SMTB » Topics » Summary

These excerpts taken from the SMTB 10-K filed Mar 12, 2009.

Summary

Smithtown Bancorp, Inc., is a holding company formed in 1984, engaged primarily in commercial banking through its wholly owned bank subsidiary, Bank of Smithtown. The Bank offers a full array of consumer and commercial deposit and lending products and services through its nineteen branch offices as well as limited deposit services through its online banking site. The Bank also provides insurance and financial products through its two wholly owned subsidiaries, Bank of Smithtown Insurance Agents and Brokers, Inc. and Bank of Smithtown Financial Services, Inc. For the following discussion, the consolidated entity is referred to as the Company and the Bank and its subsidiaries are referred to as the Bank. There were several significant factors that affected the Company’s financial condition and results of operations during 2008. The discussion of these factors should be

14


read in conjunction with the accompanying financial statements.

The turmoil in the financial markets earmarked 2008 as one of the most troubling times experienced by the financial system since the Great Depression. Three major investment banking firms no longer exist as they did prior to 2008, and two additional firms have become banks. The U.S. government took over Fannie Mae and Freddie Mac, and bailed out a giant insurance company and two megabanks. Two of the largest bank failures in history took place during 2008, as did the acquisition of two other very large banks. Two of the largest U.S. auto manufacturers were bailed out by the U.S. government, and the Federal Reserve Bank lowered its target rate to an unprecedented range of 0.00% - 0.25%. Bank stocks dropped in price at rapid rates including the stock price of certain banks whose performance remained good. Smithtown Bancorp was one of those banks. It was a year of unprecedented growth for the Company. Opportunities were seized upon that never existed before for the Bank, and results were positive. Asset growth of 66.38% was fueled by loan growth of over $704 million. This 71.63% loan growth was almost entirely in the real estate sector, with growth in commercial real estate of 78.44%, in multi-family housing of 245.58% and in single family residences of 48.85%. Construction lending increased by 31.60%, although the majority of this lending included drawdowns on previously committed lines of credit. The Company’s earnings per share for 2008 were $1.55 as compared to $1.47 for 2007, an increase of 5.44%. Net income of $15,723 was yet another record level of income for the Company, an increase of $1,448 over the 2007 level. Various factors contributed to the growth in earnings this year, although the overriding factor was the growth in loans. Net interest margin declined by forty eight basis points during the year, from 4.10% at yearend 2007 to 3.62% at yearend 2008. This decline in margin was a direct result of the 400 basis point decline in the prime rate during the year. Although some loan rates immediately reprice downward upon a drop in the prime rate, there is no such immediate commensurate drop in deposit rates. At December 31, 2008, $522.5 million of the Company’s commercial and construction loans and home equity lines of credit were indexed to the prime rate, and therefore rates on these loans decreased immediately, unless a floor was in place and had already been reached. On the liability side of the balance sheet, however, rates decline much more slowly, particularly due to the continued strong competitive pressures of other banks and financial institutions all attempting to gain, or at a minimum, retain deposits. During the first quarter of 2008, deposits were often priced irrationally, and as a result the Company decided to allow funds to flow out of the Bank, rather than getting caught up in the rate competition that was going on at the time. Indicative of this irrational pricing early in the year, just a short time later some of the banks participating in this “rate war” failed and were taken over by larger institutions. Margin was also impacted by the increased borrowings required this year to fund a portion of the newly originated loans, although the average cost of these borrowings at 2.72% was lower than the Bank’s 2008 cost of deposits of 2.86%. Noninterest income for the year decreased slightly due in the majority to an other than temporary impairment (OTTI) writedown of $865 of a trust preferred pooled security. This security is made up of a pool of banks located throughout the country, varying in size from community banks to regional banks. Due to the deteriorated credit quality of some of the banks within the pool, the reduction in reserve collateral of the remaining issue and the lack of evidence to support the continued payments of all principal and interest according to original contractual terms, current mark to market accounting rules required the writedown of this security. However, as of February 2009, all payments of principal and interest have been received for this security. Noninterest expense grew by 18.54% this year. The largest growth of expense was in occupancy and equipment expense as a result of the Company’s continued geographical expansion. Four new branch locations were opened during 2008, with all their associated costs hitting bottom line. These new branch offices, however, along with the Company’s other fifteen locations, helped provide much of the funding for the loan growth experienced this year. An additional seven new branch locations expected to open during 2009 will provide a majority of the funding for continued loan growth during 2009. The increase in noninterest expense during 2008 was also a result of a greatly increased provision for loan losses. During 2007 this provision expense was $1,300 as compared to $3,200 for 2008. Although there is no regulatory requirement as to the ratio of the allowance for loan losses to total loans, as loan balances grew significantly throughout the year, management’s analysis of asset quality and safety guidelines lead to the decision to increase provision expense for the year. No financial institution is immune to the current credit crisis, and as such the Bank saw an increase in its nonperforming loans in 2008. These nonperforming loans still remain at a low level as compared to peer group banks. All of the Bank’s credit quality ratios continue to be significantly better than these peers.

