<PAGE> 3
No. of pages within this report 57
As filed with the Securities and Exchange Commission on March 26, 1999
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 1998 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, $2.50 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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 1999
$2.50 Par Value 815,327
The aggregate market value of the Registrant's common stock held by
nonaffiliates was approximately 45,556,396 based on the price at which stock was
sold on 15 March 1999.
DOCUMENTS INCORPORATED BY REFERENCE
1) Portions of the Annual Report for the fiscal year ended 31 December 1998 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.
3) Portions of the Proxy Statement relating to the annual meeting of
stockholders to be held on 15 April 1999 are incorporated herein by reference
into Part III.
<PAGE> 4
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 13 of the Registrant's Annual Report for the year ended 31 December
1998, 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> 5
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 27 and 35 of the Registrant's Annual Report for the year ended 31 December
1998 is incorporated herein by reference.
Item 202: Description of Securities or Plan of Operation
691 Shareholders of common stock at 15 March 1999.
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 46, inclusive, of the Registrant's Annual Report for the year
ended 31 December 1998 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 14 through 31, inclusive, of the Registrant's Annual Report for the year
ended 31 December 1998 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 50 through 51, and pages 52 through 53, of the
Registrant's Proxy Statement dated 10 March 1999, 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> 6
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 54 of the Registrant's Proxy Statement dated 10 March 1999 are
incorporated herein by reference, together with the information set forth on
page 54.
Item 403: Security Ownership of Certain Beneficial Owners and Management
Page 52 and 53 of the Registrant's Proxy Statement, dated 10 March 1999 are
incorporated herein by reference.
Item 404: Certain Relationships and Related Transactions
Page 54 of the Registrant's Proxy Statement dated 10 March 1999 and page 24 of
the Registrant's Annual Report for the year ended 31 December 1998 are
incorporated herein by reference.
<PAGE> 7
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 10-47
Notice of Annual Meeting and Proxy Statement 48-56
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 48-56
24 Consent of Independent Auditors 9
Report of Independent Auditors 13
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> 8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
Date: 3/30/99 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 3/30/99
Officer and Chairman of the Board
/s/ Augusta Kemper
-------------------------------------------
Augusta Kemper, Director Date 3/30/99
/s/ Patrick A. Given
------------------------------------------- Date 3/30/99
Patrick A. Given, Director
/s/ Manny Schwartz
------------------------------------------- Date 3/30/99
Manny Schwartz, Director
/s/ Edith Hodgkinson
------------------------------------------- Date 3/30/99
Edith Hodgkinson, Director
/s/ Barry M. Seigerman
------------------------------------------- Date 3/30/99
Barry M. Seigerman, Director
/s/ Attmore Robinson
------------------------------------------- Date 3/30/99
Attmore Robinson, Director
/s/ Charles E. Rockwell
------------------------------------------- Date 3/30/99
Charles E. Rockwell, Director
/s/ Robert W. Scherdel
------------------------------------------- DATE 3/30/99
Robert W. Scherdel, Director
<PAGE> 9
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 22, 1999, included in the 1998 Annual
Report to shareholders of Smithtown Bancorp, Inc.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
January 22, 1999
<PAGE> 10
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
(OBJECT OMITTED)
(OBJECT OMITTED)
(OBJECT OMITTED)
(OBJECT OMITTED)
<TABLE>
<CAPTION>
Financial Highlights
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
At Year End
Assets ................................ $ 205,825,657 $ 197,656,435 $ 181,629,049 $ 157,528,274 $ 156,951,687
Loans ................................. 115,454,910 98,035,610 98,955,368 95,984,044 78,421,816
Deposits .............................. 183,875,462 168,195,635 158,928,455 143,581,497 135,230,577
Stockholders' Equity .................. 17,412,189 16,979,458 14,097,239 12,837,073 11,605,718
For the Year
Net Income ............................ $ 3,500,413 $ 3,320,819 $ 1,705,498 $ 1,471,381 $ 1,231,511
Return on Average Equity (%) .......... 20.45 21.60 12.94 11.98 10.61
Return on Average Assets (%) .......... 1.73 1.73 1.00 0.94 0.79
Efficiency (%) ........................ 0.54 0.52 0.72 0.75 0.79
Per Share
Net Income ............................ $ 4.15 $ 3.83 $ 1.97 $ 1.70 $ 1.40
Cash Dividends Declared ............... 0.80 0.70 0.64 0.56 0.50
Stockholders' Equity .................. 21.16 19.60 16.27 14.82 13.57
</TABLE>
<PAGE> 11
(OBJECT OMITTED)
Message From the Chairman of the Board
During 1998 Bank of Smithtown continued to solidify and enhance its position of
leadership among community banks on Long Island and, indeed, among community
banks throughout the nation.
For the third consecutive year, Bank of Smithtown posted a record level of
earnings, finishing 1998 with net income of $3,500,413. Even more impressively,
for the second straight year, the Bank achieved a return on average equity of
more than 21%, a level of success attained by only a handful of banks in the
entire country.
Other measures of the Bank's performance also place it at or near the top of its
peer group. Return on average assets was 1.73% for the second year in a row, far
exceeding statewide and national averages. Efficiency was 53.75%, more than 10%
leaner than peer group averages.
Our loan portfolio increased in overall size by 17.6%, finishing the year at
more than $118 million. During this year our loan quality improved significantly
with non-performing loans decreasing 16% to $1.7 million and Other Real Estate
Owned decreasing 73% to $1.1 million. The total past due loans, non-performing
loans and real estate owned declined by 46%.
Earnings per share were $4.15, an increase of 8.4%. These figures were aided by
both the increase in earnings and the holding company's stock repurchase
program, which has been very successful. Smithtown Bancorp repurchased more than
43,000 of its shares in market transactions during 1998.
The company's stock price also continued its stellar performance. Our stock
price (adjusted for the 2 for 1 split in May) gained more then 28% during the
course of the year. This trend continued the stock's long climb through the
decade of the 90's. In fact, if you had invested $100,000 in Smithtown Bancorp
in 1990, your total return on that investment today would be $659,550.
Not only has our company reached the highest levels of financial performance,
but we have also gained increasing regional and even national recognition for
our success. U. S. Banker magazine ranked Smithtown Bancorp 6th in the nation
among community banks in return to its shareholders. Similarly, Newsday has
ranked Smithtown Bancorp among the top investments on Long Island.
We intend to continue to bring our special brand of community bank service to an
increasing number of consumers and small businesses on Long Island. We
appreciate your support of our efforts and look forward to even greater
prosperity as we approach the millennium.
Bradley E. Rock
Chairman of the Board
President & Chief Executive Officer
(OBJECT OMITTED)
With a strong commitment to our customers and the communities we serve, Bank of
Smithtown has assumed an increasing position of leadership among banks on Long
Island and banks throughout the country. Accordingly, the Bank has received
increasing recognition for its achievements. In 1998, U. S. Banker's annual
ranking of community banks placed Smithtown Bancorp at 6th among all community
banks nationwide in return on equity.
In forums that range from community newspapers to broadcast news, our strong
performance has been recognized and our innovative efforts designed to enhance
our region's quality of life are being advocated. Brad Rock was among the
commentators in a Cablevision-News 12 economic roundtable, and he served as a
High-Tech Incubator conference keynote speaker where he underscored the need for
area banks to invest in the region's high-tech entrepreneurs.
