Item 1: Description of Business
Smithtown Bancorp, Inc. ("Registrant")
Bank of Smithtown ("Bank")
Information regarding the Registrant's formation and business and a description of the Bank's business is contained on:
Page 9 of the Registrant's Annual Report for the year ended December 31, 2001, and
Page 8 of the Registrant's Prospectus dated July 26, 1984, both of which are incorporated by reference.
Item 2:
Item 2: Description of Properties
The Registrant owns no materially important physical properties. Office facilities of the Registrant are located at One East Main Street, Smithtown, New York 11787.
The Bank owns in fee the following locations:
Smithtown Office Hauppauge Office
One East Main Street 548 Route 111 Smithtown, New York 11787 Hauppauge, New York 11788
Trust and Audit Building East Setauket Office 17 Bank Avenue 184 North Belle Mead Road Smithtown, New York 11787 East Setauket, New York 11733
The Bank occupies the following locations under lease arrangements:
Commack Office Kings Park Office 2020 Jericho Turnpike 14 Park Drive Commack, New York 11725 Kings Park, New York 11754
Centereach Office Lake Grove Office 1919 Middle Country Road 2921 Middle Country Road Centereach, New York 11720 Lake Grove, New York 11755
Northport Office 836 Fort Salonga Road Northport, New York 11768
All office facilities are well maintained. There are no other owners of these properties and no mortgages or liens exist on the properties.
The Bank owns one property that it has acquired through the foreclosure process. It is a vacant commercial property.
Item 3:
Item 3: Legal Proceedings
In the opinion of the Registrant and its counsel, there are no material proceedings pending in which the Registrant or the Bank is a party, or of which its property is the subject, or any which depart from the ordinary routine litigation incident to the kind of business conducted by the Registrant and the Bank; no proceedings are known to be contemplated by government authorities or others.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders
No matter was submitted during the quarter ended December 31, 2001 to a vote of our security holders through the solicitation of proxies or otherwise.
Part II
Item 5:
Item 5: Market for Common Equity and Related Stockholder Matters
Page 14 of the Registrant's Annual Report for the year ended December 31, 2001 is incorporated herein by reference.
672 shareholders of common stock at March 15, 2002.
Item 6:
Item 6: Selected Financial Data
Pages 11 through 14 inclusive of the Registrant's Annual Report for the year ended December 31, 2001 is incorporated herein by reference.
Item 7:
Item 7: Management's Discussion and Analysis of Financial Plan and Results of Operations
Pages 15 through 27, inclusive, of the Registrant's Annual Report for the year ended December 31, 2001 are incorporated herein by reference.
Item 7A:
Item 7A: Quantitative and Qualitative Disclosures About Market Risks
Pages 24 through 25, inclusive, of the Registrant's Annual Report for the year ended December 31, 2001 are incorporated herein by reference.
Item 8:
Item 8: Financial Statements and Supplementary Data
Pages 28 through 49, inclusive, of the Registrant's Annual Report for the year ended December 31, 2001 are incorporated herein by reference.
Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2001 ------------------------------------ First Second Third Forth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter ------------------------------------ Interest Income $ 6,080 $ 6,250 $ 6,443 $ 6,410 Interest Expense 2,534 2,496 2,342 2,017 ------------------------------------ Net Interest Income 3,546 3,754 4,101 4,393 Provision for Possible Loan Loss 210 210 210 360 ------------------------------------ Net Interest Income After Provision for Possible Loan Loss 3,336 3,544 3,891 4,033 Other Non-Interest Income 1,097 1,026 1,055 1,390 Other Operating Expenses 2,481 2,316 2,452 2,676 ------------------------------------ Income Before Income Taxes 1,952 2,254 2,494 2,747 Provision for Income Taxes 694 812 884 985 ------------------------------------ Net Income $ 1,258 $ 1,442 $ 1,610 $ 1,762 ==================================== Earnings Per Share $ 0.81 $ 0.93 $ 1.04 $ 1.14
Year Ended December 31, 2000 ------------------------------------ First Second Third Forth (In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter ------------------------------------ Interest Income $ 5,118 $ 5,683 $ 6,046 $ 6,158 Interest Expense 2,055 2,316 2,511 2,562 ------------------------------------ Net Interest Income 3,063 3,367 3,535 3,596 Provision for Possible Loan Loss 120 120 150 150 ------------------------------------ Net Interest Income After Provision for Possible Loan Loss 2,943 3,247 3,385 3,446 Other Non-Interest Income 894 925 779 834 Other Operating Expenses 2,052 2,168 2,158 2,333 ------------------------------------ Income Before Income Taxes 1,785 2,004 2,006 1,947 Provision for Income Taxes 660 698 730 704 ------------------------------------ Net Income $ 1,125 $ 1,306 $ 1,276 $ 1,243 ==================================== Earnings Per Share $ 0.70 $ 0.81 $ 0.80 $ 0.79
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
There were no changes in or disagreements with accountants on accounting and financial disclosure as defined in Item 304 of Regulation S-K.
Part III
Item 10:
Item 10: Directors and Executive Officers
Pages 2 through 3, inclusive, and page 8 of the Registrant's Proxy Statement dated March 11, 2002 are incorporated herein by reference.
None of the individuals named in the Proxy Statement was selected as a director or nominee by any arrangement or understanding between him/her and any other person(s).
There are no family relationships between any director, executive officer, or person nominated by the Registrant to become a director.
None of the individuals named in the Proxy Statement hold a directorship in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
None of the individuals named in the Proxy Statement are or have been involved in a material legal proceeding that has effected or would effect his/her ability or integrity while carrying out his/her term of office.
Item 11:
Item 11: Executive Compensation
Page 9 of the Registrant's Proxy Statement dated March 11, 2002 are incorporated herein by reference.
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management
Pages 6 through 7, inclusive, of the Registrant's Proxy Statement dated March 11, 2002 are incorporated herein by reference.
Item 13:
Item 13: Certain Relationships and Related Transactions
Page 10 of the Registrant's Proxy Statement dated March 11, 2002 and page 39 of the Registrant's Annual Report for the year ended December 31, 2001 are incorporated herein by reference.
Part IV
Item 14:
Item 14: Exhibits, Financial Statements Schedules, and Reports on Form 8-K
INDEX OF EXHIBITS
Exhibit No. Description Page - ----------- ----------- -----
3a Articles of Incorporation *
3b By-Laws *
4 By-Laws Page Nos. 2,11,12,13,14 *
Articles of Incorporation Page No. 2 *
9 No voting trust agreements
10 No material contracts
11 Statement Re Computation of Per Share Earnings 99
13 Annual Report for the year ended 31 December 2001 9 - 81
Notice of Annual Meeting and Proxy Statement 82 - 97
16 Reference to Item 8 in 10-K 4
18 No change in accounting principles
19 Reference to Page 1 in 10-K 1
21 Bank of Smithtown Smithtown, New York 11787
22 Notice of Annual Meeting And Proxy Statement 82 - 97
23 Consent of Independent Auditors 98 Report of Independent Auditors 79
24 None
99 None
* Incorporated by reference and filed as a part of the Registrant's Form S-14 Registration Statement under the Securities Act of 1933, Reg #2-91511, filed on June 6, 1984.
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, hereunto duly authorized.
Date: 3/26/02 Smithtown Bancorp, Inc. ----------------------- Registrant
/s/ Bradley E. Rock -------------------------------------------------------- Bradley E. Rock, Chairman, President and Chief Executive Officer
/s/ Anita M. Florek -------------------------------------------------- Anita M. Florek, Treasurer, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Bradley E. Rock - -------------------------------------------------------- Bradley E. Rock, Chairman, President and Chief Executive Date 3/26/02 Officer
/s/ Augusta Kemper - -------------------------------------------------------- Augusta Kemper, Director Date 3/26/02
/s/ Patrick A. Given - -------------------------------------------------------- Patrick A. Given, Director Date 3/26/02
/s/ Manny Schwartz - -------------------------------------------------------- Manny Schwartz, Director Date 3/26/02
/s/ Edith Hodgkinson - ------------------------------------------ Edith Hodgkinson, Director Date 3/26/02
/s/ Barry M. Seigerman - ------------------------------------------ Barry M. Seigerman, Director Date 3/26/02
/s/ Robert W. Scherdel - ------------------------------------------ Robert W. Scherdel, Director Date 3/26/02
/s/ Patricia C. Delaney - ------------------------------------------ Patricia C. Delaney, Director Date 3/26/02
/s/ Sanford C. Scheman Date 3/26/02 - ------------------------------------------ Sanford C. Scheman, Director
FINANCIAL HIGHLIGHTS
A GREAT BANK GETS GREAT NUMBERS
Ranked # 1 in the nation by U.S. Banker on a 5-year ranking of similarly-sized community banks by profitability.
We have the numbers and the numbers say it all.
EARNINGS PER SHARE STOCK PRICE [dollars] [dollars]
1.92 2.08 2.63 3.10 3.92 21.25 27.25 30.25 31.25 38.50 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001
Per share figures have been adjusted to reflect stock splits in 1998 and 2001.
FINANCIAL HIGHLIGHTS
ROE COMPARISON LOAN GROWTH [percent] [millions]
9.05 9.62 12.50 25.30 99.7 117.6 176.2 228.3 281.7 All NY NY Nat'l Bank of 1997 1998 1999 2000 2001 Banks Peer Peer Smithtown
ROA COMPARISON DEPOSIT GROWTH [percent] [millions]
.84 .93 1.10 1.74 168.2 183.9 207.8 257.2 311.9 All NY NY Nat'l Bank of 1997 1998 1999 2000 2001 Banks Peer Peer Smithtown
EFFICIENCY COMPARISON NON-PERFORMING LOANS/TOTAL LOANS [percent] [percent]
66.0 60.7 47.0 2.05 1.49 .79 .60 .22 NY Nat'l Bank of 1997 1998 1999 2000 2001 Peer Peer Smithtown
In virtually all categories of financial performance, Bank of Smithtown consistently ranks at or near the top. In particular, over the past five years, Smithtown Bancorp has produced a return to its shareholders of more than 20% per year, a performance unequaled by any of its peers across the entire nation.
