<PAGE> 1
No. of pages within this report 58
As filed with the Securities and Exchange Commission on March 27, 1997
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 31 December 1996 Commission File #0 - 13314
SMITHTOWN BANCORP, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2695037
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE EAST MAIN STREET, SMITHTOWN, NEW YORK 11787-2801
(Address of principal executive office, Zip Code)
Registrant's telephone number, including area code: (516) 360-9300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK, $5.00 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
<TABLE>
<CAPTION>
Number of Shares Outstanding
Class of Common Stock as of 15 March 1997
- --------------------- -------------------
<S> <C>
$5.00 Par Value 433,268
</TABLE>
The aggregate market value of the Registrant's common stock held by
nonaffiliates was approximately $15,164,380 based on the price at which stock
was sold on 15 March 1997.
DOCUMENTS INCORPORATED BY REFERENCE
1) Portions of the Annual Report for the fiscal year ended 31 December 1996
are incorporated herein by reference into Parts I and II.
2) Portions of the Prospectus dated 26 July 1984 and filed as a part of the
Registrant's Form S-14 Registration Statement under the Securities Act of
1933, Reg #2-91511, are incorporated
1
<PAGE> 2
by reference into Part I.
3) Portions of the Proxy Statement relating to the annual meeting of
stockholders to be held on 8 April 1997 are incorporated herein by
reference into Part III.
PART I
Item 101: 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 8 of the Registrant's Annual Report for the year ended 31 December
1996, and
Page 8 of the Registrant's Prospectus dated 26 July 1984, both of which are
incorporated by reference.
Item 102: 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
17 Bank Avenue
Smithtown, New York 11787
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 in well maintained condition. There are no other
owners of these properties and no mortgages or liens exist on the properties.
The Bank owns properties that it has acquired through the foreclosure process.
The majority in this category are vacant commercial properties. The balance are
residential properties.
2
<PAGE> 3
Item 103: 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.
PART 2
Item 201: Market for Common Equity and Related Stockholder Matters
Page 31 and 38 of the Registrant's Annual Report for the year ended 31 December
1996 is incorporated herein by reference.
Item 202: Description of Securities or Plan of Operation
710 shareholders of common stock at 15 March 1996.
Preemptive Rights exist whereby the holders of the shares outstanding at that
time shall have the right to subscribe, in proportion to their holdings, for
capital stock to be so issued. The right to subscribe shall only last for such a
period of time as shall be determined by the Board of Directors of the
Registrant.
PART 3
Item 303: Management's Discussion and Analysis or Plan of Operations
Pages 39 through 49, inclusive, of the Registrant's Annual Report for the year
ended 31 December 1996 are incorporated herein by reference.
Item 304: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Form 8-K was filed with the Exchange on September 14, 1992. Form 8 Amendment to
Form 8-K was filed on September 24, 1992. Both forms are incorporated herein by
reference.
Item 310: Financial Statements
Pages 19 through 37, inclusive, of the Registrant's Annual Report for the year
ended 31 December 1996 are incorporated herein by reference.
PART 4
Item 401: Directors, Executive Officers, Promoters and Control Persons of the
Registrant
The information with respect to directors, executive officers and control
persons contained on pages 53 through 54, and pages 56 through 58, of the
Registrant's Proxy Statement dated 3 March 1997, is 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.
3
<PAGE> 4
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 402: Executive Compensation
Pages 56 and 57 of the Registrant's Proxy Statement dated 3 March 1997 are
incorporated herein by reference, together with the information set forth on
page 51.
Item 403: Security Ownership of Certain Beneficial Owners and Management
Page 55 of the Registrant's Proxy Statement, dated 3 March 1997 are incorporated
herein by reference.
Item 404: Certain Relationships and Related Transactions
Page 57 of the Registrant's Proxy Statement dated 3 March 1997 and page 28 of
the Registrant's Annual Report for the year ended 31 December 1996 are
incorporated herein by reference.
4
<PAGE> 5
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
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
13 Annual Report for the year ended 31 December 1996 8 - 50
Notice of Annual Meeting and Proxy Statement 51 - 58
16 Reference to Item 8 in 10-KSB 3
18 No change in accounting principles
19 Reference to Page 1 1
22 Bank of Smithtown
Smithtown, New York 11787
23 Notice of Annual Meeting and Proxy Statement 51 - 58
24 Consent of Independent Auditors 7
Report of Independent Auditors 18
25 None
28 Prospectus dated 26 July 1984 *
29 N/A
</TABLE>
*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 6 June 1984.
5
<PAGE> 6
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: March 27, 1997 Smithtown Bancorp, Inc.
-------------- -------------------------------
Registrant
/s/ Bradley E. Rock
---------------------------------------------------
Bradley E. Rock, President, Chief Executive
Officer and Chairman of the Board
/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 March 27, 1997
---------------------------------------------
Bradley E. Rock, President, Chief Executive Date
Officer and Chairman of the Board
/s/ Augusta Kemper March 27, 1997
---------------------------------------------
Augusta Kemper, Director Date
/s/ Patrick A. Given March 27, 1997
---------------------------------------------
Patrick A. Given, Director Date
/s/ James H. Glamore March 27, 1997
---------------------------------------------
James H. Glamore, Director Date
/s/ Edith Hodgkinson March 27, 1997
---------------------------------------------
Edith Hodgkinson, Director Date
/s/ Barry M. Seigerman March 27, 1997
---------------------------------------------
Barry M. Seigerman, Director Date
/s/ Attmore Robinson March 27, 1997
---------------------------------------------
Attmore Robinson, Director Date
/s/ Charles E. Rockwell March 27, 1997
---------------------------------------------
Charles E. Rockwell, Director Date
/s/ Robert W. Scherdel March 27, 1997
---------------------------------------------
Robert W. Scherdel, Director Date
6
<PAGE> 7
ALBRECHT, VIGGIANO, ZURECK
& COMPANY, P.C.
Certified Public Accountants
25 Suffolk Court
Hauppauge, New York 11788
(516) 434-9500
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Form 10-KSB of Smithtown
Bancorp, Inc. of our report dated January 24, 1997, included in the 1996 Annual
Report to shareholders of Smithtown Bancorp, Inc.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
January 31, 1997
7
<PAGE> 8
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 is subject to the supervision of the State of
New York Banking Department and the Federal Reserve Bank of New York. The Bank
has been headquartered in Smithtown since 1910. It is in its 87th year of
operation as an independent commercial bank. The Bank operates seven offices in
the following communities: Smithtown, Commack, Hauppauge, Kings Park,
Centereach, Lake Grove, and Northport. The Bank employs 87 employees of which 70
are full time.
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 Department, introduced in 1970, provides trust administration,
estate administration and fiduciary services, and acts as a bond and coupon
paying agent for local municipalities.
The Bank's intention is to continue to provide individuals, businesses, and
municipalities with a comprehensive array of financial services.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights 1
Message from the Chairman of the Board 2
Independent Auditors' Report 8
Consolidated Balance Sheets 9
Consolidated Statements of Income 10
Consolidated Statements of Changes in Stockholders' Equity 11
Consolidated Statements of Cash Flows 12
Notes to Consolidated Financial Statements 13
Selected Financial Data
Consolidated Average Balance Sheets 24
Consolidated Balance Sheets 25
Consolidated Income Statements 26
Per Share Data and Supplementary Information 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Banking Locations Inside Back Cover
Corporate Directory Inside Back Cover
</TABLE>
8
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AT YEAR END
Assets $181,629,049 $157,528,274 $156,951,687 $153,720,337
Loans 98,955,368 95,984,044 78,421,816 62,450,651
Deposits 158,928,455 143,581,497 135,230,577 141,377,440
Stockholders' Equity 14,097,239 12,837,073 11,605,718 11,243,502
For the Year
Interest Income $ 12,686,674 $ 11,352,368 $ 10,678,437 $ 10,948,073
Net Interest Income 9,001,689 7,987,473 8,145,247 8,248,312
Other Non-Interest Income 2,328,830 2,164,410 2,099,966 2,276,211
Other Operating Expense 8,257,130 7,721,712 8,231,202 8,841,415
Net Income 1,705,498 1,471,381 1,231,511 301,696
Per Share
Net Income $ 3.94 $ 3.40 $ 2.80 $ 0.69
Cash Dividends Declared 1.28 1.12 1.00 0.75
Stockholders' Equity 32.54 29.63 27.14 25.57
</TABLE>
9
<PAGE> 10
NET INCOME
<TABLE>
<S> <C>
1993 301,696
1994 1,231,511
1995 1,471,381
1996 1,705,498
</TABLE>
CASH DIVIDENDS(in dollars)
<TABLE>
<S> <C>
1993 .75
1994 1.00
1995 1.12
1996 1.28
</TABLE>
10
<PAGE> 11
LOANS
<TABLE>
<S> <C>
1993 62,450,651
1994 72,421,816
1995 95,984,044
1996 98,955,368
</TABLE>
EARNINGS PER SHARE (in dollars)
EPS
-----------------
1993 0.69
1994 2.80
1995 3.40
1996 3.94
11
<PAGE> 12
ROE
---------------
1993 2.70
1994 10.61
1995 11.98
1996 12.94
ROE COMPARISON
----------------
Peer 9.66
NVS 10.64
BOS 13.13
12
<PAGE> 13
MESSAGE FROM THE CHAIRMAN OF THE BOARD
1996 represents a turning point for Bank of Smithtown. It was a year of rapid
change and dramatic improvement.
During the first six months of this past year we completely reengineered all of
our work processes throughout the Bank. We did so to increase efficiency, to
reduce noninterest expense and to improve customer service. The reengineering
process involved significant effort and costs, but we felt that absorption of
those costs during the early part of 1996 would become an investment in the
future of our bank.
July and August of 1996 were transitional months during which time we had
completed all of our reengineering work, but were not yet feeling all of the
financial benefits of our efforts. During the last four months of the year,
however, the fruits of our labors became apparent.
Comparing the Bank's first eight months' performance with the Bank's performance
during the last four months produces a sharp contrast. Our return on assets,
return on equity and efficiency ratio during the first eight months were as
follows:
<TABLE>
<CAPTION>
ROA ROE Efficiency
--- --- ----------
<S> <C> <C>
.71 9.29 77.74
</TABLE>
For the last four months of the year, however, the improvement was dramatic.
Once the full effects of our reengineering work had taken hold, the same ratios
were:
<TABLE>
<CAPTION>
ROA ROE Efficiency
--- --- ----------
<S> <C> <C>
1.53 20.57 61.61
</TABLE>
Improved, indeed. ROA and ROE more than doubled. In fact, net income during the
latter period was more than twice net income during the first eight months, in
half the time.
This marked improvement in so short a period of time produced the best year in
the Bank's 87 year history in spite of our retrenchment during the first half of
the year. Net income was $1,705,498, our second consecutive year of record
earnings and almost 16% higher than our previous record high.
The ratios previously discussed, for the entire year of 1996, were:
<TABLE>
<CAPTION>
ROA ROE Efficiency
--- --- ----------
<S> <C> <C>
1.00 12.94 72.02
</TABLE>
While these numbers are still short of the goals we have set for ourselves, they
nonetheless represent new levels of achievement for Bank of Smithtown, and are
clearly "ahead of schedule" with respect to our strategic plan.
In addition to our improved profitability, we also achieved significant growth
during 1996. During a year when most banks had difficulty growing core deposits,
our average deposits grew by more than $14 million, almost a 10% increase over
the previous year. Assets grew correspondingly by more than $14 million to
$181,629,049 at year-end. This size level, of course, also represents a new
record high for the Bank.
13
<PAGE> 14
Capital ratios remain strong with leverage capital at 7.82% at year-end and a
risk-based capital ratio of 13.58%. OREO and nonperforming assets are still at
levels higher than our peers but remain concentrated in a few properties which
are in the process of being sold. These properties are still part of the residue
of the recession in the Long Island real estate market during the early 1990s.
Our trends with respect to nonperforming assets continue to be favorable.
The prospects for our common stock are strong also. Earnings per share increased
by more than 15.5% to $3.94 per share. The market value of the shares has
continued to rise as well as the cash dividends. Cash dividends were increased
during 1996 for the fourth consecutive year, and the Board presently anticipates
a further increase during 1997.
In summary, 1996 represented a giant step toward our goals. While ratios for the
last four months of the year, of course, do not constitute a guarantee of future
performance, we do feel that the sharp contrast and rapid improvement clearly
indicate our direction for the future.
We appreciate your support and look forward to continuing our recent strong
performance throughout 1997 and beyond.
Bradley E. Rock
Chairman of the Board, President
& Chief Executive Officer
14
<PAGE> 15
TEXT
1996 was a year in which we focused our attention on ways to improve
customer service. During the past year, we have significantly increased our
efforts to train our people better, in order to better serve our customers.
As new products are developed, as technology is enhanced and as
processes are improved, our employees must continuously be kept abreast of the
changes. We have a full time training officer whose job it is to conduct and
coordinate the training of our staff. We have developed a comprehensive product
manual for every employee. Each member of our staff is trained and periodically
tested on their knowledge of the Bank's products and services.
By providing our employees with the tools they need to do their jobs
better, they can respond customers.
DEPOSITS
[GRAPHIC OMITTED]
<TABLE>
<S> <C>
1993 141,377,440
1994 135,230,577
1995 143,581,497
1996 158,928,455
</TABLE>
15
<PAGE> 16
TEXT
Our history, as one of the oldest independently owned
commercial banks on Long Island, has been inextricably intertwined with the
successful growth and development of our community. Over the years, we have
forged a powerful partnership with the area's residents and businesses, always
striving to improve the quality of life and foster a vibrant economic
environment.
Our recent performance evidences that our commitment to these
high ideals has never been stronger. We have steadily increased our lending to
small and growing companies and the resources dedicated to financing the
acquisition, construction, and rehabilitation of residential and commercial
properties. With a cadre of seasoned professionals, Bank of Smithtown will
continue to be a vital partner, working hard to respond to the specialized needs
of our customers and the communities we serve.
CONSTRUCTION LOANS, COMMERCIAL
MORTGAGES AND BUSINESS LOANS
LOANS
--------------------
1993 39,463,430
1994 47,235,512
1995 65,729,943
1996 74,710,054
16
<PAGE> 17
TEXT
Bank of Smithtown's commitment to the community goes beyond providing
financial products and services for local businesses and consumers. We are
dedicated to help build the communities we serve by supporting its members
through work with local civic, youth and philanthropic organizations.
In particular, we believe that the youth of our community is vital to
its growth and prosperity. Over our 87 year history, we have supported many
local athletic teams, clubs and other groups with our money and our leadership.
Whether the groups are affiliated with the C.Y.O., P.A.L., other youth
organizations, Little League or, sometimes, school-related groups involved in
activities outside the scope of the ordinary school budget, Bank of Smithtown
has always made an effort to lend a hand with our contributions and our
participation. We recently helped send a volleyball team to a statewide
tournament in Buffalo. Last summer we helped some boys compete in a national
wrestling competition held in Indiana. We helped send a girls dance team to a
national competition in Orlando and some cheerleaders to a worldwide competition
in Europe. We helped to sponsor a softball team that won a championship in
Texas. For many years we have sponsored a "5K" run in St. James for people of
all ages.
