years after
construction. Otherwise, management believes that the physical facilities are
suitable and adequate and at present are being fully utilized. Suffolk, however,
evaluates future needs continuously and anticipates other changes in its
facilities during the next several years.
ITEM 3. Legal Proceedings
There are no material legal proceedings, individually or in the aggregate, to
which Suffolk or its subsidiaries are a party or of which any of the property is
subject.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
Pages 4 and 19 of this Annual Report to Shareholders for the fiscal year ended
December 31, 2003.
At February 1, 2004, there were approximately 1,900 equity holders of record and
approximately 1,600 beneficial shareholders of the Company's common stock.
ITEM 6. Selected Quarterly Financial Data
Page 33 of this Annual Report to Shareholders for the fiscal year ended December
31, 2003.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 5 - 17 of this Annual Report to Shareholders for the fiscal year ended
December 31, 2003.
ITEM 7a. Quantitative and Qualitative Disclosure about Market Risk
Page 13 of this Annual Report to Shareholders for the fiscal year ended December
31, 2003.
ITEM 8. Financial Statements and Supplementary Data
Pages 18 - 34 of this Annual Report to Shareholders for the fiscal year ended
December 31, 2003.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
40
ITEM 9a. Controls and Procedures
Suffolk' Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for Suffolk. Based upon their evaluation of
these controls and procedures as of a date within 90 days of the filing of this
report, the Certifying Officers have concluded that Suffolk's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by Suffolk in this report is accumulated and communicated to
Suffolk's management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure.
The Certifying Officers also have indicated that there were no significant
changes in Suffolk's internal controls or other factors that could significantly
affect these controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Pages 2 - 6 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 13, 2004 is incorporated herein by reference.
Executive Officers
NAME AGE POSITION BUSINESS EXPERIENCE
- ------------------ --- ------------------------------------- --------------------------------------------------------------
Thomas S. Kohlmann 57 President and Chief Executive Officer Oct-99 - Present President, CEO, and Director, Suffolk Bancorp
Oct-99 - Present President, CEO, and Director, SCNB
Jan-98 - Oct-99 EVP, Suffolk Bancorp
Jan-96 - Oct-99 EVP and Chief Lending Officer
Feb-92 - Dec-95 SVP, SCNB
1980 - Feb-92 Marine Midland Bank
Employed by SCNB since February 1992.
J. Gordon Huszagh 50 Executive Vice President and Jan-99 - Present EVP and CFO, Suffolk Bancorp
Chief Financial Officer Jan-99 - Present EVP and CFO, SCNB
Jan-97 - Jan-99 SVP and CFO, SCNB
Dec-92 - Dec-96 SVP & Comptroller, SCNB
Dec-88 - Dec-92 VP & Comptroller, SCNB
Dec-86 - Dec-88 VP, SCNB
Jan-83 - Dec-86 Auditor, SCNB
1975 - 1982 Eastern Federal Savings and Loan
Employed by SCNB since January 1983.
Robert C. Dick 54 Executive Vice President and Apr-00 - Present EVP, Suffolk Bancorp
Chief Lending Officer Apr-00 - Present EVP and Chief Lending Officer, SCNB
Oct-99 - Apr-00 SVP and Chief Lending Officer, SCNB
Dec-88 - Oct-99 SVP, Commercial Loans, SCNB
Dec-82 - Apr-88 VP, Commercial Loans, SCNB
1965 - 1980 Security National Bank/Chemical Bank
Employed by SCNB since January 1980.
Frank D. Filipo 52 Executive Vice President, Mar-03 - Present EVP, Suffolk Bancorp
Retail Banking Mar-03 - Present EVP, Retail Banking, SCNB
Sep-01 - Mar-03 SVP, Retail Banking, SCNB
Sep-96 - Sep-01 Regional Administrator, North Fork Bank
Apr-94 - Sep-96 SVP, Commercial Loans, SCNB
Jul-84 - Apr-94 EVP, Senior Lending Officer, Bank of the
Hamptons, N.A.
1982 - Jul-84 VP Commerical Loans, Continental Bank
Employed by SCNB from April 1994 to September 1996 and since
September 2001.
Augustus C. Weaver 61 Executive Vice President and Jan-98 - Present EVP, Suffolk Bancorp
Chief Information Officer Jan-96 - Present EVP and Chief Information Officer, SCNB
Feb-87 - Dec-95 President, Island Computer Corporation of
New York, Inc.