CHAIRMAN'S MESSAGE
The past year, for Bank of Smithtown, was a year of unprecedented achievement. The Bank and its holding company achieved record levels of success in virtually every category of performance and Smithtown Bancorp received national recognition as the #1 publicly-held community bank holding company its size in the country.
Net income exceeded $6 million, the sixth consecutive year that the Company has achieved record levels of earnings. Return on equity was 24.59%, marking the fifth year in a row that shareholder return has exceeded the lofty 20% mark. We continue to be a leader among our peers in expense management, with the Bank posting an efficiency ratio of 46.98%. Asset quality ratios are also excellent with nonperforming loans at .22% of total loans at year-end. Deposits grew by $54.8 million, an increase of more than 21%. Loans grew by $53.4 million, an increase of more than 23%. In virtually every category of performance, the Company is either the best or near best among its peers.
The extraordinarily successful operations of the Bank have resulted in significantly increased value for the Company's shareholders. Earnings per share grew by 26.4% to $3.92 per share. As a result of this remarkable earnings growth, during a year when many bank stock indexes decreased in value, the value of Smithtown Bancorp shares increased by more than 23%.
We look toward the future, both near-term and long-term, with great enthusiasm. We are presently engaged in substantial efforts to extend our unique brand of community banking by de novo branching throughout our market area. We presently expect three of these new offices to open during 2002. Our efforts to bring the look, feel and functionality of our customer areas into alignment with our already-established special brand of personalized service has received much attention, and we expect this brand extension to bring us benefits in the future. Our various efforts to build our customer base and extend our markets are costly, however, and may moderate near-term earnings growth. We are confident, nonetheless, that these current expenditures on new branches and other efforts to extend our markets represent sound investments in the future of our Company.
Although we take pride in the recognition we have received for various accomplishments on an annual basis, our focus is not upon short-term goals. Our mission is to build long-term shareholder value. We believe that we have succeeded in this mission throughout our 92-year history, and with your valued support, we will continue to do so in the future.
Sincerely,
/s/ Bradley E. Rock
Bradley E. Rock Chairman of the Board President & Chief Executive Officer
SERVICE
GREAT SERVICE MAKES A GREAT BANK
Bank of Smithtown has enjoyed a 92-year history of excellence. The foundation of our success has always been to our people and their dedication to customers. Our customers know this and surely, as shareholders, you've recongnized the financial benefit of this single-minded focus.
Once again, we are hard at work proving that Bank of Smithtown doesn't just preach superior service. We live it. As a result, our unique "Person-to-Person" brand of banking continues to grow in philosophy, execution, and success - success we're only too happy to share with you.
Here are some of our current highlights:
We've re-designed our logo to better reflect our "Person-to-Person" philosophy and exemplify our 92-year commitment to exceeding customer expectations.
The logo design contains two abstract figures and represents the guidance offered by a warm and personal community bank while also presenting a contemporary and corporate image.
Our new tagline, "Dedicated. To You." also affirms our long established commitment to our unique brand of "Person-to-Person" banking.
SERVICE
We're revolutionizing the world of banking by announcing our new retail concept. The idea is to eventually replace the traditional bank and branch and start thinking like a retail store. Positioning ourselves this way, as a destination for customers looking for an array of financial products and services, is unique in our market place.
These informal retail environments are designed to put the customer at ease, showcase our products and services, and improve opportunities for dialogue that will more effectively get those products and services directly into the hands of the customers.
We're introducing Bank Pros(SM) , our visionary interpretation of customer service representatives. As members of our knowledgeable and helpful staff, Bank Pros(SM) will greet and work with customers one-on-one throughout their entire visit to the bank. It is our belief that this approach will increase our opportunities to create lasting relationships, exceed expectations, eliminate confusion, and directly supply customers with products and services specific to their needs.
We're doing away with teller lines. We're eliminating the barriers between our clientele and staff. We're replacing counters and desks with comfortable conversation areas. We're once again improving our level of customer service.
We're unveiling new in-store marketing technologies like our plasma screens to communicate product and service messages to customers, pique their interest, and encourage them to invest more heavily with us.
We're continuing to prove we're as dedicated to our customers outside the bank as inside it. With fundraisers, local benefits, and philanthropic works like our long-time support of the Long Island Museums, Guide Dog Foundation, student of the month programs, and other community involvement, we continue to demonstrate our solid corporate citizenship.
So with each and every interaction, we're striving to remind our customers of our service and dedication. There's no better way to ensure a successful 2002 as well.
[Photo Appears Here]
GREAT FUTURE
BANKING ON AN EVEN GREATER FUTURE
Yes, it was a banner year, but this is no time to rest on our laurels. To that end, we plan on intensifying our unique and profitable approach to banking in order to continue growing and increasing shareholder value.
What to look for in 2002:
In an effort to capitalize further on our unique brand of "Dedicated. To You." banking, we intend to open three new state-of-the-art retail stores. They will be our finest examples of the kind of creative solutions we believe better enable us to engage in dialogues with customers and deliver services more effectively.
Current sites for our new retail store include East Setauket, Rocky Point, Wading River, and Bohemia.
We will gradually convert existing branches to our new state-of-the-art concepts, which include no teller counters, plasma screens, computer bars and our Bank Pros(SM) training.
We are taking a variety of steps to capture an increasing percentage of our customers' insurance and investment business. Our new stores, the conversion of our existing branches, and Bank Pros(SM) training will gradually help us achieve our insurance and investment goals.
We will also be implementing new marketing and communication plans to get our "Dedicated. To You." message out, create awareness, increase sales, and build upon brand loyalty.
We believe that the exciting steps that we will take in 2002 will not only elevate the visibility of our Company in the eyes of customers and investors, but even more importantly, these steps represent sound investments in the long-term future growth of our Company.
[Photo Appears Here]
BUSINESS DESCRIPTION
A DESCRIPTION OF OUR BUSINESS
Smithtown Bancorp (the "Bancorp") is a bank holding company incorporated in the State of New York, subject to the regulation and supervision of the State of New York Banking Department, the Federal Reserve Board and the Securities and Exchange Commission. The Bancorp owns all of the outstanding stock of Bank of Smithtown (the"Bank") and conducts no business other than holding the stock of Bank of Smithtown. Therefore, the content of this annual report, as it pertains to the description of the activities of the Bancorp, is in essence a description of the activities of Bank of Smithtown.
Bank of Smithtown, chartered under the laws of the State of New York, is a member of the Federal Reserve System and is insured by the Federal Deposit Insurance Corporation. The Bank has been headquartered in Smithtown since 1910. It is in its 93rd year of operation as an independent commercial bank. The Bank operates eight offices in the following communities: Smithtown, Commack, Hauppauge, Kings Park, Centereach, Lake Grove, Northport, and East Setauket.
Bank of Smithtown is a full-service bank offering a complete range of commercial and consumer financial services. The Bank also extends its services to local municipalities.
The Bank's Trust and Investment Management Division, introduced in 1970, provides trust and estate administration, fiduciary and investment advisory services, and acts as a bond and coupon paying agent for local municipalities.
The Bank's intention is to provide individuals, businesses, and municipalities with a comprehensive array of financial services
2001 FINANCIAL DATA
Management is not necessarily aware of the price for every transaction of Bancorp stock. The following charts show the prices for the transactions of which management is aware. All per share data has been adjusted to reflect the May 2001 two-for-one stock split.
Per Share -------------------------------------------- Cash Dividend 2001 High Low Declared - ----------------------------------------------------------------------------- First Quarter $ 33.50 $ 30.88 $ 0.13 Second Quarter 40.00 32.65 0.13 Third Quarter 37.00 35.00 0.13 Fourth Quarter 41.00 36.29 0.13 - ----------------------------------------------------------------------------- Total Cash Dividends Declared $ 0.52 =============================================================================
- ----------------------------------------------------------------------------- First Quarter $ 31.00 $ 29.44 $ 0.12 Second Quarter 29.50 28.38 0.12 Third Quarter 31.00 28.38 0.12 Fourth Quarter 32.50 31.00 0.12 - ----------------------------------------------------------------------------- Total Cash Dividends Declared $ 0.48 =============================================================================
- ----------------------------------------------------------------------------- First Quarter $ 28.38 $ 27.50 $ 0.11 Second Quarter 31.00 27.50 0.11 Third Quarter 28.50 27.75 0.11 Fourth Quarter 30.25 27.88 0.11 - ----------------------------------------------------------------------------- Total Cash Dividends Declared $ 0.44 =============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF - ------------------------------------------------------------------------------- OPERATIONS - ----------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND ANALYST REPORTS This report may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, but actual results may differ materially from anticipated future results. Forward-looking statements may be identified by use of the words "believe," "expect," "anticipate," "project," "estimate," "expect," "will be," "will continue," "will likely result," or similar expressions. The Company's ability to predict results or the actual effect of future strategic plans is inherently uncertain. Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in: general economic conditions, interest rates, deposit flows, loan demand, competition, accounting principles and guidelines, and governmental, regulatory and technological factors affecting the Company's operations, pricing, products and services. The factors included here are not exhaustive. Other sections of this report may include additional factors that could adversely impact the Company's performance.