And our support is not at all limited to athletics. We help publish a
list of business education courses available in local schools each year. We lent
our support to the recent publication of a pictorial history of the Town of
Smithtown in its early years. And our employees have acted many times as guest
lecturers in local high schools on business-related subjects or other subjects
in which they have special expertise.
Unlike the "big" banks, virtually all of our employees live in the
towns and villages we serve. Bank of Smithtown's employees are coaches,
instructors and group leaders. They also sit on the boards of local school
districts, churches, museums and chambers of commerce.
At Bank of Smithtown, community service means more than providing
funding for local projects. It means helping to build our community by lending
our time and support, as well as our money!
17
<PAGE> 18
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, 1996 and 1995, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, Smithtown
Bancorp changed its methods of accounting for impaired loans in 1995 and for
certain investments in debt securities in 1994.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
January 24, 1997
18
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
SMITHTOWN BANCORP
<TABLE>
<CAPTION>
As of December 31,
1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 7,689,964 $ 7,003,234
Investment Securities:
Investment Securities Held to Maturity:
Obligations of U.S. Government 2,008,366 2,013,739
Mortgage-Backed Securities 9,003,335 10,226,753
Obligations of State and Political Subdivisions 4,996,750 4,647,865
- ----------------------------------------------------------------------------------------------
Total (Fair Value $15,903,133 in 1996 and
$16,975,739 in 1995) 16,008,451 16,888,357
- ----------------------------------------------------------------------------------------------
Investment Securities Available for Sale:
Obligations of U.S. Government 0 3,008,900
Obligations of U.S. Government Agencies 13,563,700 3,015,900
Mortgage-Backed Securities 34,218,784 13,155,534
Other Securities 599,800 599,000
- ----------------------------------------------------------------------------------------------
Total (At Fair Value) 48,382,284 19,779,334
- ----------------------------------------------------------------------------------------------
Total Investment Securities 64,390,735 36,667,691
- ----------------------------------------------------------------------------------------------
Federal Funds Sold 0 6,750,000
- ----------------------------------------------------------------------------------------------
Loans 101,150,671 98,069,261
Less:Unearned Discount 572,731 655,323
Allowance for Possible Loan Losses 1,622,572 1,429,894
- ----------------------------------------------------------------------------------------------
Loans, Net 98,955,368 95,984,044
- ----------------------------------------------------------------------------------------------
Bank Premises and Equipment 2,618,863 3,173,036
- ----------------------------------------------------------------------------------------------
Other Assets
Other Real Estate Owned 5,087,707 5,046,544
Other 2,886,412 2,903,725
- ----------------------------------------------------------------------------------------------
Total Other Assets 7,974,119 7,950,269
- ----------------------------------------------------------------------------------------------
TOTAL $181,629,049 $ 157,528,274
==============================================================================================
LIABILITIES
Deposits:
Demand (Non-Interest Bearing) $ 42,562,809 $ 35,944,658
NOW 14,466,688 13,341,511
Money Market 27,412,325 23,376,214
Savings 45,729,259 46,314,234
Time 28,757,374 24,604,880
- ----------------------------------------------------------------------------------------------
Total Deposits 158,928,455 143,581,497
Dividend Payable 138,646 121,315
Securities Sold Under Agreements to Repurchase 2,800,000 0
Other Borrowings 4,485,724 0
Other Liabilities 1,178,985 988,389
- ----------------------------------------------------------------------------------------------
Total Liabilities 167,531,810 144,691,201
- ----------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities
STOCKHOLDERS' EQUITY
Common Stock - $5.00 Par Value
(1,500,000 Shares Authorized; 447,955 Issued) 2,239,775 2,239,775
Capital Surplus 1,993,574 1,993,574
Unrealized Gain (Loss) on Securities Available for Sale 81,093 (28,157)
Retained Earnings 10,229,436 9,078,520
- ----------------------------------------------------------------------------------------------
Total 14,543,878 13,283,712
Less:Treasury Stock (14,687 Shares at Cost at
December 31, 1996 and 1995, respectively) 446,639 446,639
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 14,097,239 12,837,073
- ----------------------------------------------------------------------------------------------
TOTAL $181,629,049 $ 157,528,274
==============================================================================================
</TABLE>
See notes to consolidated financial statements
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF INCOME
SMITHTOWN BANCORP
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 9,393,295 $ 8,278,027 $ 6,690,095
Interest on Federal Funds Sold 417,107 221,857 117,440
Interest and Dividends on Investment Securities:
Taxable:
Obligations of U.S. Government 141,265 431,259 1,235,897
Obligations of U.S. Government Agencies 569,716 178,689 177,332
Mortgage-Backed Securities 1,833,879 1,901,977 2,080,703
Other 37,638 22,385 7,632
- -----------------------------------------------------------------------------------------------------------------------------
Total 2,582,498 2,534,310 3,501,564
Exempt from Federal Income Taxes:
Obligations of State and Political Subdivisions 293,774 318,174 369,338
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Income 12,686,674 11,352,368 10,678,437
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Money Market Accounts 834,353 716,465 584,242
Savings 1,298,962 1,387,282 1,269,785
Certificates of Deposit of $100,000 and Over 361,484 210,891 113,101
Other Time Deposits 1,044,946 928,796 438,839
Interest on Securities Sold Under Agreements To Repurchase 100,932 106,511 127,223
Interest on Other Borrowings 44,308 14,950 0
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 3,684,985 3,364,895 2,533,190
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income 9,001,689 7,987,473 8,145,247
Provision for Possible Loan Losses 370,000 110,000 120,000
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income, After Provision for Possible Loan Losses 8,631,689 7,877,473 8,025,247
- -----------------------------------------------------------------------------------------------------------------------------
OTHER NON-INTEREST INCOME
Trust Department Income 434,069 401,811 298,786
Service Charges on Deposit Accounts 1,337,449 1,278,668 1,344,754
Other Income 540,588 482,538 433,731
Net Gain on Sales of Investment Securities 16,724 1,393 22,695
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Non-Interest Income 2,328,830 2,164,410 2,099,966
- -----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries 3,379,214 3,470,680 3,556,241
Pensions and Other Employee Benefits 717,516 761,577 832,603
Net Occupancy Expense of Bank Premises 1,130,358 944,571 905,538
Furniture and Equipment Expense 637,029 622,775 582,663
Other Expenses 2,393,013 1,922,109 2,354,157
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Operating Expenses 8,257,130 7,721,712 8,231,202
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 2,703,389 2,320,171 1,894,011
Provision for Income Taxes 997,891 848,790 662,500
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,705,498 $ 1,471,381 $ 1,231,511
=============================================================================================================================
EARNINGS PER SHARE
Net Income $ 3.94 $ 3.40 $ 2.80
Weighted Average Shares Outstanding 433,268 432,929 439,400
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SMITHTOWN BANCORP
<TABLE>
<CAPTION>
Net
Unrealized
Common Stock Cost of Gain(Loss)on
-------------------------- Common Securities Total
Shares Capital Retained Stock in Available Stockholders'
Outstanding Amount Surplus Earnings Treasury for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 439,765 $ 2,239,775 $ 1,993,118 $ 7,297,259 $(286,650) $11,243,502
Net Income 1,231,511 1,231,511
Cash Dividends Declared (436,741) (436,741)
Treasury Stock Sales 4,467 110,000 110,000
Treasury Stock Purchases (16,566) (407,938) (407,938)
Unrealized Loss on Securities
Available for Sale $ (134,616) (134,616)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 427,666 $ 2,239,775 $ 1,993,118 $ 8,092,029 $(584,588) $ (134,616) $11,605,718
Net Income 1,471,381 1,471,381
Cash Dividends Declared (484,890) (484,890)
Treasury Stock Sales 5,602 456 137,949 138,405
Unrealized Gain on Securities
Available for Sale 106,459 106,459
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 433,268 $ 2,239,775 $ 1,993,574 $ 9,078,520 $(446,639) $ (28,157) $12,837,073
Net Income 1,705,498 1,705,498
Cash Dividends Declared (554,582) (554,582)
Unrealized Gain on Securities
Available for Sale 109,250 109,250
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 433,268 $ 2,239,775 $ 1,993,574 $10,229,436 $(446,639) $ 81,093 $14,097,239
===================================================================================================================================
</TABLE>
Cash dividends per share were $1.28 in 1996, $1.12 in 1995, $1.00 in 1994.
See notes to consolidated financial statements.
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
SMITHTOWN BANCORP
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,705,498 $ 1,471,381 $ 1,231,511
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Valuation Reserve for Other Real Estate Owned 209,000 100,000 335,000
Depreciation on Premises and Equipment 450,265 455,199 408,082
Provision for Possible Loan Losses 370,000 110,000 120,000
Net Gain on Sales of Investment Securities (16,724) (1,393) (22,695)
Amortization of Transition Obligation 49,909 74,200 74,200
Loss on Sale of Bank Property 57,568 0 0
Increase in Interest Payable 44,568 81,546 27,426
Increase (Decrease) in Miscellaneous Payables
and Accrued Expenses (7,324) (96,232) 23,342
(Increase) Decrease in Fees and Commissions Receivable (65,000) (22,137) 34,595
(Increase) Decrease in Interest Receivable (72,496) 182,437 133,445
(Increase) Decrease in Prepaid Expenses 222,052 160,135 (404,119)
(Increase) Decrease in Miscellaneous Receivables 159 927,357 (107,308)
(Increase) Decrease in Income Taxes Receivable 98,246 213,595 (54,905)
(Increase) Decrease in Deferred Taxes (87,318) 28,738 (56,376)
Decrease in Accumulated Postretirement
Benefit Obligation (54,000) (44,301) (58,157)
Amortization of Investment Security Premiums
and Accretion of Discounts (198,574) 38,790 347,694
- -------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 2,705,829 3,679,315 2,031,735
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Disposition of Mortgage-Backed Securities:
Held to Maturity 1,198,295 4,000,128 2,468,598
Available for Sale 6,734,886 9,408,375 4,939,590
Proceeds from Disposition of Other Investment Securities:
Held to Maturity 356,652 2,507,707 16,413,194
Available for Sale 3,163,281 8,153,750 0
Purchase of Mortgage-Backed Securities:
Held to Maturity 0 0 (9,231,246)
Available for Sale (27,502,567) 0 0
Purchase of Other Investment Securities:
Held to Maturity (714,347) 0 (3,075,461)
Available for Sale (10,555,581) (1,476,956) 0
Federal Funds Sold, Net 6,750,000 (6,550,000) 2,300,000
Loans Made to Customers, Net (4,931,095) (17,734,860) (18,176,533)
Purchase of Premises and Equipment (158,900) (461,086) (265,156)
Proceeds from Sale of Other Real Estate Owned 1,339,608 505,877 621,314
Proceeds from Sale of Bank Property 205,239 0 0
- -------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (24,114,529) (1,647,065) (4,005,700)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Demand Deposits,
NOW Accounts and Savings Accounts 11,194,464 (1,401,661) (7,300,072)
Net Increase in Time Deposits 4,152,494 9,752,581 1,153,210
Cash Dividends Paid (537,252) (470,491) (329,824)
Securities Sold Under Agreements to
Repurchase and Other Borrowings, Net 7,285,724 (9,003,500) 9,003,500
Purchase of Treasury Stock 0 0 (407,938)
Proceeds from Sale of Treasury Stock 0 138,405 110,000
- -------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 22,095,430 (984,666) 2,228,876
- -------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Due from Banks 686,730 1,047,584 254,911
Cash and Due from Banks, Beginning of Year 7,003,234 5,955,650 5,700,739
- -------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks, End of Year $ 7,689,964 $ 7,003,234 $ 5,955,650
=========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $ 117,111 $ 136,012 $ 112,672
Income Taxes 986,963 774,542 773,781
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Loans Transferred to Other Real Estate Owned $ 1,589,770 $ 87,099 $ 1,235,368
</TABLE>
See notes to consolidated financial statements
22
<PAGE> 23
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 CONSOLIDATION
The consolidated financial statements include the accounts of Smithtown Bancorp,
and its wholly-owned subsidiary, Bank of Smithtown. All material intercompany
transactions have been eliminated.
NATURE OF OPERATIONS
Smithtown Bancorp operates under a state bank charter and provides full banking
services, including trust services. As a state bank, the Bank is subject to
regulation of the State of New York Banking Department and the Federal Reserve
Board. The area served by Smithtown Bancorp is the north central region of
Suffolk County, New York, and services are provided at seven 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 loan loss reserve could differ from actual results.
INVESTMENT SECURITIES
On January 1, 1994, the Bank adopted Statement of Financial Accounting Standards
No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115). In accordance with SFAS 115, prior years' financial statements have not
been restated to reflect the change in accounting method. There was no
cumulative effect as a result of adopting SFAS 115.
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 not classified as trading securities nor as securities to
be held to maturity are carried at fair value.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities are determined using the
specific-identification method.
LOANS
Effective January 1, 1995, Bank of Smithtown 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 reserve for possible credit losses related to
impaired loans 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 if the
loan is collateral dependent. Prior to the adoption of SFAS 114, Bank of
Smithtown's methodology for determining the adequacy of the reserve for possible
credit 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.
23
<PAGE> 24
Effective January 1, 1995, Bank of Smithtown also adopted Statement of Financial
Account Standards No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosure," (SFAS 118) which amends SFAS 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 Bank of Smithtown 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 reserve for 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 fair value. The Bank sells or
securitizes certain loans. Such sales are with recourse and no reserve is
considered necessary at December 31, 1996. Gains are reported in Other Income.
Loan-related fees and costs 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:
<TABLE>
<S> <C>
Bank Premises.................................................. 25-30 years
Leasehold Improvements......................................... 5-40 years
Furniture and Equipment........................................ 10 years
</TABLE>
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 VALUATIONS RESERVE ACCOUNT
The valuation reserve account is established through a Loss on Other Real Estate
Owned charged to expenses. Properties held in Other Real Estate Owned are
periodically valued through appraisals, and are written down to fair market
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, post retirement
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.
24
<PAGE> 25
STATEMENTS OF CASH FLOWS
For the purposes of the Statement of Cash Flows, the Bank considers Cash and Due
from Banks as Cash and Cash Equivalents.
RETIREMENT BENEFITS
In December 1990, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions," (SFAS 106) which was implemented in 1993. This
statement established accounting standards for postretirement benefits other
than pensions (hereinafter referred to as postretirement benefits). The
statement principally focuses on health care benefits, although it applies to
all forms of postretirement benefits other than pensions. SFAS 106 changed the
Bank's practice of accounting for postretirement benefits from a cash basis to
an accrual basis. This statement requires that the estimated costs of
postretirement benefits other than pensions be accrued over the period earned
rather than expensed as incurred.