Feb-86 - Feb-87 Director of Data Processing and Corporate
Planning, Southland Frozen Food Corporation
Feb-62 - Feb-86 VP & Director of Operations, Long Island Savings
Bank Employed by SCNB since January 1996.
41
ITEM 11. Executive Compensation
Pages 5-10 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 13, 2004 is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Pages 2, 8, 9, and 10 of Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on April 13, 2004 is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
Page 10 of Registrant's Proxy Statement for its Annual Meeting of Shareholders
to be held on April 13, 2004 is incorporated herein by reference.
ITEM 14. Principal Accountant Fees and Services
The following table presents the fees billed for each of the last two fiscal
years by principal accountant by category:
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Audit fees $189,891 $146,760
Audit -related fees -- --
Tax fees 23,701 19,500
All other fees -- 175,000 (1)
- --------------------------------------------------------------------------------
$213,592 $341,260
================================================================================
(1) fees primarily for internal audit
The Audit Committee pre-approves all auditing services and permitted non-audit
services (including the fees and terms thereof) to be performed for Suffolk by
its independent auditor, subject to the de minimus exceptions for non-audit
services described in Section 10A (i) (1) (B) of the Exchange Act which are
approved by the Committee prior to the completion of the audit. The Audit
Committee may form and delegate authority to subcommittees consisting of one or
more members when appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that decisions of such
subcommittee to grant pre-approvals shall be presented to the full Audit
Committee at its next scheduled meeting.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following consolidated financial statements of the Registrant and
Subsidiaries, and the accountant's report thereon, are included on pages 18
through 34 inclusive.
Financial Statements (Consolidated)
Statements of Condition -- December 31, 2003 and 2002
Statements of Income -- For the years ended December 31, 2003, 2002, and 2001
Statements of Changes in Stockholder's Equity -- For the years ended December
31, 2003, 2002, and 2001
Statements of Cash Flows -- For the years ended December 31, 2003, 2002, and
2001
Notes to Consolidated Financial Statements
EXHIBITS
The following exhibits, which supplement this report, have been filed with the
Securities and Exchange Commission. Suffolk Bancorp will furnish a copy of any
or all of the following exhibits to any persons sending a request in writing to
the Corporate Secretary, Suffolk Bancorp, 4 West Second Street, Riverhead, New
York 11901.
A. Certificate of Incorporation of Suffolk Bancorp (filed by incorporation by
reference to Suffolk Bancorp's Form 10-K for the fiscal year ended December
31, 1999, filed March 10, 2000)
B. Bylaws of Suffolk Bancorp (filed by incorporation by reference to Suffolk
Bancorp's Form 10-K for the fiscal year ended December 31, 1999, filed
March 10, 2000)
C. Suffolk Bancorp 1995 Shareholder Rights Plan (filed by incorporation by
reference to Suffolk Bancorp's Form 10-K for the fiscal year ended December
31, 1999, filed March 10, 2000)
D. Suffolk Bancorp 1999 Stock Option Plan (filed by incorporation by reference
to Suffolk Bancorp's Form 10-K for the fiscal year ended December 31, 1999,
filed March 10, 2000)
E. Suffolk Bancorp Form of Change-of-Control Employment Contract (filed by
incorporation by reference to Suffolk Bancorp's Form 10-K for the fiscal
year ended December 31, 1999, filed March 10, 2000)
Reports on Form 8-K
The following reports were filed on Form 8-K during the three-month period ended
December 31, 2003:
are October 15, 2003, Item 12, earnings release for the three months ended
September 20, 2003.