During 2008, the Company’s investment portfolio remained stable in size, although the composition of the portfolio changed. Obligations of US government agencies declined by 41.32%, while holdings of mortgage-backed securities increased by 199.66% over their 2007 levels. This was primarily the result of called agency securities being replaced with comparable yielding mortgage-backed securities. Average yield on the securities portfolio rose by thirty five basis points from yearend 2007 to yearend 2008. The investment portfolio provides interest income to the Company and is a source of liquidity, but it is primarily used to provide collateral for deposits of local municipalities. The Company’s holdings of restricted securities increased by over $13,000 during the year. These securities are made up of primarily Federal Home Loan Bank stock that is required to be held in an amount proportionate to the level of outstanding advances. The stock earned dividends during 2008 and yielded a 3.95% return to the Bank.

Bank premises and equipment increased dramatically this year. An increase of 45.92% was due to the addition of the four new branch locations, as well as the construction in progress at various other new leasehold properties. These assets will continue to increase at a rapid pace in 2009 as at least seven new locations are slated for opening during the year.

Deposit growth during 2008 was also very high. This growth of over $376,000 or 37.96% was achieved primarily in the Bank’s core deposits. These deposits include checking, savings, money market and certificates of deposit under one hundred thousand dollars. Approximately one half of this growth in deposits was from the Company’s new branches, including its newest online

15


branch. The segmentation of the deposit portfolio changed slightly during 2008, with money market accounts and certificates of deposit now representing 32.34% and 50.83% of total deposits as compared to 39.35% and 40.38%, respectively, at yearend 2007. The cost of these deposits declined by almost one hundred basis points during 2008, and now have an average rate of 3.17% as compared to 4.14% in 2007. Borrowings also increased significantly during 2008, as the need for additional funding to support the Company’s loan growth was required. These borrowings were all in the form of Federal Home Loan Bank advances, with varying structures and rates. They are primarily collateralized with the Company’s residential real estate loans and some commercial real estate loans. Additional credit availability to the Company through the Federal Home Loan Bank remains high.

During the first quarter of 2008, the Company formed a trust that issued $20,000 of floating rate trust preferred securities due in June 2038. The securities bear an interest rate of 3 month Libor plus 375 basis points. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering. The Company may redeem the subordinated debentures, in whole or in part, at a premium declining ratably to par on June 1, 2013. During the third quarter of 2008, the Company also issued a private placement of common equity. As a result of this equity issuance, 1,965,000 shares of common stock were added to the existing 9,834,477 shares. This growth in capital was used to support the growth in loans achieved during the year. At yearend the Company’s capital ratios were all within the “well capitalized” range. Tier I leverage capital was 8.66%, Tier I risk based capital was 9.96% and total risk based capital was 10.72%.

In summary, 2008 was a very challenging year for financial institutions, with unprecedented events occurring regularly. In spite of the tumultuous economy, Smithtown Bancorp remained true to its core business of providing the highest quality of loans to its customers and acquiring as many core deposits as possible at reasonable rates. By continuing to follow these goals, 2008 was another record year for the Company, a true accomplishment in light of current economic conditions. The Company’s return on equity for the year was 16.73%, and its efficiency ratio was 53.03%. The efficiency ratio is calculated by dividing total noninterest expense, net of the provisions for income tax, OTTI and probable incurred loan losses, by total revenues, net of total interest expense. Net income grew by 10.14% and year over year EPS growth reached 5.44%. The Company expanded its geographical footprint by over 25%. 2009 will continue to present its challenges, but the Company will remain faithful to its long term goal of returning the highest possible shareholder value within the limits of safety and soundness.