Equally important are the Bank's efforts in support of the economic growth of
the communities we serve and our sponsorship of local civic, youth and
charitable events. From hosting quarterly 'Boardroom Luncheons', where local
business people are invited for lunch to exchange ideas and information; to
offering open seminars for small business owners to prepare them against
computer fraud; to sponsoring Long Island's first 'Community Dog Walk' for the
benefit of the Guide Dog Foundation; we continue to demonstrate our commitment
to the community.
While we appreciate the recognition we have received, we realize that our growth
and future success is ultimately powered by the individual relationships that we
enjoy with each customer. As we continue to project our message, we do so for
the purposes of making ourselves helpful to our customers and profitable for our
stockholders.
(OBJECT OMITTED)
<PAGE> 12
We will continue to offer our customers the latest in automated banking products
as an option, but first, we will offer a handshake and personal assistance.
(Above) Branch Manager, Lisa McCulloch, answers a customer's question about
Individual Retirement Accounts.
Bank of Smithtown is reaching for the Year 2000 by reaffirming our belief in
good old fashioned manners. While we are introducing a state-of-the-art website,
we also continue to insist that our customers be greeted by name and that our
officers and customer service representatives be available to offer personal
attention at convenient hours. We believe our ability to 'right size' the Bank
means that we have created an institution that is accessible to the community we
serve. We are building our future based on an 89- year history of personal
service and community commitment. We have remodeled our main office to reflect
the architectural heritage of the original 1920's design and to honor a time
when service was everything. Our customer service representatives are in a
location where our customers have the greatest access to them. Accessibility
remains our watchword and we encourage our staff to know our customers well in
order to serve them better.
<PAGE> 13
A Description of Our Business
Smithtown Bancorp (the 'Bancorp') is a bank holding company incorporated in the
State of New York, subject to the regulation and supervision of the State of New
York Banking Department, the Federal Reserve Board and the Securities and
Exchange Commission. The Bancorp owns all of the outstanding stock of Bank of
Smithtown (the 'Bank') and conducts no business other than holding the stock of
Bank of Smithtown. Therefore, the content of this annual report, as it pertains
to the description of the activities of the Bancorp, is in essence a description
of the activities of Bank of Smithtown.
Bank of Smithtown, chartered under the laws of the State of New York, is a
member of the Federal Reserve System and is insured by the Federal Deposit
Insurance Corporation. The Bank has been headquartered in Smithtown since 1910.
It is in its 89th 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, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. 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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 1998 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. 132, 'Employers' Disclosures about Pensions and Other Postretirement
Benefits' in 1998 and SFAS No. 125, 'Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities' in 1997.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
January 22, 1999
<PAGE> 14
<TABLE>
<CAPTION>
Consolidated Balance Sheets Smithtown Bancorp
As of December 31,
1998 1997
<S> <C> <C>
Assets
Cash and Due from Banks .............................................................................. $ 7,124,365 $ 7,667,371
Investment Securities:
Investment Securities Held to Maturity:
Obligations of U.S. Government ................................................................. 0 2,002,757
Mortgage-Backed Securities ..................................................................... 4,582,024 7,237,038
Obligations of State and Political Subdivisions ................................................ 6,292,248 6,458,344
Total (Estimated Fair Value $11,125,675 in 1998 and $15,861,965 in 1997) ................ 10,874,272 15,698,139
Investment Securities Available for Sale:
Obligations of U.S. Government ................................................................. 6,151,890 6,175,710
Obligations of U.S. Government Agencies ........................................................ 14,213,318 15,251,638
Mortgage-Backed Securities ..................................................................... 19,129,406 36,190,088
Obligations of State and Political Subdivisions ................................................ 11,818,684 0
Other Securities ............................................................................... 856,800 856,800
Total (At Estimated Fair Value) .......................................................... 52,170,098 58,474,236
Total Investment Securities ................................................................. 63,044,370 74,172,375
Federal Funds Sold ................................................................................... 12,500,000 8,300,000
Loans ................................................................................................ 118,101,158 100,403,532
Less: Unearned Discount ............................................................................ 525,877 690,328
Allowance for Possible Loan Losses ........................................................... 2,120,371 1,677,594
Loans, Net ........................................................................................... 115,454,910 98,035,610
Bank Premises and Equipment .......................................................................... 3,259,290 2,454,834
Other Assets
Other Real Estate Owned ........................................................................... 1,072,495 3,927,786
Other ............................................................................................. 3,370,227 3,098,459
Total Other Assets .......................................................................... 4,442,722 7,026,245
Total ....................................................................................... $205,825,657 $197,656,435
Liabilities
Deposits:
Demand (Non-Interest Bearing) ...................................................................... $ 49,752,008 $ 42,566,624
Money Market ....................................................................................... 42,807,109 36,326,089
NOW ................................................................................................ 15,790,178 15,284,660
Savings ............................................................................................ 39,267,087 40,998,166
Time ............................................................................................... 36,259,080 33,020,096
Total Deposits ............................................................................... 183,875,462 168,195,635
Dividend Payable ..................................................................................... 165,893 151,644
Securities Sold Under Agreements to Repurchase ....................................................... 0 2,800,000
Other Borrowings ..................................................................................... 3,174,645 8,452,540
Other Liabilities .................................................................................... 1,197,468 1,077,158
Total Liabilities ........................................................................... 188,413,468 180,676,977
Commitments and Contingent Liabilities
Stockholders' Equity
Common Stock - $2.50 Par Value:
(3,000,000 Shares Authorized; 895,910 Shares Issued) ......................................... 2,239,775 2,239,775
Capital Surplus ...................................................................................... 1,993,574 1,993,574
Retained Earnings .................................................................................... 15,770,822 12,943,680
Accumulated Other Comprehensive Income ............................................................... 249,455 249,068
Total ........................................................................................ 20,253,626 17,426,097
Less: Treasury Stock (73,145 and 29,374 Shares at Cost
at December 31, 1998 and 1997, respectively) ................................................... 2,841,437 446,639
Total Stockholders' Equity .................................................................. 17,412,189 16,979,458
Total ....................................................................................... $205,825,657 $197,656,435
See notes to consolidated financial statements
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Consolidated Statements of Income Smithtown Bancorp
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and Fees on Loans ...................................................... $ 9,996,927 $ 9,731,626 $ 9,391,802
Interest on Balances Due from Banks ............................................. 7,631 5,973 1,493
Interest on Federal Funds Sold .................................................. 707,252 382,157 417,107
Interest and Dividends on Investment Securities:
Taxable:
Obligations of U.S. Government ........................................... 414,782 235,724 141,265
Obligations of U.S. Government Agencies .................................. 920,343 1,038,404 569,716
Mortgage-Backed Securities ............................................... 1,979,480 2,847,023 1,833,879
Other Securities ......................................................... 57,932 52,010 37,638
Total ................................................................. 3,372,537 4,173,161 2,582,498
Exempt from Federal Income Taxes:
Obligations of State and Political Subdivisions ......................... 656,858 308,609 293,774
Total Interest Income ................................................... 14,741,205 14,601,526 12,686,674
Interest Expense
Money Market Accounts ........................................................... 1,418,621 1,136,766 834,353
Savings ......................................................................... 775,420 967,334 1,298,962
Certificates of Deposit of $100,000 and Over .................................... 516,403 392,267 123,851
Other Time Deposits ............................................................. 1,284,662 1,194,572 1,282,579
Securities Sold Under Agreements To Repurchase .................................. 72,826 174,556 100,932
Other Borrowings ................................................................ 375,057 286,995 44,308
Total Interest Expense ................................................ 4,442,989 4,152,490 3,684,985
Net Interest Income ................................................... 10,298,216 10,449,036 9,001,689
Provision for Possible Loan Losses .................................... 525,000 805,000 370,000
Net Interest Income, After Provision for Possible Loan Losses ......... 9,773,216 9,644,036 8,631,689
Other Non-Interest Income
Trust Department Income ......................................................... 400,569 364,600 434,069
Service Charges on Deposit Accounts ............................................. 1,479,577 1,518,765 1,337,449
Other Income .................................................................... 952,721 751,137 540,588
Net Gain on Sales of Investment Securities ...................................... 40,676 0 16,724
Total Other Non-Interest Income ........................................ 2,873,543 2,634,502 2,328,830
Other Operating Expenses
Salaries ........................................................................ 3,252,761 2,949,150 3,379,214
Pensions and Other Employee Benefits ............................................ 682,397 669,919 717,516
Net Occupancy Expense of Bank Premises .......................................... 835,787 874,033 1,130,358
Furniture and Equipment Expense ................................................. 621,808 589,897 637,029
Other Expenses .................................................................. 1,726,923 1,793,602 2,393,013
Total Other Operating Expenses ......................................... 7,119,676 6,876,601 8,257,130
Income Before Income Taxes ...................................................... 5,527,083 5,401,937 2,703,389
Provision for Income Taxes ...................................................... 2,026,670 2,081,118 997,891
Net Income ...................................................................... $ 3,500,413 $ 3,320,819 $ 1,705,498
Earnings Per Share
Net Income....................................................................... $ 4.15 $ 3.83 $ 1.97
Weighted Average Shares Outstanding.............................................. 844,496 866,536 866,536
</TABLE>
See notes to consolidated financial statements.
