No. of pages within this report 53
As filed with the Securities and Exchange Commission on March 26, 1998
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 1997 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:
Number of Shares Outstanding
Class of Common Stock as of 15 March 1998
$5.00 Par Value 428,004
The aggregate market value of the Registrant's common stock held by
nonaffiliates was approximately 42,800,004 based on the price at which stock was
sold on 15 March 1998.
DOCUMENTS INCORPORATED BY REFERENCE
1) Portions of the Annual Report for the fiscal year ended 31 December 1997 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 by reference into Part I.
<PAGE> 1
3) Portions of the Proxy Statement relating to the annual meetingof stockholders
to be held on 7 April 1998 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 12 of the Registrant's Annual Report for the year ended 31 December
1997, 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.
<PAGE> 2
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 24 and 31 of the Registrant's Annual Report for the year ended 31 December
1997 is incorporated herein by reference.
Item 202: Description of Securities or Plan of Operation
686 Shareholders of common stock at 15 March 1998.
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 32 through 40, inclusive, of the Registrant's Annual Report for the year
ended 31 December 1997 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 13 through 31, inclusive, of the Registrant's Annual Report for the year
ended 31 December 1997 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 43 through 44, and pages 47 through 49, of the
Registrant's Proxy Statement dated 2 March 1998, 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.
<PAGE> 3
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 49 of the Registrant's Proxy Statement dated 2 March 1998 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 47 and 48 of the Registrant's Proxy Statement, dated 2 March 1998 are
incorporated herein by reference.
Item 404: Certain Relationships and Related Transactions
Page 50 of the Registrant's Proxy Statement dated 2 March 1998 and page of the
Registrant's Annual Report for the year ended 31 December 1997 are incorporated
herein by reference.
<PAGE> 4
INDEX OF EXHIBITS
Exhibit No. Description Page
3a Articles of Incorporation *
3b By-Laws *
4 By-Laws Page Nos. 2,11,12,13,14 *
Articles of Incorporation Page No. 2 *
9 No voting trust agreements
10 No material contracts
13 Annual Report for the year ended 31 December 1997 7-41
Notice of Annual Meeting and Proxy Statement 41-51
16 Reference to Item 8 in 10-KSB 2
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 41-51
24 Consent of Independent Auditors 6
Report of Independent Auditors 12
25 None
28 Prospectus dated 26 July 1984 *
29 N/A
*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.
<PAGE> 5
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: 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
-------------------------------------------
Bradley E. Rock, President, Chief Executive Date 3/24/98
Officer and Chairman of the Board
/s/ Augusta Kemper
-------------------------------------------
Augusta Kemper, Director Date 3/24/98
/s/ Patrick A. Given, Director
------------------------------------------- Date 3/24/98
Patrick A. Given, Director
/s/ Edith Hodgkinson, Director
------------------------------------------- Date 3/24/98
Edith Hodgkinson, Director
/s/ Barry M. Seigerman, Director
------------------------------------------- Date 3/24/98
Barry M. Seigerman, Director
/s/ Attmore Robinson, Director
------------------------------------------- Date 3/24/98
Attmore Robinson, Director
/s/ Charles E. Rockwell, Director
------------------------------------------- Date 3/24/98
Charles E. Rockwell, Director
/s/ Robert W. Scherdel, Director
------------------------------------------- DATE 3/24/98
Robert W. Scherdel, Director
<PAGE> 6
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 23, 1998, included in the 1997 Annual
Report to shareholders of Smithtown Bancorp, Inc.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
January 30 , 1998
<PAGE> 7
TABLE OF CONTENTS
Financial Highlights
Message from the Chairman of the Board
Independent Auditors'
Report Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Selected Financial Data
Consolidated Average Balance Sheets
Consolidated Balance Sheets
Consolidated Income Statements
Per Share Data and Supplementary Information
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Banking Locations
Corporate Directory
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AT YEAR END
Assets $197,656,435 $181,629,049 $157,528,274 $156,951,687 $153,720,337
Loans 98,035,610 98,955,368 95,984,044 78,421,816 62,450,651
Deposits 168,195,635 158,928,455 143,581,497 135,230,577 141,377,440
Stockholders' Equity 16,979,458 14,097,239 12,837,073 11,605,718 11,243,502
For the Year
Net Income 3,320,819 1,705,498 1,471,381 $ 1,231,511 $ 301,696
Return on Average Equity (%) 21.60 12.94 11.98 10.61 2.70
Return on Average Assets (%) 1.73 1.00 0.94 0.79 0.19
Efficiency (%) 0.52 0.72 0.75 0.79 0.82
Per Share
Net Income $ 7.66 3.94 $ 3.40 $ 2.80 $ 0.69
Cash Dividends Declared 1.40 1.28 1.12 1.00 0.75
Stockholders' Equity 39.19 32.54 29.63 27.14 25.57
</TABLE>
<PAGE> 8
1997 was a year of unprecedented success for Bank of Smithtown. The year was
highlighted by record earnings, huge growth in the value of the Bancorp's stock,
and a rise to the top performing position among banks in its class.
With respect to earnings, not only did the Bank post a record level of income
for its 88-year history, but it did so in dramatic fashion. The Bank's previous
level of record earnings (achieved in 1996) was $1.7 million. In 1997, not only
did Bank of Smithtown surpass $2 million for the first time in its history, but
it surpassed the $3 million mark as well, with a total net income of $3,320,819,
almost double the previous record high.
These record earnings resulted in profitability which makes Bank of Smithtown
stand out among its peers and, in fact, among all commercial banks throughout
the nation. The Bank's return on average equity (ROAE) was a remarkable 21.72%*.
As one of the charts to the right indicates, this achievement is more than 1,000
basis points better than the average level of achievement among all New York
State banks. Even more significantly, among the 71 community banks in the State
with less than $200 million in assets, Bank of Smithtown ranks first in return
on equity.
Similarly, with regard to most other measures of profitability and performance,
Bank of Smithtown ranks at or near the top of the class. The Bank's return on
average assets (ROAA) was 1.73%,a
[OBJECT OMITTED]
[OBJECT OMITTED]
[OBJECT OMITTED]
* Bank figures (as opposed to consolidated holding company figures) provide a
more meaningful basis of comparison for many of the ratios contained in this
discussion, therefore, bank figures will be used for all of the comparisons
throughout the Chairman's message.
<PAGE> 9
[OBJECT OMITTED]
[OBJECT OMITTED]
[OBJECT OMITTED]
substantial 65 basis points more than average. On the expense side, our
efficiency ratio was a trim 51.85%. The Bank's net interest margin was 6.07%,
among the best of all banks in the nation. Our performance was aided by a
favorable deposit mix and our continuing ability to collect a higher percentage
of demand deposits than our competitors. While the Bank's peers average 10.8% of
their deposits in demand accounts, Bank of Smithtown maintains more than twice
that amount, 26.4%, in demand deposits.
These indices of performance by Bank of Smithtown have translated into
unprecedented value and benefit for our stockholders. Earnings per share grew to
$7.66 which, of course, produced concomitant results for the market price of the
shares. The stock price began the year at $34 per share and finished 1997 at an
astounding $85 per share. In fact, one financial journal reported that from
December 1996 to December 1997, Smithtown Bancorp's market price increased by a
whopping 279%, making it the leading gainer among stocks of publicly-traded
companies headquartered on Long Island.
Our efforts to improve asset quality and to increase efficiency and productivity
during the past few years have brought the kind of results we anticipated. We
will continue to adapt to the ever-changing financial marketplace in order to
maximize value for our shareholders and to maintain our position among the
leading community banks in the nation.
Bradley E. Rock
Chairman of the Board
President & Chief Executive Officer
<PAGE> 10
The bigger the big banks get, the greater the need for the services a small bank
has to offer. And as the banking industry continues to consolidate its players,
choices are becoming crystal clear for the consumer.
Rather than being swept away by the wave of bank mergers and acquisitions, Bank
of Smithtown's position in the industry has solidified because of our size.
"Big banks" are simply too vast, their corporate policies too rigid and their
decision makers too far removed from their customer base to develop the
relationships needed to meet the needs of small business owners and many
consumers. Our senior officers and branch managers get to know our customers
well, even to the extent of visiting them at their locations in order to
understand their businesses and their needs thoroughly. Our loan officers
frequently go on-site to review a construction location, or to evaluate
inventory, or to answer customer questions.
Bank of Smithtown is singularly committed to meet the ever-changing needs of our
customers ---- to be "hands-on" with our customer base --- and to know our
marketplace intimately, as no "big bank" can. We are dedicated to providing a
level of service unparalleled by our competition, and we proudly acknowledge
this motivation as our competitive edge in today's banking environment.
<PAGE> 11
The people who work at Bank of Smithtown and most of our stockholders,
too, live in the communities we serve. We care not only about the financial
health of the community, we care also about making our community a good place to
live and to raise families. And all of us at Bank of Smithtown believe that we
can help bring the achievement of these economic and social goals together.
When people bank with us or invest in us, it enables us to support
those efforts in the community that we think will make it an even better place
to live. Whether we make a loan to buy a house, to build a place of business or
to pay for a college education; or whether we purchase a school district bond or
a library bond; whether we buy equipment for an athletic team or we pay to send
students on an educational trip, it's really all the same - us using our
customers' and stockholders' money to improve the quality of life in our
communities.
From year to year, we are particularly involved in programs that
support our area's youth. One of the programs we are proudest to have supported
during this past year is a "Student of the Month" program at the Smithtown
Middle School. Students in all classes and grade levels are eligible to
participate. Teams of teachers identify not just the students with the highest
grade in a particular subject, but the students who most exemplify the kind of
attitude, effort and workmanship that the teachers think ought to be rewarded.
The teachers present the awards each month in school at a ceremony that includes
the students' family members and friends.
Of course, this is just one small example of how we try to help our
children and their families grow and develop. Our employees are coaches,
instructors and group leaders. They also sit on the boards of a myriad of local
organizations. Every day we try to give meaning to the idea of local people
trying to help other local people make our community better.
<PAGE> 12
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 88th 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.
Bank of Smithtown is a full-service bank offering a complete range of commercial
and consumer financial services. The Bank also extends its services to local
municipalities.
The Bank's Trust and Investment Management Division, introduced in 1970,
provides trust and estate administration, fiduciary and investment advisory
services, and acts as a bond and coupon paying agent for local municipalities.
The Bank's intention is to continue to provide individuals, businesses, and
municipalities with a comprehensive array of financial services.