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:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES TO BE HELD TO MATURITY:
DECEMBER 31, 1996
OBLIGATIONS OF U.S. GOVERNMENT $ 2,008,366 $ 0 $ (20,066) $ 1,988,300
MORTGAGE-BACKED SECURITIES 7,003,335 0 (169,364) 6,833,971
COLLATERALIZED MORTGAGE OBLIGATIONS 2,000,000 0 (40,200) 1,959,800
OBLIGATIONS OF STATE AND POLITICAL
SUBDIVISIONS 4,996,750 134,029 (9,717) 5,121,062
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $16,008,451 $134,029 $ (239,347) $15,903,133
===========================================================================================================================
DECEMBER 31, 1995
Obligations of U.S. Government $ 2,013,739 $ 0 $ (14,439) $ 1,999,300
Mortgage-Backed Securities 8,240,962 8,472 (101,079) 8,148,355
Collateralized Mortgage Obligations 1,985,791 0 (34,191) 1,951,600
Obligations of State and Political
Subdivisions 4,647,865 232,627 (4,008) 4,876,484
- ---------------------------------------------------------------------------------------------------------------------------
Total $16,888,357 $241,099 $ (153,717) $16,975,739
===========================================================================================================================
DECEMBER 31, 1994
Obligations of U.S. Government $ 3,019,956 $ 0 $ (174,169) $ 2,845,787
Obligations of U.S. Government Agencies 2,051,544 0 (187,169) 1,864,375
Mortgage-Backed Securities 28,613,602 0 (2,216,952) 26,396,650
Collateralized Mortgage Obligations 6,147,841 3,033 (649,550) 5,501,324
Obligations of State and Political Subdivisions 6,137,424 141,582 (11,947) 6,267,059
- ---------------------------------------------------------------------------------------------------------------------------
Total $45,970,367 $144,615 $(3,239,787) $42,875,195
===========================================================================================================================
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1996
OBLIGATIONS OF U.S. GOVERNMENT AGENCIES $13,534,626 $ 61,561 $ (32,487) $13,563,700
MORTGAGE-BACKED SECURITIES 30,773,776 189,721 (69,322) 30,894,175
COLLATERALIZED MORTGAGE OBLIGATIONS 3,334,266 0 (9,657) 3,324,609
OTHER SECURITIES 599,800 0 0 599,800
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $48,242,468 $251,282 $ (111,466) $48,382,284
===========================================================================================================================
DECEMBER 31, 1995
Obligations of U.S. Government $ 3,008,013 $ 1,780 $ (893) $ 3,008,900
Obligations of U.S. Government Agencies 3,026,634 0 (10,734) 3,015,900
Mortgage-Backed Securities 11,938,626 23,286 (57,593) 11,904,319
Collateralized Mortgage Obligations 1,255,609 0 (4,394) 1,251,215
Other Securities 599,000 0 0 599,000
- ---------------------------------------------------------------------------------------------------------------------------
Total $19,827,882 $ 25,066 $ (73,614) $19,779,334
===========================================================================================================================
DECEMBER 31, 1994
Obligations of U.S. Government $10,086,065 $ 35,012 $ (65,453) $10,055,624
Obligations of U.S. Government Agencies 1,000,000 0 (102,188) 897,812
Mortgage-Backed Securities 2,145,263 520 (99,988) 2,045,795
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C> <C> <C> <C>
Other Securities 127,200 0 0 127,200
------------------------------------------------------------------------------------------------------------------------
Total $13,358,528 $ 35,532 $(267,629) $ 13,126,431
==============================================================================================================================
</TABLE>
The following table presents the amortized cost of and fair values of
investment in debt securities by scheduled maturity at respective year-ends.
<TABLE>
<CAPTION>
1996 1995
AMORTIZED FAIR Amortized Fair
TYPE AND MATURITY GROUPING COST VALUE Cost Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
Obligations of U.S. Government
After 1 year, but within 5 years $ 2,008,366 $ 1,988,300 $ 2,013,739 $ 1,999,300
- --------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS OF U.S.
GOVERNMENT $ 2,008,366 $ 1,988,300 $ 2,013,739 $ 1,999,300
====================================================================================================================
Mortgage-Backed Securities
After 1 year, but within 5 years $ 3,553,981 $ 3,473,619 $ 4,219,423 $ 4,171,205
After 5 years, but within 10 years 2,000,000 1,959,800 1,985,791 1,951,600
After 10 years 3,449,354 3,360,352 4,021,539 3,977,150
- --------------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES $ 9,003,335 $ 8,793,771 $10,226,753 $10,099,955
====================================================================================================================
Obligations of State and Political
Subdivisions
Within 1 year $ 557,644 $ 560,065 $ 352,072 $ 354,317
After 1 year, but within 5 years 2,492,355 2,570,337 2,939,504 3,073,746
After 5 years, but within 10 years 1,855,751 1,898,949 1,219,539 1,312,194
After 10 years 91,000 91,711 136,750 136,227
- --------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS OF STATE AND
POLITICAL SUBDIVISIONS $ 4,996,750 $ 5,121,062 $ 4,647,865 $ 4,876,484
====================================================================================================================
SECURITIES AVAILABLE FOR SALE:
Obligations of U.S. Government
Within 1 year $ 0 $ 0 $ 3,008,013 $ 3,008,900
- --------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS OF U.S.
GOVERNMENT $ 0 $ 0 $ 3,008,013 $ 3,008,900
====================================================================================================================
Obligations of U.S. Government Agencies
After 1 year, but within 5 years $ 2,000,000 $ 1,987,600 $ 1,000,000 $ 989,900
After 5 years, but within 10 years 11,534,626 11,576,100 2,026,634 2,026,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS U.S. GOVERNMENT
AGENCIES $13,534,626 $13,563,700 $ 3,026,634 $ 3,015,900
====================================================================================================================
Mortgage-Backed Securities
Within 1 year $ 1,498,403 $ 1,488,514 $ 0 $ 0
After 1 year, but within 5 years 5,683,495 5,638,494 8,852,209 8,794,617
After 10 years 26,926,144 27,091,776 4,342,026 4,360,917
- --------------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES $34,108,042 $34,218,784 $13,194,235 $13,155,534
====================================================================================================================
</TABLE>
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 $385,311 and
$266,165 in 1996 and 1995, respectively, while gross unrealized losses amounted
to $350,813 and $227,331 in 1996 and 1995, respectively.
Obligations of the U.S. Government and Mortgage-Backed Securities having a book
value of $23,843,405 and a fair value of $23,634,530 were pledged to secure
public deposits. No municipality maintains deposits exceeding ten percent of
stockholders' equity.
Gross realized gains (losses) on sales of Securities Available for Sale for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government and Agency Securities $ 0 $ 33,508 $22,695
Mortgage-Backed Securities 16,724 (32,115) 0
</TABLE>
26
<PAGE> 27
Effective November 15, 1995, the Financial Accounting Standards Board permitted
a one-time opportunity for banks to reassess the appropriateness of the
designation of all securities held. Any resulting reclassifications had to be
made no later than December 31, 1995. In accordance with this one time
reclassification consistent with SFAS 115, Bank of Smithtown transferred
securities from the Held to Maturity portfolio to the Available for Sale
portfolio in order to increase its liquidity position. The amortized cost,
related net unrealized loss, and fair value of these transferred securities were
$22,537,536, $206,705, and $22,330,831, respectively.
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 6.0% for 1996 and 1995. During 1995, the Bank
became a member of the Federal Home Loan Bank of New York, and now holds
$472,600 of its stock. This stock also has no maturity and has paid average
dividends of 6.0% during 1996. Stock of both the Federal Reserve Bank and the
Federal Home Loan Bank are restricted.
NOTE C. LOANS
Loans as of December 31, consisted of the following:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate Loans, Construction $ 8,180,276 $ 7,669,120
Real Estate Loans, Other
Commercial 43,071,726 38,986,443
Residential 14,074,208 16,270,758
Mortgage Loans Held for Sale 495,000 0
Commercial and Industrial Loans 23,458,052 19,074,380
Loans to Individuals for Household, Family and Other Personal Expenditures 11,543,331 15,993,856
All Other Loans (Including Overdrafts) 328,078 74,704
- ---------------------------------------------------------------------------------------------------------------
Total Loans 101,150,671 98,069,261
Less: Unearned Discount on Loans 572,731 655,323
- ---------------------------------------------------------------------------------------------------------------
TOTAL LOANS (NET OF UNEARNED DISCOUNT) $100,577,940 $97,413,938
===============================================================================================================
</TABLE>
Collateral varies, but generally includes residential and income producing
commercial properties, as well as automobiles on personal loans. Fair value of
loans at December 31, 1996 totaled $99,444,340.
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, 1996, the
recorded investment in loans that are considered impaired under SFAS 114 was
$1,592,024. No additional SFAS 114 reserve is required for the $1,592,024 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, 1996 was $2,217,618. The total allowance on
impaired loans at December 31, 1996 and 1995 totaled $246,810 and $410,102,
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. For the twelve months ended December 31, 1996 and 1995,
Bank of Smithtown recognized no interest revenue on these impaired loans. Any
cash receipts would first be applied to accrued interest on impaired loans, and
then to the principal balance outstanding.
At December 31, 1996 and 1995, loans with unpaid principal balances of
$2,000,529 and $2,849,175, 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, 1996 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 $143,045 in 1996 and $177,261 in 1995. Loans contractually
past-due 90 days or more and still accruing interest amounted to $3,072 and
$90,391 in 1996 and 1995, respectively.
During 1996, $1,589,770 of loans, net of an allocated portion of the Allowance
for Possible Loan Losses, were transferred to Other Real Estate Owned (OREO).
The book value of OREO, net of valuation reserves of $417,127, amounted to
$5,087,707 as of December 31, 1996. The fair value of OREO as of December 31,
1996 was $5,428,790.
The composition of OREO at December 31, follows:
27
<PAGE> 28
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
OREO $5,504,834 $5,534,829
Less: Valuation Reserve 417,127 488,285
- --------------------------------------------------------------------------------
Net $5,087,707 $5,046,544
================================================================================
</TABLE>
Provisions for real estate losses totaled $209,000, $100,000 and $335,000 for
the years ended December 31, 1996, 1995, and 1994, respectively. Other net OREO
costs, which include operating revenue and expense, and gains and losses on the
sale or disposition of real estate owned, approximated $102,000, $121,000, and
$275,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
A summary of information concerning interest income on nonaccrual loans and OREO
at December 31, follows:
<TABLE>
<CAPTION>
OREO Nonaccrual
-------------------------- -------------------------
(in thousands) 1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross interest income which would have
been recorded during the year under
original contract terms $595 $635 $642 $143 $177 $26
Gross interest income recorded during
the year 0 0 0 40 64 18
- ---------------------------------------------------------------------------------------------------------
</TABLE>
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
was $776,237 and $644,243 at December 31, 1996 and 1995, respectively. During
1996, $206,295 of new loans were made, and repayments totaled $74,301.
During 1996, Bank of Smithtown originated residential mortgages to be sold in
the secondary market to various investors. The Bank does not retain servicing
rights on these mortgages, but earns fee income from the origination process. At
year end 1996, $495,000 of Mortgages Held for Sale were outstanding. Fee income
earned during the year from such mortgage originations totaled $30,719.
NOTE D. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for the year ending December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1 $1,429,894 $1,362,404 $1,500,829
Add:
Recoveries 21,499 33,231 38,958
Provision Charged to Current Expense 370,000 110,000 120,000
- --------------------------------------------------------------------------------------------
TOTAL 1,821,393 1,505,635 1,659,787
Less: Charge-Offs 198,821 75,741 297,383
- --------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $1,622,572 $1,429,894 $1,362,404
============================================================================================
</TABLE>
NOTE E. BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31, at cost is as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 92,650 $ 92,650
Bank Premises 1,518,609 1,803,836
Leasehold Improvements 1,723,352 1,751,478
Furniture and Equipment 2,948,107 2,802,435
----------------------------------------------------------------------------------------------------
TOTAL 6,282,718 6,450,399
Less: Accumulated Depreciation and Amortization 3,663,855 3,277,363
----------------------------------------------------------------------------------------------------
TOTAL $2,618,863 $3,173,036
====================================================================================================
</TABLE>
28
<PAGE> 29
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 2% of the participating employee's compensation.
The Bank's 401(k) contribution for 1996, 1995, and 1994, amounted to $51,266,
$52,994, and $58,173, respectively.
During 1995, the Bank established an Employee Stock Ownership Plan (ESOP) for
substantially all of its employees. The ESOP replaced the Defined Contribution
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 is using the Bank's contribution of $125,000 in 1996 to acquire 3,906
shares at $32.00 per share for eligible employees which represents 5.03% of
eligible compensation. The Bank contributed $125,000 and $120,000 to the ESOP
for each of the plan years in the two-year period ended December 31, 1996. ESOP
shares are included in Weighted Average Shares Outstanding in the calculations
of earnings per share.
In 1993, the Company adopted SFAS 106 "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions", which requires a calculation of the actuarial
present value of expected benefits to be paid to employees after their
retirement and an allocation of the cost of those benefits to the periods for
which employees rendered service. The Bank pays a fixed amount for health
insurance coverage that covers all employees that had retired as of December 31,
1993. There is no benefit for employees retiring after that date. The
accumulated postretirement benefit obligation included in Other Liabilities at
December 31, 1996 and 1995 totaled $696,271 and $607,895, respectively. The
unrecognized transition obligation included in Other Assets at December 31, 1996
and 1995 totaled $508,000 and $539,800, respectively, which is being amortized
using a straight-line method over twenty years.
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Periodic Post Retirement Benefit Cost included the following Components:
Interest Cost $46,393 $42,400
Amortization of Unrecognized Net Loss 1,618 0
Amortization of Unrecognized Transition Obligation 31,800 31,800
- --------------------------------------------------------------------------------------------------------
TOTAL $79,811 $74,200
========================================================================================================
</TABLE>
For the years ended December 31, 1996 and 1995, the weighted-average discount
rates used in determining the actuarial present value of the accumulated benefit
obligation was 7.0% and 8.0%, respectively.
NOTE G. INCOME TAXES
Federal and State Income Taxes payable (prepaid) as of December 31, included in
other liabilities in 1996 and other assets in 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Current $ (66,693) $ 31,553
Deferred 350,064 341,859
- --------------------------------------------------------------------------------
TOTAL $ 283,371 $373,412
================================================================================
</TABLE>
Provisions for current income taxes for the years ended December 31, are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $662,461 $ 627,738 $364,621
Deferred 70,865 (32,417) 124,879
- --------------------------------------------------------------------------------
Total Federal 733,326 595,321 489,500
- --------------------------------------------------------------------------------
New York State:
Current 248,111 261,318 144,025
Deferred 16,454 (7,849) 28,975
- --------------------------------------------------------------------------------
Total New York State 264,565 253,469 173,000
- --------------------------------------------------------------------------------
TOTAL $997,891 $ 848,790 $662,500
================================================================================
</TABLE>
29
<PAGE> 30
A reconciliation of the federal statutory tax rate to the required tax rate
based on income before income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
TAX PRETAX Tax Pretax Tax Pretax
AMOUNT INCOME(%) Amount Income(%) Amount Income(%)
------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Rate $ 919,152 34.00 $ 788,858 34.00 $ 643,964 34.00
Increase (Reduction) of
Taxes Resulting From:
Tax Exempt Interest (92,839) (3.43) (100,501) (4.33) (118,767) (6.27)
State Income Taxes Net
of Federal Income
Tax Benefit 174,613 6.46 167,290 7.21 114,180 6.02
Other (3,035) (0.11) (6,857) (0.30) 23,123 1.22
- ---------------------------------------------------------------------------------------------------------------
TOTAL $ 997,891 36.92 $ 848,790 36.58 $ 662,500 34.97
===============================================================================================================
</TABLE>
Income taxes on investment securities transactions amounted to approximately
$7,100 in 1996, $600 in 1995 and $8,000 in 1994.