<PAGE> 16
<TABLE>
<CAPTION>
Consolidated Statements of Comprehensive Income Smithtown Bancorp
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income ......................................................................... $3,500,413 $3,320,819 $1,705,498
Other Comprehensive Income, Before Tax:
Unrealized Holding Gain Arising During the Period ............................... 41,343 289,612 205,086
Less: Reclassification Adjustment for Gains Included in Net Income ............. 40,676 0 16,724
667 289,612 188,362
Income Tax Related to Other Comprehensive Income ................................ 280 121,637 79,112
Other Comprehensive Income, Net of Tax .......................................... 387 167,975 109,250
Total Comprehensive Income ................................................... $3,500,800 $3,488,794 $1,814,748
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity Smithtown Bancorp
Cost of Accumulated
Common Stock Common Other Total
Shares Capital Retained Stock in Comprehensive Stockholders'
Outstanding Amount Surplus Earnings Treasury Income (Loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 866,536 $2,239,775 $1,993,574 $9,078,520 $(446,639) $(28,157) $12,837,073
Comprehensive Income:
Net Income 1,705,498 1,705,498
Other Comprehensive Income,
Net of Tax 109,250 109,250
Total Comprehensive Income 1,814,748
Cash Dividends Declared (554,582) (554,582)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 866,536 2,239,775 1,993,574 10,229,436 (446,639) 81,093 14,097,239
Comprehensive Income:
Net Income 3,320,819 3,320,819
Other Comprehensive Income,
Net of Tax 167,975 167,975
Total Comprehensive Income 3,488,794
Cash Dividends Declared (606,575) (606,575)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 866,536 2,239,775 1,993,574 12,943,680 (446,639) 249,068 16,979,458
Comprehensive Income:
Net Income 3,500,413 3,500,413
Other Comprehensive Income,
Net of Tax 387 387
Total Comprehensive Income 3,500,800
Cash Dividends Declared (673,271) (673,271)
Treasury Stock Purchases (43,771) (2,394,798) (2,394,798)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 822,765 $2,239,775 $1,993,574 $15,770,822 $(2,841,437) $249,455 $17,412,189
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash dividends per share were $.80 in 1998, $.70 in 1997, $.64 in 1996.
See notes to consolidated financial statements.
<PAGE> 17
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows Smithtown Bancorp
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income ......................................................................... $ 3,500,413 $ 3,320,819 $ 1,705,498
Adjustments to reconcile net income to net cash provided by operating activities:
Valuation Reserve for Other Real Estate Owned ................................... (67,002) 120,000 209,000
Depreciation on Premises and Equipment .......................................... 371,715 401,663 450,265
Provision for Possible Loan Losses .............................................. 525,000 805,000 370,000
Net Gain on Sale of Investment Securities ....................................... (40,676) 0 (16,724)
Amortization of Transition Obligation ........................................... 79,811 104,102 49,909
Gain on Sale of Other Real Estate Owned ......................................... (35,437) 0 0
Loss on Sale of Bank Property ................................................... 0 0 57,568
Increase in Interest Payable .................................................... 15,387 40,203 44,568
Increase (Decrease) in Miscellaneous Payables and Accrued Expenses .............. 111,373 (73,361) (7,324)
(Increase) Decrease in Fees and Commissions Receivable .......................... (26,400) 25,000 (65,000)
(Increase) Decrease in Interest Receivable ...................................... 172,950 (154,263) (72,496)
(Increase) Decrease in Prepaid Expenses ......................................... (111,624) 142,864 222,052
(Increase) Decrease in Miscellaneous Receivables ................................ (139,858) (161,499) 159
(Increase) Decrease in Income Taxes Receivable .................................. 29,592 (224,362) 98,246
Increase in Deferred Taxes ...................................................... (229,922) (71,947) (87,318)
Decrease in Accumulated Postretirement Benefit Obligation ....................... (52,843) (62,249) (54,000)
Amortization of Investment Security Premiums and Accretion of Discounts ......... 160,734 (1,467) (198,574)
Cash Provided by Operating Activities ......................................... 4,263,213 4,210,503 2,705,829
Cash Flows from Investing Activities
Proceeds from Disposition of Mortgage-Backed Securities:
Held to Maturity .............................................................. 2,629,306 1,734,661 1,198,295
Available for Sale ............................................................ 16,887,078 8,272,600 6,734,886
Proceeds from Disposition of Other Investment Securities:
Held to Maturity .............................................................. 2,642,018 569,013 356,652
Available for Sale ............................................................ 9,015,875 7,103,438 3,163,281
Purchase of Mortgage-Backed Securities:
Available for Sale ............................................................ 0 (10,022,600) (27,502,567)
Purchase of Other Investment Securities:
Held to Maturity ............................................................. (415,730) (2,031,947) (714,347)
Available for Sale ........................................................... (19,749,933) (15,115,725) (10,555,581)
Federal Funds Sold, Net .......................................................... (4,200,000) (8,300,000) 6,750,000
Loans Made to Customers, Net ..................................................... (18,184,265) (613,921) (4,931,095)
Purchase of Premises and Equipment ............................................... (1,176,171) (237,635) (158,900)
Proceeds from Sale of Other Real Estate Owned .................................... 3,197,491 1,768,601 1,339,608
Proceeds from Sale of Bank Property .............................................. 0 0 205,239
Cash Used in Investing Activities ............................................. (9,354,331) (16,873,515) (24,114,529)
Cash Flows from Financing Activities
Net Increase in Demand Deposits, NOW Accounts and Savings Accounts ............... 12,440,843 5,004,459 11,194,464
Net Increase in Time Accounts .................................................... 3,238,984 4,262,721 4,152,494
Cash Dividends Paid .............................................................. (659,022) (593,577) (537,252)
Securities Sold Under Agreements to Repurchase and Other Borrowings, Net ......... (8,077,895) 3,966,816 7,285,724
Purchase of Treasury Stock ....................................................... (2,394,798) 0 0
Cash Provided by Financing Activities ......................................... 4,548,112 12,640,419 22,095,430
Net Increase (Decrease) in Cash and Due from Banks ............................ (543,006) (22,593) 686,730
Cash and Due from Banks, Beginning of Year .................................... 7,667,371 7,689,964 7,003,234
Cash and Due from Banks, End of Year .......................................... $ 7,124,365 $ 7,667,371 $ 7,689,964
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest ........................................................................ $ 447,883 $ 461,392 $ 117,111
Income Taxes .................................................................... 2,227,000 2,377,427 986,963
Schedule of Noncash Investing Activities
Loans Transferred to Other Real Estate Owned ..................................... $ 239,964 $ 728,680 $ 1,589,770
Unrealized Gain on Securities Available for Sale ................................. 387 167,975 109,250
</TABLE>
See notes to consolidated financial statements.