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, Smithtown
Bancorp adopted the provisions of Statements of Financial Accounting Standards
(SFAS) No. 125, " Accounting for Transfers and Serving of Financial Assets and
Extinguishment of Liabilities" in 1997 and SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" in 1995.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
January 23, 1998
<PAGE> 13
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS SMITHTOWN BANCORP
AS OF DECEMBER 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 7,667,371 $ 7,689,964
Investment Securities:
Investment Securities Held to Maturity:
Obligations of U.S. Government 2,002,757 2,008,366
Mortgage-Backed Securities 7,237,038 9,003,335
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS 6,458,344 4,996,750
- ----------------------------------------------------------------------------------------------------------------------------------
Total (Estimated Fair Value $15,861,965 in 1997 and
$15,903,133 IN 1996) 15,698,139 16,008,451
- ----------------------------------------------------------------------------------------------------------------------------------
Investment Securities Available for Sale:
Obligations of U.S. Government 6,175,710 0
Obligations of U.S. Government Agencies 15,251,638 13,563,700
Mortgage-Backed Securities 36,190,088 34,218,784
OTHER SECURITIES 856,800 599,800
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL (AT ESTIMATED FAIR VALUE) 58,474,236 48,382,284
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 74,172,375 64,390,735
- ----------------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 8,300,000 0
- ----------------------------------------------------------------------------------------------------------------------------------
Loans 100,403,532 101,150,671
Less: Unearned Discount 690,328 572,731
ALLOWANCE FOR POSSIBLE LOAN LOSSES 1,677,594 1,622,572
- ----------------------------------------------------------------------------------------------------------------------------------
LOANS, NET 98,035,610 98,955,368
- ----------------------------------------------------------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT 2,454,834 2,618,863
- ----------------------------------------------------------------------------------------------------------------------------------
Other Assets
Other Real Estate Owned 3,927,786 5,087,707
OTHER 3,098,459 2,886,412
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 7,026,245 7,974,119
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 197,656,435 $ 181,629,049
==================================================================================================================================
LIABILITIES
Deposits:
Demand (Non-Interest Bearing) $ 42,566,624 $ 42,562,809
NOW 15,284,660 14,466,688
Money Market 36,326,089 27,412,325
Savings 40,998,166 45,729,259
TIME 33,020,096 28,757,374
- ------------------------------------------------------------------------------------------------------------------------------------
Total Deposits 168,195,635 158,928,455
Dividend Payable 151,644 138,646
Securities Sold Under Agreements to Repurchase 2,800,000 2,800,000
Other Borrowings 8,452,540 4,485,724
OTHER LIABILITIES 1,077,158 1,178,985
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 180,676,977 167,531,810
- ----------------------------------------------------------------------------------------------------------------------------------
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 on Securities Available for Sale 249,068 81,093
RETAINED EARNINGS 12,943,680 10,229,436
- ----------------------------------------------------------------------------------------------------------------------------------
Total 17,426,097 14,543,878
Less: Treasury Stock (14,687 Shares at Cost at
DECEMBER 31, 1997 AND 1996, RESPECTIVELY) 446,639 446,639
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 16,979,458 14,097,239
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 197,656,435 $ 181,629,049
==================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME SMITHTOWN BANCORP
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 9,731,626 $ 9,391,802 $ 8,278,027
Interest on Balance Due from Banks 5,973 1,493 0
Interest on Federal Funds Sold 382,157 417,107 221,857
Interest and Dividends on Investment Securities:
Taxable:
Obligations of U.S. Government 235,724 141,265 431,259
Obligations of U.S. Government Agencies 1,038,404 569,716 178,689
Mortgage-Backed Securities 2,847,023 1,833,879 1,901,977
OTHER 52,010 37,638 22,385
- ----------------------------------------------------------------------------------------------------------------------------------
Total 4,173,161 2,582,498 2,534,310
Exempt from Federal Income Taxes:
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS 308,609 293,774 318,174
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 14,601,526 12,686,674 11,352,368
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Money Market Accounts 1,136,766 834,353 716,465
Savings 967,334 1,298,962 1,387,282
Certificates of Deposit of $100,000 and Over 392,267 123,851 210,891
Other Time Deposits 1,194,572 1,282,579 928,796
Interest on Securities Sold Under Agreements To Repurchase 174,556 100,932 106,511
INTEREST ON OTHER BORROWINGS 286,995 44,308 14,950
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 4,152,490 3,684,985 3,364,895
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 10,449,036 9,001,689 7,987,473
PROVISION FOR POSSIBLE LOAN LOSSES 805,000 370,000 110,000
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income, After Provision
FOR POSSIBLE LOAN LOSSES 9,644,036 8,631,689 7,877,473
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER NON-INTEREST INCOME
Trust Department Income 364,600 434,069 401,811
Service Charges on Deposit Accounts 1,518,765 1,337,449 1,278,668
Other Income 751,137 540,588 482,538
NET GAIN ON SALES OF INVESTMENT SECURITIES 0 16,724 1,393
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER NON-INTEREST INCOME 2,634,502 2,328,830 2,164,410
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries 2,949,150 3,379,214 3,470,680
Pensions and Other Employee Benefits 669,919 717,516 761,577
Net Occupancy Expense of Bank Premises 874,033 1,130,358 944,571
Furniture and Equipment Expense 589,897 637,029 622,775
OTHER EXPENSES 1,793,602 2,393,013 1,922,109
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER OPERATING EXPENSES 6,876,601 8,257,130 7,721,712
- ----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,401,937 2,703,389 2,320,171
PROVISION FOR INCOME TAXES 2,081,118 997,891 848,790
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,320,819 $ 1,705,498 $ 1,471,381
==================================================================================================================================
EARNINGS PER SHARE
Net Income $ 7.66 $ 3.94 $ 3.40
Weighted Average Shares Outstanding 433,268 433,268 432,929
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE> 15
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SMITHTOWN BANCORP
<TABLE>
<CAPTION>
NET
UNREALIZED
COST OF GAIN (LOSS)ON
COMMON STOCK 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, 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)
Treasury Stock Purchases
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
Net Income 3,320,819 3,320,819
Cash Dividends Declared (606,575) (606,575)
Unrealized Gain on Securities
AVAILABLE FOR SALE 167,975 167,975
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 433,268 $2,239,775 $1,993,574 $12,943,680 $(446,639) $ 249,068 $16,979,458
====================================================================================================================================
CASH DIVIDENDS PER SHARE WERE $1.40 IN 1997, $1.28 IN 1996, $1.12 IN 1995.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS SMITHTOWN BANCORP
YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,320,819 $ 1,705,498 $ 1,471,381
Adjustments to reconcile net income to
net cash provided by operating activities:
Valuation Reserve for Other Real Estate Owned 120,000 209,000 100,000
Depreciation on Premises and Equipment 401,663 450,265 455,199
Provision for Possible Loan Losses 805,000 370,000 110,000
Net Gain on Sale of Investment Securities 0 (16,724) (1,393)
Amortization of Transition Obligation 104,102 49,909 74,200
Loss on Sale of Bank Property 0 57,568 0
Increase in Interest Payable 40,203 44,568 81,546
Decrease in Miscellaneous Payables and
Accrued Expenses (73,361) (7,324) (96,232)
(Increase) Decrease in Fees and Commissions Receivable 25,000 (65,000) (22,137)
(Increase) Decrease in Interest Receivable (154,263) (72,496) 182,437
Decrease in Prepaid Expenses 142,864 222,052 160,135
(Increase) Decrease in Miscellaneous Receivables (161,499) 159 927,357
(Increase) Decrease in Income Taxes Receivable (224,362) 98,246 213,595
(Increase) Decrease in Deferred Taxes (71,947) (87,318) 28,738
Decrease in Accumulated Postretirement
Benefit Obligation (62,249) (54,000) (44,301)
Amortization of Investment Security Premiums
AND ACCRETION OF DISCOUNTS (1,467) (198,574) 38,790
- ----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 4,210,503 2,705,829 3,679,315
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Disposition of Mortgage-Backed Securities:
Held to Maturity $ 1,734,661 $ 1,198,295 $ 4,000,128
Available for Sale 8,272,600 6,734,886 9,408,375
Proceeds from Disposition of Other Investment Securities:
Held to Maturity 569,013 356,652 2,507,707
Available for Sale 7,103,438 3,163,281 8,153,750
Purchase of Mortgage-Backed Securities:
Available for Sale (10,022,600) (27,502,567) 0
Purchase of Other Investment Securities:
Held to Maturity (2,031,947) (714,347) 0
Available for Sale (15,115,725) (10,555,581) (1,476,956)
Federal Funds Sold, Net (8,300,000) 6,750,000 (6,550,000)
Loans Made to Customers, Net (613,921) (4,931,095) (17,734,860)
Purchase of Premises and Equipment (237,635) (158,900) (461,086)
Proceeds from Sale of Other Real Estate Owned 1,768,601 1,339,608 505,877
PROCEEDS FROM SALE OF BANK PROPERTY 0 205,239 0
- ------------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (16,873,515) (24,114,529) (1,647,065)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Increase/(Decrease) in Demand Deposits,
NOW Accounts and Savings Accounts 5,004,459 11,194,464 (1,401,661)
Net Increase in Time Deposits 4,262,721 4,152,494 9,752,581
Cash Dividends Paid (593,577) (537,252) (470,491)
Securities Sold Under Agreements to
Repurchase and Other Borrowings, Net 3,966,816 7,285,724 (9,003,500)
PROCEEDS FROM SALE OF TREASURY STOCK 0 0 138,405
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 12,640,419 22,095,430 (984,666)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Due from Banks (22,593) 686,730 1,047,584
CASH AND DUE FROM BANKS, BEGINNING OF YEAR 7,689,964 7,003,234 5,955,650
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks, End of Year $ 7,667,371 $ 7,689,964 $ 7,003,234
====================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $ 461,392 $ 117,111 $ 136,012
Income Taxes 2,377,427 986,963 774,542
SCHEDULE OF NONCASH INVESTING ACTIVITIES
Loans Transferred to Other Real Estate Owned $ 728,680 $ 1,589,770 $ 87,099
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
<PAGE> 17
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 and investment management services. As a state bank,
the Bank is subject to regulation by the State of New York Banking Department
and the Federal Reserve Board. The area 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
The Bank evaulates its investment policies consistent with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). Accordingly, the Bank's investments in
securities are classified in two categories and accounted for as follows:
SECURITIES TO BE HELD TO MATURITY - Bonds, notes and debentures for which the
Bank has the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums and accretion of discounts which are
recognized in interest income using the interest method over the period to
maturity.
SECURITIES AVAILABLE FOR SALE - Bonds, notes, debentures, and certain
equity securities not classified as trading securities nor as securities to be
held to maturity are carried at estimated fair value.
Unrealized holding gains and losses, net of deferred taxes, 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 allowance for possible loan losses be determined
based on the present value of expected cash flows discounted at the loan's
effective interest rate or, as a practical expedient, the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. Prior to the adoption of SFAS 114, Bank of Smithtown's methodology
for determining the adequacy of the allowance for possible loan losses did not
incorporate the concept of the time value of money and expected future interest
cash flows. In addition, SFAS 114 modifies the accounting for insubstance
foreclosures (ISF). A collateralized loan is now considered an ISF and
reclassified to Other Assets only when a creditor has taken physical possession
of the collateral regardless of whether formal foreclosure proceedings have
taken place.
Effective January 1, 1995, Bank of Smithtown also adopted Statement of Financial
Accounting 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 the Bank against principal or to be realized as interest
revenue, according to management's judgment as to the collectibility of
principal.
<PAGE> 18
Loans are generally recorded at the principal amount outstanding net of unearned
discount and the allowance for possible loan losses. Unearned discounts are
generally amortized over the term of the loan using the interest method.
Interest on loans is credited to income based on the principal amount
outstanding. The accrual of interest on a loan is discontinued when in the
opinion of management there is doubt about the ability of the borrower to pay
interest or principal. Management may continue to accrue interest when it
determines that a loan and related interest are adequately secured and in the
process of collection. Loans held for sale are carried at the lower of aggregate
cost or fair value. The Bank sells or securitizes certain loans. Such sales are
with recourse and no reserve is considered necessary at December 31, 1997. 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:
Bank Premises........................................................25-30 years
Leasehold Improvements................................................5-40 years
Furniture and Equipment.................................................10 years
OTHER REAL ESTATE OWNED
Included in other assets is real estate held for sale which is acquired
principally through foreclosure or a similar conveyance of title and is carried
at the lower of cost or fair value minus estimated costs to sell the property.
Any write-downs at the dates of acquisition are charged to the Allowance for
Possible Loan Losses. Revenues and expenses associated with holding such assets
are recorded through operations when realized.
OTHER REAL ESTATE OWNED VALUATION RESERVE ACCOUNT
The valuation reserve account is established through a loss on other real estate
owned charged to expense. Properties held in Other Real Estate Owned 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, postretirement
benefits, and investment securities which are recognized for financial
accounting purposes in one period and for tax purposes in another period.
TRUST ASSETS
Assets belonging to trust customers that are held in fiduciary or agency
capacity by the Bank are not included in the financial statements since they are
not assets of the Bank. Deposits held in fiduciary or agency capacity in the
normal course of business are reported in the applicable deposit categories of
the consolidated balance sheets.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of shares
outstanding.
STATEMENTS OF CASH FLOWS
For the purposes of the Statements of Cash Flows, the Bank considers Cash and
Due from Banks as Cash and Cash Equivalents.
<PAGE> 19
RETIREMENT BENEFITS
The Bank accounts for postretirement benefits other than pensions in accordance
with Statement of Financial Accounting Standards No. 106 "Employers' Accounting
for Postretirement Benefits Other Than Pensions" (SFAS 106). This statement
requires that the estimated costs of postretirement benefits other than pensions
be accrued over the period earned rather than expensed as incurred.
COLLATERALIZED SECURITIES TRANSACTIONS
Transactions involving purchases of securities under agreements to resell
("reverse repurchase agreements") or sales of securities under agreements to
repurchase ("repurchase agreements") are treated as collateralized financing
transactions and are recorded at their contracted resale or repurchase amounts
plus accrued interest. The Bank is required to provide securities to
counterparties in order to collateralize repurchase agreements. The Bank's
agreements with counterparties generally contain contractual provisions allowing
for additional collateral to be obtained, or excess collateral returned, when
necessary. It is the Bank's policy to value collateral periodically and to
obtain additional collateral, or to retrieve excess collateral from
counterparties, when deemed appropriate.
<TABLE>
<CAPTION>
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:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES ) VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES TO BE HELD TO MATURITY:
DECEMBER 31, 1997
OBLIGATIONS OF U.S. GOVERNMENT $ 2,002,757 0 $ (6,667) $ 1,996,090
MORTGAGE-BACKED SECURITIES 5,910,087 3,593 (41,364) 5,872,316
COLLATERALIZED MORTGAGE OBLIGATIONS 1,326,951 0 (15,326) 1,311,625
OBLIGATIONS OF STATE AND POLITICAL
SUBDIVISIONS 6,458,344 227,169 (3,579) 6,681,934
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 15,698,139 $ 230,762 $ (66,936) $ 15,861,965
====================================================================================================================================
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
====================================================================================================================================
SECURITIES AVAILABLE FOR SALE:
DECEMBER 31, 1997
OBLIGATIONS OF U.S. GOVERNMENT $ 6,142,129 $ 33,581 $ 0 $ 6,175,710
OBLIGATIONS OF U.S. GOVERNMENT
AGENCIES 15,175,156 83,651 (7,169) 15,251,638
MORTGAGE-BACKED SECURITIES 33,241,065 383,341 (21,492) 33,602,914
COLLATERALIZED MORTGAGE OBLIGATIONS 2,629,657 0 (42,483) 2,587,174
OTHER SECURITIES 856,800 0 0 856,800
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 58,044,807 $ 500,573 $ (71,144) $ 58,474,236
====================================================================================================================================
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
====================================================================================================================================
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
The following table presents the amortized costs of and fair values of investment in debt securities by scheduled maturity
at respective year-ends.
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
AMORTIZED ESTIMATED FAIR AMORTIZED ESTIMATED FAIR
TYPE AND MATURITY GROUPING COSTS VALUE COSTS VALUE
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
SECURITIES HELD TO MATURITY:
Obligations of U.S. Government
WITHIN 1 YEAR $ 2,002,757 $ 1,996,090 $ 2,008,366 $ 1,988,300
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS OF U.S.
GOVERNMENT $ 2,002,757 $ 1,996,090 $ 2,008,366 $ 1,988,300
====================================================================================================================================
Mortgage-Backed Securities
After 1 year, but within 5 years $ 3,012,964 $ 2,981,703 $ 3,553,981 $ 3,473,619
After 5 years, but within 10 years 1,326,951 1,311,625 2,000,000 1,959,800
AFTER 10 YEARS 2,897,123 2,890,613 3,449,354 3,360,352
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES $ 7,237,038 $ 7,183,941 $ 9,003,335 $ 8,793,771
====================================================================================================================================
Obligations of State and Political Subdivisions
Within 1 year $ 564,903 $ 569,175 $ 557,644 $ 560,065
After 1 year, but within 5 years 3,831,257 3,964,748 2,492,355 2,570,337
After 5 years, but within 10 years 2,016,934 2,099,292 1,855,751 1,898,949
AFTER 10 YEARS 45,250 48,719 91,000 91,711
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS OF STATE AND
POLITICAL SUBDIVISIONS $ 6,458,344 $ 6,681,934 $ 4,996,750 $ 5,121,062
====================================================================================================================================
SECURITIES AVAILABLE FOR SALE:
Obligations of U.S. Government
AFTER 1 YEAR, BUT WITHIN 5 YEARS $ 6,142,129 $ 6,175,710 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS OF U.S.