Summary



Smithtown Bancorp, Inc., is a holding company formed in 1984, engaged primarily in commercial banking through its wholly owned bank subsidiary, Bank of Smithtown. The Bank offers a full array of consumer and commercial deposit and lending products and services through its nineteen branch offices as well as limited deposit services through its online banking site. The Bank also provides insurance and financial products through its two wholly owned
subsidiaries, Bank of Smithtown Insurance Agents and Brokers, Inc. and Bank of Smithtown Financial Services, Inc. For the following discussion, the consolidated entity is referred to as the Company and the Bank and its subsidiaries are referred to as the Bank. There were several significant factors that affected the Company’s financial condition and results of operations during 2008. The discussion of these factors should be



14








read in conjunction with the accompanying financial statements.



The turmoil in the financial markets earmarked 2008 as one of the most troubling times experienced by the financial system since the Great Depression. Three major investment banking firms no longer exist as they did prior to 2008, and two additional firms have become banks. The U.S. government took over Fannie Mae and Freddie Mac, and bailed out a giant insurance company and two megabanks. Two of the largest bank failures in history took place during
2008, as did the acquisition of two other very large banks. Two of the largest U.S. auto manufacturers were bailed out by the U.S. government, and the Federal Reserve Bank lowered its target rate to an unprecedented range of 0.00% - 0.25%. Bank stocks dropped in price at rapid rates including the stock price of certain banks whose performance remained good. Smithtown Bancorp was one of those banks. It was a year of unprecedented growth for the Company. Opportunities were seized upon
that never existed before for the Bank, and results were positive. Asset growth of 66.38% was fueled by loan growth of over $704 million. This 71.63% loan growth was almost entirely in the real estate sector, with growth in commercial real estate of 78.44%, in multi-family housing of 245.58% and in single family residences of 48.85%. Construction lending increased by 31.60%, although the majority of this lending included drawdowns on previously committed lines of credit. The
Company’s earnings per share for 2008 were $1.55 as compared to $1.47 for 2007, an increase of 5.44%. Net income of $15,723 was yet another record level of income for the Company, an increase of $1,448 over the 2007 level. Various factors contributed to the growth in earnings this year, although the overriding factor was the growth in loans. Net interest margin declined by forty eight basis points during the year, from 4.10% at yearend 2007 to 3.62% at yearend 2008. This decline
in margin was a direct result of the 400 basis point decline in the prime rate during the year. Although some loan rates immediately reprice downward upon a drop in the prime rate, there is no such immediate commensurate drop in deposit rates. At December 31, 2008, $522.5 million of the Company’s commercial and construction loans and home equity lines of credit were indexed to the prime rate, and therefore rates on these loans decreased immediately, unless a floor was in place and
had already been reached. On the liability side of the balance sheet, however, rates decline much more slowly, particularly due to the continued strong competitive pressures of other banks and financial institutions all attempting to gain, or at a minimum, retain deposits. During the first quarter of 2008, deposits were often priced irrationally, and as a result the Company decided to allow funds to flow out of the Bank, rather than getting caught up in the rate competition that was
going on at the time. Indicative of this irrational pricing early in the year, just a short time later some of the banks participating in this “rate war” failed and were taken over by larger institutions. Margin was also impacted by the increased borrowings required this year to fund a portion of the newly originated loans, although the average cost of these borrowings at 2.72% was lower than the Bank’s 2008 cost of deposits of 2.86%. Noninterest income for the year
decreased slightly due in the majority to an other than temporary impairment (OTTI) writedown of $865 of a trust preferred pooled security. This security is made up of a pool of banks located throughout the country, varying in size from community banks to regional banks. Due to the deteriorated credit quality of some of the banks within the pool, the reduction in reserve collateral of the remaining issue and the lack of evidence to support the continued payments of all principal and
interest according to original contractual terms, current mark to market accounting rules required the writedown of this security. However, as of February 2009, all payments of principal and interest have been received for this security. Noninterest expense grew by 18.54% this year. The largest growth of expense was in occupancy and equipment expense as a result of the Company’s continued geographical expansion. Four new branch locations were opened during 2008, with all their
associated costs hitting bottom line. These new branch offices, however, along with the Company’s other fifteen locations, helped provide much of the funding for the loan growth experienced this year. An additional seven new branch locations expected to open during 2009 will provide a majority of the funding for continued loan growth during 2009. The increase in noninterest expense during 2008 was also a result of a greatly increased provision for loan losses. During 2007 this
provision expense was $1,300 as compared to $3,200 for 2008. Although there is no regulatory requirement as to the ratio of the allowance for loan losses to total loans, as loan balances grew significantly throughout the year, management’s analysis of asset quality and safety guidelines lead to the decision to increase provision expense for the year. No financial institution is immune to the current credit crisis, and as such the Bank saw an increase in its nonperforming loans in
2008. These nonperforming loans still remain at a low level as compared to peer group banks. All of the Bank’s credit quality ratios continue to be significantly better than these peers.