<PAGE> 18
Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
The accounting and reporting policies of Smithtown Bancorp (the 'Bancorp) and
its subsidiary, Bank of Smithtown (the 'Bank') reflect banking industry
practices and conform to generally accepted accounting principles. A summary of
the significant accounting policies followed by the Bancorp in the preparation
of the accompanying consolidated financial statements is set forth below.
Basis of Presentation
The consolidated financial statements include the accounts of Smithtown Bancorp,
and its wholly-owned subsidiary, Bank of Smithtown. All material intercompany
transactions have been eliminated.
On May 6, 1998, the Bank effected a two-for-one split of common stock. All
references in the accompanying consolidated financial statements and notes
thereto relating to common stock, capital surplus, earnings per share and share
data have been retroactively adjusted to reflect the two-for-one stock split.
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 Allowance for Possible Loan Losses and the Valuation Reserve for OREO could
differ from actual results.
Investment Securities
The Bank evaluates its investment policies consistent with Statement of
Financial Accounting Standards No. 115 'Accounting for Certain Investments in
Debt and Equity Securities' (SFAS No. 115). Accordingly, the Bank's investments
in securities are classified in two categories and accounted for as follows:
o 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.
o Securities Available for Sale - Bonds, notes, debentures, and certain equity
securities are carried at estimated fair value.
Unrealized holding gains and losses, net of tax, arising on securities available
for sale are reported as a component of accumulated other comprehensive income,
in accordance with SFAS No. 130, 'Reporting Comprehensive Income'. In June 1997,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 (SFAS No. 130), 'Reporting Comprehensive Income'.
This statement establishes requirements for disclosure of comprehensive income
and became effective for the Bank in 1998, with reclassification of earlier
financial statements for comparative purposes. Comprehensive income generally
represents all changes in stockholders' equity except those resulting from
investments by and distributions to stockholders.
Gains and losses on the sale of securities are determined using the
specific-identification method.
<PAGE> 19
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 No. 114). SFAS No. 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
No. 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 No.
114 requires that a portion of the overall Allowance for Possible Loan Losses be
determined based on the present value of expected cash flows discounted at the
loan's effective interest rate or, as a practical expedient, the loan's
observable market price or the fair value of the collateral. Prior to the
adoption of SFAS No. 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 No. 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 SFAS No. 118,
'Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure' (SFAS No. 118) which amends SFAS No. 114 to permit a creditor to use
existing methods for recognizing interest revenue on impaired loans. Generally,
interest revenue received on impaired loans continues either to be applied by
the Bank against principal or to be realized as interest revenue, according to
management's judgment as to the collectibility of principal.
<PAGE> 20
Loans are generally recorded at the principal amount outstanding net of unearned
discount and the allowance for possible loan losses. Unearned discounts are
generally amortized over the term of the loan using the interest method.
Interest on loans is credited to income based on the principal amount
outstanding. The accrual of interest on a loan is discontinued when in the
opinion of management there is doubt about the ability of the borrower to pay
interest or principal. Management may continue to accrue interest when it
determines that a loan and related interest are adequately secured and in the
process of collection. Loans held for sale are carried at the lower of aggregate
cost or estimated fair value. The Bank sells or securitizes certain loans. Such
sales are with recourse and no reserve is considered necessary at December 31,
1998 and 1997. Gains are reported in Other Income.
Loan-related fees and cost are recognized as income when received in accordance
with generally accepted accounting principles.
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for
possible loan losses when management believes the collectibility of the
principal is unlikely. The allowance for possible loan losses is based on
management's evaluation of the loan portfolio. Management believes that the
allowance for possible loan losses is adequate. While management uses available
information, including appraisals, to estimate potential losses on loans,
further additions to the allowance may be necessary based on changes in economic
conditions.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. The depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the related assets as
follows:
Bank Premises .......................................... 25-30 years
Leasehold Improvements ................................. 5-40 years
Furniture and Equipment ................................ 10 years
Other Real Estate Owned
Included in other assets is real estate held for sale which is acquired
principally through foreclosure or a similar conveyance of title and is carried
at the lower of cost or estimated 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 estimated 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. There are no shares issuable through stock options or warrants.
Statements of Cash Flows
For the purposes of the Statements of Cash Flows, the Bank considers Cash and
Due from Banks as Cash and Cash Equivalents.
Retirement Benefits
The Bank accounts for postretirement benefits other than pensions in accordance
with Statement of Financial Accounting Standards No. 106 'Employers' Accounting
for Postretirement Benefits Other Than Pensions' (SFAS No. 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.
In addition, the Bank adopted the provisions of SFAS No. 132, 'Employers'
Disclosures about Pensions and Other Postretirement Benefits' (SFAS No. 132), in
1998. This Statement supersedes the disclosure requirements in SFAS No. 106. It
does not address the measurement or recognition issues as prescribed by SFAS No.
106.
<PAGE> 21
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.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, 'Accounting for Derivative
Instruments and Hedging Activities' (SFAS No. 133) which is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. This
statement standardizes the accounting for derivative instruments and hedging
activities.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134, 'Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage-Banking Enterprise'
(SFAS No. 134) an amendment of SFAS No. 65, which is effective for the first
fiscal quarter beginning after December 15, 1998. This Statement establishes
standards for the subsequent accounting for securities retained after the
securitization of mortgage loans held for sale by mortgage-banking enterprises.
The Bank is evaluating methods for adoption of these statements, if necessary,
and currently does not expect these new pronouncements to have a material impact
on its consolidated financial statements.