GOVERNMENT $ 6,142,129 $ 6,175,710 $ 0 $ 0
====================================================================================================================================
Obligations of U.S. Government Agencies
After 1 year, but within 5 years $ 1,000,000 $ 995,350 $ 2,000,000 $ 1,987,600
After 5 years, but within 10 years 11,535,300 11,598,685 11,534,626 11,576,100
AFTER 10 YEARS 2,639,856 2,657,603 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OBLIGATIONS U.S. GOVERNMENT
AGENCIES $ 15,175,156 $ 15,251,638 $ 13,534,626 $ 13,563,700
====================================================================================================================================
Mortgage-Backed Securities
Within 1 year $ 3,696,671 $ 3,685,892 $ 1,498,403 $ 1,488,514
After 1 year, but within 5 years 801,610 798,484 5,683,495 5,638,494
AFTER 10 YEARS 31,372,441 31,705,712 26,926,144 27,091,776
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES $ 35,870,722 $ 36,190,088 $ 34,108,042 $ 34,218,784
====================================================================================================================================
</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 $731,335 and
$385,311 in 1997 and 1996, respectively, while gross unrealized losses amounted
to $138,080 and $350,813 in 1997 and 1996, respectively.
Obligations of the U.S. Government Agencies and Mortgage-Backed Securities
having a book value of $32,865,249 and an estimated fair value of $32,991,533
were pledged to secure public deposits, treasury tax and loan deposits,
repurchase agreements and advances. 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,
1997 1996 1995
- --------------------------------------------------------------------------------
U.S. Government and Agency Securities $0 $0 $33,508
Mortgage-Backed Securities 0 16,724 (32,115)
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 estimated fair value of these transferred
securities were $22,537,536, $206,705 and $22,330,831, respectively.
<PAGE> 21
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 1997 and 1996. During 1995, the Bank
became a member of the Federal Home Loan Bank of New York, and now holds
$699,600 of its stock. This stock also has no maturity and has paid average
dividends of 6.0% during 1997 and 1996. Stock of both the Federal Reserve Bank
and the Federal Home Loan Bank are restricted.
During 1996 and 1997, the Bank invested $30,000 in the Nassau-Suffolk Business
Development Fund. This consortium of banks provides loans to low income
homeowners.
NOTE C. LOANS
Loans as of December 31, consisted of the following:
1997 1996
- --------------------------------------------------------------------------------
Real Estate Loans, Construction $ 13,032,541 $ 8,180,276
Real Estate Loans, Other
Commercial 43,520,062 43,071,726
Residential 12,506,653 14,074,208
Mortgage Loans Held for Sale 0 495,000
Commercial and Industrial Loans 23,745,418 23,458,052
Loans to Individuals for Household, Family and Other
Personal Expenditures 7,492,586 11,543,331
ALL OTHER LOANS (INCLUDING OVERDRAFTS) 106,272 328,078
- --------------------------------------------------------------------------------
Total Loans, Gross 100,403,532 101,150,671
LESS: UNEARNED DISCOUNT ON LOANS 690,328 572,731
- --------------------------------------------------------------------------------
TOTAL LOANS (NET OF UNEARNED DISCOUNT) $ 99,713,204 $100,577,940
================================================================================
Collateral varies, but generally includes residential and income producing
commercial properties, as well as automobiles on personal loans. Estimated fair
value of loans at December 31, 1997 totaled $103,617,753.
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, 1997, the
recorded investment in loans that are considered impaired under SFAS 114 was
$2,045,020. No additional SFAS 114 reserve is required for the $2,045,020 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, 1997 was $1,814,963. The total allowance on
impaired loans at December 31, 1997 and 1996 totaled $332,084 and $246,810,
respectively.
Recognition of interest income on impaired loans, as for all other loans, is
discontinued when reasonable doubt exists as to the full collectibility of
principal or interest. Bank of Smithtown recognized $2,996 in interest revenue
in 1997 and no revenue during 1996 and 1995 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, 1997 and 1996, loans with unpaid principal balances of
$1,593,264 and $2,000,529, 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, 1997 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 $94,872 in 1997 and $143,045 in 1996. Loans contractually past-due
90 days or more and still accruing interest amounted to $431,757 and $3,072 in
1997 and 1996, respectively.
During 1997, $728,680 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 $429,232, amounted to
$3,927,786 as of December 31, 1997. The estimated fair value of OREO as of
December 31, 1997 was $4,485,500.
The composition of OREO at December 31, follows:
1997 1996
- --------------------------------------------------------------------------------
OREO $ 4,357,018 $ 5,504,834
LESS: VALUATION RESERVE 429,232 417,127
- --------------------------------------------------------------------------------
Net $ 3,927,786 $ 5,087,707
================================================================================
Provisions for real estate losses totaled $120,000, $209,000 and $100,000 for
the years ended December 31, 1997, 1996 and 1995, 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 $85,000, $102,000 and
$121,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
<PAGE> 22
A summary of information concerning interest income on non accrual loans and
OREO at December 31, follows:
OREO NONACCRUAL
(IN THOUSANDS) 1997 1996 1995 1997 1996 1995
- --------------------------------------------------------------------------------
Gross interest income which would have
been recorded during the year under
original contract terms $522 $595 $635 $95 $143 $177
Gross interest income recorded during
THE YEAR 0 0 0 0 40 64
- --------------------------------------------------------------------------------
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 $578,516 and $774,237 at December 31, 1997 and 1996. During 1997, $201,000
of new loans were made, repayments totaled $185,646 and one loan to a prior
officer of the Bank for $211,075 is no longer included in 1997 year end totals.
During 1997 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 1997, there were no of Mortgages Held for Sale outstanding. Fee income
earned during the year from mortgage origination totaled $48,724.
NOTE D. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Transactions in the allowance for the year ending December 31 were as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
BALANCE, JANUARY 1 $1,622,572 $1,429,894 $ 1,362,404
Add:
Recoveries 98,648 21,499 33,231
PROVISION CHARGED TO CURRENT EXPENSE 805,000 370,000 110,000
- --------------------------------------------------------------------------------
Total 2,526,220 1,821,393 1,505,635
LESS: CHARGE-OFFS 848,626 198,821 75,741
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $ 1,677,594 $ 1,622,572 $ 1,429,894
================================================================================
NOTE E. BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of December 31 at cost is as follows:
1997 1996
- --------------------------------------------------------------------------------
Land $ 92,650 $ 92,650
Bank Premises 1,692,139 1,518,609
Leasehold Improvements 1,724,500 1,723,352
FURNITURE AND EQUIPMENT 3,007,760 2,948,107
- --------------------------------------------------------------------------------
Total 6,517,049 6,282,718
LESS: ACCUMULATED DEPRECIATION AND AMORTIZATION 4,062,215 3,663,855
- --------------------------------------------------------------------------------
TOTAL $ 2,454,834 $ 2,618,863
================================================================================
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 1997, 1996, and 1995, amounted to $43,015,
$51,266, and $52,994, respectively.
During 1995, the Bank established an Employee Stock Ownership Plan (ESOP) for
substantially all of its employees. The ESOP replaced the Profit Sharing Plan.
Eligibility requirements for the ESOP remain the same as for the Defined
Contribution Plan and include one year of continuous service, 1,000 hours and
attaining an age of 21. Eligible compensation is defined as gross wages less
contributions to any qualified plans to the extent that these contributions are
not includable in the gross income of the participant. Contributions to the ESOP
are in the form of cash and are made at the discretion of the Board of
Directors. The ESOP uses this contribution to purchase shares of Smithtown
Bancorp stock which are then allocated to eligible participants. ESOP benefits
generally become 20% vested after each year of credited service, becoming 100%
vested after five years of service with the Bank. Forfeitures are reallocated
among participating employees, in the same proportion as contributions. Benefits
are payable upon death, retirement, early retirement, disability or separation
from service and may be payable in cash or stock. The Bank reported a net
expense of $125,000, $125,000 and $120,000 related to the ESOP for the years
ended December 31, 1997, 1996 and 1995.
<PAGE> 23
During 1997, 1996 and 1995, the ESOP used the Bank's contribution to purchase
623, 3,507 and 4,873 shares of common stock at an approximate average cost of
$64, $32 and $25 per share, respectively. The 1997 contribution represents 4.51%
of eligible compensation. At year end 1997, 1996 and 1995 there were 623,
3,507and 4,873 unallocated shares in the ESOP, respectively. The dividends
payable on these unallocated shares was $218, $1,122 and $1,364., respectively.
Dividends are paid on these shares when they are allocated. The dividends paid
in each of the three years for allocated shares was $4,804, $5,458 and $4,869.
ESOP shares are included in Weighted Average Shares Outstanding in the
calculations of earnings per share.
In accordance with SFAS 106 the Bank was required to calculate the actuarial
present value of expected benefits to be paid to employees after their
retirement and subsequently allocate 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, 1997 and 1996 totaled $692,578 and $696,271, respectively. The
unrecognized transition obligation included in other assets at December 31, 1997
and 1996 totaled $463,139 and $508,000, respectively, which is being amortized
using a straight-line method over twenty years.
1997 1996
- --------------------------------------------------------------------------------
Net Periodic Post Retirement
Benefit Cost included the following Components:
Interest Cost $ 57,622 $ 46,393
Amortization of Unrecognized Net Loss 1,618 1,618
AMORTIZATION OF UNRECOGNIZED TRANSITION OBLIGATION 42,211 31,800
- --------------------------------------------------------------------------------
TOTAL $ 101,451 $ 79,811
================================================================================
For the years ended December 31, 1997 and 1996 the weighted-average discount
rate used in determining the actuarial present value of the accumulated benefit
obligation was 7.0%.
NOTE G. INCOME TAXES
Federal and State Income Taxes payable (prepaid) as of December 31, included
in other assets in 1997 and other liabilities in 1996 are as follows:
1997 1996
- --------------------------------------------------------------------------------
Current $ 157,669 $ (66,693)
DEFERRED 300,374 350,064
- --------------------------------------------------------------------------------
TOTAL $ 458,043 $ 283,371
================================================================================
Provisions for current income taxes for all years ended December 31,
are as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Federal:
Current $ 1,490,794 $ 662,461 $ 627,738
DEFERRED 58,528 70,865 (32,417)
- --------------------------------------------------------------------------------
TOTAL FEDERAL 1,549,322 733,326 595,321
- --------------------------------------------------------------------------------
New York State:
Current 518,377 248,111 261,318
DEFERRED 13,419 16,454 (7,849)
- --------------------------------------------------------------------------------
TOTAL NEW YORK STATE 531,796 264,565 253,469
- --------------------------------------------------------------------------------
TOTAL $ 2,081,118 $ 997,891 $ 848,790
================================================================================
A reconciliation of the federal statutory tax rate to the required tax rate
based on income before income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
TAX PRETAX TAX PRETAX TAX PRETAX
AMOUNT INCOME(%) AMOUNT INCOME(%) AMOUNT INCOME(%)
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Rate $ 1,836,659 34.00 $ 919,152 34.00 $ 788,858 34.00
Increase (Reduction) of Taxes
Resulting From:
Tax Exempt Interest (97,258) (1.80) (92,839) (3.43) (100,501) (4.33)
State Income Taxes Net
of Federal Income
Tax Benefit 350,985 6.50 174,613 6.46 167,290 7.21
OTHER (9,268) (0.17) (3,035) (0.11) (6,857) (0.30)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,081,118 38.53 $ 997,891 36.92 $ 848,790 36.58
====================================================================================================================================
</TABLE>
Income taxes on investment securities transactions amounted to zero in 1997, and
approximately $7,100 in 1996, and $600 in 1995.
<PAGE> 24
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 $300,374 and $350,064 as of the end of
1997 and 1996, respectively.
Deferred tax assets and liabilities were recognized as of December 31, 1997 and
1996 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, 1997: PROVISION DEPRECIATION LOSSES 106 115 TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal Deferred Tax
Asset (Liability) $ 332,221 $ (144,922) $ 131,318 $ 35,992 $ (146,006) $ 208,603
New York State Deferred
TAX ASSET (LIABILITY) 78,009 8,750 30,898 8,468 (34,354) 91,771
- ------------------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax
Asset (Liability) $ 410,230 $ (136,172) $ 162,216 $ 44,460 $ (180,360) $ 300,374
====================================================================================================================================
DECEMBER 31, 1996:
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
====================================================================================================================================
</TABLE>
NOTE H. DEPOSITS
TIME DEPOSITS IN EXCESS OF $100,000
At December 31, 1997 and 1996, time deposits in principal amounts of $100,000 or
more were $8,773,618 and $6,392,848, respectively. Interest expense on such
deposits for the three years ended December 31, 1997 was $392,267, $361,484,
$210,891, 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:
1999.......................................................... $ 1,143,122
2000.......................................................... 420,729
2001.......................................................... 0
2002.......................................................... 1,013,588
- --------------------------------------------------------------------------------
Total......................................................... $ 2,577,439
================================================================================
DEPOSITS OF MAJOR SHAREHOLDERS, OFFICERS, DIRECTORS AND THEIR AFFILIATES
Deposits due to major shareholders, officers, directors and their affiliates
aggregated $3,591,412 and $4,273,845 at December 31, 1997 and 1996,
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 $5,458,225 at December 31, 1997.