November 28, 2003, Item 5, "Suffolk Bancorp Announces Regular Quarterly
Dividend"
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 12, 2004
(Registrant)
By: /s/ EDWARD J. MERZ
----------------------------------------------------
Edward J. Merz
Chairman of the Board, Director
By: /s/ THOMAS S. KOHLMANN
----------------------------------------------------
Thomas S. Kohlmann
President and Chief Executive Officer, Director
By: /s/ J. GORDON HUSZAGH
----------------------------------------------------
J. Gordon Huszagh
Executive Vice President and Chief Financial Officer
By: /s/ BRUCE COLLINS
----------------------------------------------------
Bruce Collins
Director
By: /s/ JAMES E. DANOWSKI
----------------------------------------------------
James E. Danowski
Director
By: /s/ JOSEPH A. DEERKOSKI
----------------------------------------------------
Joseph A. Deerkoski
Director
By: /s/ HOWARD M. FINKELSTEIN
----------------------------------------------------
Howard M. Finkelstein
Director
By: /s/ RALPH M. GIBSON
----------------------------------------------------
Ralph M. Gibson
Director
By: /s/ EDGAR F. GOODALE
----------------------------------------------------
Edgar F. Goodale
Director
By: /s/ DAVID A. KANDELL
----------------------------------------------------
David A. Kandell
Director
By: /s/ TERENCE X. MEYER
----------------------------------------------------
Terence X. Meyer
Director
By: /s/ SUSAN V.B. O'SHEA
----------------------------------------------------
Susan V.b. O'shea
Director
By: /s/ J. DOUGLAS STARK
----------------------------------------------------
J. Douglas Stark
Director
43
CERTIFICATION OF PERIODIC REPORT
I, Thomas S. Kohlmann, Chief Executive Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Suffolk Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;
4. The other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: March 12, 2004
/s/ THOMAS S. KOHLMANN
- -----------------------------------
Thomas S. Kohlmann
President & Chief Executive Officer
CERTIFICATION OF PERIODIC REPORT
I, J. Gordon Huszagh, Chief Financial Officer of the Company, certify that:
1. I have reviewed this annual report on Form 10-K of Suffolk Bancorp;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: March 12, 2004
/s/ J. GORDON HUSZAGH
- --------------------------------------------------
J. Gordon Huszagh
Executive Vice President & Chief Financial Officer
44
CERTIFICATION OF PERIODIC REPORT
I, Thomas S. Kohlmann, President & Chief Executive Officer of Suffolk Bancorp
(the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that: (1) the Annual Report on Form 10-K of the
Company for the year ended December 31, 2003 (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Report
fairly represents, in all material respects, the financial condition and results
of operations of the Company.
Dated: March 12, 2004
/s/ Thomas S. Kohlmann
- -----------------------------------
Thomas S. Kohlmann
President & Chief Executive Officer
CERTIFICATION OF PERIODIC REPORT
I, J. Gordon Huszagh, Executive Vice President & Chief Financial Officer of
Suffolk Bancorp (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) the Annual Report
on Form 10-K of the Company for the year ended December 31, 2003 (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information
contained in the Report fairly represents, in all material respects, the
financial condition and results of operations of the Company.
Dated: March 12, 2004
/s/ J. Gordon Huszagh
- --------------------------------------------------
J. Gordon Huszagh
Executive Vice President & Chief Financial Officer
[LOGO OF SUFFOLK BANCORP]
DIRECTORS
Edward J. Merz
Chairman
Bruce Collins
Retired
James E. Danowski
Partner; Coughlin, Foundotos, Cullen & Danowski
(accounting firm)
Joseph A. Deerkoski
Consultant
(general insurance)
Howard M. Finkelstein
Partner; Smith, Finkelstein, Lundberg, Isler & Yakaboski
(attorneys)
Ralph M. Gibson, M.D.
Physician
Edgar F. Goodale
President; Riverhead Building Supply Corp.
(building supply distributor)
David A. Kandell
Managing Partner; Kandell, Farnworth, & Pubins, C.P.A.'s
(accounting firm)
Thomas S. Kohlmann
President & Chief Executive Officer
Terence X. Meyer
Managing Partner; Meyer, Meyer, Metli & Keneally, Esqs. L.L.P.
(attorneys)
Susan V. B. O'Shea
Managing Partner; L.I. Commercial Industrial Corp.
(commercial real estate)
J. Douglas Stark
President; Stark Mobile Homes, Inc.