Deferred income tax assets and liabilities are calculated based on their
estimated effect on future cash flows. The calculations under this method
results in a net deferred tax asset of $350,064 and $341,859 as of the end of
1996 and 1995, respectively.
Deferred tax assets and (liabilities) were recognized as of December 31, 1996
and 1995 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:
<TABLE>
<CAPTION>
Loan
Loss OREO SFAS SFAS
DECEMBER 31, 1996: Provision Depreciation Losses 106 115 Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Deferred Tax
Asset (Liability) $333,913 $(186,798) $127,202 $21,762 $(47,538) $248,541
New York State Deferred
Tax Asset (Liability) 78,407 (749) 29,930 5,120 (11,185) 101,523
- -----------------------------------------------------------------------------------------------------------------------
Net Deferred Tax
Asset (Liability) $412,320 $(187,547) $157,132 $26,882 $(58,723) $350,064
=======================================================================================================================
DECEMBER 31, 1995:
Federal Deferred Tax
Asset (Liability) $235,762 $(199,717) $166,016 $23,153 $ 16,506 $241,720
New York State Deferred
Tax Asset (Liability) 55,313 (3,568) 39,063 5,447 3,884 100,139
- -----------------------------------------------------------------------------------------------------------------------
Net Deferred Tax
Asset (Liability) $291,075 $(203,285) $205,079 $28,600 $ 20,390 $341,859
=======================================================================================================================
</TABLE>
NOTE H. DEPOSITS
TIME DEPOSITS IN EXCESS OF $100,000
At December 31, 1996 and 1995, time deposits in principal amounts of $100,000 or
more were $6,392,848 and $4,986,024, respectively. Interest expense on such
deposits for the three years ended December 31, 1996 was $361,484, $210,891, and
$113,101, respectively.
A schedule of time deposits having a remaining term of more than one year and
the aggregate amount of maturities for each of the four years following the
balance sheet date is set forth as follows:
<TABLE>
<S> <C>
1998 ............................................. $4,862,034
1999 ............................................. 1,171,436
2000 ............................................. 1,082,840
2001 ............................................. 730,334
----------
TOTAL ....................................... $7,846,644
==========
</TABLE>
30
<PAGE> 31
DEPOSITS TO MAJOR SHAREHOLDERS, OFFICERS, DIRECTORS AND THEIR AFFILIATES
Deposits due to major shareholders, officers, directors and their affiliates
aggregated $4,273,845 and $ 4,405,513 at December 31, 1996 and 1995,
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 $3,483,860 at December 31, 1996.
During 1996, the shareholders authorized the issuance of 100,000 shares of
preferred stock at $.01 per share and an additional 1,000,000 shares of common
stock. There are no preferred shares outstanding at December 31, 1996.
NOTE J. SMITHTOWN BANCORP (PARENT COMPANY ONLY)
Smithtown Bancorp has one wholly-owned subsidiary, Bank of Smithtown.
BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Non-Interest-Bearing Deposits with Subsidiary Bank $ 188,905 $ 171,824
Investment in Bank of Smithtown 13,965,887 12,814,722
- ------------------------------------------------------------------------------------------------------------------
TOTAL $14,154,792 $12,986,546
==================================================================================================================
LIABILITIES
Cash Dividends Payable $ 138,646 $ 121,316
- ------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock - $5.00 Par Value (1,500,000 Shares Authorized; 447,955 Issued) 2,239,775 2,239,775
Capital Surplus 7,859,918 7,859,918
Retained Earnings 4,363,092 3,212,176
Less: Treasury Stock (14,687 Shares at Cost at
December 31, 1996 and 1995) 446,639 446,639
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 14,016,146 12,865,230
- ------------------------------------------------------------------------------------------------------------------
TOTAL $14,154,792 $12,986,546
==================================================================================================================
</TABLE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from Bank of Smithtown $ 554,582 $ 668,564 $ 439,765
EXPENSES (249) (6,359) (125)
- -------------------------------------------------------------------------------------------------
Net Income Before Equity in Undistributed
Earnings of Subsidiary 554,333 662,205 439,640
Equity in Undistributed Earnings of
Subsidiary 1,151,165 809,176 791,871
- -------------------------------------------------------------------------------------------------
NET INCOME 1,705,498 1,471,381 1,231,511
Retained Earnings, Beginning of Year 3,212,176 2,225,685 1,430,914
Dividends Declared (554,582) (484,890) (436,740)
- -------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR $ 4,363,092 $ 3,212,176 $ 2,225,685
=================================================================================================
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Year ended December 31,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 1,705,498 $ 1,471,381 $ 1,231,511
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in Undistributed Net Earnings of Subsidiary (1,151,165) (809,176) (791,871)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 554,333 662,205 439,640
- -----------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Advances from (Repayments to) Bank of Smithtown 0 (297,938) 297,938
Dividends Paid (537,252) (470,491) (329,823)
Purchase of Treasury Stock 0 0 (407,938)
Proceeds from Sale of Treasury Stock 0 138,405 110,000
- -----------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (537,252) (630,024) (329,823)
- -----------------------------------------------------------------------------------------------------------------
Net Increase in Non-Interest-Bearing Deposits with
Subsidiary Bank 17,081 32,181 109,817
Non-Interest Bearing Deposits with Subsidiary Bank,
Beginning of Year 171,824 139,643 29,826
- -----------------------------------------------------------------------------------------------------------------
Non-Interest-Bearing Deposits with Subsidiary Bank,
End of Year $ 188,905 $ 171,824 $ 139,643
=================================================================================================================
</TABLE>
NOTE K. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1996, the minimum rental commitments under non-cancelable
operating leases for premises and equipment with initial terms in excess of one
year are as follows:
<TABLE>
<S> <C>
1997 ............................................... $ 149,973
1998 ............................................... 129,267
1999 ............................................... 118,930
2000 ............................................... 115,898
2001 ............................................... 116,692
Subsequent to 2001 ................................. 1,273,454
----------
Total .............................................. $1,904,214
==========
</TABLE>
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 $403,060 in
1996, $343,175 in 1995 and $394,283 in 1994.
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, 1996 was $765,000.
NOTE L. 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.
Statement of Financial Accounting Standards, "Disclosures about Fair Value of
Financial Instruments", (SFAS 107) requires the Bank to disclose estimated fair
values of its financial instruments. SFAS 107 was amended in October, 1994 by
SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments". Financial instruments are
32
<PAGE> 33
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, if one exists. Fair value
estimates, methods and assumptions are set forth below for the Bank's financial
instruments.
CASH AND DUE FROM BANKS, DIVIDEND PAYABLE AND OTHER LIABILITIES
Cash and due from banks, 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 AND MORTGAGE 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 value.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable at the reporting date. This is recorded at cost
which approximates the fair value of fixed maturity certificates of deposit
which is estimated using the rates currently offered for deposits of similar
remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The fair values 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
At December 31, 1996, the Bank had $2,800,000 outstanding in Securities Sold
Under Agreements to Repurchase (REPO's). The maturity date of this REPO is May
26, 1998 and the interest rate is 6.16%. The Bank's interest in these securities
has been designated under a written custodial agreement. The average balance of
these Securities Sold Under Agreements to Repurchase totaled $1,644,809 during
1996, with $2,800,000 being the maximum amount outstanding at any month end
during 1996. The underlying security in the $2,800,000 REPO is a 7.75% U.S.
Government Agency security, maturity date May 26, 2006, fair value $3,048,000.
The security is held in safekeeping at Morgan Stanley and Company, Inc..
At December 31, 1995, there were no Securities Sold Under Agreements to
Repurchase. Securities Sold Under Agreements to Repurchase averaged
approximately $1,690,000 during 1995, based on daily averages, and the maximum
amount outstanding at any month-end during 1995 totaled $7,962,000.
NOTE N. OTHER BORROWINGS
Other Borrowings at year end included a five year convertible advance, obtained
through the Federal Home Loan Bank of New York totaling $3,000,000 with a
maturity date of December 3, 2001 and Demand Notes issued to the U.S. Treasury
totaling $1,485,724.
These borrowings were secured by the Federal Home Loan Bank Mortgage Corporation
(FHLMC) securities ranging in maturity dates from July 1998 to August 2024, with
coupon interest rates paying between 5.00% to 8.50%, with a total value of
$7,377,062.
These securities are held in safekeeping at the Federal Reserve Bank of New York
and the Federal Home Loan Bank of New York.
The average balance of these Other Borrowings for 1996 was $848,260 and the
maximum outstanding amount at any month end was $4,485,724.
At December 31, 1996 and 1995, the fair value of Other Borrowings approximated
cost.
33
<PAGE> 34
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,
1996, the Bank's total commitments to extend credit were $7,482,393 at fixed
rates and $544,763 at variable rates. Standby letters of credit are written
conditional instruments issued by Smithtown Bancorp to guarantee the financial
performance of a customer to a third party. There were twenty-six performance
standby letters of credit totaling $1,829,943 as of December 31, 1996. 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.
NOTE P. REGULATORY MATTERS
The Board of Governors of the Federal Reserve Bank has 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.
<TABLE>
<CAPTION>
1996 ACTUAL 1995 Actual Required
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier I 12.30% 11.63% 4.00%
Tier II 1.25% 1.25% **
Total Risk-Based Capital 13.58% 12.89% 8.00%
Leverage Ratio 7.82% 8.15% 4.00%
</TABLE>
**Tier II Capital is limited to maximum of 100% of Tier 1 Capital.
34
<PAGE> 35
SELECTED FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET DATA
<TABLE>
<CAPTION>
As of December 31,
(in thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 7,401 $ 6,781 $ 6,451 $ 7,050 $ 6,915
Investment Securities:
Obligations of U.S. Government and
Agencies 10,788 10,496 22,387 37,327 40,469
Mortgage-Backed Securities 31,392 33,601 37,604 22,214 14,757
Obligations of State and Political
Subdivisions 4,814 5,259 6,180 5,990 6,121
Other Investment Securities 600 331 127 127 127
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 47,594 49,687 66,298 65,658 61,474
- ---------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 7,681 3,758 2,962 5,479 6,294
Loans (Net of Unearned Discount) 99,451 86,437 71,448 67,675 68,727
Less: Allowance for Possible Loan Losses 1,550 1,412 1,507 2,115 1,486
- ---------------------------------------------------------------------------------------------------------------------------
Loans Net 97,901 85,025 69,941 65,560 67,241
Bank Premises and Equipment 2,793 3,133 3,272 3,442 2,960
Other Assets
Other Real Estate Owned 4,523 5,489 4,902 7,595 5,607
Other 3,207 2,839 2,623 3,157 2,826
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 171,100 $ 156,712 $ 156,449 $157,941 $153,317
===========================================================================================================================
LIABILITIES
Deposits:
Demand (Non-Interest Bearing) $ 38,425 $ 35,075 $ 34,872 $ 34,005 $ 32,557
Money Market 26,627 22,965 25,838 31,657 32,823
Savings (including NOW) 60,578 60,404 65,157 66,787 60,781
Time 28,660 22,896 15,796 14,134 15,805
- ---------------------------------------------------------------------------------------------------------------------------
Total Deposits 154,290 141,340 141,663 146,583 141,966
Securities Sold Under Agreements to
Repurchase 1,645 1,690 2,465 0 0
Other Borrowings 848 247 0 0 0
Other Liabilities 1,141 1,157 708 149 202
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 157,924 144,434 144,836 146,732 142,168
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock - $5.00 Par Value 2,240 2,240 2,240 2,240 2,240
Capital Surplus 1,993 1,993 1,993 1,998 2,000
Unrealized Loss on Securities
Available for Sale (156) (53) (20) 0 0
Retained Earnings 9,546 8,579 7,695 7,271 7,217
- ---------------------------------------------------------------------------------------------------------------------------
Total 13,623 12,759 11,908 11,509 11,457
Less: Treasury Stock 447 481 295 300 308
- ---------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 13,176 12,278 11,613 11,209 11,149
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL $ 171,100 $ 156,712 $ 156,449 $157,941 $153,317
===========================================================================================================================
</TABLE>
35
<PAGE> 36
SELECTED FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
(in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 7,690 $ 7,003 $ 5,956 $ 5,701 $ 7,047
Investment Securities Held to Maturity:
Obligations of U.S. Government 2,008 2,014 3,020 28,159 39,245
Obligations of U.S. Government
Agencies 0 0 2,052 2,000 2,022
Mortgage-Backed Securities 9,003 10,227 34,761 34,835 14,910
Obligations of State and Political
Subdivisions 4,997 4,648 6,137 5,768 6,017
Other Securities 0 0 0 127 127
- ------------------------------------------------------------------------------------------------------------------------
Total 16,008 16,889 45,970 70,889 62,321
- ------------------------------------------------------------------------------------------------------------------------
Investment Securities Available for Sale:
Obligations of U.S. Government 0 3,009 10,056 0 0
Obligations of U.S. Government
Agencies 13,564 3,016 898 0 0
Mortgage-Backed Securities 34,219 13,155 2,046 0 0
Other Securities 600 599 127 0 0
- ------------------------------------------------------------------------------------------------------------------------
Total 48,383 19,779 13,127 0 0
- ------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 64,391 36,668 59,097 70,889 62,321
- ------------------------------------------------------------------------------------------------------------------------
Federal Funds Sold 0 6,750 200 2,500 3,550
Loans 101,151 98,069 80,491 64,896 70,008
Less:Unearned Discount 573 655 707 944 1,560
Allowance for Possible Loan
Losses 1,623 1,430 1,362 1,501 2,050
- ------------------------------------------------------------------------------------------------------------------------
Loans, Net 98,955 95,984 78,422 62,451 66,398
- ------------------------------------------------------------------------------------------------------------------------
Bank Premises and Equipment 2,619 3,173 3,167 3,310 3,573
Other Assets
Other Real Estate Owned 5,088 5,046 5,590 5,309 8,151