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, 1997 and 1996.
<PAGE> 25
NOTE J. SMITHTOWN BANCORP (PARENT COMPANY ONLY)
Smithtown Bancorp has one wholly-owned subsidiary, Bank of Smithtown.
<TABLE>
<CAPTION>
BALANCE SHEETS
AS OF DECEMBER 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Non-Interest-Bearing Deposits with Subsidiary Bank $ 191,902 $ 188,905
INVESTMENT IN BANK OF SMITHTOWN 16,690,132 13,965,887
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 16,882,034 $ 14,154,792
====================================================================================================================================
LIABILITIES
CASH DIVIDENDS PAYABLE $ 151,644 $ 138,646
- ------------------------------------------------------------------------------------------------------------------------------------
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 7,077,336 4,363,092
LESS: TREASURY STOCK (14,687 SHARES AT COST AT DECEMBER 31, 1997 AND 1996) 446,639 446,639
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 16,730,390 14,016,146
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 16,882,034 $ 14,154,792
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from Bank of Smithtown $ 606,575 $ 554,582 $ 668,564
EXPENSES (10,000) (249) (6,359)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Equity in Undistributed
Earnings of Subsidiary 596,575 554,333 662,205
Equity in Undistributed Earnings of SUBSIDIARY 2,724,244 1,151,165 809,176
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 3,320,819 1,705,498 1,471,381
Retained Earnings, Beginning of Year 4,363,092 3,212,176 2,225,685
DIVIDENDS DECLARED (606,575) (554,582) (484,890)
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR $ 7,077,336 $4,363,092 $ 3,212,176
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 3,320,819 $ 1,705,498 $ 1,471,381
Adjustments to reconcile net income to net cash provided
by operating activities:
EQUITY IN UNDISTRIBUTED NET EARNINGS OF SUBSIDIARY (2,724,244) (1,151,165) (809,176)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 596,575 554,333 662,205
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayments to Bank of Smithtown 0 0 (297,938)
Dividends Paid (593,578) (537,252) (470,491)
PROCEEDS FROM SALE OF TREASURY STOCK 0 0 138,405
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (593,578) (537,252) (630,024)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase in Non-Interest-Bearing Deposits with
Subsidiary Bank 2,997 17,081 32,181
Non-Interest Bearing Deposits with Subsidiary Bank, BEGINNING OF YEAR 188,905 171,824 139,643
- -----------------------------------------------------------------------------------------------------------------------------------
Non-Interest-Bearing Deposits with Subsidiary Bank, End of Year $ 191,902 $ 188,905 $ 171,824
====================================================================================================================================
</TABLE>
<PAGE> 26
NOTE K. COMMITMENTS AND CONTINGENT LIABILITIES
As of December 31, 1997, the minimum rental commitments under non-cancelable
operating leases for premises and equipment with initial terms in excess of one
year are as follows:
1998........................................................ $ 166,706
1999........................................................ 157,492
2000........................................................ 155,617
2001........................................................ 157,602
2002........................................................ 160,613
SUBSEQUENT TO 2002.......................................... 1,379,401
- --------------------------------------------------------------------------------
Total $ 2,177,431
================================================================================
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 $422,622 in
1997, $403,060 in 1996, and $343,175 in 1995.
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, 1997 was $766,000.
NOTE L. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. Fair value estimates are based on many judgments. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumption could significantly affect the estimates.
Fair value estimates do not apply to the value of anticipated future business
and the value of assets and liabilities that are not considered financial
instruments in accordance with generally accepted accounting principles.
Significant assets and liabilities that are not considered financial instruments
include the mortgage banking operation, deferred income taxes and premises and
equipment. In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
Statement of Financial Accounting Standards No. 107, "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 Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial lnstruments and Fair Value of Financial
Instruments" (SFAS 119). Financial instruments are defined as cash, evidence of
an ownership in an entity, or a contract that conveys or imposes on an entity
the contractual right or obligation to either receive or deliver cash or another
financial instrument. Fair value is defined as the amount at which such
financial instruments could be exchanged in a current transaction between
willing parties, other than in a forced sale or liquidation, and is best
evidenced by a quoted price, if one exists. Fair value estimates, methods and
assumptions are set forth below for the Bank's financial instruments.
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, DIVIDEND PAYABLE AND OTHER
LIABILITIES
Cash and due from banks, Federal Funds Sold, dividend payable and other
liabilities because of their short-term nature, have been valued at their
respective carrying vales.
INVESTMENT SECURITIES
For securities held-to-maturity and available-for-sale, fair values are
estimated based on quoted market prices or dealer quotes.
LOANS
The fair value of fixed-rate loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. The fair value of mortgage loans held for
sale approximates cost based on current estimated disposition values.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable at the reporting date. The fair value of fixed
maturity certificates of deposit are estimated using the rates currently offered
for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The fair value of securities sold under agreements to repurchase and other
borrowings are estimated based on quoted market prices or dealer quotes.
<PAGE> 27
NOTE M. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1997, 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 $2,800,000 during
1997 with $2,800,000 being the maximum amount outstanding at any month end
during 1997. The underlying security in the $2,800,000 REPO is a 7.75% U.S.
Government Agency security, call date May 26, 1998, and estimated fair value
$3,021,900. The security is held at Morgan Stanley & Company, Inc..
At December 31, 1996, there was one outstanding Security Sold Under Agreement to
Repurchase. Securities Sold Under Agreements to Repurchase averaged
approximately $1,644,809 during 1996, based on daily averages, and the maximum
amounts outstanding at any month-end during 1996 totaled $2,800,000.
NOTE N. OTHER BORROWINGS
The Bank has available to it, under various lines of credit from its
correspondent banks and Morgan Stanley & Company, Inc., a total of $66,169,710.
At December 31, 1997, outstanding balances on these lines of credit were
$5,800,000, with remaining available credit of $60,369,710. In addition to the
$2,800,000 repurchase agreement referred to in Note M the remaining outstanding
balance at year end consisted of a $3,000,000 five year fixed rate advance with
a three year call date, obtained through the Federal Home Loan Bank of New York
with a maturity date of December 3, 2001 and Demand Notes issued to the U.S.
Treasury totaling $5,452,540.
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 estimated fair
value of $13,285,632.
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 1997 was $5,501,517 and the
maximum outstanding amount at any month end was $12,000,000.
At December 31, 1997 and 1996, the fair value of Other Borrowings approximated
cost.
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,
1997 the Bank's total commitments to extend credit were $2,000,000 at fixed
rates and $15,208,174 at variable rates. Standby letters of credit are written
conditional instruments issued by the Bank to guarantee the financial
performance of a customer to a third party. There were thirty-one performance
standby letters of credit totaling $1,394,951 as of December 31, 1997. 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 other 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.
1997 ACTUAL 1996 ACTUAL REQUIRED
- --------------------------------------------------------------------------------
Tier I 14.35% 12.30% 4.00%
Tier II 1.25% 1.25% **
Total Risk-Based Capital 15.63% 13.58% 8.00%
Leverage Ratio 8.01% 7.82% 4.00%
<PAGE> 28
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
CONSOLIDATED AVERAGE BALANCE SHEET DATA
AS OF DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 7,796 $ 7,401 $ 6,781 $ 6,451 $ 7,050
Investment Securities:
Obligations of U.S. Government and
Agencies 18,828 10,788 10,496 22,387 37,327
Mortgage-Backed Securities 45,452 31,392 33,601 37,604 22,214
Obligations of State and Political
Subdivisions 5,213 4,814 5,259 6,180 5,990
OTHER INVESTMENT SECURITIES 823 600 331 127 127
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 70,316 47,594 49,687 66,298 65,658
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 6,884 7,681 3,758 2,962 5,479
- ------------------------------------------------------------------------------------------------------------------------------------
Loans (Net of Unearned Discount) 98,997 99,451 86,437 71,448 67,675
LESS: ALLOWANCE FOR POSSIBLE LOAN LOSSES 1,513 1,550 1,412 1,507 2,115
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS: NET 97,484 97,901 85,025 69,941 65,560
- ------------------------------------------------------------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT 2,515 2,793 3,133 3,272 3,442
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets
Other Real Estate Owned 4,245 4,523 5,489 4,902 7,595
OTHER 2,695 3,207 2,839 2,623 3,157
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 191,935 $ 171,100 $ 156,712 $ 156,449 $ 157,941
====================================================================================================================================
LIABILITIES
Deposits:
Demand (Non-Interest Bearing) $ 42,664 $ 38,425 $ 35,075 $ 34,872 $ 34,005
Money Market 33,636 26,627 22,965 25,838 31,657
Savings (including NOW) 58,814 60,578 60,404 65,157 66,787
TIME 31,506 28,660 22,896 15,796 14,134
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 166,620 154,290 141,340 141,663 146,583
Securities Sold Under Agreements to
Repurchase 2,800 1,645 1,690 2,465 0
Other Borrowings 5,502 848 247 0 0
OTHER LIABILITIES 1,641 1,141 1,157 708 149
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 176,563 157,924 144,434 144,836 146,732
- -----------------------------------------------------------------------------------------------------------------------------------
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 1,993 1,998
Unrealized Gain (Loss) on Securities
Available for Sale 121 (156) (53) (20) 0
RETAINED EARNINGS 11,465 9,546 8,579 7,695 7,271
- -----------------------------------------------------------------------------------------------------------------------------------
Total 15,819 13,623 12,759 11,908 11,509
LESS: TREASURY STOCK 447 447 481 295 300
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 15,372 13,176 12,278 11,613 11,209
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 191,935 $ 171,100 $ 156,712 $ 156,449 $ 157,941
===================================================================================================================================
</TABLE>
<PAGE> 29
SELECTED FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 7,667 $ 7,690 $ 7,003 $ 5,956 $ 5,701
Investment Securities Held to Maturity:
Obligations of U.S. Government 2,003 2,008 2,014 3,020 28,159
Obligations of U.S. Government
Agencies 0 0 0 2,052 2,000
Mortgage-Backed Securities 7,237 9,003 10,227 34,761 34,835
Obligations of State and Political
Subdivisions 6,458 4,997 4,648 6,137 5,768
OTHER SECURITIES 0 0 0 0 127
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 15,698 16,008 16,889 45,970 70,889
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Securities Available for Sale:
Obligations of U.S. Government 6,176 0 3,009 10,056 0
Obligations of U.S. Government
Agencies 15,252 13,564 3,016 898 0
Mortgage-Backed Securities 36,190 34,219 13,155 2,046 0
OTHER SECURITIES 856 600 599 127 0
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 58,474 48,383 19,779 13,127 0
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 74,172 64,391 36,668 59,097 70,889
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS SOLD 8,300 0 6,750 200 2,500
- ------------------------------------------------------------------------------------------------------------------------------------
Loans 100,404 101,151 98,069 80,491 64,896
Less: Unearned Discount 690 573 655 707 944
Allowance for Possible Loan
LOSSES 1,678 1,623 1,430 1,362 1,501
- ------------------------------------------------------------------------------------------------------------------------------------
LOANS, NET 98,036 98,955 95,984 78,422 62,451
- ------------------------------------------------------------------------------------------------------------------------------------
BANK PREMISES AND EQUIPMENT 2,455 2,619 3,173 3,167 3,310
- ------------------------------------------------------------------------------------------------------------------------------------
Other Assets
Other Real Estate Owned 3,928 5,088 5,046 5,590 5,309
OTHER 3,098 2,886 2,904 4,520 3,560
----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 197,656 $ 181,629 $ 157,528 $ 156,952 $ 153,720
====================================================================================================================================
LIABILITIES
Deposits:
Demand (Non-Interest Bearing) $ 42,567 $ 42,563 $ 35,945 $ 34,656 $ 35,312
Money Market 36,326 27,412 23,376 22,654 25,369
Savings (including NOW) 56,283 60,196 59,656 63,069 66,997
TIME 33,020 28,757 24,605 14,852 13,699
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 168,196 158,928 143,582 135,231 141,377
Dividend Payable 152 139 121 107 0
Securities Sold Under Agreements to
Repurchase 2,800 2,800 0 9,003 0
Other Borrowings 8,452 4,486 0 0 0
OTHER LIABILITIES 1,077 1,179 988 1,005 1,099
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 180,677 167,532 144,691 145,346 142,476
- -----------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock - $5.00 Par Value 2,240 2,240 2,240 2,240 2,240
Capital Surplus 1,994 1,994 1,994 1,993 1,993
Unrealized Gain (Loss) on Securities
Available for Sale 249 81 (28) (135) 0
RETAINED EARNINGS 12,943 10,229 9,078 8,092 7,298
- -----------------------------------------------------------------------------------------------------------------------------------
Total 17,426 14,544 13,284 12,190 11,531
LESS: TREASURY STOCK 447 447 447 584 287
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 16,979 14,097 12,837 11,606 11,244
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 197,656 $181,629 $ 157,528 $ 156,952 $ 153,720
===================================================================================================================================
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
CONSOLIDATED INCOME STATEMENTS
AS OF DECEMBER 31,
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 9,731,626 $ 9,391,802 $ 8,278,027 $ 6,690,095 $ 6,730,657
Interest on Balance due from Banks 5,973 1,493 0 0 0
Interest on Federal Funds Sold 382,157 417,107 221,857 117,440 167,520
Interest and Dividends on Investment
Securities:
Taxable:
Obligations of U.S. Government 235,724 141,265 431,259 1,235,897 2,205,419
Obligations of U.S. Government
Agencies 1,038,404 569,716 178,689 177,332 166,526
Mortgage-Backed Securities 2,847,023 1,833,879 1,901,977 2,080,703 1,314,747
OTHER SECURITIES 52,010 37,638 22,385 7,632 7,632
---------------------------------------------------------------------------------------------------------------------------------
Total 4,173,161 2,582,498 2,534,310 3,501,564 3,694,324
Exempt from Federal Income Taxes:
Obligations of State and Political
SUBDIVISIONS 308,609 293,774 318,174 369,338 355,572
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 14,601,526 12,686,674 11,352,368 10,678,437 10,948,073
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Money Market Accounts 1,136,766 834,353 716,465 584,242 738,928
Certificates of Deposit of $100,000 and Over 392,267 361,484 210,891 113,101 112,961
Other 2,161,906 2,343,908 2,316,078 1,708,624 1,847,872
Interest on Securities Sold Under
Agreements to Repurchase 174,556 100,932 106,511 127,223 0
INTEREST ON OTHER BORROWINGS 286,995 44,308 14,950 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 4,152,490 3,684,985 3,364,895 2,533,190 2,699,761
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 10,449,036 9,001,689 7,987,473 8,145,247 8,248,312
PROVISION FOR POSSIBLE LOAN LOSSES 805,000 370,000 110,000 120,000 1,364,329
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
FOR POSSIBLE LOAN LOSSES 9,644,036 8,631,689 7,877,473 8,025,247 6,883,983
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER NON-INTEREST INCOME
Trust Department Income 364,600 434,069 401,811 298,786 330,796
Service Charges on Deposit Accounts 1,518,765 1,337,449 1,278,668 1,344,754 1,263,371
Other Income 751,137 540,588 482,538 433,731 441,934
INVESTMENT SECURITY GAINS 0 16,724 1,393 22,695 240,110
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER NON-INTEREST INCOME 2,634,502 2,328,830 2,164,410 2,099,966 2,276,211
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries 2,949,150 3,379,214 3,470,680 3,556,241 3,654,727
Pensions and Other Employee Benefits 669,919 717,516 761,577 832,603 862,213
Net Occupancy Expense 874,033 1,130,358 944,571 905,538 848,704
Furniture and Equipment Expense 589,897 637,029 622,775 582,663 589,701
OTHER EXPENSES 1,793,602 2,393,013 1,922,109 2,354,157 2,886,070
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER OPERATING EXPENSES 6,876,601 8,257,130 7,721,712 8,231,202 8,841,415
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,401,937 2,703,389 2,320,171 1,894,011 318,779
PROVISION FOR INCOME TAXES 2,081,118 997,891 848,790 662,500 17,083
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 3,320,819 $ 1,705,498 $ 1,471,381 $ 1,231,511 $ 301,696
===================================================================================================================================
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
SUPPLEMENTARY INFORMATION
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Income $ 7.66 $ 3.94 $ 3.40 $ 2.80 $ 0.69
Book Value 39.19 32.54 29.63 27.14 25.57
DIVIDENDS DECLARED
Cash Dividends per Share 1.40 1.28 1.12 1.00 0.75
Cash Dividends Declared 606,575 554,582 484,890 436,741 329,504
YEAR-END DATA
Total Assets 197,656,436 181,629,049 157,528,274 156,951,687 153,720,337
Total Deposits 168,195,635 158,928,455 143,581,497 135,230,577 141,377,440
Total Stockholders'
Equity 16,979,459 14,097,239 12,837,073 11,605,718 11,243,502
Total Trust Assets 76,562,667 70,643,739 71,304,522 62,452,427 67,128,712
Number of Shares
Outstanding 433,268 433,268 433,268 427,666 439,765
SELECTED RATIOS % % % % %
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income to:
Total Income 19.27 11.36 10.89 9.64 2.28
Average Total Assets 1.73 1.00 0.94 0.79 0.19
Average Stockholders'
Equity 21.60 12.94 11.98 10.61 2.70
Average Stockholders'
Equity to Average Assets 8.01 7.70 7.84 7.44 7.08
Dividend Payout Ratio 18.27 32.52 32.95 35.46 109.22
Because the common stock of Smithtown Bancorp is not actively traded, managementis not always aware of sale prices of stock
traded privately or through brokerage firms. The following prices are based on estimates of such sales.