Investors are cautioned not to place undue reliance on forward-looking statements as a prediction of actual results. Except as required by applicable law or regulation, the Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated results. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in our reports to the Securities Exchange Commission.
SUMMARY Smithtown Bancorp is a one-bank holding company formed in 1984. Its income is derived primarily from the operations of its largest subsidiary, Bank of Smithtown. The Bank operates eight full-service offices in the north central region of Suffolk County and offers a full line of consumer and commercial products, including a Trust and Investment Management Division. Bank of Smithtown is committed to providing increased shareholder value through superior customer service, efficiency of operations, and financial products especially geared toward the community we serve. The year 2001 was another record-breaking year for Bank of Smithtown. As one of the highest performing banks in the nation, for the sixth consecutive year, the Bank was able to achieve record earnings, balance sheet growth, and return on equity. Efficiency reached an all-time peak level of 47.1%. Earnings per share attained an unprecedented level in the Bank's history and demand and price for the Bank's stock remain very strong, indicative of continued investor confidence in our company.
Strength in our local economy continued throughout the year 2001 as evidenced by the demand for real estate financing, both construction and permanent, as well as home equity lines. Three consecutive years of loan growth greater than 20%, including 2001 growth of 23.40% is noteworthy. This asset growth demanded corresponding growth on the liability side of the balance sheet for funding purposes. Bank of Smithtown was once again extremely successful in managing its balance sheet so as to maintain a steady growth in deposits to keep pace with loan demand, thus reducing its need for alternative funding. For the second year in a row, deposit growth nearly matched loan growth. This years' numbers were $54,782,722 growth in deposits and $53,419,703 growth in loans. As in 2000, Bank of Smithtown used the year 2001 to further diversify its revenue streams. Bank of Smithtown Insurance Agency, a wholly owned subsidiary of Bank of Smithtown, began operations in August. The Agency was formed to sell various non-bank investment vehicles including equities, mutual funds, annuities, and insurance. Net income from Agency operations for 2001 was $53,521. SMTBFinancialGroup, formed during the year 2000 for the purpose of insurance sales, also continued to add to the bottom line with net income of $32,707 for the year 2001. Fee income from products and services continues to generate significant income. As well as providing additional revenue streams, the Bank continues to provide more choices to our customers as to how they wish to conduct their banking business. A Bank of Smithtown credit card, debit card, an ATM at every branch, and online banking now allow our customers to choose their preferred delivery channel. Providing our customers with a choice of high touch or high tech, allowing them to find the right balance for themselves, remains an important goal. Bank of Smithtown has continued to invest in technology, which is really an investment in our most valuable assets: our employees. New software and hardware enhance their ability and efficiency in providing accurate information to management and customers. Once again, we look back at the year 2001 with great pride and satisfaction. We attained all of the goals with which we set out and continue to pave the road for ongoing success and designation as the strongest community bank in the nation.
Bank of Smithtown's balance sheet changed significantly during 2001. Total assets increased by 20.87% from $314,580,743 at year-end 2000 to $380,220,901 at December 31, 2001. As in the past two years, the area of largest growth was the loan portfolio that grew from $228,319,535 to $281,739,238 from December 31, 2000 to December 31, 2001, and represents 23.40% growth. Loans now comprise 74.10% of total assets compared to 72.58% at year-end 2000. Composition of credits within the portfolio remained stable with the highest
percentage of loans in the commercial real estate segment. These loans represent 51.49% of total loans. The next largest category of loans remains residential real estate loans, which comprise 26.20% of the portfolio. Total real estate loans represent 90.16% of the loan portfolio, however, high credit quality and low loan to value ratios mitigate this concentration, as evidenced by the absence of any non-performing real estate loans. The Bank's loan to deposit ratio increased from 2000 to 2001 from 88.79% to 90.32%. The investment securities portfolio increased during 2001. The Available for Sale portfolio comprises 93.18% of total securities and is predominantly made up of Mortgage-Backed Securities and Obligations of State and Political Subdivisions. During the year 2001, the Bank transacted multiple sales of securities in order to take advantage of investments in higher yielding loans. The net loss on the sales of these securities was $4,636. The sale of federal funds at December 31, 2001 was $40,327. During the year 2000, the Bank of Smithtown entered into a limited liability company, SMTB Financial Group, LLC. The Bank's equity investment in this Company at year-end 2001 was $35,207. Total other assets decreased from $18,540,941 to $18,274,997 from December 31, 2000 to December 31, 2001, representing a 1.43% decrease. The liability side of the balance sheet also underwent changes in allocations. Total deposits increased from year-end 2000 to year-end 2001 from $257,159,322 to $311,942,044, a 21.30% increase. Money market accounts represent the largest category of deposits, currently at 32.22% of the total. They were also the largest growing segment of deposits this year, with an increase of 39.81%. The next largest segment of deposits is time deposits which represent 27.05% of the total. These time deposits increased by 8.87% during 2001. Deposits as a percentage of total liabilities were nearly identical at year-end 2001 compared to year-end 2000, at an 88.31% level compared to 88.01%. Although the year 2001 was one of record low interest rates, lower yielding assets could have compressed the Bank's net interest margin. As evidenced by the balance sheet, the largest segments of the Bank's deposits are in high interest paying accounts, but the 18.91% increase in demand deposits was a major contributing factor in actually increasing the Bank's net interest margin. Other borrowings increased by $6,250,000 or 18.66% during 2001. Stockholders' equity increased by 20.58%, a result of $6,072,263 of net income, $805,480 of dividends declared, the purchase of 27,957 shares of treasury stock at $951,042, and a reduction in the unrealized loss on investment securities available for sale of $291,762. At year-end 2001, the Bancorp retains 252,563 shares of Treasury Stock at cost with a value of $6,095,915.
The Bank's income statement reflects a continued upward trend in earnings, with net income of $6,072,263 as compared to $4,949,880 for the years ended December 31, 2001 and 2000. This represents an increase in earnings of 22.67% and is the highest level ever achieved by the Bank in its 92 years of operation. The driving force behind earnings and certainly its largest component, remains net interest income. The difference between the interest earned on interest earning assets and the interest paid on interest bearing liabilities, net interest income, reached $15,794,375 for the period ended December 31, 2001, an increase of $2,233,209 or 16.47% over 2000. Interest and fees on loans was the largest contributor to this increase and represents a 15.23% higher level over 2000 income. Total interest expense decreased by 0.59% over the comparable period in 2000. This was the result of the significantly lower cost of funds during 2001 as well as the benefit accrued from the 18.91% increase in demand deposits. Lower borrowing costs of 3.56% compared to 4.27% for 2001 and 2000 also positively impacted the lower expense. The Bank's yield on interest earning assets for the years 2001 and 2000 was 8.07% and 8.42% respectively. The resulting net interest margin for the Bank for the years-ended December 31, 2001 and 2000 was 5.10% and 4.99%, respectively, a 2.20% reduction. The downward pressure on margin resulting from reduced interest rates was significantly mitigated by the increased volume of earning assets. Non-interest income, the Bank's source of fee income on its deposit accounts, delivery channel services, and loan originations increased from $3,400,031 for the period ended December 31, 2000 to $4,535,373 for the same period in 2001. This increase was partially the result of the increased collection of service charge income during the year 2001. Also included in this category of non-interest income are fees associated with debit and credit cards. The largest contributors to the growth in non-interest income were the gains in cash value on $9,000,000 of Bank-owned life insurance. As margins throughout the banking industry are reduced, the importance of generating non-interest income becomes much greater. Bank of Smithtown has placed significant emphasis on raising additional fee income through additional financial revenue streams. The ratio of the Bank's non-interest income to total income for the periods ended December 31, 2001 and 2000 were 15.24% and 12.98%, respectively. Other Operating Expenses increased by $1,214,000 or 13.94% over the period ended December 31, 2000. These expenses represent the Bank's cost of doing business, such as salary and benefit expense, overhead costs, and miscellaneous legal, accounting, and computer expenses. The increase during 2001 was primarily due to increased salary and benefit expense. Also during 2001, the remodeling and renovation of our Bookkeeping and Retail Areas were completed and the resultant amortization and depreciation expenses were incurred. Other Operating Expenses as a percentage of total expenses increased from 41.58% for the year 2000 to 43.74% for the year 2001. Earnings per share at year-end 2001 were $3.92 compared to $3.10 at year-end 2000, with weighted average shares outstanding of 1,550,766 compared to 1,600,155. This 26.86% increase in EPS is the result of the superior level of earnings.
INTEREST INCOME Interest income for the three years-ended December 31, 2001, 2000, and 1999 were $25,183,337, $23,005,334, and $17,220,065, respectively. The largest contributor to interest income was interest and fees on loans and represented 84.23%, 80.02%, and 73.60% of the total. This increased income during 2001 is the result of 23.40% increase in loan volume. As can be seen from the Average Balance Sheet and Yield Analysis Schedule, yield on the loan portfolio decreased from 9.08% during 2000 to 8.41% during 2001. This yield reduction was a result of the lower interest rate environment during 2001. The next largest contributor to interest income was the investment portfolio, which increased in volume during 2001, and now comprises 17.70% of total assets. Yield on the portfolio declined, once again, as a result of the current rate environment. The yield was 6.98% in 2001 as compared to 7.09% during 2000. New securities that were added during 2001 carried lower yields than maturing securities and Mortgage-Backed Securities experienced large paydowns. Interest on federal funds sold contributed a lower percentage of interest income during 2001 than 2000, a result of lower rates and volume. This percentage of decline in interest income was from 2.10% in 2000 to 1.17% during 2001. Yield on these funds also declined from 5.98% to 4.02%. During periods of low rates, it becomes even more important to keep the level of federal funds at a minimum and invest all excess cash in the highest yielding vehicles.