Other 2,886 2,904 4,520 3,560 2,887
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $181,629 $ 157,528 $ 156,952 $153,720 $153,927
========================================================================================================================
LIABILITIES
Deposits:
Demand (Non-Interest Bearing) $ 42,563 $ 35,945 $ 34,656 $ 35,312 $ 35,424
Money Market 27,412 23,376 22,654 25,369 30,314
Savings (including NOW) 60,196 59,656 63,069 66,997 62,886
Time 28,757 24,605 14,852 13,699 13,851
- ------------------------------------------------------------------------------------------------------------------------
Total Deposits 158,928 143,582 135,231 141,377 142,475
Dividend Payable 139 121 107 0 0
Securities Sold Under Agreements to
Repurchase 2,800 0 9,003 0 0
Other Borrowings 4,486 0 0 0 0
Other Liabilities 1,179 988 1,005 1,099 190
- ------------------------------------------------------------------------------------------------------------------------
Total Liabilities 167,532 144,691 145,346 142,476 142,665
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock - $5.00 Par Value 2,240 2,240 2,240 2,240 2,240
Capital Surplus 1,994 1,994 1,993 1,993 1,998
Unrealized Gain (Loss) on Securities
Available for Sale 81 (28) (135) 0 0
Retained Earnings 10,229 9,078 8,092 7,298 7,325
- ------------------------------------------------------------------------------------------------------------------------
Total 14,544 13,284 12,190 11,531 11,563
Less:Treasury Stock 447 447 584 287 301
- ------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 14,097 12,837 11,606 11,244 11,262
- ------------------------------------------------------------------------------------------------------------------------
TOTAL $181,629 $ 157,528 $ 156,952 $153,720 $153,927
========================================================================================================================
</TABLE>
36
<PAGE> 37
SELECTED FINANCIAL DATA
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
As of December 31,
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 9,391,802 $ 8,278,027 $ 6,690,095 $ 6,730,657 $ 7,430,991
Interest on Balance due from Banks 1,493 0 0 0 0
Interest on Federal Funds Sold 417,107 221,857 117,440 167,520 230,199
Interest and Dividends on Investment Securities:
Taxable:
Obligations of U.S. Government 141,265 431,259 1,235,897 2,205,419 2,553,259
Obligations of U.S. Government
Agencies 569,716 178,689 177,332 166,526 170,047
Mortgage-Backed Securities 1,833,879 1,901,977 2,080,703 1,314,747 1,146,958
Other Securities 37,638 22,385 7,632 7,632 7,632
- ----------------------------------------------------------------------------------------------------------------------------
Total 2,582,498 2,534,310 3,501,564 3,694,324 3,877,896
Exempt from Federal Income Taxes:
Obligations of States and Political
Subdivisions 293,774 318,174 369,338 355,572 362,718
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Income 12,686,674 11,352,368 10,678,437 10,948,073 11,901,804
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Money Market Accounts 834,353 716,465 584,242 738,928 1,133,467
Certificates of Deposit of
$100,000 and Over 361,484 210,891 113,101 112,961 179,938
Other 2,343,908 2,316,078 1,708,624 1,847,872 2,543,814
Interest on Securities Sold Under
Agreements to Repurchase 100,932 106,511 127,223 0 0
Interest on Other Borrowings 44,308 14,950 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 3,684,985 3,364,895 2,533,190 2,699,761 3,857,219
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 9,001,689 7,987,473 8,145,247 8,248,312 8,044,585
Provision for Possible Loan
Losses 370,000 110,000 120,000 1,364,329 1,096,000
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Possible Loan Losses 8,631,689 7,877,473 8,025,247 6,883,983 6,948,585
- ----------------------------------------------------------------------------------------------------------------------------
OTHER NON-INTEREST INCOME
Trust Department Income 434,069 401,811 298,786 330,796 279,577
Service Charges on Deposit
Accounts 1,337,449 1,278,668 1,344,754 1,263,371 1,202,480
Other Income 540,588 482,538 433,731 441,934 359,996
Investment Security Gains 16,724 1,393 22,695 240,110 55,161
- ----------------------------------------------------------------------------------------------------------------------------
Total Other Non-Interest Income 2,328,830 2,164,410 2,099,966 2,276,211 1,897,214
- ----------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries 3,379,214 3,470,680 3,556,241 3,654,727 3,660,218
Pensions and Other Employee
Benefits 717,516 761,577 832,603 862,213 822,934
Net Occupancy Expense 1,130,358 944,571 905,538 848,704 834,375
Furniture and Equipment Expense 637,029 622,775 582,663 589,701 650,723
Other Expenses 2,393,013 1,922,109 2,354,157 2,886,070 1,848,735
- ----------------------------------------------------------------------------------------------------------------------------
Total Other Operating Expenses 8,257,130 7,721,712 8,231,202 8,841,415 7,816,985
- ----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 2,703,389 2,320,171 1,894,011 318,779 1,028,814
Provision for Income Taxes 997,891 848,790 662,500 17,083 261,259
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,705,498 $ 1,471,381 $ 1,231,511 $ 301,696 $ 767,555
============================================================================================================================
</TABLE>
37
<PAGE> 38
SELECTED FINANCIAL DATA
SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Income $ 3.94 $ 3.40 $ 2.80 $ 0.69 $ 1.75
Stockholders' Equity 32.54 29.63 27.14 25.57 25.64
DIVIDENDS DECLARED
Cash Dividends per Share 1.28 1.12 1.00 0.75 0.75
Cash Dividends Declared 554,582 484,890 436,741 329,504 329,327
YEAR-END DATA
Total Assets 181,629,049 157,528,274 156,951,687 153,720,337 153,926,652
Total Deposits 158,928,455 143,581,497 135,230,577 141,377,440 142,474,683
Total Stockholders'
Equity 14,097,239 12,837,073 11,605,718 11,243,502 11,261,512
Total Trust Assets 70,643,739 71,304,522 62,452,427 67,128,712 64,416,736
Number of Shares
Outstanding 433,268 433,268 427,666 439,765 439,339
</TABLE>
<TABLE>
<CAPTION>
SELECTED RATIOS % % % % %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income to:
Total Income 11.36 10.89 9.64 2.28 5.56
Average Total Assets 1.00 .94 .79 0.19 0.50
Average Stockholders'
Equity 12.94 11.98 10.61 2.70 6.88
Average Stockholders' Equity
to Average Assets 7.70 7.84 7.44 7.08 7.27
Dividend Payout Ratio 32.52 32.95 35.46 109.22 99.90
</TABLE>
Because the common stock of Smithtown Bancorp is not actively traded, management
is not always aware of sale prices of stock traded privately or through
brokerage firms. The following prices are based on estimates of such sales.
<TABLE>
<CAPTION>
Cash
Dividend
1996 High Low Declared
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $32.000 $ 29.75 $ 0.32
Second Quarter 32.000 29.75 0.32
Third Quarter 32.000 31.000 0.32
Fourth Quarter 35.000 32.000 0.32
- ------------------------------------------------------------------------------
TOTAL $ 1.28
==============================================================================
</TABLE>
<TABLE>
<CAPTION>
Cash
Dividend
1995 High Low Declared
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $25.250 $24.625 $ 0.28
Second Quarter 26.500 25.250 0.28
Third Quarter 32.000 25.250 0.28
Fourth Quarter 32.000 29.750 0.28
- -----------------------------------------------------------------------------
Total $ 1.12
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Cash
Dividend
1994 High Low Declared
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $ 23.000 $ 23.000 $0.25
Second Quarter 23.000 23.000 0.25
Third Quarter 23.000 23.000 0.25
Fourth Quarter 24.625 24.000 0.25
- --------------------------------------------------------------------------------
Total $1.00
================================================================================
</TABLE>
38
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SUMMARY
Smithtown Bancorp is a one-bank holding company formed in 1984. The majority of
its income is derived from the operations of its sole subsidiary, Bank of
Smithtown. The Bank operates seven full service offices in the north central
region of Suffolk County, and offers a full line of consumer and commercial
products, including a Trust Department. The year 1996 was a year of change and
record growth for the Bank of Smithtown. The reengineering project that began
during fourth quarter of 1995 continued and reached completion during third
quarter of 1996. The bank emerged from the process more focused, efficient and
profitable. Despite substantial expenses related to the reengineering project,
net income reached $1,705,498, the highest level recorded in the Bank's history.
Work processes were redesigned and improved to provide for higher quality
customer service and technology was utilized to a greater degree in order to
provide staff and customers with more information through alternative delivery
channels. Products and services were redesigned and increased so as to offer our
customers a more comprehensive array of financial investment alternatives. The
results of our efforts can already be seen in higher levels of net interest
income and reduced levels of noninterest expense. The full benefits of the
reengineering project did not reach bottom line until the end of fourth quarter
as the cost of severance packages did not run off until December.
The Bank's balance sheet changed significantly from year end 1995. Lower
yielding Federal Fund Sold were channeled into higher yielding investment
securities. These investment securities increased in volume by 75.61% with the
largest increase in adjustable rate U.S. Government Agencies and Mortgage-Backed
Securities. Investments continue to be a source of interest income, but they
remain the Bank's primary source of liquidity. They also provide collateral
value for the Bank's municipal deposits. The loan portfolio increased in size by
3.10% over December 1995, with the majority of the increase in commercial real
estate and commercial and industrial loans. During 1996, the Bank entered into
residential mortgage loan origination. These mortgages are sold in the secondary
market to various investors, and provide additional sources of fee income to the
bank. At year end, the balance of the Residential Mortgage Loans Held for Sale
totaled $495,000. The value of the Other Real Estate Owned portfolio remained
stable, although three properties totaling $1,557,000 were sold and three
additional properties totaling $1,589,770 were added. Total assets increased by
15.79% over year end 1995. The liability side of the Balance Sheet reflects
similar changes in size and composition. Total deposits increased by 10.69%, a
result of various factors including our new Northport branch location, the
marketing efforts related to the Preferred Professional and Preferred Platinum
Packages, the increased stability of the Long Island economy and the Bank's
competitive interest rate structure. An additional factor contributing to the
increased size of the Bank of Smithtown's deposit base has also been the effect
of the merger and acquisition activity surrounding our branch locations. The
reputation of stability and financial soundness connected with the Bank of
Smithtown served to attract customers with negative perception toward their
"newly merged banks." Based on increased retained earnings during 1995 and
projections of significantly higher earnings by year end 1996, the Board of
Directors and management decided to increase the dividend payment during 1996 by
14.29%. Borrowings increased by $7,285,724 during the year and were in the form
of Securities Sold Under Agreements to Repurchase, an advance from the Federal
Home Loan Bank of New York, and Demand Notes issued to the U.S. Treasury. These
borrowings were invested in U.S. Government Agency securities and used to fund
loans, both of which provided a significant positive interest spread for the
Bank. Total Stockholders' Equity increased by 9.82% over year end 1995, a result
of increased net income.
Net interest income remains the primary contributor to net income and increased
by 12.70% during 1996. Interest and fee income on loans provide 74.03% of total
interest income and increased by 13.45% over 1995. Interest expense increased by
9.51% due to increased volume and a more competitive rate structure.
Non-interest income increased by 7.60% a result of additional trust income,
service charge income and investment security gains. Non-interest expense
increased by 6.93% over 1995. This increase is primarily due to additional
occupancy expense attributed to the Northport office, real estate taxes paid on
loans in foreclosure and consulting expenses related to the reengineering
project. Salary and benefit expense decreased by 3.20%. Net income increased by
15.91% over 1995, the highest level recorded in Bank of Smithtown's 86 year
history. One representation of shareholder value is earnings per share which
increased to $3.94 by year end 1996, an increase of 15.88% over 1995. An
additional indicator of improved shareholder value is return on average equity
which increased from 11.82% at December 31, 1995 to 12.94% at December 31, 1996,
an increase of 9.48%.
INTEREST INCOME
Interest income for the years ended December 31, 1996, 1995 and 1994 was
$12,686,674, $11,352,368 and $10,678,437, respectively. Interest and fees on
loans is the largest single component of interest income representing 74.03%,
72.92% and 62.65% for each of the three preceding years. The increase in this
category of income is due to the increased volume in the
39
<PAGE> 40
portfolio including short term construction loans booked and paid off during the
year. The second largest contribution to interest income is derived from
investment securities and represents 22.67%, 25.13% and 36.25% of total interest
income for the periods ending December 31, 1996, 1995 and 1994. Interest on
Federal Funds Sold increased by 88.01% in 1996 over the same twelve month period
in 1995 due to the higher volume of sales.
INTEREST EXPENSE
Interest expense for the three year period ended December 31, 1996, 1995 and
1994 was $3,684,985, $3,364,895 and $2,533,190, respectively. This increase is
due primarily to the increase in volume of certificates of deposit. Average
rates on other deposit products remained stable from 1995 throughout 1996. An
increase in the expense due to Other Borrowings was an additional factor
contributing to higher interest expense. These borrowings were a relatively low
cost source of funds which were invested in loans and securities in order to
provide additional interest spread.
NET INTEREST INCOME
Net interest income for the twelve months ended December 31, 1996, 1995 and 1994
was $9,001,689, $7,987,473 and $8,145,247. The 12.70% increase over 1995 results
and 10.51% increase over 1994 results is largely the result of greater loan
volume, and a significantly increased level of demand deposits. As can be seen
from the accompanying Average Balance Sheet and Yield Analysis, the Bank's
interest spread on Average Total Assets increased to 5.35% from 5.20% in 1995,
and interest spread on Average Total Interest-Earning Assets increased from
5.89% to 5.97%. This high margin places Bank of Smithtown well above the peer
group median of 4.98% and is largely responsible for our success. The continued
addition of adjustable rate products on the asset side of the Balance Sheet and
the ability to reprice deposit liabilities weekly have allowed for active
management of this spread. While this spread management has resulted in very
positive margins, it has in no way precluded a competitive interest rate
structure on deposit accounts. It has been through relationship pricing with our
Preferred Professional and Preferred Platinum Packages that Bank of Smithtown
customers are able to earn the highest rates.
40
<PAGE> 41
The tables presented below show a comparative analysis of major areas of
interest income, interest expense and resulting changes in net interest income.
Variances in rate volume relationships have been allocated to the rate.