CASH
DIVIDEND
1997 HIGH LOW DECLARED
- ------------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER $ 36.000 $ 34.000 $ .35
SECOND QUARTER 42.000 36.000 .35
THIRD QUARTER 51.000 38.500 .35
FOURTH QUARTER 85.000 52.750 .35
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1.40
====================================================================================================================================
CASH
DIVIDEND
1996 HIGH LOW DECLARED
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter $ 32.000 $ 29.750 $ 0.32
Second Quarter 32.000 29.750 0.32
Third Quarter 32.000 31.000 0.32
FOURTH QUARTER 35.000 32.000 0.32
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1.28
====================================================================================================================================
CASH
DIVIDEND
1995 HIGH LOW DECLARED
- ------------------------------------------------------------------------------------------------------------------------------------
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>
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SUMMARY
Smithtown Bancorp is a one-bank holding company formed in 1984. Its income is
derived solely 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 and Investment Management Division. Bank of Smithtown is
committed to providing increased shareholder value through superior customer
service, efficiency of operations and financial products especially geared
toward the community which we serve. 1997 was an outstanding year for the Bank.
Assets grew from $181,629,049 at year end 1996 to $197,656,435 at year end 1997,
an increase of 8.82%. Net income reached an 88 year record high level of
$3,320,819, an increase of 94.71% over 1996. The Bank's stock price climbed from
$32 per share at December 1996 to $85 per share at year end 1997, a very strong
indicator of the strength and confidence in our institution.
During 1997, the Bank continued to strengthen and enhance its existing product
lines, and also introduced new products and services in response to our
customers' requests. We continued to originate residential mortgage loans which
were sold in the secondary market. The Bank also developed a home equity product
"Home Advance," in response to customer requests for a source of funds to
improve their homes or to use for other personal expenditures. We also installed
a voice response unit "CHATS," in order to provide deposit and loan information
and transaction ability 24 hours a day, 7 days a week to our customer base. In
the short time during which this telephone system has been fully operational,
the number of calls received has increased dramatically. Although the Bank is
committed to providing technology solutions to a changing customer base which
works non-traditional hours, travels more often, and is unquestionably more
computer literate, we will never lose sight of the value of providing one on one
customer-employee contact for any of our customers who prefer to conduct their
business in this manner. Our Preferred Professional and Preferred Platinum
products, packages with rate and fee incentives offered to our "total
relationship" customers, have continued to show success and have increased
significantly in volume. Benefits offered through "relationship banking
products" will continue to be a focus for the Bank during 1998. Our Trust and
Investment Management Division has also broadened its scope by providing more
comprehensive and well documented investment advice, as well as additional
investment alternatives. In summary, 1997 was a year of expansion in terms of
products and services offered by Bank of Smithtown. Although the Bank operated
in a relatively flat yield curve environment when spread management becomes more
difficult and margins tighten, the Bank's profitability reached record levels.
Due to our focus on a more profitable lending market (small businesses) and our
relatively low cost of funds, Bank of Smithtown's margin reached 6.07%, the
highest level recorded in our history.
The Bank's balance sheet changed in asset allocation during 1997. Investment
securities climbed from $64,390,735 to $74,172,375 and now represents 37.53% of
assets as compared to 35.45% at year end 1996. The loan portfolio remained
stable during 1997, with a slight decline of 0.93% and now represents 49.60% of
total assets as compared to 54.48% at December 31, 1996. Other Real Estate Owned
(OREO) decreased from $5,087,707 to $3,927,786 due to the sale of five
properties with migration of four additional properties into this category.
Total assets increased by 8.82% from year end 1996 to year end 1997. The
composition of deposits changed dramatically during 1997. Demand deposits
remained at near 1996 levels and NOW accounts increased by 5.65%. Money market
accounts increased significantly from $27,412,325 to $36,326,089 at year end
1997. This represents 32.52% growth. The level of time deposits also increased
during 1997 by 14.82%. This shift into money market and time accounts is
partially a result of our competitive rate structure and the higher rate
offerings on these products to our Preferred Platinum and Preferred Professional
customers. In conjunction with the increased money market and time account
volumes, the bank saw a 10.35% decline in savings accounts. Since money market
accounts share some similarities with savings accounts, but paid a significantly
higher rate of interest during 1997, the transfer of funds was predictable.
Certain cost advantages exist to the Bank for money market accounts that are not
inherent in savings accounts. As a result of continued strength and
profitability of Bank of Smithtown during 1997, the Board of Directors increased
dividend payments to its shareholders by 9.38%. Dividends declared during 1997
was $1.40 per share as compared to $1.28 per share in 1996. Other Borrowings
increased during 1997 due to increased investments received by the Bank under
the Treasury, Tax and Loan Note Option and Direct Investment Program. The Bank
increased the level of these holdings in order to increase the spread income
derived from the investment programs. Stockholder's Equity increased from
$14,097,239 to $16,979,458, representing 20.45% growth due to the high level of
net income.
INTEREST INCOME
Interest income for the years ended December 31, 1997, 1996 and 1995 was
$14,601,526, $12,686,674 and $11,352,368, respectively. The largest component of
interest income is interest and fees on loans. Although loan volume declined by
0.93%, interest and fee income grew by 3.62%. Average yield on the loan
portfolio increased from 9.59% in 1996 to 9.98% in 1997. Interest and dividend
income on the Bank's investment securities increased from $2,852,494 in 1995 to
$2,876,272 in 1996 and $4,481,770 in 1997. This 57.12% growth in income
corresponds to a 102.28% growth in volume. Average yield on these investment
securities has increased from 6.07% in 1996 to 6.60% in 1997. This additional
yield is a result of change in portfolio composition. The final components of
interest income is derived from sales of Federal Funds. Although the average
volume of sales declined by 11.58% from 1996 to 1997, the yield on these funds
increased from 5.42% to 5.55% during 1997. This increase in yield is a result of
slightly higher rates paid for these funds in 1997 as well as our management of
correspondent bank sales. The resultant yield on interest-earning assets for
1997 was 8.44% as compared to 8.38% in 1996 and 8.32% in 1995.
INTEREST EXPENSE
Interest expense rose by 9.51% from 1995 to 1996 and again by 12.69% in 1997 as
a result of an increased volume of interest-bearing liabilities. The increase in
interest expense is due to the change in deposit composition to higher interest
bearing accounts as well as the cost of borrowed funds. In spite of this
increased expense, the Bank's cost of funds remains low at 3.15%.
<PAGE> 33
NET INTEREST INCOME
Net interest income remains the largest contributor to net income and represents
79.86% of total income. The Bank's spread on interest-earning assets reached
6.07% during 1997, an increase of 10 basis points over 1996. This was
accomplished by us in spite of the flat yield curve environment of 1997. We have
been able to produce higher yields on earning assets while maintenance a
relatively low cost of funds. We make a majority of our loans to a profitable
segment of the lending market of small businesses and builders. The service we
provide our customers in conjunction with competitive rates has also proven to
be a necessary combination which has allowed us to keep our funding costs lower.
As the larger banks become even larger, they have tended to lose sight of the
necessity of quality customer service, and as result, our market share has
increased. The communities we service place high value in customer service, at
times even in preference to slightly higher rates offered by the larger banks.
While the Bank remains committed to providing a high level of customer service,
this has in no way replaced our competitive rate structure on deposit accounts.
It is through relationship pricing that Bank of Smithtown customers are able to
earn the highest rates.
The tables below show a comparative analysis of the major areas of interest
income, interest expense and resultant changes in net interest income. Variances
in rate volume relationships have been allocated to the rate.
AVERAGE BALANCE SHEET AND YIELD ANALYSIS
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------- --------------------------------------
(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 $ 65,103 $ 4,173 6.41 $ 42,780 $ 2,582 6.04
NONTAXABLE 5,213 468 8.98 4,814 445 9.24
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 70,316 4,641 6.60 47,594 3,027 6.36
- -----------------------------------------------------------------------------------------------------------------------------------
Balances Due from Banks 131 6 4.58 27 1 3.70
Total Net Loans 97,484 9,732 9.98 97,901 9,391 9.59
FEDERAL FUNDS SOLD 6,884 382 5.55 7,681 417 5.42
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 174,815 14,761 8.44 153,203 12,836 8.38
NON-INTEREST-EARNING ASSETS 17,120 0 0.00 17,897 0 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 191,935 14,761 7.69 $ 171,100 $ 12,836 7.50
===================================================================================================================================
LIABILITIES
Interest-Bearing Liabilities:
Savings Deposits (including
NOW) $ 58,814 $ 967 1.64 $ 60,578 $ 1,299 2.14
Money Market Accounts 33,636 1,137 3.38 26,627 834 3.13
CERTIFICATES OF DEPOSIT 31,079 1,587 5.11 27,874 1,407 5.05
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits 123,529 3,691 2.99 115,079 3,540 3.07
Securities Sold Under
Agreements to Repurchase 2,800 174 6.21 1,645 101 6.14
OTHER BORROWINGS 5,502 287 5.22 848 44 5.19
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------- --------------------------------------
(IN THOUSANDS) AVERAGE AVERAGE AVERAGE AVERAGE
TAX EQUIVALENT BASIS BALANCE INTEREST RATE(%) BALANCE INTEREST RATE(%)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 131,831 4,152 3.15 117,572 3,685 3.13
Non-Interest Bearing
Liabilities:
Demand Deposits 43,091 0 0.00 38,425 0 0.00
OTHER 1,641 0 0.00 1,927 0 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 176,563 4,152 2.35 157,924 3,685 2.33
STOCKHOLDERS' EQUITY 15,372 0 0.00 13,176 0 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 191,935 $ 4,152 2.16 $ 171,100 3,685 2.15
===================================================================================================================================
INTEREST MARGIN $ 10,609 $ 9,151
Interest Spread on:
Average Total Assets 5.53% 5.35%
Average Total Interest-Earning Assets 6.07% 5.97%
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
RATE VOLUME RELATIONSHIPS OF INTEREST MARGIN ON EARNING ASSETS
1997 1996
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 $ 1,347 $ 244 $ 1,591 $ (94) $ 142 $ 48
NONTAXABLE 37 (14) 23 (41) 4 (37)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 1,384 230 1,614 (135) 146 11
Total Net Loans (40) 380 340 1,254 (140) 1,114
Federal Funds Sold (43) 8 (35) 232 (37) 195
BALANCES DUE FROM DEPOSITORY INSTITUTIONS 4 1 5 0 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 1,305 619 1,924 1,351 (30) 1,321
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits (38) (294) (332) 4 (95) (91)
Money Market Accounts 220 83 303 114 4 118
CERTIFICATES OF DEPOSITS 162 18 180 295 (28) 267
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Deposits 344 (193) 151 413 (119) 294
Securities Sold Under Agreements
to Repurchase 71 2 73 (3) (3) (6)
OTHER BORROWINGS 242 1 243 36 (7) 29
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
LIABILITIES 657 (190) 467 446 (129) 317
- ------------------------------------------------------------------------------------------------------------------------------------
Changes in Interest Margin $ 648 $ 809 $ 1,457 $ 905 $ 99 $ 1,004
====================================================================================================================================
OTHER OPERATING INCOME
The schedule below details items of non-interest income for the years ended December 31, 1997, 1996 and 1995.