INTEREST EXPENSE Interest expense for the three years ended December 31, 2001, 2000, and 1999 were $9,388,962, $9,444,168, and $5,257,833, a decrease of 0.58% from 2000 and an increase of 78.57% over the period ended December 31, 1999, respectively. During 2001 and 2000, interest cost to the Bank was made up of the cost for its deposits, which were 3.28% and 3.94% and the cost of other borrowings which were 5.52% and 6.20%. Interest expense on deposit accounts remains the largest percentage of total interest expense and at year-end 2001 and 2000 represented 80.58% and 78.64% of this total. The Bank's comparatively low interest cost on deposit accounts is due to the composition of its deposit base, with lower yielding savings and NOW accounts comprising 19.25% of this base. Competitive and higher yielding money market and certificate of deposit rates are offered to customers in return for higher balances and more extensive banking relationships. "Preferred Customers" who conduct a majority of their banking business with us and customers maintaining high balances in single accounts receive rates that are the among the highest paid on Long Island. Overall, the Bank's deposit pricing strategy provides our customers many different types of accounts and terms and delivery channels to suit their needs while rewarding them for maintaining balances with us. Other borrowings have been an alternative source of funding for the Bank as it continues to expand its current deposit base. The use of other borrowings as both a temporary and long-term source of funding is common and cost-effective for financial institutions, as long as it is part of a carefully planned and executed asset liability management program.
NET INTEREST INCOME Net interest income was the largest contributor to net income and represented 53.09% of total income at year-end 2001 compared to 51.30% at year-end 2000. Net interest income increased from $13,561,166 during 2000 to $15,794,375 during 2001. The average volume of non-interest earning assets decreased from 8.76% at year-end 2000 to 8.63% at year-end 2001, while the volume of non-interest bearing liabilities decreased from 18.57% to 17.35% for the same period. The result of these changes in the balance sheet was an interest margin of 5.10%, an increase from the 4.99% margin achieved during 2000. This interest margin remains very high compared to the Bank's peers. In spite of the lower rate environment characteristic of 2001, which placed downward pressure on margins, the Bank's margin to date has been unaffected. This result has been achieved through the addition of $62,485,342 of interest earning assets as well as $10,658,835 of non-interest bearing deposits.
The tables below show a comparative analysis of the major areas of interest income, interest expense and resultant changes in net interest income. Variances in the rate volume relationship have been allocated to the rate.
Average Balance Sheet and Yield Analysis
Rate Volume Relationships of Interest Margin on Earning Assets
Other Operating Income
The schedule below details items of non-interest income for the years ended December 31,
Other Operating Income represents fee income collected by the Bank on non-rate sensitive transactions. As margins tighten due to the low interest rate environment, the generation of fee income plays a larger role in the level of net income. Other operating income increased by 33.39% and 6.87% over 2000 and 1999, respectively. Service charges on deposit accounts were the single largest contributor to Other Operating Income and increased from $1,589,901 to $1,769,932 or 11.32% from 2000 to 2001. This increase is due to the large number of demand accounts and their associated fees. Income from Trust and Investment Management Services increased by 10.88% over the 2000 level due to increased fees. Other income rose by 61.81% and 19.83% over 2000 and 1999 levels. This increase can be attributed to the gain in cash value of life insurance investments and the increased fee income on a higher volume of ATM and debit card transactions. Loan fees are also a large part of Other Income and they increased due to the large increase in the portfolio. During 2001, the Bank also recognized a net loss of $4,636 on the sales of investments securities held in the available for sale portfolio.
Other Operating Expenses
Detailed below are the components of the Other Operating Expenses for the years ended December 31,
2001 2000 1999 - ---------------------------------------------------------------------------- Other Operating Expenses Salaries $ 4,582,160 $ 4,069,205 $ 3,626,284 Pensions and Other Employee Benefits 889,289 890,976 704,559 Net Occupancy Expense 988,549 906,088 864,844 Furniture and Equipment Expense 877,952 818,633 807,080 Other Expenses 2,586,611 2,025,659 1,992,593 - ---------------------------------------------------------------------------- Total $ 9,924,561 $ 8,710,561 $ 7,995,360 ============================================================================
Other Operating Expenses represent various categories of non-interest expense. These expenses increased by 13.94% over 2000 levels and 8.94% over 1999 levels. Salary and benefit expense increased during 2001 partially due to the increasing costs of health insurance, as well as additions to Senior Management. The large increases in balance sheet assets experienced over the last three years, have required additional staff in order to maintain superior customer service and achieve the highest returns for our shareholders. Net occupancy expense increased from $906,088 during 2000 to $988,549 during 2001. This resulted from increased lease payments on branch properties and depreciation expenses attributed to leasehold and building improvements. Expenses related to the maintenance of Other Real Estate Owned declined during 2001, as only one property remains to be sold. Furniture and equipment expense rose by 7.25% and 1.43% over 2000 and 1999. This was due to the purchase and resultant depreciation on new computer hardware and software, as well as expenses related to Retail and Bookkeeping department renovations. Other expenses increased by 27.69%, reflective of increased overhead and operating expenses related to an increased asset and deposit base.
INVESTMENT SECURITIES Investment securities at December 31, 2001 totaled $67,309,548 as compared to $57,693,375 at year-end 2000, an increase of 16.67%. As the interest rates decreased during 2001, principal payment reductions on Mortgage-Backed Securities increased. Proceeds from maturities of investment securities were reinvested into lower yielding securities and were re-channeled into new loan originations. The majority of investment securities are held in the Available for Sale portfolio which represent 93.18% of the total portfolio. This provides maximum liquidity for the Bank, as these securities may be sold, if necessary. It remains, however, management's intent to hold most securities to maturity. The composition of the portfolio has changed somewhat during 2001. At December 31, 2001, Obligations of the U.S. Government Agencies represented 18.21% of the portfolio versus 28.79% at December 31, 2000. At December 31, 2001, Obligations of State and Political Subdivisions represented 35.76% of the portfolio verses 27.27% at December 31, 2000. Mortgage-Backed Securities remained stable with Mortgage-Backed Securities representing 40.08% and 40.54% at December 31, 2001 and 2000, respectively. "Other securities" is comprised solely of other equity investments. As can be seen from the accompanying Weighted Average Maturity Schedule, the entire portfolio has lengthened in term and has moved from 16 years, 5 months in average term to 17 years, 2 months. This maturity term is the result of replacement of Obligations of U.S. Government Agencies which were called during 2001 with Obligations of State and Political Subdivisions having longer terms. The Weighted Average Yield Table and the Average Balance Sheet and Yield Analysis both indicate the decreased yield on the investment portfolio. During 2001 the yield decreased from 7.08% to 6.98% as would be anticipated given the interest rate environment for this period.
The following schedule presents the amortized cost for Investment Securities Held to maturity and estimated fair value for Investment Securities Available for Sale as detailed in the bank's balance sheet as of December 31:
The tables below set forth the investment securities by portfolio, weighted average maturity,and weighted average yield as of December 31:
Weighted Average Maturity
The tables below set forth the investment securities by portfolio, weighted average maturity and weighted average yield as of December 31, 2001.
LOANS The Bank's loan portfolio at December 31, 2001 and 2000 was $282,090,123 and $229,062,660, respectively, an increase of 23.15%. The classification of the portfolio is as follows:
The areas of largest growth in the portfolio have been in the residential and commercial mortgage portfolio. Average yield on the portfolio decreased from 9.08% to 8.41% due primarily to the current rate environment. Real estate loans comprise 90.16% of the entire portfolio, but credit concentration risk in this segment has been minimized through low loan to value ratios and high credit quality of borrowers. A high percentage of loans made by Bank of Smithtown are to residents and businesses located in the Bank's primary lending area and credit is extended to a wide spectrum of borrowers, including individuals, not-for-profit organizations, and small to middle market businesses.
The following table shows the maturities of loans (excluding real estate mortgages and installment loans) outstanding as of December 31, 2001:
Deposits Average deposits for 2001 increased by 19.75% over 2000. Year end deposits increased by 21.30% over the same period in 2000. The largest areas of growth in average deposits for 2001 were money market accounts and time deposits, respectively. The resultant increase in interest expense on this increased deposit base was $137,902. The average costs of deposits during 2001 and 2000 were 3.28% and 3.94%, respectively
Average Balance
(in thousands) 2001 2000 - ------------------------------------------------------------------------ Demand (Non-Interest Bearing) $ 59,247 $ 53,556 Money Market 90,394 65,418 Savings (Including NOW) 54,974 52,035 Time 85,564 71,304 - ------------------------------------------------------------------------ Total Deposits $ 290,179 $ 242,313 ========================================================================
At December 31, 2001, the remaining maturities of the Bank's Certificates of Deposit in amounts of $100,000 or greater were as follows:
(in thousands) 3 months or less......................... $ 20,469 Over 3 through 6 months.................. 4,295 Over 6 through 12 months................. 4,027 Over 12 months........................... 9,365 - ------------------------------------------------------- Total.................................... $ 38,156 =======================================================
Other Borrowings During 2001 borrowings increased from $38,750,000 to $38,000,000. These borrowings are in the form of six advances from the Federal Home Loan Bank of New York, a Repo advance with Salomon Smith Barney, and federal funds purchased from JP Morgan Chase. A description of the advances is detailed below:
The weighted average interest rate for these borrowings is 4.78%. The underlying collateral for the borrowings is comprised of various U.S. government agency securities and Mortgage-Backed Securities. These borrowings were also secured by residential mortgages. The average maturity is 30 years. The average interest rate is approximately 7.70%. Total estimated fair value of these residential mortgages at December 31, 2001, was approximately $47,100,000.