AVERAGE BALANCE SHEET AND YIELD ANALYSIS
<TABLE>
<CAPTION>
1996 1995
(in thousands) AVERAGE AVERAGE Average Average
Tax Equivalent Basis BALANCE INTEREST RATE(%) Balance Interest Rate(%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Investment Securities:
Taxable $ 42,780 $ 2,582 6.04 $ 44,428 $ 2,534 5.70
Nontaxable 4,814 445 9.24 5,259 482 9.17
- -------------------------------------------------------------------------------------------------------------------
Total Investment Securities 47,594 3,027 6.36 49,687 3,016 6.07
- -------------------------------------------------------------------------------------------------------------------
Total Net Loans 97,901 9,392 9.59 85,025 8,278 9.74
Federal Funds Sold 7,681 417 5.42 3,758 222 5.91
- -------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 153,176 12,836 8.38 138,470 11,516 8.32
Non-Interest-Earning Assets 17,924 0 0.00 18,242 0 0.00
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $171,100 $12,836 7.50 $ 156,712 $11,516 7.35
===================================================================================================================
LIABILITIES
Interest-Bearing Liabilities:
Savings Deposits (including
NOW) $ 60,578 $ 1,299 2.14 $ 60,404 $ 1,387 2.30
Money Market Accounts 26,627 834 3.13 22,965 716 3.12
Certificates of Deposit 27,874 1,407 5.05 22,136 1,140 5.15
- -------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits 115,079 3,540 3.07 105,505 3,243 3.07
Securities Sold Under
Agreements to Repurchase 1,645 101 6.14 1,690 107 6.33
Other Borrowings 848 44 5.19 247 15 6.07
- -------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 117,572 3,685 3.13 107,442 3,365 3.13
Non-Interest Bearing
Liabilities:
Demand Deposits 38,425 0 0.00 35,075 0 0.00
Other 1,927 0 0.00 1,917 0 0.00
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 157,924 3,685 2.33 144,434 3,365 2.33
STOCKHOLDERS' EQUITY 13,176 0 0.00 12,278 0 0.00
- -------------------------------------------------------------------------------------------------------------------
TOTAL $171,100 3,685 2.15 $ 156,712 $ 3,365 2.15
===================================================================================================================
INTEREST MARGIN $ 9,151 $ 8,151
Interest Spread on:
Average Total Assets 5.35% 5.20%
Average Total Interest-
Earning Assets 5.97% 5.89%
</TABLE>
41
<PAGE> 42
RATE VOLUME RELATIONSHIPS OF INTEREST MARGIN ON EARNING ASSETS
<TABLE>
<CAPTION>
1996 1995
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
NET Net
(in thousands) VOLUME RATE CHANGE Volume Rate Change
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Investment Securities:
Taxable $ (94) $ 142 $ 48 $ (914) $ (54) $ (968)
Nontaxable (41) 4 (37) (83) 5 (78)
- -------------------------------------------------------------------------------------------------------------------------
Total Investment Securities (135) 146 11 (997) (49) (1,046)
Total Net Loans 1,254 (140) 1,114 1,443 145 1,588
Federal Funds Sold 232 (37) 195 31 74 105
- -------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 1,351 (31) 1,320 477 170 647
- -------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits 4 (95) (91) (93) 210 117
Money Market Accounts 114 4 118 (65) 197 132
Certificates of Deposits 295 (28) 267 260 328 588
- -------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits 413 (119) 294 102 735 837
Securities Sold Under Agreements
to Repurchase (3) (3) (6) (40) 20 (20)
Other Borrowings 36 (7) 29 0 15 15
- -------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 446 (129) 317 62 770 832
- -------------------------------------------------------------------------------------------------------------------------
Changes in Interest Margin $ 905 $ 98 $ 1,003 $ 415 $(600) $ (185)
=========================================================================================================================
</TABLE>
OTHER OPERATING INCOME
The schedule below details items of non-interest income for the years ended
December 31,
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER OPERATING INCOME
Trust Department Income $ 434,069 $ 401,811 $ 298,786
Service Charges on Deposit Accounts 1,337,449 1,278,668 1,344,754
Other Income 540,588 482,538 433,731
Investment Security Gains 16,724 1,393 22,695
- ----------------------------------------------------------------------------------------
$2,328,830 $2,164,410 $2,099,966
========================================================================================
</TABLE>
Other Operating Income increased by 7.60% for the year ended December 31, 1996,
a result of increases in each category of noninterest income. The largest
contributors to Operating Income are service charges on deposit accounts which
increased by 4.60% over 1995 due to a significantly increased demand deposit
account base and other income comprised of safe deposit fees, Bancard fees and
loan fees. This category of Other Income increased by 12.03% as a result of a
restructure of safe deposit fees and increased loan fees.
OTHER OPERATING EXPENSES
Detailed below are the components of the Other Operating Expenses for the years
ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER OPERATING EXPENSES
Salaries $3,379,214 $3,470,680 $3,556,241
Pensions and Other Employee Benefits 717,516 761,577 832,603
Net Occupancy Expense 1,130,358 944,571 905,538
Furniture and Equipment Expense 637,029 622,775 582,663
Other Expenses 2,393,013 1,922,109 2,354,157
- -----------------------------------------------------------------------------------------
$8,257,130 $7,721,712 $8,231,202
=========================================================================================
</TABLE>
42
<PAGE> 43
This category of expense represents various non-interest expense items. It
increased by 6.93% over 1995. Salary and benefit expense declined for the third
consecutive year, as the effects of the reengineering project were reflected in
fourth quarter totals. This category of expense is expected to decline more
significantly during 1997 as all severance packages have been fully expensed.
Net Occupancy expense increased by 19.69% primarily a result of the cost of
operation of our new Northport Branch and the cost of real estate taxes on
foreclosed properties. Expenses related to the maintenance of Other Real Estate
Owned during 1996 decreased slightly from $121,444 to $113,183. The Loss on
Other Real Estate Owned, an expense account used to provide for declining values
in Other Real Estate Owned properties totaled $209,000 during 1996 as compared
to $100,000 during 1995. The Valuation Reserve Account serves a cushion for
sales of Other Real Estate Owned Properties below their carrying value. The
level of this reserve is determined by management's evaluation of these
properties based on current appraisals. At year end, through the $209,000 Loss
on Other Real Estate Owned expense account, the Valuation Reserve reached a
level of $417,127 an amount deemed adequate by management to protect the Bank
against the future losses on sales of these properties. The largest item of
Other Expense for 1996 was the cost of the reengineering project. This expense
for 1996 totaled $365,716. The project began during fourth quarter of 1995 and
was completed by June 30, 1996. All costs for this project were expensed during
1996.
NET INCOME
Net income for 1996 reached $1,705,498 or $3.94 per share as compared to
$1,471,381 and $1,231,511 and $3.40 and $2.80 per share for 1995 and 1994. Net
income has increased by 19.48% from 1994 to 1995, and an additional 15.91% from
1995 to 1996. This record growth in income has been the result of various
factors including increased loan volume, improved asset quality with less
expenses related to nonperforming loans, an increased level of demand deposits,
and a decreased level of noninterest expense. Two highly recognized indicators
of overall strength of a bank are derived from its net income. The first
indicator is the Bank's return on average assets (ROAA) ratio which indicates
how efficiently the Bank is employing its assets. For 1994, 1995 and 1996, Bank
of Smithtown's ROAA was 0.79, 0.94 and 1.00, a 26.58% increase over three years.
Although this ratio is still below peer level medians, management fully expects
ROAA to continue its positive trend in future years. The second indicator of
overall strength of a bank, in particular shareholder value, is return on
average equity (ROAE) which indicates the degree of capital utilization. ROAE
for 1994, 1995 and 1996 was 10.61, 11.82 and 12.94, an increase of 21.96% over
three years. Once again, the positive trend of this ratio is expected to
continue.
INVESTMENT SECURITIES
Investments at December 31, 1996 totaled $64,390,735 compared to $36,667,691 an
increase of 75.61% over 1995 year end levels The majority of 1996 investment
security purchases were U.S. Government Agency and Mortgage Backed Securities.
Of these new purchases, 60.04% were Government National Mortgage Association
adjustable rate products. These securities are direct government agency
obligations carrying minimal credit risk and, therefore, have no impact on risk
based capital requirements. Of the $64,390,735 investment portfolio, 75.14% of
the securities are classified Available for Sale and, therefore, carried at fair
value. These securities provide additional liquidity potential for the Bank as
they may be sold if desired. However, it remains the intention of management to
hold most securities to maturity. As can be seen from the accompanying Weighted
Average Maturity schedule, due to the purchase of securities with extended final
maturity dates, the weighted average maturity of the entire portfolio has been
extended to 14 years 7 months. Many of these U.S. Government Agency and
Mortgage-Backed Securities carry call dates and are adjustable rate products
which provide a natural hedge against market interest rate fluctuations. The
Weighted Average Yield of the portfolio has increased to 6.83% from 6.41% at
year end 1995. 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 6.0% for 1996 and 1995. During
1995, the Bank became a member of the Federal Home Loan Bank of New York, and
now holds $472,600 of its stock. This stock has no maturity and has paid average
dividends of 6.0% during 1996 and 1995. Stock of both the Federal Reserve Bank
and the Federal Home Loan Bank are restricted.
The following schedule shows the amortized cost of all Held to Maturity
Securities and fair value of Available for Sale Securities as detailed in the
Bank's balance sheet as of December 31,
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Obligations of U.S. Government $ 2,008,366 $ 2,013,739
Mortgage-Backed Securities 9,003,335 10,226,753
Obligations of State and Political Subdivisions 4,996,750 4,647,865
- -----------------------------------------------------------------------------------
TOTAL $16,008,451 $16,888,357
===================================================================================
SECURITIES AVAILABLE FOR SALE
- -----------------------------------------------------------------------------------
Obligations of U.S. Government $ 0 $ 3,008,900
Obligations of U.S. Government Agencies 13,563,700 3,015,900
</TABLE>
43
<PAGE> 44
<TABLE>
<S> <C> <C>
Mortgage-Backed Securities 34,218,784 13,155,534
Other Securities 599,800 599,000
- -----------------------------------------------------------------------------------
TOTAL $48,382,284 $19,779,334
===================================================================================
</TABLE>
The tables below set forth the investment securities by portfolio, weighted
average maturity, and weighted average yield as of December 31, 1996 and 1995.
WEIGHTED AVERAGE MATURITY
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Obligations of U.S. Government 1 YR. 6 MOS 2 YRS. 6 MOS.
Mortgage-Backed Securities 7 YRS. 8 MOS. 8 YRS. 7 MOS.
Obligations of State and Political Subdivisions 4 YRS. 2 MOS. 4 YRS. 0 MOS.
- --------------------------------------------------------------------------------------------
Total 5 YRS. 10 MOS. 6 YRS. 8 MOS.
- --------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------------------
Obligations of U.S. Government - 0 YRS. 3 MOS.
Obligations of U.S. Government Agencies 7 YRS. 6 MOS. 5 YRS. 7 MOS.
Mortgage-Backed Securities 21 YRS. 8 MOS. 6 YRS. 0 MOS.
- --------------------------------------------------------------------------------------------
Total 17 YRS. 7 MOS. 5 YRS. 0 MOS.
- --------------------------------------------------------------------------------------------
Total Investment Securities 14 YRS. 7 MOS. 5 YRS. 9 MOS.
============================================================================================
</TABLE>
WEIGHTED AVERAGE YIELD
<TABLE>
<CAPTION>
Weighted
Amortized Average
SECURITIES HELD TO MATURITY Cost Fair Value Yield (%)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Obligations of U.S. Government:
After 1 year, but within 5 years $ 2,008,366 $ 1,988,300 5.31
Mortgage-Backed Securities:
After 1 year, but within 5 years 3,553,981 3,473,619 5.83
After 5 years, but within 10 years 2,000,000 1,959,800 5.00
After 10 years 3,449,354 3,360,352 6.50
Obligations of State and Political Subdivisions:
Within 1 year 557,644 560,065 6.42
After 1 year, but within 5 years 2,492,355 2,570,337 6.46
After 5 years, but within 10 years 1,855,751 1,898,949 6.10
After 10 years 91,000 91,711 6.18
- -----------------------------------------------------------------------------------------------
Total $16,008,451 $15,903,133 6.20
===============================================================================================
SECURITIES AVAILABLE FOR SALE
Obligations of U.S. Government Agencies:
After 1 year, but within 5 years $ 2,000,000 $ 1,987,600 6.56
After 5 years, but within 10 years 11,534,626 11,576,100 7.60
Mortgage-Backed Securities:
Within 1 year 1,498,403 1,488,514 6.00
After 1 year, but within 5 years 5,683,495 5,638,494 5.74
After 10 years 26,926,144 27,091,776 6.79
- -----------------------------------------------------------------------------------------------
Total $47,642,668 $47,782,484 6.83
===============================================================================================
</TABLE>
LOANS
The Bank's loan portfolio (net of unearned income) at December 31, 1996 and 1995
was $100,577,940 and $97,413,938 and represents 55.38% and 61.83% of total
assets, respectively. The classification of the portfolio is as follows:
<TABLE>
<CAPTION>
1996 % 1995 %
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Loans, Construction $ 8,180,276 8.09 $ 7,669,120 7.82
Real Estate Loans, Other:
Commercial 43,071,726 42.58 38,986,443 39.75
Residential 14,074,208 13.91 16,270,758 16.59
</TABLE>
44
<PAGE> 45
<TABLE>
<S> <C> <C> <C> <C>
Mortgage Loans Held for Sale 495,000 .49 0 --
Commercial and Industrial Loans 23,458,052 23.19 19,074,380 19.45
Loans to Individuals for Household,
Family and Other Personal Expenditures 11,543,331 11.41 15,993,856 16.31
All Other Loans (including Overdrafts) 328,078 .33 74,704 .08
- ---------------------------------------------------------------------------------------------------------
Total Loans $101,150,671 100.00 $98,069,261 100.00
=========================================================================================================
</TABLE>
The largest areas of growth within the portfolio are in the Construction and
Commercial Real Estate loan categories. Average yield on the entire loan
portfolio for 1995 was 9.74%. The majority of other loans made by Bank of
Smithtown are to residents located within the Bank's primary lending area.
Credit has been extended to a wide spectrum of borrowers, including individuals,
non-profit and religious organizations and small and middle market businesses.
Although real estate loans comprise a majority of the portfolio, credit risks
has been minimized through low loan to value ratios, thorough credit
investigations, current appraisals and periodic review by a loan review
consultant.
The following table shows the maturities of loans (excluding real estate
mortgages and installment loans) outstanding as of December 31, 1996. There are
no amounts due after one year which are classified as sensitive to changes in
interest rates.
<TABLE>
<CAPTION>
After One
Within Year but After
One Within Five Five
(in thousands) Year Years Years Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial (and all other
loans including overdrafts) $23,786 $0 $0 $23,786
Real Estate - Construction 8,180 0 0 8,180
- ----------------------------------------------------------------------------------
TOTAL $31,966 $0 $0 $31,966
==================================================================================
</TABLE>
DEPOSITS
Average deposits for 1996 were $154,290,130 as compared to $141,340,000 in 1995.
Year end 1996 deposits increased by $15,346,958 or 10.69% over year end 1995.
During 1996, the largest increase of 18.41% was in demand deposit accounts.
AVERAGE BALANCE
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Demand $ 38,425 $ 35,075
Money Market 26,627 22,965
Savings 60,578 60,404
Time 28,660 22,896
- --------------------------------------------------------------------------------
Total Deposits $154,290 $141,340
================================================================================
</TABLE>
At December 31, 1996, the remaining maturities of the Bank's Certificates of
Deposit in amounts of $100,000 or greater were as follows:
(in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
3 months or less ........................................ $1,898
Over 3 through 6 months ................................. 1,327
Over 6 through 12 months ................................ 1,364
Over 12 months .......................................... 1,804
Total ................................................... $6,393
================================================================================
</TABLE>
OTHER BORROWINGS
Borrowings during 1996 increased as a result of increased loan demand as well as
availability of low cost funds through avenues other than bank deposits. Sources
of funding utilized during 1996 were Repurchase Agreements, Federal Home Loan
Bank advances and Demand Notes Issued to the U.S. Treasury. Repurchase
Agreements involve the sale of a high grade investment security and simultaneous
agreement by the Bank to repurchase the security at a stated contract date and
interest cost. At December 31, 1996, Bank of Smithtown had one Repurchase
Agreement outstanding totaling $2,800,000 with a Maturity Date of May 1998,
carrying a 6.16% interest rate. The underlying security is held at Morgan
Stanley in safekeeping. Advances are loan agreements made with stated maturities
and interest rates. At year end 1996, Bank of Smithtown had one advance
outstanding totaling $3,000,000 to the Federal Home Loan of New York with a
final maturity date
45
<PAGE> 46
of December 2001 carrying a 5.56% interest rate. As Bank of Smithtown has become
a Treasury Tax and Loan Note Option Depositary and a member of the direct
investment program, the Bank is now able to use funds accumulated from Federal
Tax Deposits as well as additional investment funds for cash management and
investment opportunities at favorable rates of interest. These funds are
invested at Bank of Smithtown when the Treasury has excess funds and are
returned to them as needed. The Bank earns a spread on these investments. At
year end 1996, these borrowings totaled $1,485,724.