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Trust and Investment Management Department Income $ 364,600 $ 434,069 $ 401,811
Service Charges on Deposit Accounts 1,518,765 1,337,449 1,278,668
Other Income 751,137 540,588 482,538
INVESTMENT SECURITY GAINS 0 16,724 1,393
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,634,502 $ 2,328,830 $ 2,164,410
====================================================================================================================================
</TABLE>
Other Operating Income increased by 13.13% from year end 1996 to year end 1997.
Service charges on deposit accounts is the primary contributor to non-interest
income. Its increase of 13.56% over 1996 income is a result of restructured
service charge fees as well as our increased commitment to their collection. One
additional ATM was installed at our Hauppauge location this year, which
increased the Bank's ATM network to four machines. The fee income generated by
these ATM machines increased 33.05% over 1996 income to $44,666 this year. Loan
fees is another major contributor to noninterest income, and for the year ended
December 31, 1997, loan fees collected totaled $492,243, an increase of 60.49%
over 1996.
<TABLE>
<CAPTION>
OTHER OPERATING EXPENSES
Detailed below are the components of the Other Operating Expenses for the years ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER OPERATING EXPENSES
Salaries $ 2,949,150 $ 3,379,214 $ 3,470,680
Pensions and Other Employee Benefits 669,919 717,516 761,577
Net Occupancy Expense of Bank Premises 874,033 1,130,358 944,571
Furniture and Equipment Expense 589,897 637,029 622,775
OTHER EXPENSES 1,793,602 2,393,013 1,922,109
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 6,876,601 $ 8,257,130 $ 7,721,712
====================================================================================================================================
</TABLE>
Other Operating Expenses represent various categories of noninterest expense.
These expenses declined by 16.72% from 1996. Salary and benefit expense
decreased for the fourth consecutive year, a result of our commitment to
maintaining appropriate staffing levels while continuing to provide
<PAGE> 35
the high level of customer service which our depositors have become accustomed.
Careful scrutiny of benefit plans offered to our employees has resulted in
increased levels of benefits with reductions in cost. Net occupancy expense
decreased by 22.67% from 1996 due primarily to an adjustment in real estate
taxes on bank properties as well as the recognition of benefits resulting from
building improvements done throughout 1997. Expenses related to the maintenance
of Other Real Estate Owned during 1997 increased slightly from $113,183 to
$120,254. The loss on Other Real Estate Owned, the expense account used to
provide for declining values in OREO properties totaled $93,172 during 1997 as
compared to $209,000 during 1996. The Valuation Reserve Account serves as 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 $93,172
loss on OREO expense account, the Valuation Reserve reached a level of $429,232,
an amount deemed adequate by management to protect the Bank against any future
losses on sales of these properties. Miscellaneous Operating Expenses decreased
by 25.05% for the year ended December 31, 1997 due to tight expense control
throughout the Bank. A major component of Miscellaneous Expenses is the
Provision for Loan Loss expense account which provides coverage for losses in
the Bank's loan portfolio. Based on both the size of the loan portfolio and the
volume of nonperforming loans, management felt it prudent to reserve $805,000
this year as compared to $451,000 during 1996. The level of the Allowance for
Possible Loan Losses has been reviewed and deemed adequate by management.
NET INCOME
Net income for 1997 reached $3,320,819 as compared to $1,705,498 in 1996 and
$1,471,381 in 1995. Growth in earnings has been 125.69% since 1995. This record
high level of net income has been the result of increased investment and loan
income, and reduced operating expenses. A new budget process was developed
during 1997 and its implementation produced very positive results. Expenses were
very closely monitored by staff members. By linking salary increases and
incentive pay to the adherence to budget constraints, results were material, and
the contribution to the Bank's bottom line of these reduced operating expenses
was significant. Efficiencies have increased in opposite proportion to reduced
expenses. The Bank's efficiency ratio, which measures the amounts of expense
required to produce $1.00 of income, is now at 52%. During 1996 and 1995 this
ratio was 72% and 75%, respectively. 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 1995, 1996 and 1997, Bank of Smithtown's ROAA
was 0.94%, 1.00% and 1.73% an 84.04% increase over the three year period. 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 1995, 1996 and 1997 was 11.82, 12.94 and 21.60,
respectively, an increase of 82.74% over the three year period. The strength of
these two ratios, in conjunction with other results attained during 1997 have
placed Bank of Smithtown in the number one position among 71 similarly sized
community banks throughout New York State.
INVESTMENT SECURITIES
Investments at December 31, 1997 totaled $74,172,375 as compared to $64,390,735
at year end 1996 an increase of 15.19%. During 1997, the proceeds primarily from
the maturities of agency securities were used to purchase $3,000,000 in Treasury
Notes, $7,500,000 in GNMA Adjustable Rate Mortgages, $2,500,000 in GNMA Fixed
Rate Mortgages and $2,000,000 in municipal bonds. Of the $74,172,375 investment
portfolio, 78.84% is classified as Available to Sale (AFS) and 21.16% as Held to
Maturity (HTM). The majority of the portfolio is classified AFS so as to provide
additional liquidity potential for the Bank as these securities may be sold, if
necessary. However, it remains management's intent to hold most securities to
maturity. The composition of the portfolio has changed only slightly, with
U.S.Treasury notes representing 11.03%, U.S. Government Agencies representing
20.56%, Mortgage Backed Securities 58.55% and Municipal Bonds 8.71%, Other
Securities consist of $127,200 of Federal Reserve Stock, $699,600 of Federal
Home Loan Bank Stock, and $30,000 of other equity investments. The Federal
Reserve Bank and Federal Home Loan Bank Stock are restricted. As can be seen
from the accompanying data the weighted average maturity of the entire
investment portfolio has remained the same as it was in 1996, 14 years, 7
months. Although this average maturity has increased over the past three years,
the actual maturity or average like of the portfolio remains considerably
shorter due to paydowns on mortgage-backed securities. The portfolio has
increased in average yield from 6.36% at year end 1996 to 6.60% at year end
1997. This is primarily a result of the tax benefit accrued to the Bank from its
holdings of municipal bonds.
The following schedules shows the amortized cost of all Held to Maturity
Securities and estimated fair value of Available for Sale Securities as detailed
in the Bank's balance sheet as of December 31:
INVESTMENT SECURITIES HELD TO MATURITY 1997 1996
- --------------------------------------------------------------------------------
Obligations of U.S. Government $ 2,002,757 $ 2,008,366
Mortgage-Backed Securities 7,237,038 9,003,335
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS 6,458,344 4,996,750
- --------------------------------------------------------------------------------
TOTAL $ 15,698,139 $ 16,008,451
================================================================================
INVESTMENT SECURITIES AVAILABLE FOR SALE
Obligations of U.S. Government $ 6,175,710 $ 0
Obligations of U.S. Government Agencies 15,251,638 13,563,700
Mortgage-Backed Securities 36,190,088 34,218,784
OTHER SECURITIES 856,800 599,800
- --------------------------------------------------------------------------------
TOTAL $58,474,236 $ 48,382,284
================================================================================
<PAGE> 36
The tables below set forth the investment securities by portfolio, weighted
average maturity, and weighted average yield as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE MATURITY
INVESTMENT SECURITIES HELD TO MATURITY 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C <C> <C> <C>
Obligations of U.S. Government 0 YRS. 6 MOS. 1 YR. 6 MOS.
Mortgage-Backed Securities 6 YRS. 7 MOS. 7R YRS. 8 MOS.
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS 4 YRS. 1 MOS. 4 YRS. 2 MOS.
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 4 YRS. 9 MOS. 5 YRS. 10 MOS.
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE
Obligations of U.S. Government 2 YRS. 0 MOS. - -
Obligations of U.S. Government Agencies 8 YRS. 6 MOS. 7 YRS. 6 MOS.
MORTGAGE-BACKED SECURITIES 23 YRS. 8 MOS. 21 YRS. 8 MOS.
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 17 YRS. 4 MOS. 17 YRS. 7 MOS.
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities 14 YRS. 7 MOS. 14,YRS. 7 MOS.
====================================================================================================================================
</TABLE>
WEIGHTED AVERAGE YIELD
<TABLE>
<CAPTION> WEIGHTED
AMORTIZED ESTIMATED AVERAGE
SECURITIES HELD TO MATURITY COST FAIR VALUE YIELD (%)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Obligations of U.S. Government:
Within 1 year $ 2,002,757 $ 1,996,090 5.31
Mortgage-Backed Securities:
After 1 year, but within 5 years 3,012,964 2,981,703 5.81
After 5 years, but within 10 years 1,326,951 1,311,625 5.00
After 10 years 2,897,123 2,890,613 6.50
Obligations of State and Political Subdivisions:
Within 1 year 564,903 569,175 6.17
After 1 year, but within 5 years 3,831,257 3,964,74 6.14
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
SECURITIES HELD TO MATURITY COST FAIR VALUE YIELD (%)
- ------------------------------------------------------------------------------------------------------------------------------------
After 5 years, but within 10 years 2,016,934 2,099,292 5.27
AFTER 10 YEARS 45,250 48,719 5.94
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 15,698,139 $ 15,861,965 5.83
====================================================================================================================================
INVESTMENT SECURITIES AVAILABLE FOR SALE
Obligations of U.S. Government:
After 1 year, but within 5 years $ 6,142,129 $ 6,175,710 7.19
Obligations of U.S. Government Agencies:
After 1 year, but within 5 years 1,000,000 995,350 5.96
After 5 years, but within 10 years 11,535,300 11,598,685 7.61
After 10 years 2,639,856 2,657,603 8.18
Mortgage-Backed Securities:
Within 1 year 3,696,671 3,685,892 5.66
After 1 year, but within 5 years 801,610 798,484 6.00
AFTER 10 YEARS 31,372,441 31,705,712 7.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 57,188,007 $ 57,617,436 7.09
====================================================================================================================================
<PAGE> 37
</TABLE>
LOANS
The Bank's loan portfolio at December 31, 1997 and 1996 (net of unearned income)
was $99,713,203 and $100,577,940, respectively. The classification of the
portfolio is as follows:
<TABLE>
<CAPTION>
1997 % 1996 %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Loans, Construction $ 13,032,541 12.98 $ 8,180,276 8.09
Real Estate Loans, Other:
Commercial 43,520,062 43.35 43,071,726 42.58
Residential 12,506,653 12.46 14,074,208 13.91
Mortgage Loans Held for Sale 0 0.00 495,000 0.49
Commercial and Industrial Loans 23,745,418 23.65 23,458,052 23.19
Loans to Individuals for Household,
Family and Other Personal Expenditures 7,492,586 7.46 11,543,331 11.41
ALL OTHER LOANS (INCLUDING OVERDRAFTS) 106,272 0.10 328,078 0.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans $ 100,403,532 100.00 $ 101,150,671 100.00
====================================================================================================================================
</TABLE>
The largest areas of growth within the portfolio remain in the construction and
commercial real estate loan categories. Average yield on the entire loan
portfolio for 1997 was 9.98% as compared to 9.59% during 1996. Of the
$99,713,203 portfolio, 76.48% are adjustable rate products and 23.52% fixed rate
loans. The Bank has entered into various participation agreements with other
local Long Island banks in order to provide funding for high quality commercial
real estate loans, yet still avoid any risk of credit concentration. These
participation loans totaled $18,519,418 for Bank of Smithtown at December 31,
1997. The majority of other loans made by Bank of Smithtown are to residents
located within the Bank's primary lending area. Credit is extended to a wide
spectrum of borrowers, including individuals, non-profit and religious
organizations and small to middle market businesses. Although real estate loans
comprise a majority of the portfolio, credit risks are 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, 1997:
<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) $ 12,630 $ 0 $ 0 $12,630
REAL ESTATE - CONSTRUCTION 9,576 3,457 0 13,033
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 22,206 $ 3,457 $ 0 $25,663
====================================================================================================================================
</TABLE>
DEPOSITS
Average deposits for 1997 were $166,619,073 as compared to $154,290,130 in 1996.
Year end 1997 deposits increased by $9,267,180 or 5.83% over year end 1996. The
largest increase in deposit accounts during 1997 were in money market accounts
and certificates of deposit. The Bank's interest rate structure shifted during
1997, with lower rates paid for savings deposits and higher rates for money
market accounts. The benefits offered to Preferred Platinum and Professional
Account holders was also responsible for the increase in money market accounts
and certificates of deposit.