Note B. Investment Securities
The carrying amounts of investment securities as shown in the consolidated
balance sheets and their estimated fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities to be Held to Maturity:
December 31, 1998
Mortgage-Backed Securities ................................ $ 4,261,731 $ 24,123 $ (5,407) $ 4,280,447
Collateralized Mortgage Obligations ....................... 320,293 0 (846) 319,447
Obligations of State and Political Subdivisions ........... 6,292,248 233,533 0 6,525,781
Total ................................................... $10,874,272 $257,656 $ (6,253) $11,125,675
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
Securities Available for Sale:
December 31, 1998
Obligations of U.S. Government ............................. $ 6,077,249 $ 74,641 $ 0 $ 6,151,890
Obligations of U.S. Government Agencies .................... 14,135,967 97,671 (20,320) 14,213,318
Mortgage-Backed Securities ................................. 17,920,702 199,929 (6,802) 18,113,829
Collateralized Mortgage Obligations ........................ 1,030,083 0 (14,506) 1,015,577
Obligations of State and Political Subdivisions ............ 11,719,202 146,656 (47,174) 11,818,684
Other Securities ........................................... 856,800 0 0 856,800
Total ................................................... $51,740,003 $518,897 $(88,802) $52,170,098
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
</TABLE>
<PAGE> 22
The following table presents the amortized costs of and estimated fair values of
investment in debt securities by scheduled maturity at respective year-ends.
<TABLE>
<CAPTION>
1998 1997
Amortized Estimated Fair Amortized Estimated Fair
Type and Maturity Grouping Costs Value Costs Value
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Investment Securities Held to Maturity:
Obligations of U.S. Government
Within 1 year ........................................... $ 0 $ 0 $ 2,002,757 $ 1,996,090
Total Obligations of U.S. Government ................. $ 0 $ 0 $ 2,002,757 $ 1,996,090
Mortgage-Backed Securities
After 1 year, but within 5 years ........................ $ 2,109,778 $ 2,110,703 $ 3,012,964 $ 2,981,703
After 5 years, but within 10 years ...................... 2,472,246 2,489,191 1,326,951 1,311,625
After 10 years .......................................... 0 0 2,897,123 2,890,613
Total Mortgage-Backed Securities .................... $ 4,582,024 $ 4,599,894 $ 7,237,038 $ 7,183,941
Obligations of State and Political Subdivisions
Within 1 year ........................................... $ 1,864,243 $ 1,884,271 $ 564,903 $ 569,175
After 1 year, but within 5 years ........................ 2,897,921 3,017,547 3,831,257 3,964,748
After 5 years, but within 10 years ...................... 1,530,084 1,623,963 2,016,934 2,099,292
After 10 years .......................................... 0 0 45,250 48,719
Total Obligations of State and Political Subdivisions $ 6,292,248 $ 6,525,781 $ 6,458,344 $ 6,681,934
Investment Securities Available for Sale:
Obligations of U.S. Government
Within 1 year ........................................... $ 2,998,111 $ 3,029,070 $ 0 $ 0
After 1 year, but within 5 years ........................ 3,079,138 3,122,820 6,142,129 6,175,710
Total Obligations of U.S. Government ................ $ 6,077,249 $ 6,151,890 $ 6,142,129 $ 6,175,710
Obligations of U.S. Government Agencies
After 1 year, but within 5 years ........................ $ 0 $ 0 $ 1,000,000 $ 995,350
After 5 years, but within 10 years ...................... 9,531,548 9,595,975 11,535,300 11,598,685
After 10 years .......................................... 4,604,419 4,617,343 2,639,856 2,657,603
Total Obligations U.S. Government Agencies .......... $14,135,967 $14,213,318 $15,175,156 $15,251,638
Mortgage-Backed Securities
Within 1 year ........................................... $ 109,152 $ 109,343 $ 3,696,671 $ 3,685,892
After 1 year, but within 5 years ........................ 0 0 801,610 798,484
After 10 years .......................................... 18,841,633 19,020,063 31,372,441 31,705,712
Total Mortgage-Backed Securities .................... $18,950,785 $19,129,406 $35,870,722 $36,190,088
Obligations of State and Political Subdivisions
After 1 year, but within 5 years ........................ $ 776,629 $ 787,316 $ 0 $ 0
After 5 years, but within 10 years ...................... 4,386,613 4,459,239 0 0
After 10 years .......................................... 6,555,960 6,572,129 0 0
Total Obligations of State and Political Subdivisions $11,719,202 $11,818,684 $ 0 $ 0
</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 $776,553 and
$731,335 in 1998 and 1997, respectively, while gross unrealized losses amounted
to $95,055 and $138,080 in 1998 and 1997, respectively.
Obligations of the U.S. Government, U.S. Government Agencies and Mortgage-Backed
Securities having a book value of $27,307,734 and an estimated fair value of
$27,609,598 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 Investment Securities Available for
Sale for the years ended December 31,
1998 1997 1996
Mortgage-Backed Securities ........... $40,676 $ 0 $16,724
<PAGE> 23
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 No. 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.
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 7.25% and 6.60% for 1998 and 1997,
respectively. 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 1998 and 1997. Stock of
both the Federal Reserve Bank and the Federal Home Loan Bank are restricted.
During 1998 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 and OREO
Loans as of December 31, consisted of the following:
1998 1997
Real Estate Loans, Construction .................. $ 17,349,704 $ 13,032,541
Real Estate Loans, Other
Commercial .................................... 54,025,411 43,520,062
Residential ................................... 13,455,104 12,506,653
Commercial and Industrial Loans .................. 27,663,218 23,745,418
Loans to Individuals for Household, Family and
Other Personal Expenditures ...................... 4,782,592 7,492,586
All Other Loans (Including Overdrafts) ........... 825,129 106,272
Total Loans, Gross ............................... 118,101,158 100,403,532
Less: Unearned Discount on Loans ................. 525,877 690,328
Total Loans (Net of Unearned Discount) ........ $117,575,281 $ 99,713,204
Collateral varies, but generally includes residential and income producing
commercial properties, as well as automobiles on personal loans. Estimated fair
values of loans at December 31, 1998 and 1997 totaled $118,276,323 and
$103,617,753, respectively.
Bank of Smithtown adopted SFAS No. 114 and SFAS No. 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 No. 115 are included in
the Bank's 90-day or more past due or nonaccrual categories. At December 31,
1998, the recorded investment in loans that are considered impaired under SFAS
No. 114 was $1,749,751. No additional SFAS No. 114 reserve is required for the
$1,749,751 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 No. 114 calculated values. The average recorded investment in
impaired loans during the twelve months ended December 31, 1998 was $1,729,116.
The total allowance on impaired loans at December 31, 1998 and 1997 totaled
$593,123 and $332,084, 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 $26,654, $2,996, and zero in
interest revenue during 1998, 1997 and 1996 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, 1998 and 1997, loans with unpaid principal balances of
$1,749,751 and $1,593,264, 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, 1998 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 $90,166 in 1998 and $94,872 in 1997. There were no loans
contractually past due 90 days or more and still accruing interest at December
31, 1998, however there were $431,757 of these loans at year end 1997.
During 1998, $239,964 of loans, net of an allocated portion of the allowance for
possible loan losses, were transferred to Other Real Estate Owned (OREO). The
estimated fair value of OREO as of December 31, 1998 was $1,392,500.
<PAGE> 24
The composition of OREO at December 31, follows:
1998 1997
OREO ..................................... $1,392,500 $4,357,018
Less: Valuation Reserve .................. 320,005 429,232
Net ...................................... $1,072,495 $3,927,786
Other net OREO costs, which include operating revenue and expense, and gains and
losses on the sale or disposition of other real estate owned, approximated
$91,000, $85,000 and $102,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
A summary of information concerning interest income on nonaccrual loans and OREO
at December 31, follows:
<TABLE>
<CAPTION>
OREO Nonaccrual
(in thousands) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross interest income which would have been recorded
during the year under original contract terms ........... $214 $522 $595 $ 90 $ 95 $143
Gross interest income recorded during the year ............. 0 0 0 0 0 40
</TABLE>
The Bank has granted loans to officers, directors and principal shareholders of
the Bancorp and to their associates. Related party loans are made in the
ordinary course of business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons. The aggregate dollar amount of these loans
was $1,542,012 and $578,516 at December 31, 1998 and 1997, respectively. During
1998, $1,167,264 of new loans were made, and repayments totaled $203,768.