(manufactured housing)
OFFICERS
Thomas S. Kohlmann
President & Chief Executive Officer
J. Gordon Huszagh
Executive Vice President & Chief Financial Officer
Robert C. Dick
Executive Vice President
Frank D. Filipo
Executive Vice President
Augustus C. Weaver
Executive Vice President
Douglas Ian Shaw
Vice President & Corporate Secretary
45
[LOGO] SUFFOLK COUNTY
NATIONAL BANK
DIRECTORS Joan Brigante Hampton Bays Office
Edward J. Merz Vice President David C. Barczak
Chairman of the Board Robert T. Ellerkamp Vice President
Bruce Collins Vice President
James E. Danowski Wendy Harris Hauppauge Office
Joseph A. Deerkoski Vice President Dean Kupinsky
Howard M. Finkelstein John J. Reilly Vice President
Ralph M. Gibson Vice President
Edgar F. Goodale Deborah Simonetti Manorville Office
David A. Kandell Vice President Diane De Fabrizio
Thomas S. Kohlmann Frederick J. Weinfurt Assistant Vice President
Terence X. Meyer Vice President
Susan V. B. Mattituck Office
J. Douglas Stark RETAIL BANKING Janet V. Stewart
Stanley V. Gelish Vice President
EXECUTIVE OFFICERS Administrative Vice President
Thomas S. Kohlmann Anita J. Nigrel Medford Office
President & Administrative Vice President Paul E. Vaas
Chief Executive Officer Susan M. Martinelli Vice President
J. Gordon Huszagh Vice President
Executive Vice President & Miller Place Office
Chief Financial Officer Bohemia Office Michele Fenning
Frank D. Filipo Steve E. Horner Assistant Vice President
Executive Vice President Vice President
Retail Banking Montauk Harbor Office
Augustus C. Weaver Center Moriches Office Montauk Village Office
Executive Vice President & Julia Pratt John J. McDonald
Chief Information Officer Manager Manager
Robert C. Dick
Executive Vice President & Cutchogue Office Port Jefferson Harbor Office
Chief Lending Officer Richard J. Noncarrow Port Jefferson Village Office
Vice President Peter A. Poten
LOANS Vice President
Philip D. Ammirato East Hampton Pantigo Office
Senior Vice President Paul D. Hawkins, Jr. Riverhead, Ostrander
Bruce W. Bradley Vice President Avenue Office
Senior Vice President Angela R. Reese
David T. DeVito East Hampton Village Office Manager
Senior Vice President Jill James
Lawrence Milius Vice President Riverhead, Second Street Office
Senior Vice President Darleen Korpi-Schneider
Peter M. Almasy Assistant Vice President
Vice President
46
[LOGO] SUFFOLK COUNTY
NATIONAL BANK
Sag Harbor Office TRUST & INVESTMENT COMPTROLLER
Jane P. Markowski SERVICES William Cassara
Assistant Vice President Dan A. Cicale Vice President
Senior Vice President
Sayville Office & Trust Officer CORPORATE SERVICES
Pamela S. Werner Douglas Ian Shaw
Assistant Vice President Trust & Estate Services Vice President &
Linda Schwartz Corporate Secretary
Shoreham Office Vice President & Trust Officer
Wendy A. Stapon Warren Palzer DATA PROCESSING
Assistant Vice President Vice President Mark J. Drozd
Lori E. Thompson Senior Vice President
Smithtown Office Vice President
Susan L. Hughes FACILITIES
Assistant Vice President Private Banking Charles E. Anderson
Richard B. Smith Manager
Southampton Office Senior Vice President
Patricia Bolomey Theresa A. Kiernan HUMAN RESOURCES
Vice President Vice President Nancy Jacob
Margaret Lupardo Vice President
Wading River Office Vice President
John A. Maki Benjamin Mancuso INFORMATION
Manager Vice President SECURITY
Joanne Appel
Water Mill Office Investors' Marketplace Assistant Vice President
Patricia Bolomey William C. Araneo
Vice President Vice President MARKETING
Brenda B. Sujecki
West Babylon Office AUDIT Vice President
Vincent Cangiano Maria R. Michaelson
Vice President Vice President OPERATIONS
Dennis F. Orski
Westhampton Beach Office COLLECTIONS Senior Vice President
John McGregor Christopher R. Martinelli Deanna L. Miller
Assistant Vice President Assistant Vice President Vice President
COMPLIANCE SECURITY
Jeanne P. Hamilton Alexander B. Doroski
Senior Vice President Senior Vice President
47
[LOGO] SUFFOLK COUNTY
NATIONAL BANK
Directory of Offices and Departments
Area Code (631)
ON THE WEB AT: WWW.SCNB.COM Telephone FAX
- ----------------------------------------------------------------------------------------------------------------------------
Executive Offices 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2400 727-2638
Audit 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2285 727-8236