During 2008, the Company’s investment portfolio remained stable in size, although the composition of the portfolio changed. Obligations of US government agencies declined by 41.32%, while holdings of mortgage-backed securities increased by 199.66% over their 2007 levels. This was primarily the result of called agency securities being replaced with comparable yielding mortgage-backed securities. Average yield on the securities portfolio rose by
thirty five basis points from yearend 2007 to yearend 2008. The investment portfolio provides interest income to the Company and is a source of liquidity, but it is primarily used to provide collateral for deposits of local municipalities. The Company’s holdings of restricted securities increased by over $13,000 during the year. These securities are made up of primarily Federal Home Loan Bank stock that is required to be held in an amount proportionate to the level of outstanding
advances. The stock earned dividends during 2008 and yielded a 3.95% return to the Bank.



Bank premises and equipment increased dramatically this year. An increase of 45.92% was due to the addition of the four new branch locations, as well as the construction in progress at various other new leasehold properties. These assets will continue to increase at a rapid pace in 2009 as at least seven new locations are slated for opening during the year.



Deposit growth during 2008 was also very high. This growth of over $376,000 or 37.96% was achieved primarily in the Bank’s core deposits. These deposits include checking, savings, money market and certificates of deposit under one hundred thousand dollars. Approximately one half of this growth in deposits was from the Company’s new branches, including its newest online



15








branch. The segmentation of the deposit portfolio changed slightly during 2008, with money market accounts and certificates of deposit now representing 32.34% and 50.83% of total deposits as compared to 39.35% and 40.38%, respectively, at yearend 2007. The cost of these deposits declined by almost one hundred basis points during 2008, and now have an average rate of 3.17% as compared to 4.14% in 2007. Borrowings also increased significantly during 2008,
as the need for additional funding to support the Company’s loan growth was required. These borrowings were all in the form of Federal Home Loan Bank advances, with varying structures and rates. They are primarily collateralized with the Company’s residential real estate loans and some commercial real estate loans. Additional credit availability to the Company through the Federal Home Loan Bank remains high.



During the first quarter of 2008, the Company formed a trust that issued $20,000 of floating rate trust preferred securities due in June 2038. The securities bear an interest rate of 3 month Libor plus 375 basis points. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering. The Company may redeem the subordinated debentures, in whole or in part, at a premium declining ratably to par on June 1, 2013. During
the third quarter of 2008, the Company also issued a private placement of common equity. As a result of this equity issuance, 1,965,000 shares of common stock were added to the existing 9,834,477 shares. This growth in capital was used to support the growth in loans achieved during the year. At yearend the Company’s capital ratios were all within the “well capitalized” range. Tier I leverage capital was 8.66%, Tier I risk based capital was 9.96% and total risk based
capital was 10.72%.



In summary, 2008 was a very challenging year for financial institutions, with unprecedented events occurring regularly. In spite of the tumultuous economy, Smithtown Bancorp remained true to its core business of providing the highest quality of loans to its customers and acquiring as many core deposits as possible at reasonable rates. By continuing to follow these goals, 2008 was another record year for the Company, a true accomplishment in light of
current economic conditions. The Company’s return on equity for the year was 16.73%, and its efficiency ratio was 53.03%. The efficiency ratio is calculated by dividing total noninterest expense, net of the provisions for income tax, OTTI and probable incurred loan losses, by total revenues, net of total interest expense. Net income grew by 10.14% and year over year EPS growth reached 5.44%. The Company expanded its geographical footprint by over 25%. 2009 will continue to present
its challenges, but the Company will remain faithful to its long term goal of returning the highest possible shareholder value within the limits of safety and soundness.



EXCERPTS ON THIS PAGE:

10-K (2 sections)
Mar 12, 2009
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