46
<PAGE> 47
LIQUIDITY AND RATE SENSITIVITY
Liquidity provides the source of funds for anticipated or unanticipated deposit
outflow and loan growth. The Bank's primary source of liquidity include
deposits, repayments of loan principals, maturities of investment securities,
principal reductions on mortgage-backed securities, overnight federal funds sold
and borrowings. The primary factor effecting these sources of liquidity is the
market rate of interest, which can cause fluctuations in deposits as well as
prepayments on loans and mortgage-backed 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 and matching the maturity
of 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 addition of adjustable rate
products in the loan and investment portfolio is one method employed to reduce
interest rate risk. Laddered maturities of investment securities is still
another asset/liability management strategy for interest sensitivity reduction.
The ability of management to reprice deposits on a frequent basis is also
important for Balance Sheet Management. All of these strategies have been
employed by management and have resulted in minimal interest rate sensitivity
for Bank of Smithtown. The President, Chief Financial Officer and Chief Lending
Officer serve on the Asset/Liability Management Committee. The Committee uses
the results of an income simulation model to review the effects of a
predetermined basis point rise and fall on the current and future net interest
income of the Bank. Results of these models consistently reveal very low
fluctuations in margins and net income despite rises and declines in market
interest rates. This model is prepared semi-annually and leads to investment,
loan and deposit strategies for earnings maximization within acceptable risk
levels.
The following table details the interest rate sensitivity of the Bank over
various periods as of December 31, 1996.
<TABLE>
<CAPTION>
Three One
Months Six Total Year
Three Through Months Sensitive Through Over
Months Six Through Within Five Five All
(in thousands) or Less Months One Year One Year Years Years Other(1) Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Interest $40,473 $ 11,883 $ 19,688 $72,044 $ 60,509 $30,060 $ 2,600 $ 165,213
Earning Assets
Total Interest Bearing
Liabilities and
Demand Deposits (2) 18,549 12,722 21,115 52,386 92,546 0 21,282 166,214
Interest Sensitivity
Gap Per Period 21,924 (839) (1,427) 19,658 (32,037) 30,060 (18,682) (1,001)
Cumulative Interest
Sensitivity Gap 21,924 21,085 19,658 19,658 (12,379) 17,681 (1,001) (1,001)
Percent of Cumulative
Gap to Total Assets 12.07% 11.61% 10.82% 10.82% (6.82)% 9.73% (0.55)% (0.55)%
</TABLE>
(1) Includes interest-earning assets and interest-bearing liabilities that do
not reprice as well as $2,000,529 in non-accrual loans.
(2) NOW and Money Market Accounts assumed to decline over a two year period.
Savings Accounts assumed to decline over a five year period. Demand
Deposits are spread based on historical experience.
STOCKHOLDERS' EQUITY
Shown below are the components of Stockholders' Equity as of December 31,
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock - $5.00 Par Value $ 2,239,775 $ 2,239,775
(1,500,000 Shares Authorized, 447,955 Issued)
Capital Surplus 1,993,574 1,993,574
Unrealized Gain (Loss) on Securities Available for Sale 81,093 (28,157)
Retained Earnings 10,229,436 9,078,520
- --------------------------------------------------------------------------------------------
Total 14,543,878 13,283,712
Less: Treasury Stock (14,687 Shares at Cost
at December 31, 1996 and 1995) 446,639 446,639
- --------------------------------------------------------------------------------------------
Total Stockholders' Equity $14,097,239 $ 12,837,073
============================================================================================
</TABLE>
47
<PAGE> 48
Stockholder's Equity increased by $1,260,166 or 9.82% during 1996. The increase
in retained earnings was the result of $1,705,498 of net income and $554,582 of
dividends declared. The number of shares of Treasury Stock that the Bank had
outstanding at year end 1996 and 1995 was 14,687.
Capital ratios are regarded as one of the most important indications of a
banking institution's strength. There are two capital ratios that are most
significant: leverage ratio and total risk based capital ratio. The leverage
ratio at year end 1996 was 7.82%. The required minimum leverage ratio of Bank of
Smithtown is 4.00%. Total risk based capital ratio at year end 1996 was 13.58%
compared to 12.79% at year end 1995. The minimum required ratio is 8.00%. By all
guidelines, the Bank's capital position is considered strong.
ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Allowance for Possible Loan Loss Account at year end 1996 was $1,622,572 as
compared to $1,429,894 at year end 1995. The change in the Allowance Account is
the result of net charge-offs totaling $177,322 and a Provision for Possible
Loan Losses of $370,000.
The following tables describe the activity in the Allowance for Possible Loan
Losses Account for the years ended December 31,
<TABLE>
<CAPTION>
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Allowance for Possible Loan Losses at Beginning of
Period $ 1,430 $ 1,362
- ---------------------------------------------------------------------------------
Loans Charged Off:
Commercial 13 0
Real Estate 63 73
Consumer 123 2
- ---------------------------------------------------------------------------------
Total Loans Charged-Off 199 75
- ---------------------------------------------------------------------------------
Recoveries on Amounts Previously Charged-Off:
Commercial 2 0
Real Estate 13 12
Consumer 7 21
- ---------------------------------------------------------------------------------
Total Recoveries 22 33
- ---------------------------------------------------------------------------------
Net Charge-Offs 177 42
- ---------------------------------------------------------------------------------
Current Year's Provision for Possible Loan Losses 370 110
- ---------------------------------------------------------------------------------
Allowance for Possible Loan Losses at End of Period $ 1,623 $ 1,430
=================================================================================
Total Loans:
Average (Net of Unearned Discount and Allowance
for Possible Loan Loss) $ 97,901 $85,025
End of Period (Net of Unearned Discount) $100,578 $97,414
=================================================================================
<CAPTION>
Ratios: 1996 1995
- ---------------------------------------------------------------------------------
Net Loans Charged-Off to:
<S> <C> <C>
Average Loans 0.18% 0.05%
Loans at End of Period 0.18 0.04
Allowance for Possible Loan Losses 10.91 2.97
Provision for Possible Loan Losses 47.84 38.65
Last Year's Charge-Off to This Year's Recovery 340.91 903.03
Allowance for Possible Loan Losses at Year End To:
Average Loans (Net of Unearned Discount) 1.63 1.65
End of Period Loans (Net of Unearned Discount) 1.61 1.47
</TABLE>
48
<PAGE> 49
The following table shows the Bank's non-accrual and contractually past due
loans:
<TABLE>
<CAPTION>
At December 31,
(in thousands) 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accruing Loans Past Due 90
Days or More $ 3 $ 90 $ 97 $ 418 $1,257
Non-Accrual Loans 2,001 2,849 1,214 1,496 2,842
- -------------------------------------------------------------------------------------------
Total $2,004 $2,939 $1,311 $1,914 $4,099
===========================================================================================
</TABLE>
For 1996 and 1995 the difference between interest income on non-accrual loans
and income that would have been recognized at original contractual rates and
terms is $143,045 and $177,261, respectively.
The composition of Other Real Estate Owned at December 31, 1996, is as follows:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
Commercial Land ................................... $2,847,936
Single Family ..................................... 2,239,771
- --------------------------------------------------------------------------------
TOTAL ...................................... $5,087,707
================================================================================
</TABLE>
The value of Other Real Estate Owned shown above is net of the Valuation
Reserve.
49
<PAGE> 50
CORPORATE SECRETARY
<TABLE>
<S> <C> <C>
SMITHTOWN BANCORP AND BANK OF SMITHTOWN BANK OF SMITHTOWN
BANK OF SMITHTOWN
OFFICERS CORPORATE HEADQUARTER'S
DIRECTORS Bradley E. Rock SMITHTOWN, NY 11787-2801
Bradley E. Rock, Chairman Chairman, President One East Main Street
Patrick A. Given & Chief Executive Officer (516) 360-9300
James H. Glamore
Edith Hodgkinson Anita M. Florek CENTEREACH, NY 11720-3501
Augusta Kemper Executive Vice President 1919 Middle Country Road
Attmore Robinson, Jr. & Chief Financial Officer (516) 585-6644
Charles E. Rockwell
Robert W. Scherdel Marc DeSimone COMMACK, NY 11725-3097
Barry M. Seigerman Executive Vice President 2020 Jericho Turnpike
& Chief Lending Officer (516) 543-7400
SMITHTOWN BANCORP
Thomas J. Stevens HAUPPAUGE, NY 11788-4346
OFFICERS Senior Vice President, Commercial Loans 548 Route 111
Bradley E. Rock (516) 265-7922
Chairman, President Ellen Metzger
& Chief Executive Officer Vice President, Marketing & Training KINGS PARK, NY 11754-3811
14 Park Drive
Anita M. Florek Rosanna Dill (516) 269-4900
Executive Vice President Vice President, Human Resources
& Treasurer LAKE GROVE, NY 11755-2107
Cynthia Verunac 2921 Middle Country Road
Rosanna Dill Vice President, New Business Development (516) 588-0700
Vice President
Edward Benedetto NORTHPORT, NY 11768
Judith Barber Vice President & Auditor 836 Fort Salonga Road
Corporate Secretary (516) 262-1353
VICE PRESIDENTS
INDEPENDENT AUDITORS Gerald Duggan
Albrecht, Viggiano, Patricia Guidi
Zureck & Company, P.C. Deanna Varricchio
Elizabeth Woreth
GENERAL COUNSEL
Patricia C. Delaney, Esq. Colette Masom, Comptroller ANNUAL MEETING
The Annual Meeting of Stockholders
Andrew J. Enrico, Trust Officer of Smithtown Bancorp will be held
on Tuesday, April 8, 1997,
Elizabeth Santini, Ass't. Trust Officer at 10:30 AM, at the:
Bavarian Inn
Carol Schofield, Ass't. Trust Officer 422 Smithtown Boulevard
Lake Ronkonkoma, New York.
Judith Barber, Corporate Secretary
& Cashier REGISTRAR AND TRANSFER AGENT
Bank of Smithtown
MANAGERS One East Main Street
Ann Marie Bove Smithtown, New York 11787-2801
Nancy Bradley
Carol Ann Brennan 10-KSB REPORT
Constance Lynch The annual report to the Securities and
Lisa McCulloch Exchange Commission, Form 10-KSB,
Jeanne Quortrop will be made available
Sylvia Scheick upon request by contacting:
Judith Barber, Corporate Secretary
ASSISTANT MANAGERS Smithtown Bancorp
Phyllis Kaiserman One East Main Street
Faith Lonieski Smithtown, New York 11787-2801
Constance Ponticello
Beth Tramontano Member Federal Reserve System and
Federal Deposit Insurance Corporation
</TABLE>
50
<PAGE> 51
SMITHTOWN BANCORP
ONE EAST MAIN STREET
SMITHTOWN, NEW YORK 11787-2801
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held
TUESDAY, APRIL 8, 1997
The Annual Meeting of Shareholders of Smithtown Bancorp (the
"Bancorp"), will be held at the Bavarian Inn, 422 Smithtown Boulevard, Lake
Ronkonkoma, New York, on April 8, 1997, at 10:30 AM, for the following purposes:
1. The election of three directors to serve a term of three
years.
2. To approve the appointment of Albrecht, Viggiano, Zureck &
Company, P.C. as independent auditors for the year ending
December 31, 1997.
3. To transact such other business as may properly come before
the meeting for any adjournment thereof.
Pursuant to a resolution of the Board of Directors adopted at the Board
of Directors meeting on January 28, 1997, only shareholders of record at the
close of business on February 24, 1997, shall be entitled to notice of and to
vote at this meeting.
Dated: March 3, 1997
Smithtown, New York
BY ORDER OF THE BOARD OF DIRECTORS
BRADLEY E. ROCK
Chairman of the Board, President
51
<PAGE> 52
SMITHTOWN BANCORP
ONE EAST MAIN STREET
SMITHTOWN, NEW YORK 11787-2801
PROXY STATEMENT
GENERAL PROXY INFORMATION
This Proxy Statement (this "Proxy Statement") is furnished in
connection with the solicitation by and on behalf of the Board of Directors of
Smithtown Bancorp, (the "Bancorp") of proxies to be used at the Annual Meeting
of Shareholders of the Bancorp to be held at the Bavarian Inn, 422 Smithtown
Boulevard, Lake Ronkonkoma, New York, on April 8, 1997, and at any adjournment
thereof. The costs of the proxy solicitation are to be paid by the Bancorp. Bank
of Smithtown (the "Bank" or "Bank of Smithtown" ) is a wholly-owned subsidiary
of the Bancorp. This Proxy Statement is being mailed on or about March 3, 1997,
to holders of the Common Shares.
AUTHORIZED SHARES AND VOTING RIGHTS
Holders of record of Common Shares as of the close of business on
February 24, 1997 (the "Record Date"), will be entitled to vote at the meeting.
Each shareholder is entitled to one vote for each share of stock held by him or
her. There were 433,268 Common Shares outstanding on the Record Date.
REVOCABILITY OF PROXY
If the accompanying form of Proxy is executed and returned, it
nevertheless may be revoked by the shareholder at any time before it is
exercised. But if it is not revoked, the shares represented thereby will be
voted by the persons designated in each such Proxy.
FINANCIAL STATEMENTS
A copy of the Bancorp's Annual Report to Shareholders, including
financial statements for the fiscal year ended December 31, 1996, has heretofore
been mailed to the shareholders.
MATTERS TO BE VOTED ON AT THE MEETING
There are two matters that are scheduled to be voted on at the Annual
Meeting. Shareholders are being asked to vote on (1) the election of three
directors, and (2) the approval of Albrecht, Viggiano, Zureck & Co., P.C., as
the Bancorp's independent auditors for the year ending December 31, 1997.
It is intended that the shares of stock represented by the
accompanying form of Proxy will be voted for the election of the director
nominees listed in Table I and in favor of the other proposals, unless a
contrary direction is indicated on the form of Proxy. With respect to the
director nominees, if any of such nominees should become unavailable for any
reason, which the directors do not now contemplate, it is intended that,
pursuant to the accompanying form of Proxy, votes will be cast for a substitute
nominee designated by the Board of Directors.
Directors are elected by a plurality of the votes cast at the Annual
Meeting, either in person or by proxy. The approval referred to above will be
authorized if a majority of the votes cast at the Annual Meeting, either in
person or by proxy, are voted in favor of such approval.
With respect to the proposals referred to in (1) and (2) above,
abstentions and broker non-votes will be counted as not having voted and will
not be counted in determining if the plurality, with respect to (1), or the
majority, with respect to (2), was obtained.
52
<PAGE> 53
ELECTION OF DIRECTORS
(PROPOSAL NO. 1)
The Certificate of Incorporation of the Bancorp provides that the Board
of Directors shall consist of 9 members and that the directors shall be
classified into three classes, each of which shall serve for a term of three
years, with the term of office of one class expiring each year.