Bohemia Office 3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 585-4477 585-4809
Business and Professional Banking Center 260 Middle County Road, Smithtown, N.Y. 11787 979-3400 979-3430
Center Moriches Office 502 Main Street, Center Moriches, N.Y. 11934 878-8800 878-4431
Collections 206 Griffing Avenue, Riverhead, N.Y. 11901 208-2370 727-5732
Commercial Loans 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2201 727-5798
3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 580-0181 580-0183
137 West Broadway, Port Jefferson, N.Y. 11777 642-1000 642-0200
295 North Sea Road, Southampton, N.Y. 11968 287-3104 287-3296
Compliance 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2292 727-2638
Comptroller 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2270 369-2230
Consumer Loans 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2222 727-5521
Corporate Services (Investor Relations) 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 727-5667 727-3214
Cutchogue Office 31525 Main Road, P.O. Box 702, Cutchogue, N.Y. 11935 734-5050 734-7759
Data Processing 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5151 727-3499
East Hampton Pantigo Office 351 Pantigo Road, East Hampton, N.Y. 11937 324-2000 324-6367
East Hampton Village Office 100 Park Place, East Hampton, N.Y. 11937 324-3800 324-3863
Facilities 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2333 208-0767
Hampton Bays Office 168 West Montauk Highway, Hampton Bays, N.Y. 11946 728-2700 728-8311
Hauppauge Office 110 Marcus Boulevard, Hauppauge, N.Y. 11788 436-5400 436-4454
Human Resources 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2310 727-3170
Information Services 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5151 369-5834
Investors Marketplace 3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 285-7284 285-6610
48
[LOGO] SUFFOLK COUNTY
NATIONAL BANK
Directory of Offices and Departments
Area Code (631)
ON THE WEB AT: WWW.SCNB.COM Telephone FAX
- -----------------------------------------------------------------------------------------------------------------------------
Manorville Office 460 County Road 111, Suite 18, Manorville, N.Y. 11949 281-8200 281-5695
Marketing 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2323 727-9223
Mattituck Office 10900 Main Road, P.O. Box 1420, Mattituck, N.Y. 11952 298-9400 298-9188
Medford Office 2801 Route 112, Suite B, Medford, N.Y. 11763 758-1500 758-1509
Miller Place Office 74 Echo Avenue, Miller Place, N.Y. 11764 474-8400 474-8510
Montauk Harbor Office West Lake Drive, P.O. Box 2368, Montauk, N.Y. 11954 668-4333 668-3643
Montauk Village Office 746 Montauk Highway, P.O. Box 743, Montauk, N.Y. 11954 668-5300 668-1214
Operations 206 Griffing Avenue, Riverhead, N.Y. 11901 727-5151 369-5834
Port Jefferson Harbor Office 135 West Broadway, Port Jefferson, N.Y. 11777 474-7200 331-7806
Port Jefferson Village Office 228 East Main Street, Port Jefferson, N.Y. 11777 473-7700 473-9406
Private Banking 3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 585-6660 585-6398
Residential Mortgage Loans 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2244 369-2468
Retail Banking 4 West Second Street, P.O. Box 9000, Riverhead, N.Y. 11901 208-2300 727-3873
Riverhead, Ostrander Avenue Office 1201 Ostrander Avenue, P.O. Box 9000, Riverhead, N.Y. 11901 727-6800 727-5095
Riverhead, Second Street Office 6 West Second Street, Riverhead, N.Y. 11901 208-2350 727-3210
Sag Harbor Office 17 Main Street, P.O. Box 1268, Sag Harbor, N.Y. 11963 725-3000 725-4627
Sayville Office 161 North Main Street, Sayville, N.Y. 11782 218-1600 218-9425
Shoreham Office 9926 Route 25A, P.O. Box 622, Shoreham, N.Y. 11786 744-4400 744-6743
Smithtown Office 260 Middle Country Road, Smithtown, N.Y. 11787 979-3400 979-3430
Southampton Office 295 North Sea Road, Southampton, N.Y. 11968 283-3800 287-3293
Trust and Investment Services 3880 Veterans Memorial Highway, Bohemia, N.Y. 11716 285-6600 285-6610
Wading River Office 2065 Wading River-Manor Rd., Wading River, N.Y. 11792 929-6300 929-6799
Water Mill Office 828 Montauk Highway, P.O. Box 216, Water Mill, N.Y. 11976 726-4500 726-7573
West Babylon Office 955 Little East Neck Road, West Babylon, N.Y. 11704 669-7300 669-5211
Westhampton Beach Office 144 Sunset Ave., Westhampton Beach, N.Y. 11978 288-4000 288-9252
[PHOTO]