AVERAGE BALANCE
(IN THOUSANDS) 1997 1996
- --------------------------------------------------------------------------------
Demand (Non-Interest Bearing) $ 42,664 $ 38,425
Money Market 33,636 26,627
Savings (including NOW) 58,814 60,578
TIME 31,506 28,660
- --------------------------------------------------------------------------------
Total Deposits $ 166,620 $ 154,290
================================================================================
<PAGE> 38
At December 31, 1997, the remaining maturities of the Bank's Certificates of
Deposit in amounts of $100,000 or greater were as follows:
(IN THOUSANDS)
3 months or less...................................................... $ 3,997
Over 3 through 6 months............................................... 1,098
Over 6 through 12 months.............................................. 1,102
OVER 12 MONTHS........................................................ 2,577
- --------------------------------------------------------------------------------
Total $ 8,774
================================================================================
OTHER BORROWINGS
Borrowings increased slightly due to increased investments made by the U.S.
Treasury under the Treasury Tax and Loan Note Option Depository Program and
Direct Investment Program. These investments provide a twenty-five basis point
spread to the Bank and are available to us at the discretion of the U.S.
Treasury. These funds are invested at Bank of Smithtown when the Treasury has
excess funds and are returned to them as needed. One repurchase agreement
remains outstanding as of December 31, 1997 totaling $2,800,000 with a maturity
date of May 1998, carrying a 6.16% interest rate. The Bank also has one
outstanding advance from the Federal Home Loan Bank. Advances represent loan
agreements with stated maturities and interest rates. At year end 1997, Bank of
Smithtown had one advance totaling $3,000,000 with a call date of December 1999,
and stated maturity date of December 2001. This advance carries a 5.56% interest
rate.
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 without sacrificing
earnings. The Bank matches the maturity of its assets and liabilities in a way
that takes advantage of the current and anticipated rate environment.
Asset/liability management is of great concern to management and is reviewed on
an ongoing basis. The President, Chief Financial Officer and Chief Lending
Officer serve on the Asset/Liability Management Committee. 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. Semi annually,
the Bank collects the necessary information to run an Income Simulation Model,
which tests our sensitivity to upward and downward interest rate fluctuations.
The rate fluctuations used in the model are large and immediate, and actually
reflect the Bank's earnings under these simulations. The results of both income
simulations performed during 1997 reflected minimal sensitivity to any rate
fluctuations. Interest margins and net income remain consistent regardless of
changes in market interest rates. These models lead to investment, loan and
deposit strategies for earnings maximization with acceptable risk levels.
The following table details the interest rate sensitivity of the Bank over
various periods as of December 31, 1997.
<TABLE>
<CAPTION>
THREE
MONTHS SIX TOTAL ONE YEAR THREE YEARS
THREE THROUGH MONTHS SENSITIVE THROUGH THROUGH OVER
MONTHS SIX THROUGH WITHIN THREE FIVE FIVE ALL
(IN THOUSANDS) 1 DAY OR LESS MONTHS ONE YEAR ONE YEAR YEARS YEARS YEARS OTHER(1) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Interest Earning Assets $38,719 $ 12,408 $ 16,272 $ 26,849 $ 94,248 $ 49,416 $ 16,784 $ 19,872 $ 2,450 $ 182,770
Total Interest Bearing
Liabilities and
Demand Deposits (2) 6,129 19,236 17,453 22,741 65,559 55,552 37,054 0 21,283 179,448
Interest Sensitivity
Gap Per Period 32,590 (6,828) (1,181) 4,108 28,689 (6,136) (20,270) 19,872 (18,833) 3,322
Cumulative Interest
Sensitivity Gap 32,590 25,762 24,581 28,689 28,689 22,553 2,283 22,155 3,322 3,322
Percent of Cumulative
Gap to Total Assets 16.49% 13.03% 12.44% 14.51% 14.51% 11.41% 1.16% 11.21% 1.68% 1.68%
</TABLE>
(1) INCLUDES INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES THAT DO
NOT REPRICE PLUS $1,593,264 IN NON-ACCRUAL LOANS.
(2) MONEY MARKET ACCOUNTS ASSUMED TO DECLINE OVER A 2 YEAR PERIOD. SAVINGS
ACCOUNTS AND NOW ASSUMED TO DECLINE OVER A 5 YEAR PERIOD. DEMAND DEPOSITS ARE
SPREAD BASED ON HISTORICAL EXPERIENCE.
<PAGE> 39
STOCKHOLDERS' EQUITY
Shown below are the components of Stockholders' Equity as of December 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 on Securities Available for Sale 249,068 81,093
RETAINED EARNINGS 12,943,680 10,229,436
- ------------------------------------------------------------------------------------------------------------------------------------
Total 17,426,097 14,543,878
LESS: TREASURY STOCK (14,687 SHARES AT COST) 446,639 446,639
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 16,979,458 $14,097,239
====================================================================================================================================
</TABLE>
Stockholders' Equity increased by $2,882,220 or 20.45% during 1997. The increase
in retained earnings was the result of $3,320,819 of net income and $606,575 of
dividends declared.
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 1997 was 8.01%. The required minimum leverage ratio of Bank of
Smithtown is 4.00%. Total risk based capital ratio at year end 1997 was 15.63%
compared to 13.58% at year end 1996. The minimum required ratio is 8.00%. By all
guidelines, the Bank's capital position is considered extremely strong.
ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Allowance for Possible Loan Loss Account at year end 1997 was $1,677,594 as
compared to $1,622,572 at year end 1996. The change in the Allowance Account is
the result of net charge-offs totaling $177,322 and a Provision for Possible
Loan Losses of $805,000.
The following tables describe the activity in the Allowance Account for the
years ended December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for Possible Loan Losses at Beginning of
PERIOD $ 1,623 $1,430
- ------------------------------------------------------------------------------------------------------------------------------------
Loans Charged Off:
Commercial 181 13
Real Estate 382 63
CONSUMER 286 123
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS CHARGED-OFF 849 199
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries on Amounts Previously Charged-Off:
Commercial 4 2
Real Estate 60 13
CONSUMER 35 7
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 99 22
- ------------------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS 750 177
- ------------------------------------------------------------------------------------------------------------------------------------
Current Year's Provision for Possible Loan Losses 805 370
RESERVE FOR POSSIBLE LOAN LOSSES AT END OF PERIOD $ 1,678 $1,623
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loans:
Average (Net of Unearned Discount and Allowance
FOR POSSIBLE LOAN LOSS) $ 97,484 $ 97,901
- ------------------------------------------------------------------------------------------------------------------------------------
End of Period (Net of Unearned Discount) $ 99,713 $100,578
====================================================================================================================================
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
RATIOS: 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Loans Charged-Off to:
Average Loans 0.77% 0.18%
Loans at End of Period 0.75 0.18
Allowance for Possible Loan Losses 44.70 10.91
Provision for Possible Loan Losses 93.17 47.84
Last Year's Charge-Off to this Year's Recovery 201.01 340.91
Allowance for Possible Loan Losses at Year End To:
Average Loans (Net of Unearned Discount) 1.70 1.63
End of Period Loans (Net of Unearned Discount) 1.68 1.61
</TABLE>
The following table shows the Bank's non-accrual and contractually past due
loans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
(IN THOUSANDS) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accruing Loans Past Due 90
Days or More $ 432 $ 3 $ 90 $ 97 $ 418
NON-ACCRUAL LOANS 1,593 2,001 2,849 1,214 1,496
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2,025 $2,004 $ 2,939 $ 1,311 $ 1,914
====================================================================================================================================
</TABLE>
For 1997 and 1996 the difference between interest income on non-accrual loans
and income that would have been recognized at original contractual rates and
terms is $94,872 and $143,045, respectively.
The composition of Other Real Estate Owned at December 31, 1997 is as follows:
- --------------------------------------------------------------------------------
Commercial $ 321,919
Commercial Land 2,835,831
SINGLE FAMILY 770,036
- --------------------------------------------------------------------------------
Total $ 3,927,786
================================================================================
The value of Other Real Estate Owned shown above is net of the Valuation
Reserve.
IMPACT OF YEAR 2000 COMPLIANCE
During 1997, and for the next two years, the Bank will be devoting necessary
resources toward Year 2000 compliance. All date-sensitive hardware, software and
miscellaneous environmental systems will be evaluated, and in accordance with
our Year 2000 Strategic Plan will be upgraded or replaced with compliant
systems. A team consisting of members of Senior Management, as well as Board of
Director representatives is committed to completing the Assessment Phase of the
project and beginning the Validation and Renovation Phases during 1998. These
two Phases in addition to the Implementation Phase will be completed prior to
year end 1999. As of year end 1997, the expenses related to full Year 2000
compliance are anticipated to be minimal. The Bank intends to keep our
shareholders informed as we progress through the Phases toward compliance.
<PAGE> 41
CORPORATE DIRECTORY
<TABLE>
<S> <C> <C>
SMITHTOWN BANCORP AND 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 Oficer (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 Thomas J. Stevens Commack, NY 11725-3097
Barry M. Seigerman Executive Vice President 202 Jericho Turnpike
& Chief Lending Officer (516) 2657922
SMITHTOWN BANCORP Cynthia Vernuanc Hauppauge, NY 11788-4346
Senior Vice President,Marketing 548 Route 111
OFFICERS & New Business Development (516 265-7922
Bradley E. Rock
CHAIRMAN, PRESIDENT Ellen Metzger Kings Park, NY 11754-3811
& CHIEF EXECUTIVE OFFICER Vice President, Marketing & Training 14 parks Drive
(516) 269-4900
Anita M. Florek
EXECUTIVE VICE PRESIDENT Rosanna Dill Lake Grove, NY 11755-2107
& TREASURER Vice President, Human Resources 2921 Middle Country Road
(516) 588-0700
Rosanna Dill
VICE PRESIDENT Edward Benedetto Northport, NY 11768-3151
Vice President & Auditor 836 Fort Salonga Road
Judith Barber (516) 262-1353
CORPORATE SECRETARY Colette Masom
Vice President & Comptroller
INDEPENDENT AUDITORS
Vice Presidents Annual Meeting
Albrecht, Viggiano, Gerald Duggan The Annual Meeting of Stockholders
Zureck & Company, P.C. Patricia Guidi of Smithtown Bancorp will be held
Elizabeth Woreth on Tuesday,April 7, 1998
GENERAL COUNSEL at 10:30 AM, at the:
Patricia C. Delaney, Esq. Andrew J. Enrico, Trusr Officer Smithtown Landing Country Club
495 Landing Avenue
Carol Schofield, Ass't Trust Officer Smithtown, New York 11787
Judith Barber,Corporate Secretary Register and Transfer Agent
& Cashier Bank of Smithtown
One East Main Street
Managers Smithtown, New York 11787-2801
Ann Marie Bove
Nancy Bradley
Carol Ann Brennan 10-KSB Report
Constance Lynch The annual report to the Securities and
Lisa McCulloch Exchange Commission, From 10-KSB
Connie Ponticello will be made available upon request by
Jeanne Quortrop contacting:
Sylvia Scheick Judith Barber,Corporate Secretary
Smithtown Bancorp
One East Main Street
Smithtown, New York 11787-2801
Assistant Managers
Helene Caspar
Annette Graham
Phyllis Kaiserman
Faith Lonieski Member Federal Reserve System and
Mae Russo Federal Deposit Insurance Corporation
Beth Tramontana
</TABLE>
ONE EAST MAIN STREET
SMITHTOWN, NEW YORK 11787-2801
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held
TUESDAY, APRIL 7, 1998
The Annual Meeting of Shareholders of Smithtown Bancorp (the "Bancorp"), will be
held at the Smithtown Landing Country Club, 495 Landing Avenue, Smithtown, New
York, on April 7, 1998, at 10:30 AM, for the following purposes:
1. The election of three directors to serve a term of three years.
2. To consider and vote upon a proposal to amend Bancorp's Certificate of
Incorporation to effect a two-for-one stock split by changing the number of
authorized Common Shares, par value $5.00, from 1,500,000 shares to 3,000,000
shares, par value $2.50; and
3. To approve the appointment of Albrecht, Viggiano, Zureck & Company, P.C. as
independent auditors for the year ending December 31, 1998.
4. 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 27, 1998, only shareholders of record at the close
of business on February 23, 1998, shall be entitled to notice of and to vote at
this meeting.
Dated: March 2, 1998
Smithtown, New York
BY ORDER OF THE BOARD OF DIRECTORS
BRADLEY E. ROCK
Chairman of the Board, President
<PAGE> 42
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 Smithtown Landing Country Club,
495 Landing Avenue, Smithtown, New York, on April 7, 1998, 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 2, 1998, 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 23,
1998 (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, 1997, has been mailed herewith
to the shareholders.
MATTERS TO BE VOTED ON AT THE MEETING
There are three 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, (2)
an amendment to the Bancorp's Certificate of Incorporation to effect a
two-for-one stock split by changing the number of authorized Common Shares, par
value $5.00, from 1,500,000 shares to 3,000,000 shares, par value $2.50, and (3)
the approval of Albrecht, Viggiano, Zureck & Co., P.C., as the Bancorp's
independent auditors for the year ending December 31, 1998.
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.
<PAGE> 43
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 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 (3), was obtained. With respect to proposal (2), abstentions and broker
non-votes have the effect of a "No' vote.
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 2001:
Patrick A. Given, Edith Hodgkinson and Robert Scherdel.
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
Patrick A. Given, 53 2001 1989 Real Estate Appraiser and
Consultant; Given Associates,
located at 550 Route 111,
Hauppauge, New York. 2,050 .47
Edith Hodgkinson, 75 2001 1979 Retired Restaurateur, active in community
non-profit organizations. 28,203 6.50
Robert W. Scherdel, 43 2001 1996 President & CEO
Sunrest Health Facilities, Inc. 5,351 1.23
</TABLE>
<PAGE>
<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, 78 1999 1979 President, Glamore Motor Sales, Inc.