Quantitative and Qualitative Disclosures About Market Risk Liquidity provides the source of funds for anticipated and unanticipated deposit outflow and loan growth. The Bank's primary sources of liquidity include deposits, repayments of loan principal, maturities of investment securities, principal reductions on Mortgage-Backed Securities, "unpledged" securities available for sale, overnight federal funds sold, and borrowing potential from correspondent banks. The primary factors affecting these sources of liquidity are their immediate availability if necessary and their market rate of interest, which can cause fluctuations in levels of deposits and prepayments on loans and securities. The method by which the Bank controls its liquidity and interest rate sensitivity is through asset liability management. The goal of asset liability management is the combination of maintaining adequate liquidity levels without sacrificing earnings. The Bank matches the maturity of its assets and liabilities in a way that takes advantage of the current and anticipated rate environment. Asset liability management is of great concern to management and is reviewed on an ongoing basis. The Chief Executive Officer, Chief Financial Officer, Chief Lending Officer, Chief Commercial Lending Officer, and the Chief Retail Officer of the Bank serve on the Asset Liability Management Committee. Reports detailing current liquidity position and projected liquidity as well as projected funding requirements are reviewed monthly, or as often as deemed necessary. Semi-annually, the Bank collects the necessary information to run an income simulation model, which tests the Bank's sensitivity to fluctuations in interest rates. These rate fluctuations are large and immediate and actually reflect the Bank's earnings under these simulations. These income simulations are reviewed by the Board of Directors. Both simulations performed during 2001 reflected minimal sensitivity to upward or downward rate fluctuations. Interest income, margins, and net income remain stable regardless of changes in market interest rates. These models then lead to investment, loan, and deposit strategies and decisions for earnings maximization within acceptable risk levels.
The Bank's market risk is primarily its exposure to interest rate risk. Interest rate risk is the effect that changes in interest rates have in future earnings. The principal objective in managing interest rate risk is to maximize net interest income within acceptable levels of risk that have been previously established by policy.
The following table sets forth the amounts of estimated cash flows for the various interest earning assets and interest bearing liabilities that are sensitive to changes in interest rates at December 31, 2001. Adjustable rate assets are included in the period in which interest rates are next scheduled to adjust rather than in the period in which they are due. Money Market deposit accounts are assumed to decline over a two-year period. Savings and NOW deposit accounts are assumed to decline over a five-year period.
Interest Bearing Liabilities
Stockholders' Equity Shown below are the components of Stockholders' Equity as of December 31:
Stockholders' equity increased by 20.58% from year-end 2000 to year-end 2001. Effective May 4, 2001 the Board of Directors approved a 2:1 stock split which increased the number of authorized shares from 3,000,000 to 7,000,000, and reduced the par value of the stock from $2.50 per share to $1.25 per share. During 1998, the Board approved a Stock Repurchase Plan authorizing the repurchase of Bancorp stock at market prices. Pursuant to this Plan, the Bancorp has repurchased an adjusted equivalent of 16,597, 45,122, and 27,954 shares during 1999, 2000, and 2001 at a cost of $947,516, $1,355,921 and $951,039, respectively. During the year 2001, retained earnings increased by 22.41% as a result of net income of $6,072,263 and dividends declared of $805,480.
Capital ratios are regarded as one of the most important indicators of a banking institution's strength. There are two capital ratios that are most significant: leverage ratio and risk based capital. Leverage at year-end 2001 and 2000 was 7.73% and 7.54%, respectively. The minimum regulatory leverage ratio is 4.00%. Total risk based capital at year-end 2001 and 2000 were 10.46% and 10.95%. The minimum regulatory total risk based capital ratio is 10%. Bank of Smithtown is considered well capitalized by all guidelines.
Analysis of the Allowance for Possible Loan Losses
The Allowance for Possible Loan Loss Account at year-end 2001 was $3,091,585 compared to $2,500,724 at year-end 2000. The change in the Allowance Account is the result of net charge-offs of $399,138 and a Provision for Possible Loan Losses of $990,000. Based on the high quality of the loan portfolio and the low level of non-performing assets, management feels the Allowance for Possible Loan Losses provides adequate coverage.
The following tables describe the activity in the Allowance for Possible Loan Losses Account for the years-ended December 31:
The following table shows the Bank's non-accrual and contractually past due loans:
For 2001 and 2000 the difference between interest income on non-accrual loans and income that would have been recognized at original contractual rates and terms is $57,545 and $90,144, respectively.
The composition of Other Real Estate Owned at December 31 is as follows:
The value of Other Real Estate Owned shown above is net of the Valuation Reserve.
Consolidated Balance Sheets
See notes to consolidated financial statements.
Consolidated Statements of Income
See notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
See notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Cash dividends declared per share were $0.52 in 2001, $0.48 in 2000, and $0.44 in 1999.
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
See notes to consolidated financial statements
Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
The accounting and reporting policies of Smithtown Bancorp (the "Bancorp") and its subsidiary, Bank of Smithtown (the "Bank") reflect banking industry practices and conform to generally accepted accounting principles. A summary of the significant accounting policies followed by the Bancorp in the preparation of the accompanying consolidated financial statements is set forth below.
BASIS OF PRESENTATION The consolidated financial statements include the accounts of Smithtown Bancorp, and its wholly-owned subsidiary, Bank of Smithtown, and its wholly-owned subsidiary, Bank of Smithtown Insurance Agency, Inc. All material intercompany transactions have been eliminated.
On May 6, 1998, the Bank effected a two-for-one split of common stock. All references in the accompanying consolidated financial statements and notes thereto relating to common stock, capital surplus, earnings per share, and share data have been retroactively adjusted to reflect the two-for-one stock split.
On May 4, 2001, the Bank effected a two-for-one split of common stock. All references in the accompanying consolidated financial statements and notes thereto relating to common stock, capital surplus, earnings per share and share data have been retroactively adjusted to reflect the two-for-one stock split.
NATURE OF OPERATIONS Smithtown Bancorp operates under a state bank charter and provides full banking services, including trust and investment management services. As a state bank, the Bank is subject to regulation by the State of New York Banking Department and the Federal Reserve Board. The area primarily served by Smithtown Bancorp is the north central region of Suffolk County, New York and services are provided at eight branch offices.
ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is reasonably possible that the Allowance for Possible Loan Losses and the Valuation Reserve for OREO could differ from actual results.
INVESTMENT SECURITIES The Bank evaluates its investment policies consistent with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). Accordingly, the Bank's investments in securities are classified in two categories and accounted for as follows:
. Securities to be Held to Maturity - Bonds, notes, and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums, and accretion of discounts, which are recognized in interest income using the interest method over the period to maturity. . Securities Available for sale - Bonds, notes, debentures, and certain equity securities are carried at estimated fair value.
Unrealized holding gains and losses, net of tax, arising on securities available for sale are reported as a component of accumulated other comprehensive income, in accordance with SFAS No. 130, "Reporting Comprehensive Income". Bank of Smithtown has adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". This statement establishes requirements for disclosure of comprehensive income and became effective for the Bank in 1998, with reclassification of earlier financial statements for comparative purposes. Comprehensive income generally represents all changes in stockholders' equity except those resulting from investments by and distributions to stockholders.
Gains and losses on the sale of securities are determined using the specific-identification method.
EQUITY METHOD OF ACCOUNTING The Equity Method of Accounting is used when the Bank has a 20% to 50% interest in other entities. Under the Equity Method, original investments are recorded at cost and adjusted by the Bank's share of undistributed earnings or losses of these entities. Non-marketable investments in which the Bank has less than 20% interest and in which it does not have the ability to exercise significant influence over the investee are initially recorded at cost and periodically reviewed for impairment.
LOANS Bank of Smithtown has adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). SFAS 114 applies only to impaired loans, with the exception of groups of smaller-balance homogeneous loans that are collectively evaluated for impairment (generally consumer loans). A loan is defined as impaired by SFAS 114 if, based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. Specifically, SFAS 114 requires that a portion of the overall Allowance for Possible Loan Losses be determined based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the collateral. Prior to the adoption of SFAS 114, Bank of Smithtown's methodology for determining the adequacy of the Allowance for Possible Loan Losses did not incorporate the concept of the time value of money and expected future interest cash flows. In addition, SFAS 114 modifies the accounting for insubstance foreclosures (ISF). A collateralized loan is now considered an ISF and reclassified to Other Assets only when a creditor has taken physical possession of the collateral regardless of whether formal foreclosure proceedings have taken place.
Bank of Smithtown has also adopted SFAS 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure," (SFAS 118) which amends SFAS No.114 to permit a creditor to use existing methods for recognizing interest revenue on impaired loans. Generally, interest revenue received on impaired loans continues either to be applied by the Bank against principal or to be realized as interest revenue, according to management's judgment as to the collectibility of principal.
Loans are generally recorded at the principal amount outstanding net of unearned discount and the allowance for possible loan losses. Unearned discounts are generally amortized over the term of the loan using the interest method. Interest on loans is credited to income based on the principal amount outstanding. The accrual of interest on a loan is discontinued when in the opinion of management there is doubt about the ability of the borrower to pay interest or principal. Management may continue to accrue interest when it determines that a loan and related interest are adequately secured and in the process of collection. Loans held for sale are carried at the lower of aggregate cost or estimated fair value. The Bank sells or securitizes certain loans. Such sales are with recourse and no reserve is considered necessary at December 31, 2001 and 2000. Gains are reported in Other Income.
Loan-related fees and cost are recognized as income when received in accordance with generally accepted accounting principles.
ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for possible loan losses when management believes the collectibility of the principal is unlikely. The allowance for possible loan losses is based on management's evaluation of the loan portfolio. Management believes that the allowance for possible loan losses is adequate. While management uses available information, including appraisals, to estimate potential losses on loans, further additions to the allowance may be necessary based on changes in economic conditions.
BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. The depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets as follows:
Bank Premises 25-30 years Leasehold Improvements 5-40 years Furniture and Equipment 10 years
OTHER REAL ESTATE OWNED Included in other assets is real estate held for sale which is acquired principally through foreclosure or a similar conveyance of title and is carried at the lower of cost or fair value minus estimated costs to sell the property. Any write-downs at the dates of acquisition are charged to the Allowance for Possible Loan Losses. Revenues and expenses associated with holding such assets are recorded through operations when realized.
OTHER REAL ESTATE OWNED VALUATION RESERVE ACCOUNT The valuation reserve account is established through a loss on other real estate owned charged to expense. Properties held in Other Real Estate Owned (OREO) are periodically valued through appraisals, and are written down to estimated fair value based on management's evaluation of these appraisals. Specific reserves are allocated to the properties as necessary, and these reserves may be adjusted based on changes in economic conditions.
INCOME TAXES
The tax provision as shown in the consolidated statements of income relates to items of income and expense reflected in the statements after appropriate deduction of tax-free income, principally nontaxable interest from obligations of state and political subdivisions. Deferred taxes are provided for timing differences related to depreciation, loan loss provisions, postretirement benefits, and investment securities which are recognized for financial accounting purposes in one period and for tax purposes in another period.
TRUST ASSETS Assets belonging to trust customers that are held in fiduciary or agency capacity by the Bank are not included in the financial statements since they are not assets of the Bank. Deposits held in fiduciary or agency capacity in the normal course of business are reported in the applicable deposit categories of the Consolidated Balance Sheets.
EARNINGS PER SHARE Earnings per share is computed based on the weighted average number of shares outstanding. There are no shares issuable through stock options or warrants.
STATEMENTS OF CASH FLOWS For the purposes of the Statements of Cash Flows, the Bank considers Cash and Due from Banks as Cash and Cash Equivalents.
RETIREMENT BENEFITS The Bank accounts for post-retirement benefits other than pensions in accordance with Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). This statement requires that the estimated costs of post-retirement benefits other than pensions be accrued over the period earned rather than expensed as incurred.
In addition, the Bank adopted the provisions of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", (SFAS No. 132), in 1998. This Statement supersedes the disclosure requirements in SFAS No. 106. It does not address the measurement or recognition issues as prescribed by SFAS No. 106.
COLLATERALIZED SECURITIES TRANSACTIONS Transactions involving purchases of securities under agreements to resell ("reverse repurchase agreements") or sales of securities under agreements to repurchase ("repurchase agreements") are treated as collateralized financing transactions and are recorded at their contracted resale or repurchase amounts plus accrued interest. The Bank is required to provide securities to counterparties in order to collateralize repurchase agreements. The Bank's agreements with counterparties generally contain contractual provisions allowing for additional collateral to be obtained, or excess collateral returned, when necessary. It is the Bank's policy to value collateral periodically and to obtain additional collateral, or to retrieve excess collateral from counterparties, when deemed appropriate.
NOTE B. INVESTMENT SECURITIES - ------------------------------------------------------------------------------ The carrying amounts of investment securities as shown in the Consolidated Balance Sheets and their fair values at December 31 were as follows:
The following table presents the amotized costs of and estimated fair values of investment in debt securities by scheduled maturity at respective year-ends.
Mortgage-Backed Securities are classified in the above schedule by their contractual maturity. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call privileges of the issuer.
Gross unrealized gains for the above investments amounted to $692,670 and $227,853 in 2001 and 2000, respectively, while gross unrealized losses amounted to $379,811 and $506,695 in 2001 and 2000, respectively.
Obligations of the U.S. Government, U.S. Government Agencies, Mortgage-Backed Securities and Obligations of State, and Political Subdivisions having an amortized cost of $28,595,655 and an estimated fair value of $28,900,868 were pledged to secure public deposits, treasury tax, and loan deposits, repurchase agreements and advances.
Gross realized gains (losses) on sales of Investment Securities Available for Sale for the years ended December 31,
As a member of the Federal Reserve Bank of New York, the Bank owns Federal Reserve Bank stock with a book value of $127,200. The stock has no maturity and has paid dividends at the rate of 6.00% for 2001 and 2000. The Bank is a member of the Federal Home Loan Bank of New York and now holds $1,840,000 of its stock. This stock also has no maturity and has paid average dividends of approximately 8.13% and 7.00% for 2001 and 2000, respectively. Stock of both the Federal Reserve Bank and the Federal Home Loan Bank are restricted.
The Bank invested $30,000 in the Nassau-Suffolk Business Development Fund. This consortium of banks provides loans to low income homeowners.
During 1999, the Bank invested $35,000 in Metro Bankers Title Agency, LLC. This consortium of banks was formed and organized to act as a title insurance agent or agency. Due to inactivity the member banks ended operations. The Bank's investment was written off and there are no further liabilities for the Bank resulting from this transaction.
Note C. Loans and Oreo - ----------------------
Loans as of December 31, consisted of the following:
Collateral varies, but generally includes residential and income producing commercial properties, as well as automobiles on personal loans. Estimated fair values of loans at December 31, 2001 and 2000 totaled $283,993,482 and $228,659,679, respectively.
Bank of Smithtown adopted SFAS 114 and SFAS 118 effective January 1, 1995. This did not have any impact on Bank of Smithtown's results of operations nor on its financial position, including the level of the Allowance for Possible Loan Losses. All loans considered impaired under SFAS 115 are included in the Bank's 90-day or more past-due or non-accrual categories. At December 31, 2001, the recorded investment in loans that are considered impaired under SFAS 114 was $631,318. No additional SFAS 114 reserve is required for the $631,318 of recorded investment in impaired loans, since previously taken charge-offs have reduced the recorded investment values to amounts that are less than the SFAS 114 calculated values. The average recorded investment in impaired loans during the twelve months ended December 31, 2001 was $1,243,927. The total allowance on impaired loans, at December 31, 2001 and 2000 totaled $137,447 and $453,822, respectively.
Recognition of interest income on impaired loans, as for all other loans, is discontinued when reasonable doubt exists as to the full collectibility of principal or interest. Bank of Smithtown recognized $705, $40,119, and $18,149 in interest revenue in 2001, 2000, and 1999, respectively. Any cash receipts would first be applied to accrued interest on impaired loans and then to the principal balance outstanding.
At December 31, 2001 and 2000, loans with unpaid principal balances of $631,318 and $917,860, respectively, on which the Bank is no longer accruing interest income, are included in the total loans listed above. The Bank expects to recover a portion of the principal balance included in the nonaccrual category at December 31, 2001 through work-out arrangements and the liquidation of collateral. If the Bank had accrued interest income on loans which were in a nonaccrual status at year-end, its interest income would have increased by approximately $58,250 in 2001 and $90,144 in 2000. There were no loans contractually past-due 90 days or more and still accruing interest at December 31, 2001. At December 31, 2000, $445,839 in loans were past due 90 days or more and still accruing.
No loans were transferred to Other Real Estate Owned (OREO) during 2001 and 2000. The estimated fair value at OREO as of December 31, 2001 and 2000 was $750,000.
The composition of OREO at December 31, follows:
2001 2000 - ------------------------------------------------------------------------------ OREO $ 1,032,500 $ 1,032,500 Less: Valuation Reserve 302,147 302,147 - ------------------------------------------------------------------------------ Net $ 730,353 $ 730,353 - ------------------------------------------------------------------------------
Other net OREO costs, which include operating revenue and expense and gains and losses on the sale or disposition of Other Real Estate Owned, were approximately $19,700, $11,250, and $53,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
A summary of information concerning interest income on non accrual loans and OREO at December 31, follows:
The Bank has granted loans to officers, directors, and principal shareholders of the Bancorp and to their associates. Related party loans are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of these loans were $2,159,141 and $2,417,507 at December 31, 2001 and 2000. During 2001, $235,500 of new loans were made. Repayments totaled $584,495.
During December 2001, the Bank sold one residential mortgage in the amount of $85,522 to the Federal National Mortgage Association. The Bank retained servicing on this mortgage, but has not yet begun to earn fee income from the servicing. This one sale resulted in a premium in the amount of $162. It is the intent of management to continue to originate residential mortgages during 2002 for its own portfolio as well as for sale to investors. There were no mortgages sold during the year 2000.
Note D. Allowance for Possible Loan Losses - -------------------------------------------------------------------------------
Transactions in the allowance for the year ending December 31 were as follows:
Note E. Bank Premises and Equipment - -------------------------------------------------------------------------------
Note F. Employee Benefits - -------------------------------------------------------------------------------
A 401(k) Defined Contribution Plan (the "Plan") was established by the Bank during 1986. All employees who have attained age 21, with one continuous year of service, may participate in the Plan through voluntary contributions of up to 14% of their compensation. The Plan requires that the Bank match 50% of an employee's contribution up to 3% of the participating employee's compensation. The Bank's 401(k) contributions for 2001, 2000, and 1999, amounted to $78,862, $69,088, and $53,551, respectively.