NOMINEES FOR ELECTION OF DIRECTORS
All nominees who are presently serving as directors were elected to
their present term of office by the shareholders. The following directors whose
terms are expiring this year, are proposed for re-election for terms expiring in
2000: Attmore Robinson, Jr., Bradley E. Rock and Charles E. Rockwell. Robert
Scherdel was elected to the board on May 28, 1996, pursuant to Article 2,
Section 1, of the Bancorp's By-Laws to fill the unexpired term of H. Melville
Brush, who retired in February, 1996.
TABLE I
<TABLE>
<CAPTION>
DATE EXPERIENCE AND SHARES OF STOCK
DIRECTORSHIP DIRECTOR PRINCIPAL OCCUPATION BENEFICIALLY OWNED (2)
NAME AND AGE TERM EXPIRES SINCE (1) DURING PAST 5 YEARS # %
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOMINEES
Attmore Robinson, Jr., 85 1997 1948 Partner, Elzon & Robinson,
Real Estate Brokers, until
retirement in 1993. 9,763 2.25
Bradley E. Rock, 44 1997 1988 Chairman of the Board, President
& Chief Executive Officer of the
Bancorp and the Bank. 2,457 .56
Charles E. Rockwell, 80 1997 1984 Retired in 1976. Formerly a
commercial airline captain. Active
in community non-profit
organizations. 4,418 1.01
</TABLE>
<TABLE>
<CAPTION>
DATE EXPERIENCE AND SHARES OF STOCK
DIRECTORSHIP DIRECTOR PRINCIPAL OCCUPATION BENEFICIALLY OWNED (2)
NAME AND AGE TERM EXPIRES SINCE (1) DURING PAST 5 YEARS # %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DIRECTORS CONTINUING IN OFFICE
Patrick A. Given, 52 1998 1989 Real Estate Appraiser and
Consultant; Given Associates,
located at 550 Route 111,
Hauppauge, New York. 2,300 .53
Edith Hodgkinson, 74 1998 1979 Retired Restaurateur, active in community
non-profit organizations. 28,203 6.50
Robert W. Scherdel, 42 1998 1996 President & CEO
Sunrest Health Facilities, Inc. 5,039 1.16
</TABLE>
53
<PAGE> 54
<TABLE>
<CAPTION>
DATE EXPERIENCE AND SHARES OF STOCK
DIRECTORSHIP DIRECTOR PRINCIPAL OCCUPATION BENEFICIALLY OWNED (2)
NAME AND AGE TERM EXPIRES SINCE (1) DURING PAST 5 YEARS # %
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DIRECTORS CONTINUING IN OFFICE
James H. Glamore, 77 1999 1979 President, Glamore Motor Sales, Inc.
(automobile sales), until retirement
in 1996 4,755 1.09
Barry M. Seigerman, 56 1999 1993 Chairman & Chief Executive
Officer Seigerman-Mulvey, Co., Inc.,
Insurance Brokers, located at
31 Research Way, East Setauket,
New York. Active in business
and community non-profit
organizations. 748 .17
Augusta Kemper, 74 1999 1992 Horticulturist and Owner of Kemper
Nurseries until retirement in 1985. 24,933 5.75
</TABLE>
1) Each director of the Bancorp is also a director of Bank of Smithtown. The
dates given are the dates on which the director first served as a director
of Bank of Smithtown.
2) These figures include Common Shares owned by family members of directors as
to which each of the directors disclaim any beneficial ownership. Mrs.
Hodgkinson's shares include shares held by Bank of Smithtown as Trustee
under the Last Will and Testament of Carlyle Hodgkinson. The amount of
Common Shares beneficially owned and listed in the table above is provided
as of February 24, 1997.
BOARD OF DIRECTORS
The Board of Directors holds regular monthly meetings. The Board held
twelve meetings during 1996. Each director attended 75% or more of the aggregate
number of meetings of the Board of Directors and the committee or committees
thereof on which such director served during 1996.
COMMITTEES OF THE BOARD
The Board of Directors has established a number of committees to assist it
in the discharge of its responsibilities.
The Audit Committee, consisting of eight directors, had four meetings in
1996. The chairman of the committee is Attmore Robinson, Jr. The committee
reviews results of regulatory examinations, internal audits and audits of the
independent auditor in conformance with regulations of the New York State
Banking Department and the laws of the State of New York. Current members of
this committee are James H. Glamore, Edith Hodgkinson, Augusta Kemper, Attmore
Robinson, Jr., Charles E. Rockwell, Patrick A. Given, Barry M. Seigerman and
Robert Scherdel.
The Compensation Committee consists of four members. The chairman of the
committee is Attmore Robinson, Jr. This committee makes recommendations to the
Board of Directors with respect to the compensation of elected officers. Current
members of this committee are Augusta Kemper, Edith Hodgkinson, Attmore
Robinson, Jr. and Charles E.
Rockwell.
The Board of Directors does not have a standing nominating committee.
54
<PAGE> 55
DIRECTOR COMPENSATION
Directors of the Bank received a fee of $600 per month during 1996. The
members of the Directors Loan Committee who are not officers of the Bank and who
were appointed to the committee prior to May 1, 1996, also received a monthly
fee of $300 for committee membership. The total amount of directors' fees paid
during 1996 was $75,300.00.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL NOMINEES .
(PROPOSAL NO. 1 ON THE PROXY).
APPROVAL OF INDEPENDENT AUDITORS
(PROPOSAL NO. 2)
The Audit Committee has recommended that Albrecht, Viggiano, Zureck & Co.,
P.C., Certified Public Accountants, continue as the independent auditors for the
Bank and the Bancorp for 1997. The firm has served as the independent auditors
for the Bank and the Bancorp since 1992. Representatives of the firm will be
present at the annual meeting to answer questions and are free to make
statements during the course of the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL
TO APPROVE THE INDEPENDENT AUDITORS (PROPOSAL NO. 2 ON THE PROXY).
EXECUTIVE OFFICERS AND
PRINCIPAL SHAREHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The persons listed below are beneficial owners of more than 5% of the
outstanding Common Shares of the Bancorp as of February 24, 1997.
<TABLE>
<CAPTION>
NAME AND ADDRESS COMMON SHARES PERCENT
OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
<S> <C> <C>
Elizabeth Radau 30,296 6.99%
43 Edgewood Avenue
Smithtown, New York 11787-2723
Edith Hodgkinson 28,203 6.50%
P.O. Box 756
Bayport, New York 11705-0756
Augusta Kemper 24,933 5.75%
51 Mills Pond Road
St. James, New York 11780-2111
</TABLE>
The following table shows stock ownership as of February 24, 1997, of all
directors and officers of the Bancorp as a group:
TABLE II
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
AMOUNT OF COMMON SHARES PERCENTAGE OF OUTSTANDING
BENEFICIALLY OWNED (NOTE 1) COMMON SHARES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Eleven directors and executive officers
of the Bancorp as a group 82,812 Common Shares 19.11%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
55
<PAGE> 56
Note 1
Includes Common Shares owned by family members of directors as to which
the directors disclaim any interest.
MATERIAL PROCEEDINGS
There are no material proceedings to the best of management's knowledge
to which any director, officer or affiliate of the Bancorp or any record holder
or beneficial owner of more than five percent of the Bancorp's stock, or any
associate of any such director, officer, affiliate of the Bancorp, or security
holder is a party adverse to the Bancorp or any of its subsidiaries or has a
material interest adverse to the Bancorp.
EXECUTIVE OFFICERS
The following table sets forth information as to each executive officer
of the Bancorp who is also an executive officer of the Bank as of January, 1996.
TABLE III
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bradley E. Rock 44 Chairman of the Board, President & Chief Executive Officer of the Bancorp since
January 1992. President of the Bancorp and the Bank October 1990 to January
1992. Director of the Bancorp and the Bank since 1988.
- ------------------------------------------------------------------------------------------------------------------------------------
Anita M. Florek 46 Executive Vice President & Chief Financial Officer of the Bank since January
1993. Executive Vice President & Treasurer of the Bancorp since January 1993.
Senior Vice President & Comptroller of the Bank March 1989 to January 1993.
Treasurer of the Bancorp January 1991 to January 1992.
- ------------------------------------------------------------------------------------------------------------------------------------
Marc DeSimone 39 Executive Vice President & Chief Lending Officer of the Bank since January
1993. Senior Vice President & Chief Lending Officer of the Bank January 1992
to January 1993. Vice President & Chief Lending Officer of the Bank January
1991 to January 1992.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXECUTIVE COMPENSATION
The table appearing below sets forth all compensation paid in 1996 to
each executive officer whose total compensation exceeded $100,000 for such year.
All remuneration was paid by Bank of Smithtown.
TABLE IV
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY INCENTIVE OTHER COMPENSATION
COMPENSATION (1) (2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bradley E. Rock 1994 $176,337.01 -0- $14,353.05
Chairman, President & CEO 1995 $185,325.00 $20,021.30 $19,077.76
the Bancorp and the Bank 1996 $200,000.00 $17,372.54 $21,045.96
- --------------------------------------------------------------------------------------------------------------------------
Anita M. Florek 1994 $ 86,000.00 -0- $ 4,620.31
Executive Vice President 1995 $ 95,000.00 $10,615.79 $ 6,042.98
of the Bancorp and the Bank 1996 $102,000.00 $ 9,673.23 $ 8,505.85
- --------------------------------------------------------------------------------------------------------------------------
Marc DeSimone 1994 $ 86,000.00 -0- $ 2,881.10
Executive Vice President 1995 $ 95,000.00 $10,615.79 $ 7,023.63
of the Bank 1996 $102,000.00 $ 9,673.23 $10,458.90
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
56
<PAGE> 57
(1) This amount includes director's fees. These amounts also include employer
matching contributions paid in connection with the Bank's 401(k) plan,
amounts accrued during 1996 under the ESOP and premiums paid on behalf of
the officers for a group term life insurance policy.
(2) Amounts reported do not include any amount expended by the Bank which may
have provided an incidental benefit to the persons listed in the table
above, but which were made by the Bank in connection with its business.
While the specific amounts of such incidental benefits cannot be precisely
determined, after due inquiry, management does not believe that such value
would exceed $5,000 in the aggregate for any of such persons.
CERTAIN TRANSACTIONS
Some of the directors and officers of the Bancorp, and some of the
corporations and firms with which these individuals are associated, are also
customers of Bank of Smithtown in the ordinary course of business, or are
indebted to the Bank in respect of loans of $60,000 or more. It is anticipated
that some of these individuals, corporations and firms will continue to be
customers of and indebted to the Bank on a similar basis in the future. All
loans extended to such individuals, corporations and firms were made in the
ordinary course of business, did not involve more than the normal risk of
collectability or present other unfavorable features, and were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable Bank transactions with unaffiliated
persons.
No director of the Bank or the Bancorp had an aggregate amount of
unsecured indebtedness to the Bank in excess of 15 percent of the Bank's equity
capital account during the period of January 1, 1996, through December 31, 1996.
Outside of normal customer relationships, none of the directors or
officers of the Bank or the Bancorp, or the corporations or firms with which
such individuals are associated, currently maintains or has maintained within
the last fiscal year any significant business or personal relationship with the
Bank or the Bancorp other than such as arises by virtue of such individual's or
entity's position with and/or ownership interest in the Bank or the Bancorp.
PENSION PLAN
The Employee Stock Ownership Plan ( the "ESOP") and the 401(k) plans
cover full-time employees who have attained the age of 21 years and who have
completed 1,000 hours of employment during the year.
Benefits under the ESOP are based solely on the amount contributed to
the ESOP which is used to purchase Common Shares. A participant's allocation is
the total employer contribution multiplied by the ratio of that participant's
applicable compensation over the amount of such compensation for all
participants for that year. Benefits are not subject to deduction of social
security or other offset amounts.
SHAREHOLDER PROPOSALS
Shareholder proposals to be presented at the 1998 Annual Meeting must
be received by the Secretary of the Board of Directors by October 7, 1997, to be
included in the proxy statement.
OTHER BUSINESS
So far as the Board of Directors of the Bancorp now knows, no business
other than that referred to above will be transacted at the Annual Meeting. The
persons named in the Board of Directors' Proxies may, in the absence of
instructions to the contrary, vote upon all matters presented for action at the
Meeting according to their best judgment.
Dated: March 3, 1997
SMITHTOWN BANCORP
BRADLEY E. ROCK
Chairman of the Board, President
& Chief Executive Officer
57
<PAGE> 58
Additional Information Set Forth in Response to Item 10:
The Bank has agreements with Bradley Rock, Anita Florek and Marc DeSimone
(the "Executives") which would become effective in the event of a change in
control of the Bank's stock. The agreement provides, in essence, that the
Executive would continue to be employed for a period of five years from the
date of the change in control in a position with duties and authority
commensurate with the duties being performed and the authority being
exercised by the Executives immediately prior to the change in control. It
provides that their compensation and benefits would be commensurate with
those of other executives in similar positions at the Bank or in similar
positions with the organization which has acquired control of the Bank. In
any event, the Executives' compensation and benefits would not be less than
they were immediately prior to the change in control.
The agreement further provides that if the Executives' employment were
terminated by the Bank subsequent to a change in control, for any reason
other than cause, disability or death, the Executives would continue to
receive the same compensation and benefits they would have received had
they remained employed for a period of five years. It also provides that at
any time within one year after the change in control, if the Executives
elect to terminate their employment with the Bank for any reason, they will
receive a lump sum severance allowance equivalent to three years'
compensation and benefits at the same rate as payable to the Executives
immediately prior to the change in control.
58
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,054,732
<INT-BEARING-DEPOSITS> 38,757
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,382,284
<INVESTMENTS-CARRYING> 16,008,451
<INVESTMENTS-MARKET> 64,285,417
<LOANS> 101,150,671
<ALLOWANCE> 1,622,572
<TOTAL-ASSETS> 181,629,049
<DEPOSITS> 158,928,455
<SHORT-TERM> 1,685,724
<LIABILITIES-OTHER> 1,317,631
<LONG-TERM> 5,600,000
0
0
<COMMON> 2,239,775
<OTHER-SE> 12,304,103
<TOTAL-LIABILITIES-AND-EQUITY> 181,629,049
<INTEREST-LOAN> 9,393,295
<INTEREST-INVEST> 3,293,379
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,686,674
<INTEREST-DEPOSIT> 3,539,745
<INTEREST-EXPENSE> 3,684,985
<INTEREST-INCOME-NET> 9,001,689
<LOAN-LOSSES> 370,000
<SECURITIES-GAINS> 16,724
<EXPENSE-OTHER> 8,257,130
<INCOME-PRETAX> 2,703,389
<INCOME-PRE-EXTRAORDINARY> 1,705,498
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,705,498
<EPS-PRIMARY> 3.94
<EPS-DILUTED> 3.94
<YIELD-ACTUAL> 8.38
<LOANS-NON> 2,000,529
<LOANS-PAST> 3,072
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,429,894
<CHARGE-OFFS> 198,821
<RECOVERIES> 21,499
<ALLOWANCE-CLOSE> 1,622,572
<ALLOWANCE-DOMESTIC> 1,622,572
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 609,812
</TABLE>