During 1998, 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 1998, there were no Mortgages Held for Sale outstanding. Fee income
earned during the year from mortgage originations totaled $76,020.
Note D. Allowance for Possible Loan Losses
Transactions in the allowance for the year ending December 31 were as follows:
1998 1997 1996
Balance, January 1 ...................... $1,677,594 $1,622,572 $1,429,894
Add:
Recoveries ............................ 51,726 98,648 21,499
Provision Charged to Current Expense .. 525,000 805,000 370,000
Total .............................. 2,254,320 2,526,220 1,821,393
Less: Charge-Offs ...................... 133,949 848,626 198,821
Balance, December 31 .................... $2,120,371 $1,677,594 $1,622,572
Note E. Bank Premises and Equipment
Bank premises and equipment as of December 31 at cost is as follows:
1998 1997
Land ............................................... $ 92,650 $ 92,650
Bank Premises ...................................... 1,811,023 1,692,139
Leasehold Improvements ............................. 2,020,598 1,724,500
Furniture and Equipment ............................ 3,768,949 3,007,760
Total ........................................... 7,693,220 6,517,049
Less: Accumulated Depreciation and Amortization ... 4,433,930 4,062,215
Total ........................................... $3,259,290 $2,454,834
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 1998, 1997, and 1996, amounted to $43,352,
$43,015, and $51,266, respectively.
<PAGE> 25
During 1995, the Bank established an Employee Stock Ownership Plan (ESOP) for
substantially all of its employees. The ESOP replaced the Profit Sharing Plan.
Eligibility requirements for the ESOP remain the same as for the Defined
Contribution Plan and include one year of continuous service, 1,000 hours and
attaining an age of 21. Eligible compensation is defined as gross wages less
contributions to any qualified plans to the extent that these contributions are
not includable in the gross income of the participant. Contributions to the ESOP
are in the form of cash and made at the discretion of the Board of Directors.
The ESOP uses this contribution to purchase shares of Smithtown Bancorp stock
which are then allocated to eligible participants. ESOP benefits are 100% vested
after five years of service with the Bank. Forfeitures are reallocated among
participating employees, in the same proportion as contributions. Benefits are
payable upon death, retirement, early retirement, disability or separation from
service and may be payable in cash or stock. The Bank reported a net expense of
$125,000 related to the ESOP for the years ended December 31, 1998, 1997 and
1996. During 1998, 1997 and 1996, the ESOP used the Bank's contribution to
purchase 1,162, 1,246, and 7,014 shares of common stock at an average cost of
$43.50, $32.00, and $16.00 per share, respectively. The 1998 contribution
represents 3.84% of eligible compensation. As of December 31, 1998 and 1997, the
ESOP held 27,324 and 27,128 allocated shares, respectively. There were no
unallocated shares in the ESOP effective December 31, 1998 and 1997. ESOP shares
are included in Weighted Average Shares Outstanding in the calculations of
earnings per share.
The Bank of Smithtown sponsors postretirement medical and life insurance plans
for a closed group of prior employees. The following tables
provide a reconciliation of the changes in the Plans' benefit obligations and
fair value of assets over the two-year period ending December 31, 1998, and a
statement of the funded status as of December 31 of both years:
<TABLE>
<CAPTION>
Retiree Health Benefits
1998 1997
<S> <C> <C>
Reconciliation of Benefit Obligation
Obligation at January 1 .............................................................. $ 632,937 $ 696,271
Interest Cost ........................................................................ 40,580 46,393
Actuarial Gain ....................................................................... (48,446) (45,653)
Benefit Payments ..................................................................... (57,900) (64,074)
Obligation at December 31, ........................................................... 567,171 632,937
Reconciliation of Fair Value of Plan Assets
Employer Contributions ............................................................... 57,900 64,074
Benefit Payments ..................................................................... (57,900) (64,074)
Fair Value of Plan Assets at December 31, ............................................ 0 0
Funded Status
Funded Status at December 31 ....................................................... (567,171) (632,937)
Unrecognized Transition (Asset) Obligation ......................................... 444,400 476,200
Unrecognized Loss .................................................................. 8,135 56,581
Net Amount Recognized,before Additional Minimum Liability .......................... $(114,636) $(100,156)
</TABLE>
The following table provides the amounts recognized in the statement of
financial position as of December 31 of both years:
<TABLE>
<CAPTION>
Retiree Health Benefits
1998 1997
<S> <C> <C>
Accrued Benefit Liability,after Additional Minimum Liability ............................... $(114,636) $(114,636)
Net Amount Recognized ...................................................................... $(114,636) $(114,636)
Additional year-end information for plans with obligations in excess of plan assets:
Projected Benefit Obligation ............................................................... $ 567,171 $ 632,937
The following table provides the components of net periodic benefit cost for the
plans for fiscal years 1997 and 1998:
Retiree Health Benefits
1998 1997
Interest Cost .............................................................................. $ 40,580 $ 46,393
Amortization of Unrecognized Transition Obligation ......................................... 31,800 31,800
Net Periodic Benefit Cost ................................................................ 72,380 79,811
Net Periodic Benefit Cost after Curtailments and Settlements ............................. $ 72,380 $ 79,811
</TABLE>
<PAGE> 26
The assumptions used in the measurement of the Company's benefit obligation are
shown in the following table:
Retiree Health Benefits
1998 1997
Weighted Average Assumptions as of December 31
Discount ......................................... 6.50% 6.75%
Initial Rate for Health Care Costs* .............. 10.00% 30.00%
Ultimate Rate for Health Care Costs .............. 6.00% 6.00%
Ultimate Year of Health Care Increase ............ 2008 2008
*The known premium rate for 1999 was used in determining the December 31, 1997
liabilities. A 10% increase was assumed for the claim in year 2000.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
1% Increase 1% Decrease
Effect on total of service and interest cost components
net of periodic postretirement health care benefit cost $ 389 $(362)
Effect on health care component of the accumulated
postretirement benefit obligation 3,541 (3,337)
Note G. Income Taxes
Federal and State Income Taxes payable as of December 31, included in other
assets in 1998 and 1997 are as follows:
1998 1997
Current .............................. $128,077 $157,669
Deferred ............................. 530,016 300,374
Total .............................. $658,093 $458,043
Provisions for current income taxes for the years ended December 31, are as
follows:
1998 1997 1996
Federal:
Current ...................... $1,300,500 $1,490,794 $ 662,461
Deferred ..................... 186,129 58,528 70,865
Total Federal .................. 1,486,629 1,549,322 733,326
New York State:
Current ........................ 496,248 518,377 248,111
Deferred ....................... 43,793 13,419 16,454
Total New York State ........... 540,041 531,796 264,565
Total ................... $2,026,670 $2,081,118 $ 997,891
A reconciliation of the federal statutory tax rate to the required tax rate
based on income before income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Tax Pretax Tax Pretax Tax Pretax
Amount Income(%) Amount Income(%) Amount Income(%)
<S> <C> <C> <C> <C> <C> <C>
Federal Statutory Rate ..................................... $ 1,879,208 34.00 $ 1,836,659 34.00 $ 919,152 34.00
Increase (Reduction) of Taxes Resulting From:
Tax Exempt Interest ..................................... (204,358) (3.70) (97,258) (1.80) (92,839) (3.43)
State Income Taxes Net of Federal Income Tax Benefit .... 356,427 6.45 350,985 6.50 174,613 6.46
Other ................................................... (4,607) (0.08) (9,268) (0.17) (3,035) (0.11)
Total ................................................ $ 2,026,670 36.67 $ 2,081,118 38.53 $ 997,891 36.92
</TABLE>
Income taxes on investment securities transactions amounted to approximately
$17,100 in 1998, zero in 1997, and approximately $7,100 in 1996.