During 1995, the Bank established an Employee Stock Ownership Plan (ESOP) for substantially all of its employees. The ESOP replaced the Profit Sharing Plan. Eligibility requirements for the ESOP remain the same as for the Defined Contribution Plan and include one year of continuous service, 1,000 hours and attaining an age of 21. Eligible compensation is defined as gross wages less contributions to any qualified plans to the extent that these contributions are not includable in the gross income of the participant. Contributions to the ESOP are in the form of cash and made at the discretion of the Board of Directors. The ESOP uses this contribution to purchase shares of Smithtown Bancorp stock which are then allocated to eligible participants. ESOP benefits are 100% vested after five years of service with the Bank. Forfeitures are reallocated among participating employees, in the same proportion as contributions. Benefits are payable upon death, retirement, early retirement, disability, or separation from service and may be payable in cash or stock. The Bank reported a net expense of $130,000, related to the ESOP for each of the years-ended December 31, 2001, 2000, and 1999. During 2001, 2000, and 1999, the ESOP used the Bank's contribution to purchase 4,080, 4,290 and 4,470 shares of common stock at an average cost of $31.85, $31.13, and $29.21 per share, respectively. The 2001 contribution represents 4% of eligible compensation. As of December 31, 2001 and 2000 the ESOP held 65,738 and 61,658 allocated shares, respectively. There were no unallocated shares in the ESOP effective December 31, 2001 and 2000. ESOP shares are included in Weighted Average Shares Outstanding in the calculations of earnings per share.
The Bank of Smithtown sponsors post-retirement medical and life insurance plans for a closed group of prior employees. The following tables provide a reconciliation of the changes in the Plans' benefit obligations and fair value of assets over the two-year period ended December 31, 2001, and a statement of the funded status as of December 31 of both years:
The following table provides the amounts recognized in the statement of financial position as of December 31 of both years:
Additional year-end information for plans with obligations in excess of plan assets:
The following table provides the components of net periodic benefit cost for the plans for fiscal years 2001 and 2000:
The assumption used in the measurement of the Company's benefit obligation are shown in the following table:
Retiree Health Benefits ------------------------- 2001 2000 - ------------------------------------------------------------------------------ Weighted Average Assumptions as of December 31 Discount 6.75% 7.00% Initial Rate for Health Care Costs 10.00% 9.00% Ultimate Rate for Health Care Costs 6.00% 6.00% Ultimate Year of Health Care Increase 2010 2007
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
Note G. Income Taxes - -------------------------------------------------------------------------------
Federal and State Income Taxes payable as of December 31, included in other assets in 2001 and 2000 are as follows:
2001 2000 - ----------------------------------------------------------- Current $ 68,826 $ 90,820 Deferred 1,289,170 1,136,392 - ----------------------------------------------------------- Total $ 1,357,996 $ 1,227,212 - -----------------------------------------------------------
Provisions for current income taxes for the years ended December 31, are as follows:
A reconciliation of the federal statutory tax rate to the required tax rate based on income before income taxes is as follows:
Income tax expense (benefit) on investment securities transactions amounted to approximately $(2,000) in 2001, $(17,300) in 2000, and $7,100 in 1999.
Deferred income tax assets and liabilities are calculated based on their estimated effect on future cash flows. The calculations under this method resulted in a net deferred tax asset of $1,289,170 and $1,136,390 as of the end of 2001 and 2000, respectively.
Deferred tax assets and liabilities were recognized as of December 31, 2001 and 2000 for the taxable temporary differences related to loan loss provisions, depreciation, OREO losses, Accounting for Postretirement Benefits Other than Pensions (SFAS 106), and Accounting for Investment Securities (SFAS 115), as presented below:
Note H. Deposits - -------------------------------------------------------------------------------
At December 31, 2001 and 2000, time deposits in principal amounts of $100,000 or more were $38,155,529 and $24,315,657, respectively. Interest expense on such deposits for the years-ended December 31, 2001, 2000, and 1999, were $1,767,403, $906,466, and $679,756, respectively.
A schedule of all time deposits having a remaining term of more than one year and the aggregate amount of maturities is set forth as follows:
2003..................................................$ 4,339,484 2004.................................................. 3,817,984 2005.................................................. 14,165,144 - ------------------------------------------------------------------ Total.................................................$ 22,322,612 ==================================================================
DEPOSITS OF MAJOR SHAREHOLDERS, OFFICERS, DIRECTORS AND THEIR AFFILIATES Deposits due to major shareholders, officers, directors and their affiliates aggregated $4,588,698 and $4,862,576 at December 31, 2001 and 2000, respectively.
NOTE I. STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------
The Banking Law of the State of New York and the Federal Reserve Board regulate the amount of cash dividends that may be paid without prior approval. Retained Earnings available for cash dividends were $13,797,564 and $11,318,397 at December 31, 2001 and 2000, respectively.
During 1998, the Board of Directors approved a Stock Repurchase Plan authorizing the repurchase of Bancorp stock at market prices. Pursuant to the plan, the Bancorp has repurchased an adjusted equivalent of 16,597, 45,122 and 27,954 shares during 1999, 2000 and 2001 at a cost of $947,516, $1,355,921 and $951,039, respectively
NOTE J. SMITHTOWN BANCORP (PARENT COMPANY ONLY) - -------------------------------------------------------------------------------
Smithtown Bancorp has one wholly-owned subsidiary, Bank of Smithtown.
Balance Sheets
Statements of Income and Retained Earnings
Statements of Cash Flows
NOTE K. COMMITMENTS AND CONTINGENT LIABILITIES - -------------------------------------------------------------------------------
As of December 31, 2001, the minimum rental commitments under non-cancelable operating leases for premises and equipment with initial terms in excess of one year are as follows:
- ------------------------------------------------------------- 2002............................................ $ 199,683 2003............................................ 201,328 2004............................................ 194,906 2005............................................ 148,376 2006............................................ 109,867 Subsequent to 2007.............................. 808,849 - ------------------------------------------------------------- Total........................................... $ 1,663,009 =============================================================
A number of leases include escalation provisions relating to real estate taxes and expenses.
Rental expenses for all leases on premises and equipment amounted to $394,463 in 2001, $383,615 in 2000, and $366,217 in 1999.
The Bank is required to maintain reserve balances with the Federal Reserve Bank of New York for reserve and clearing purposes. The average amount of these reserve balances for the year-ended December 31, 2001 was $815,505.
At December 31, 2001, the Bank has a $4,000,000 unsecured overnight line of credit from M & T Bank. The rate of interest is determined at drawdown and is payable the next banking day.
At December 31, 2001, the Bank has a $1,500,000 unsecured overnight line of credit from J.P. Morgan Chase. The rate of interest is determined at drawdown and is payable the next banking day.
NOTE L. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumption could significantly affect the estimates.
Fair value estimates do not apply to the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments in accordance with generally accepted accounting principles. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, deferred income taxes, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires the Bank to disclose estimated fair values of its financial instruments. SFAS 107 was amended in October, 1994 by SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". Financial Instruments are defined as cash, evidence of an ownership in an entity, or a contract that conveys or imposes on an entity the contractual right or obligation to either receive or deliver cash or another financial instrument. Fair value is defined as the amount at which such financial instruments could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted price, or one exists. Fair value estimates, methods and assumptions are set forth below for the Bank's financial instruments.
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, DIVIDEND PAYABLE AND OTHER LIABILITIES Cash, due from banks, Federal funds sold, dividend payable, and other liabilities because of their short-term nature, have been valued at their respective carrying vales.
INVESTMENT SECURITIES For securities held-to-maturity and available-for-sale, fair values are estimated based on quoted market prices or dealer quotes.
LOANS The fair value of fixed-rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value. The fair value of mortgage loans held for sale approximates cost based on current estimated disposition values.
DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable at the reporting date. The fair value of fixed maturity certificates of deposit are estimated using the rates currently offered for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS The fair value of securities sold under agreements to repurchase and other borrowings are estimated based on quoted market prices or dealer quotes.
NOTE M. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - -------------------------------------------------------------------------------
On October 16, 2001, the Bank entered into a $4,000,000 Security Sold Under Agreement to Repurchase (REPO) with Salomon Smith Barney. The REPO rate is 2.47% and the maturity date is October 16, 2002. The REPO is secured by a U.S. Government Agency with a stated interest rate of 0.00%. The estimated fair value for this security was $4,484,250 and is held at Salomon Smith Barney. Interest is payable quarterly.
On May 24, 2000, the Bank entered into a $5,000,000 Security Sold Under Agreement to Repurchase (REPO) with Morgan Stanley Dean Witter, Inc. The REPO rate is 7.19% and the maturity date is May 24, 2001. The REPO is secured by a U.S. Government Agency with a stated interest rate of 7.225% and by two Mortgage-Backed Securities with stated interest rates of 8.00% and 5.50%. The estimated fair value for these securities was $6,074,000 and are held at Morgan Stanley Dean Witter, Inc. Interest is payable quarterly.
During 2001 and 2000, the average balance outstanding was $2,816,438 and $3,032,787, respectively.
NOTE N. OTHER BORROWINGS - -------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK OF NEW YORK The Bank has available to it, under various lines of credit from the Federal Home Loan Bank of New York (FHLBNY). The borrowing limit at the Federal Home Loan Bank of New York (FHLBNY) is calculated on 25% of the Bank's total average assets and is subject to specific collateral requirements.
At December 31, 2001, the outstanding balances on these lines of credit totaled $35,000,000. The outstanding balance consisted of the following advances:
. Repo Convertible Rate Advance dated March 13, 2001 in the amount of $5,000,000, maturity date March 14, 2011 bearing an interest rate of 4.69%. On March 13, 2004 and quarterly thereafter on each payment date, FHLBNY has the option to convert this Convertible Advance with four business days prior notice into replacement funding for the same or lesser principal amount based on any advance then offered by FHLBNY at the current market rates. Advance is not prepayable. Interest is payable quarterly on the 13th of June, September, December and March.