(automobile sales), until retirement
in 1996 4,752 1.09
Barry M. Seigerman, 57 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. 917 .21
Augusta Kemper, 75 1999 1992 Horticulturist and Owner of Kemper
Nurseries until retirement in 1985. 24,933 5.75
Attmore Robinson, Jr., 86 2000 1948 Partner, Elzon & Robinson,
Real Estate Brokers, until
retirement in 1993. 9,263 2.13
Bradley E. Rock, 45 2000 1988 Chairman of the Board, President
& Chief Executive Officer of the
Bancorp and the Bank. 2,492 .57
Charles E. Rockwell, 81 2000 1984 Retired in 1976. Formerly a
commercial airline captain. Active
in community non-profit
organizations. 4,418 1.01
</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 23,
1998.
<PAGE> 44
BOARD OF DIRECTORS
The Board of Directors holds regular monthly meetings. The Board held twelve
meetings during 1997 in addition to one special meeting of Bank of Smithtown and
one special meeting of Smithtown Bancorp. 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 1997.
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 1997.
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.
DIRECTOR COMPENSATION
Directors of the Bank received a fee of $600 per month from January 1997 through
April 1997. Effective May 1, 1997, the Director's fees were increased to $750
per month. 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 1997 was $86,400.00.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF ALL NOMINEES .
(PROPOSAL NO. 1 ON THE PROXY).
AMENDMENT TO THE BANCORP'S CERTIFICATE OF INCORPORATION
TO EFFECT STOCK SPLIT
(PROPOSAL NO. 2)
The Board of Directors recommends that Article FOURTH of the Bancorp's
Certificate of Incorporation be amended in order to effect a two-for-one stock
split (the "Stock Split") by changing the number of shares of authorized capital
stock, par value $5.00 (the "Old Common Shares"), from 1,500,000 to 3,000,000
shares, par value $2.50 (the "New Common Shares").
The following description of this proposal is qualified in its entirety by
reference to the proposed amendments to Article FOURTH of the Bancorp's
Certificate of Incorporation, set forth below.
<PAGE> 45
At its regularly held meeting on February 24, 1998, the Board of Directors
adopted a resolution recommending to the shareholders an amendment to the
Bancorp's Certificate of Incorporation to effect the Stock Split (the "Stock
Split Amendment").
As of February 23, 1998 the Bancorp's authorized capital stock consisted of
1,500,000 Old Common Shares, of which 433,268 Old Common Shares were issued and
outstanding on February 23, 1998 and 100,000 Preferred Shares, par value $0.01
per share, none of which was issued and outstanding on February 23, 1998.
The Stock Split Amendment will not have any material impact on the aggregate
capital represented by the shares of capital stock for financial statement
purposes. Adoption of the Stock Split will have the effect of increasing the
current amount of authorized and outstanding shares of capital stock as
indicated in the table below.
In connection with the Stock Split, Old Common Shareholders would receive two
New Common Shares in exchange for one Old Common Share.
<TABLE>
<CAPTION>
Before Split After Split
Class of
STOCK AUTHORIZED PAR VALUE OUTSTANDING AUTHORIZED PAR VALUE OUTSTANDING
- ----- ----------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Common 1,500,000 $5.00 433,268 3,000,000 $2.50 866,536
</TABLE>
The number of issued shares after the Stock Split is approximate. Except for
changes resulting from the Stock Split, the rights and privileges of holders of
Old Common Shares will remain the same, both before and after the filing of the
Stock Split Amendment.
REASONS FOR THE STOCK SPLIT
The Board of Directors believes that it is desirable to effect the Stock Split
to increase the authorized capital stock of the Bancorp in order to have such
stock available for future use in connection with acquisitions, financing,
employee benefit plans, stock dividends or other corporate purposes including
the possible issuance in reaction to an unsolicited acquisition proposal (as set
forth more fully below).
Although the Bancorp has no current plans, has made no arrangements and has not
entered into any understandings whereby it would be required to issue any of the
New Common Shares created by the Stock Split for any specific purpose, the Board
of Directors believes that it is in the best interests of the Bancorp to effect
the Stock Split with the corresponding increase in the capital stock as stated
above in order to meet possible contingencies and opportunities for which the
issuance of shares may be deemed advisable. From time to time the Bancorp has
given, and in the future is likely to give, consideration to the feasibility of
obtaining funds for appropriate corporate objectives through the public sale of
equity securities. Because questions of timing are always central to whether or
on what basis public financing is to be undertaken, the Bancorp wishes to obtain
maximum flexibility in this regard by increasing its authorized capital stock at
this time, thereby avoiding the need for, and the expense and delay occasioned
by, a special shareholders' meeting to take similar actions at a later time.
Other purposes for which such additional shares could be issued include: (a) the
acquisition of the shares or assets of other corporations;
<PAGE> 46
(b) share distributions to shareholders of the Bancorp; (c) employee benefit
plans; and (d) in reaction to unsolicited acquisition proposals. In the Board of
Directors' view the New Common Shares will provide greater flexibility in
achieving these purposes. It is intended that the additional shares of capital
stock created by the Stock Split would be subject to issuance at the discretion
of the Board of Directors from time to time for any proper corporate purpose
without further action by the shareholders, except as may be required by law or
regulation or by the rules of any stock exchange on which the Bancorp's
securities may then be listed (or by the by-laws of the National Association of
Securities Dealers, Inc., if applicable at such time).
Although the Board of Directors is not aware of any effort by any person to
acquire control of the Bancorp and effect a change of control of the Bancorp,
the authorized but unissued shares of capital stock of the Bancorp could be used
to make it more difficult to effect a change in control of the Bancorp and
thereby make it more difficult for shareholders to obtain an acquisition premium
for their shares. Such shares could be used to create impediments for persons
seeking to gain control of the Bancorp by means of a merger, tender offer, proxy
contest or other means. Such shares could be privately placed with purchasers
who might cooperate with the Board of Directors in opposing such an attempt by a
third party to gain control of the Bancorp. The issuance of new shares of the
Bancorp could be used to dilute the stock ownership of a person or entity
seeking to obtain control of the Bancorp.
The Bancorp's Certificate of Incorporation currently contains several provisions
that may be deemed to have the effect of discouraging and defeating certain
forms of acquisition proposals. Article SEVENTH of the Certificate of
Incorporation provides for a classified board of directors comprised of three
classes, each of which is elected to a three-year term. Article EIGHTH provides
that certain business combinations involving the Bancorp and holders of more
than 5% of the Bancorp's outstanding shares must be approved by the affirmative
vote of 80% of the outstanding shares unless the Board of Directors approves the
transaction prior to the time the acquiror became a 5% owner or the Board of
Directors unanimously approves the transaction. Each of these provisions has
previously been adopted by the shareholders. In addition, in 1997, the Bancorp
adopted a shareholder rights plan, which could have the effect of discouraging
unsolicited acquisition proposals.
The Board of Directors also believes that the current per share price level of
the Old Common Shares has reduced the effective marketability of the shares.
Many investors prefer to purchase shares in "round-lot" transactions of 100
shares or multiples thereof. A high per share price level discourages such type
of transactions, thus discouraging investment in the Bancorp.
The increase in the number of common shares outstanding as a consequence of the
Stock Split should decrease the per share price of the common shares, which may
encourage greater interest in the New Common Shares and possibly promote greater
liquidity for the Bancorp's shareholders. However, the decrease in the per share
price of the Common Shares as a consequence of the Stock Split may be
proportionately less than the increase in the number of shares outstanding. In
addition, any increased liquidity due to any decreased per share price could be
partially or entirely off-set by the increased numbered of shares outstanding
after the Stock Split. Nevertheless, the Stock Split could result in per share
prices that adequately compensate for the adverse impact of the market factors
noted above. There can, however, be no assurance that the favorable effects
described about will occur, or that any decrease in per share price of the New
Common Shares resulting from the Stock Split will be maintained for any period
of time.
The affirmative vote of the holders of a majority of the outstanding Common
Shares is required to adopt the proposed amendments to the Certificate of
Incorporation. If the amendments to Article FOURTH of the Bancorp's Certificate
of Incorporation are authorized, the first sentence of Article FOURTH will read
as follows:
<PAGE> 47
"FOURTH: NUMBER OF SHARES. The aggregate number of shares which the corporation
shall have authority to issue shall be 3,100,000, of which 3,000,000 shall be
designated as Common Shares with a par value of $2.50 each and 100,000 shall be
designated as Preferred Shares with a par value of one cent ($0.01) each.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL
TO AMEND THE BANCORP'S CERTIFICATE OF INCORPORATION
TO EFFECT A TWO-FOR-ONE STOCK SPLIT BY CHANGING
THE NUMBER OF AUTHORIZED COMMON SHARES, PAR VALUE
$5.00, FROM 1,500,000 TO 3,000,000, PAR VALUE
$2.50 (PROPOSAL NO. 2 ON THE PROXY).
APPROVAL OF INDEPENDENT AUDITORS
(PROPOSAL NO. 3)
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 1998. 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. 3 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 23, 1998.
Name and Address Common Shares Percent
of Beneficial Owner Beneficially Owned of Class
Elizabeth Radau 30,296 6.99%
43 Edgewood Avenue
Smithtown, New York 11787-2723
<PAGE> 48
Name and Address Common Shares Percent
of Beneficial Owner Beneficially Owned of Class
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
The following table shows stock ownership as of February 23, 1998, of all
directors and officers of the Bancorp and the Bank as a group:
TABLE II
NUMBER OF COMMON PERCENTAGE
SHARES BENEFICIALLY OF OUTSTANDING
OWNED (NOTE 1) COMMON SHARES
Patrick A. Given 2,050 .47
Anita M. Florek 792 .18
Edith 28,203 6.50
Hodgkinson 5,351 1.23
Robert W. Scherdel 4,752 1.09
James H. Glamore 917 .21
Barry M. Seigerman 24,933 5.75
Augusta Kemper 9,263 2.13
Attmore Robinson, Jr. 3,354 .77
Bradley E. Rock 4,418 1.01
Charles E. Rockwell 693 .16
Thomas J. Stevens
Eleven directors and executive officers 84,726 19.56
of the Bancorp and the Bank as a group
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 executive officers of the
Bancorp and the Bank as of February, 1998.
<PAGE> 49
TABLE III
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bradley E. Rock 45 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 47 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.
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Stevens 39 Executive Vice President & Chief Lending Officer of the Bank since July 1997.
Senior Vice President & Commercial Loan Officer of the Bank February 1997 to
July 1997. Vice President & Commercial Loan Officer May 1994 to February 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXECUTIVE COMPENSATION
The table appearing below sets forth all compensation paid in 1997 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 1995 $185,325.00 $20,021.30 $19,077.76
Chairman, President & CEO 1996 $200,000.00 $17,372.54 $21,045.96
of the Bancorp and the Bank 1997 $212,000.00 $38,000.00 $25,373.42
- ------------------------------------------------------------------------------------------------------------------------------------
Anita M. Florek 1995 $ 95,000.00 $10,615.79 $ 6,042.98
Executive Vice President 1996 $102,000.00 $ 9,673.23 $ 8,505.85
of the Bancorp and the Bank 1997 $108,120.00 $14,000.00 $12,687.42
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Stevens 1995 $ 68,000.00 $20,277.88 $ 3,392.16
Executive Vice President 1996 $ 74,000.00 $18,799.10 $ 6,822.08
of the Bank 1997 $ 88,538.34 $13,332.11 $ 9,525.43
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) These amounts include a monthly director's fee of $750 for Mr. Rock as
Chairman of the Board of Directors. Mr. Rock does not receive any additional
compensation for participation on any of the board's committees. These amounts
also include employer matching contributions paid in connection with the Bank's
401(k) plan, amounts accrued during 1997 under the ESOP and premiums paid on
behalf of the officers for a group term life insurance policy.
<PAGE> 50
(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 $60,000.00 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, 1997, through December 31, 1997.
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 1999 Annual Meeting must be
received by the Secretary of the Board of Directors by November 2, 1998, 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
<PAGE> 51
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 2, 1998
SMITHTOWN BANCORP
Bradley E. Rock
Chairman of the Board, President
& Chief Executive Officer
<PAGE>52
Additional Information Set Forth in Response to Item 10:
The Bank has agreements with Bradley Rock and Anita Florek and Thomas Stevens
(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.
<PAGE> 53
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 4,007,081
<INT-BEARING-DEPOSITS> 93,413
<FED-FUNDS-SOLD> 8,300,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,474,236
<INVESTMENTS-CARRYING> 15,698,139
<INVESTMENTS-MARKET> 74,336,201
<LOANS> 100,403,532
<ALLOWANCE> 1,677,594
<TOTAL-ASSETS> 197,656,435
<DEPOSITS> 168,195,635
<SHORT-TERM> 8,252,540
<LIABILITIES-OTHER> 1,228,802
<LONG-TERM> 3,000,000
<COMMON> 2,239,775
0
0
<OTHER-SE> 14,739,683
<TOTAL-LIABILITIES-AND-EQUITY> 197,656,435
<INTEREST-LOAN> 9,731,626
<INTEREST-INVEST> 4,863,927
<INTEREST-OTHER> 5,973
<INTEREST-TOTAL> 14,601,526
<INTEREST-DEPOSIT> 3,690,939
<INTEREST-EXPENSE> 4,152,490
<INTEREST-INCOME-NET> 10,449,036
<LOAN-LOSSES> 805,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,876,601
<INCOME-PRETAX> 5,401,937
<INCOME-PRE-EXTRAORDINARY> 3,320,819
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,320,819
<EPS-PRIMARY> 7.66
<EPS-DILUTED> 7.66
<YIELD-ACTUAL> 8.44
<LOANS-NON> 1,593,264
<LOANS-PAST> 451,756
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,622,572
<CHARGE-OFFS> 848,626
<RECOVERIES> 98,648
<ALLOWANCE-CLOSE> 1,677,594
<ALLOWANCE-DOMESTIC> 1,677,594
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 684,905
</TABLE>