<PAGE> 27
Deferred income tax assets and liabilities are calculated based on their
estimated effect on future cash flows. The calculations under this method
resulted in a net deferred tax asset of $530,015 and $300,374 as of the end of
1998 and 1997, respectively.
Deferred tax assets and liabilities were recognized as of December 31, 1998 and
1997 for the taxable temporary differences related to loan loss provisions,
depreciation, OREO losses, Accounting for Postretirement Benefits Other than
Pensions (SFAS No. 106), and Accounting for Investment Securities (SFAS No.
115), as presented below:
<TABLE>
<CAPTION>
Loan
Loss OREO SFAS SFAS
December 31, 1998: Provision Depreciation Losses No. 106 No. 115 Total
<S> <C> <C> <C> <C> <C> <C>
Federal Deferred Tax Asset (Liability) .................. $ 464,511 $(103,917) $ 134,981 $ 45,161 $(146,232) $ 394,504
New York State Deferred Tax Asset (Liability) ............ 109,136 18,398 31,760 10,625 (34,408) 135,511
Net Deferred Tax Asset (Liability) ....................... $ 573,647 $ (85,519) $ 166,741 $ 55,786 $(180,640) $ 530,015
December 31, 1997:
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
</TABLE>
Note H. Deposits
Time Deposits in Excess of $100,000
At December 31, 1998 and 1997, time deposits in principal amounts of $100,000 or
more were $10,666,898 and $8,773,618, respectively. Interest expense on such
deposits for the three years ended December 31, 1998 was $516,403, $392,267,
$361,484, respectively.
A schedule of future time deposits having a remaining term of more than one year
and the aggregate amount of maturities is set forth as follows:
2000........................................................ $1,427,518
2001........................................................ 0
2002........................................................ 1,075,366
Total.................................................... $2,502,884
Deposits of Major Shareholders, Officers, Directors and their Affiliates
Deposits due to major shareholders, officers, directors and their affiliates
aggregated $3,354,172 and $3,591,412 at December 1, 1998 and 1997, 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 $7,365,572 and $5,458,225 at December
31, 1998 and 1997 respectively.
During 1998 the Board of Directors approved a Stock Repurchase Plan authorizing
the repurchase of up to $4,000,000 worth of Bancorp stock at market prices.
Pursuant to the plan, the Bancorp repurchased an adjusted equivalent of 43,771
common shares at a total cost of $2,394,798 during this past year.
During 1996 the stockholders increased the number of authorized common shares to
1,500,000, and in 1998, the stockholders increased the number of authorized
common shares again to 3,000,000. During 1996, the stockholders also authorized
100,000 preferred shares with a par value of $.01 per share. No preferred shares
have been issued pursuant to that authorization.
<PAGE> 28
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,
<S> <C> <C>
1998 1997
Assets
Non-Interest-Bearing Deposits with Subsidiary Bank ..................................................... $ 1,012,371 $ 191,902
Investment in Bank of Smithtown ........................................................................ 16,316,256 16,690,132
Total ............................................................................................... $17,328,627 $16,882,034
Liabilities
Cash Dividends Payable ................................................................................. $ 165,893 $ 151,644
Stockholders' Equity
Common Stock - $2.50 Par Value:
(3,000,000 Shares Authorized; 895,910 Shares Issued) ................................................ 2,239,775 2,239,775
Capital Surplus ........................................................................................ 7,859,918 7,859,918
Retained Earnings ...................................................................................... 9,904,478 7,077,336
Less: Treasury Stock (73,145 and 29,374 Shares at Cost at December 31, 1998 and 1997, respectively) .... 2,841,437 446,639
Total Stockholders' Equity .......................................................................... 17,162,734 16,730,390
Total ............................................................................................... $17,328,627 $16,882,034
</TABLE>
Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
Year ended December 31,
<S> <C> <C> <C>
1998 1997 1996
Income
Dividends from Bank of Smithtown ............................................. $ 3,874,289 $ 606,575 $ 554,582
Expenses ..................................................................... 0 (10,000) (249)
Net Income Before Equity in Undistributed Earnings of Subsidiary ............. 3,874,289 596,575 554,333
Equity in Undistributed Earnings of Subsidiary ............................. (373,876) 2,724,244 1,151,165
Net Income ................................................................... 3,500,413 3,320,819 1,705,498
Retained Earnings, Beginning of Year ......................................... 7,077,336 4,363,092 3,212,176
Dividends Declared ........................................................... (673,271) (606,575) (554,582)
Retained Earnings, End of Year ............................................... $ 9,904,478 $ 7,077,336 $ 4,363,092
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net Income ............................................................................ $ 3,500,413 $ 3,320,819 $ 1,705,498
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in Undistributed Net Earnings of Subsidiary .................................. 373,876 (2,724,244) (1,151,165)
Net Cash Provided by Operating Activities ............................................. 3,874,289 596,575 554,333
Cash Flow from Financing Activities:
Dividends Paid ........................................................................ (659,022) (593,578) (537,252)
Purchases of Treasury Stock ........................................................... (2,394,798) 0 0
Net Cash Used by Financing Activities ................................................. (3,053,820) (593,578) (537,252)
Net Increase in Non-Interest-Bearing Deposits with Subsidiary Bank .................... 820,469 2,997 17,081
Non-Interest Bearing Deposits with Subsidiary Bank, Beginning of Year ................. 191,902 188,905 171,824
Non-Interest-Bearing Deposits with Subsidiary Bank, End of Year ....................... $ 1,012,371 $ 191,902 $ 188,905
</TABLE>
<PAGE> 29
Note K. Commitments and Contingent Liabilities
As of December 31, 1998, the minimum rental commitments under non-cancelable
operating leases for premises and equipment with initial terms in excess of one
year are as follows:
1999.......................................................... $ 175,888
2000.......................................................... 178,742
2001.......................................................... 179,550
2002.......................................................... 171,941
2003.......................................................... 175,003
Subsequent to 2002............................................ 1,210,158
Total......................................................... $2,091,282
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 $391,338 in
1998, $422,622 in 1997, and $403,060 in 1996.
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, 1998 was $834,000.
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.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the Bank to disclose estimated fair values of its financial instruments. SFAS
No. 107 was amended in October, 1994 by SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments".
Financial Instruments are defined as cash, evidence of an ownership in an
entity, or a contract that conveys or imposes on an entity the contractual right
or obligation to either receive or deliver cash or another financial instrument.
Fair value is defined as the amount at which such financial instruments could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted price, 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, due from banks, Federal funds sold, dividend payable and other
liabilities because of their short-term nature, have been valued at their
respective carrying values.