. Repo Convertible Rate Advance dated January 15, 1999 in the amount of $5,000,000, maturity date January 15, 2009 bearing an interest rate of 4.935%. On January 15, 2004 and quarterly thereafter on each payment date, FHLBNY has the option to convert this Convertible Advance with four business days prior notice into replacement funding for the same or lesser principal amount based on any advance then offered by FHLBNY at the current market rates. Advance is not prepayable. Interest is payable quarterly on the 15th of April, July, October and January.
. Fixed Rate Advance dated November 15, 2001 in the amount of $5,000,000, maturity date November 15, 2002, bearing an interest rate of 2.54%. Advance is not prepayable. Interest is payable monthly.
. Fixed Rate Advance dated January 8, 2001 in the amount of $10,000,000, maturity date January 8, 2002, bearing an interest rate of 5.35%. Advance is not prepayable. Interest is payable monthly.
. Fixed Rate Advance dated December 3, 1999 in the amount of $3,000,000, maturity date December 3, 2002 bearing an interest rate of 6.56%. Interest payments are due on the 1st of each month. Advance is not prepayable.
. Fixed Rate Advance dated November 8, 1999 in the amount of $7,000,000, maturity date November 14, 2003 bearing an interest rate of 6.40%. Advance is not prepayable. Interest is payable semi-annually on May 15th and November 15th.
The borrowings are secured by securities issued by the Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (FHLMC), and Government National Mortgage Association (GNMA). The maturity dates of these securities range from April 2005 to August 2030, with coupon interest rates paying between 7.33% and 5.00%. Total estimated fair value of the securities at December 31, 2001 was $5,933,281. These securities are held in safekeeping at the Federal Home Loan Bank of New York.
These borrowings were also secured by residential mortgages. The average maturity is 30 years. The average interest rate is approximately 7.70%. Total estimated fair value of these residential mortgages at December 31, 2001, was approximately $47,100,000.
The average balance of Other Borrowings for 2001 was $33,223,788 and the maximum outstanding amount at any month end was $35,000,000.
At December 31, 2000, the outstanding balances on these lines of credit totaled $28,500,000. The outstanding balance consisted of the following advances:
. Repo Convertible Rate Advance dated January 15, 1999 in the amount of $5,000,000, maturity date January 15, 2009 bearing an interest rate of 4.935%. On January 15, 2004 and quarterly thereafter on each payment date, FHLBNY has the option to convert this Convertible Advance with four business days prior notice into replacement funding for the same or lesser principal amount based on any advance then offered by FHLBNY at the current market rates. Advance is not prepayable. Interest is payable quarterly on the 15th of April, July, October and January.
. Fixed Rate Advance dated December 6, 2000 in the amount of $10,000,000, maturity date January 8, 2001, bearing an interest rate of 6.64%. Advance is not prepayable, interest payable at maturity.
. Fixed Rate Advance dated November 8, 1999 in the amount of $7,000,000, maturity date November 14, 2003 bearing an interest rate of 6.40%. Advance is not prepayable. Interest is payable semi-annually on May 15th and November 15.th
. Fixed Rate Advance dated December 3, 1999 in the amount of $3,000,000, maturity date December 3, 2002 bearing an interest rate of 6.56%. Interest payments are due on the 1st of each month. Advance is not prepayable.
. Overnight line of credit dated December 29, 2000 in the amount of $3,000,000, maturity date of January 2, 2001, bearing an interest rate of 6.60%. Advance is not prepayable and interest is payable at maturity.
. Overnight line of credit dated December 29, 2000 in the amount of $500,000, maturity date of January 2, 2001, bearing an interest rate of 6.35%. Advance is not prepayable and interest is payable at maturity.
The borrowings were secured by a U.S. Treasury Note, Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA) securities. The maturity dates of these securities range from July 2004 to February 2008, with coupon interest rates paying between 6.57% and 6.00%. Total estimated fair value of the securities at December 31, 2000 was $5,440,000. These securities are held in safekeeping at the Federal Home Loan Bank of New York.
These borrowings were also secured by residential mortgages. The average maturity is 30 years. The average interest rate is 10%. Total estimated fair value of these residential mortgages at December 31, 2000, was $35,208,927.
The average balance of Other Borrowings for 2000 was $29,481,854 and the maximum outstanding amount at any month end was $38,000,000.
At December 31, 2001 and 2000, the estimated fair value of Other Borrowings approximated cost.
J.P. MORGAN CHASE At December 31, 2001, the Bank borrowed $750,000 against the Bank's $1,500,000 unsecured overnight line of credit from J.P. Morgan Chase. The rate of interest was 2.00% and was payable the next banking day.
At December 31, 2000, the amount borrowed against the Bank's $1,500,000 unsecured overnight line of credit from J.P. Morgan Chase was zero.
Future maturities of Other Borrowings are as follows as of December 31, 2001:
2002......................................................... $ 18,750,000 2003......................................................... 7,000,000 2004......................................................... 10,000,000 - ----------------------------------------------------------------------------- Total........................................................ $ 35,750,000 =============================================================================
NOTE O. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF - ------------------------------------------------------------------------------- CREDIT RISK - -----------
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The Bank uses the same credit policies in making these commitments as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments may have fixed expiration dates or other termination clauses. At December 31, 2001 the Bank's total commitments to extend credit were $5,064,000 at fixed rates and $26,258,560 at variable rates. Standby letters of credit are written conditional instruments issued by the Bank to guarantee the financial performance of a customer to a third party. There were 33 performance standby letters of credit totaling $3,472,287 as of December 31, 2001. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but generally includes residential and income-producing properties.
Residential mortgage loans which have been sold in the secondary market present off-balance sheet risk to the Bank in the form of first payment buyback obligation. This buyback obligation commences with the date of sale of the loan to the investor. During 2001, one residential mortgage loan was sold, and therefore the value of the buyback obligation at December 31, 2001 was $85,522. There were no mortgage loan sales during 2000.
NOTE P. REGULATORY MATTERS - -------------------------------------------------------------------------------
In January 1989, the Board of Governors of the Federal Reserve Bank issued guidelines for the implementation of risk-based capital requirements by U.S. Banks and bank holding companies. These guidelines have been revised along with minimum leverage ratios also set by the Federal Reserve Bank. The Bank's capital remains extremely strong by all regulatory guidelines. The following is a listing of the Bank's required and actual capital ratios.
2001 Actual(%) 2000 Actual(%) Required(%) - --------------------------------------------------------------------- Tier I 9.38 9.72 6.00 Tier II 1.08 1.09 ** Total Risk-Based Capital 10.46 10.95 10.00 Leverage Ratio 7.73 7.54 4.00
**Tier II Capital is limited to maximum of 100% of Tier 1 Capital.
NOTE Q. DISCLOSURE OF SUMMARIZED INFORMATION OF ASSETS, LIABILITIES, AND RESULTS OF OPERATIONS OF SMTB FINANCIAL GROUP, LLC., ACCOUNTED FOR ON THE EQUITY METHOD - -------------------------------------------------------------------------------
The Bank has a 50% interest in SMTB Financial Group, LLC (SMTB), which was formed to sell insurance and investment products. The investment amounted to $35,207 and $2,500 at December 31, 2001 and 2000, respectively.
The combined results of operations and financial position of the Bank's equity basis investment are summarized below:
December 31, Condensed Income Statement Information: 2001 2000 - ---------------------------------------------------------------------
Commission Revenue $ 92,218 $ 81,332 Net Income 65,415 62,408 Bank's Equity in Net Income of Affiliates 32,707 31,204
Condensed Balance Sheet Information: Current Assets 74,857 5,000 - --------------------------------------------------------------------- Total Assets 74,857 5,000 Current Liabilities 4,443 0 - --------------------------------------------------------------------- Equity 70,414 0 - --------------------------------------------------------------------- Total Liabilities and Equity $ 74,857 $ 5,000 =====================================================================
NOTE R. DEFERRED INCENTIVE PLAN FOR EXECUTIVE OFFICERS AND DIRECTORS - -------------------------------------------------------------------------------
The Bank has adopted a non-tax qualified retirement plan for certain executives and directors. While the Plan is to be funded from the general assets of the Company, life insurance policies were acquired for the purpose of serving as the primary funding source. A participating executive and director may receive an annual award based upon the bank's Return on Equity and Earnings for each plan year. The award will be deferred into an account and the award will be credited with interest at a rate based upon the growth rate of the stock for the plan year. The benefit may be paid in 180 equal monthly installments or a lump sum at Normal Retirement. If the participant attains the age of 55 and has completed 20 years of service, he may elect Early Retirement and may receive the balance in the deferral account on the Early Retirement Date. In case of the participant's Early Termination prior to Early Retirement, the Executive is entitled to receive a benefit equal to his or her vested portion of the Deferral Account balance on the Termination Date. In the event of the participant's termination of employment due to disability, the participant may request to receive a disability benefit equal to the Deferral Account Balance at the date of Termination. The Deferred Incentive Plan has five executives and five director participants. Total contributions accrued under the Plan for the year 2001 and 2000 were $89,049 and $83,355. At December 31, 2001 and 2000, the cash values of these policies were $5,519,800 and $5,248,600 and the liability accrued for the benefits payable under the Plan was $184,277.
The Bank has a similar supplemental life insurance plan for all members of management, funded with similar life insurance policies. The benefit provides post retirement life insurance up to a maximum of two and one half times annual salary.
INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------
To the Board of Directors and Stockholders of Smithtown Bancorp
We have audited the accompanying consolidated balance sheets of Smithtown Bancorp as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of Smithtown Bancorp's management. Our responsibility is to express an opinion on these financial statements based on our audits.
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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Smithtown Bancorp at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
Albrecht, Viggiano, Zureck & Company, P.C. Hauppauge, New York January 22, 2002