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.
<PAGE> 30
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable at the reporting date. The fair value of fixed
maturity certificates of deposit are estimated using the rates currently offered
for deposits of similar remaining maturities.
Securities Sold Under Agreements to Repurchase and Other Borrowings The fair
value of securities sold under agreements to repurchase and other borrowings are
estimated based on quoted market prices or dealer quotes.
Note M. Securities Sold Under Agreements to Repurchase
At December 31, 1998, the Bank had no outstanding Securities Sold Under
Agreements to Repurchase (REPO). During 1998, a REPO of $2,800,000 remained
outstanding at a yield of 6.16% until its maturity date of May 26, 1998. The
Bank's interest in these securities has been designated under a written
custodial agreement. The average balance of this Security Sold Under Agreements
to Repurchase totaled $1,173,699 during 1998, with $2,800,000 being the maximum
amount outstanding at any month end during the first five months of 1998. The
underlying security in the $2,800,000 REPO was a 7.75% U.S. Government Agency,
called on May 26, 1998, with an estimated fair value of $3,000,000. This
security was held at Morgan Stanley.
At December 31, 1997, there was one outstanding Security Sold Under Agreement to
Repurchase. This REPO averaged $2,800,000 during 1997, and the maximum amount
outstanding at any month end during 1997 totaled $2,800,000.
Note N. Other Borrowings
The Bank has available to it, under various lines of credit from the Federal
Home Loan Bank of New York and Morgan Stanley & Company, Inc. a total of
$60,499,509 at December 31, 1998. The borrowing limit at the Federal Home Loan
Bank of New York is calculated on 25% of the Bank's total average assets and is
subject to specific collateral requirements. At December 31, 1998, the
outstanding balances on these lines of credit were $3,000,000, with remaining
available credit of $57,499,509. The outstanding balance at year end consisted
of a five year 5.56% fixed rate advance with a stated maturity date of December
2001, a call date of December 1999, obtained through the Federal Home Loan Bank
of New York and Demand Notes issued to the U.S. Treasury totaling $174,645.
These borrowings were secured by U.S. Treasury Notes, Federal Home Loan Bank
Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA)
securities. The maturity dates of these securities range from November 1999 to
August 2024, with coupon interest rates paying between 5.00% to 8.50%. Total
estimated fair value of these securities at December 31, 1998, was $17,623,784.
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 Other
Borrowings for 1998 was $7,020,425 and the maximum outstanding amount at any
month end was $16,000,000.
The Bank had available to it, under various lines of credit from its
correspondent banks and Morgan Stanley a total of $66,169,710 at December 31,
1997. 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 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, 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 were 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, 1998 and 1997, the estimated fair value of Other Borrowings
approximated cost.
<PAGE> 31
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,
1998 the Bank's total commitments to extend credit were $19,528,583 at fixed
rates and $15,170,361 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 28 performance standby
letters of credit totaling $1,913,891 as of December 31, 1998. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained by the Bank upon extension of credit is based on
management's credit evaluation of the customer.
Collateral held varies but generally includes residential and income-producing
properties.
Residential mortgage loans which have been sold in the secondary market may
present off-balance sheet-risk to the Bank in the form of first payment buyback
obligation. This buyback obligation commences with the later of the date of sale
of the loan to the investor and/or the first contractually due payment by the
mortgagee. At December 31, 1998 this buyback obligation totaled $858,000.
Note P. Regulatory Matters
In January 1989, the Board of Governors of the Federal Reserve Bank issued
guidelines for the implementation of risk based capital requirements by U.S.
Banks and bank holding companies. These guidelines have been revised along with
minimum leverage ratios also set by the Federal Reserve Bank. The Bank's capital
remains extremely strong by all regulatory guidelines. The following is a
listing of the Bank's required and actual capital ratios.
1998 Actual 1997 Actual Required
Tier I ................................ 12.09% 14.35% 4.00%
Tier II ............................... 1.25% 1.25% **
Total Risk-Based Capital .............. 14.14% 15.63% 8.00%
Leverage Ratio ........................ 8.47% 8.01% 4.00%
**Tier II Capital is limited to maximum of 100% of Tier 1 Capital.
Note Q. Subsequent Event
Subsequent Borrowings - On January 15, 1999, the Bank borrowed a $5,000,000, ten
year fixed rate advance with a five year call date from the Federal Home Loan
Bank of New York. The maturity date of this advance is January 15, 2009, with an
interest rate of 4.935% guaranteed for the first five years. Two additional U.S.
Government Agency securities were pledged at Federal Home Loan Bank of New York
to satisfy collateral requirements needed to secure this advance. The additional
pledge consisted of one Federal Home Loan Mortgage Corporation security with an
estimated fair value of $2,000,000, and one Federal Home Loan Bank security with
an estimated fair value of $1,991,250 at January 15,1999.
<PAGE> 32
<TABLE>
<CAPTION>
Selected Financial Data
Consolidated Average Balance Sheet Data
As of December 31,
(in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Assets
Cash and Due from Banks ................................... $ 8,162 $ 7,796 $ 7,401 $ 6,781 $ 6,451
Investment Securities:
Obligations of U.S. Government and Agencies ............ 20,875 18,828 10,788 10,496 22,387
Mortgage-Backed Securities ............................. 34,339 45,452 31,392 33,601 37,604
Obligations of State and Political Subdivisions ........ 12,686 5,213 4,814 5,259 6,180
Other Securities ....................................... 857 823 600 331 127
Total Investment Securities ...................... 68,757 70,316 47,594 49,687 66,298
Federal Funds Sold ........................................ 12,943 6,884 7,681 3,758 2,962
Loans (Net of Unearned Discount) .......................... 104,848 98,997 99,451 86,437 71,448
Less: Allowance for Possible Loan Losses ............... 1,934 1,513 1,550 1,412 1,507
Loans: Net ............................................... 102,914 97,484 97,901 85,025 69,941
Bank Premises and Equipment ............................... 2,900 2,515 2,793 3,133 3,272
Other Assets
Other Real Estate Owned ................................ 2,891 4,245 4,523 5,489 4,902
Other .................................................. 3,431 2,695 3,207 2,839 2,623
Total ............................................ $ 201,998 $ 191,935 $ 171,100 $ 156,712 $ 156,449
Liabilities
Deposits:
Demand (Non-Interest Bearing) ........................... $ 45,014 $ 42,664 $ 38,425 $ 35,075 $ 34,872
Money Market ............................................ 40,211 33,636 26,627 22,965 25,838
Savings (including NOW) ................................. 54,265 58,814 60,578 60,404 65,157
Time .................................................... 35,965 31,506 28,660 22,896 15,796
Total Deposits .................................... 175,455 166,620 154,290 141,340 141,663
Securities Sold Under Agreements to Repurchase ............ 1,174 2,800 1,645 1,690 2,465
Other Borrowings .......................................... 6,965 5,502 848 247 0
Other Liabilities ......................................... 1,290 1,641 1,141 1,157 708
Total Liabilities ............................... 184,884 176,563 157,924 144,434 144,836
Stockholders' Equity
Common Stock - $2.50 Par Value ............................ 2,240 2,240 2,240 2,240 2,240
Capital Surplus ........................................... 1,993 1,993 1,993 1,993 1,993
Accumulated Other Comprehensive Income .................... 279 121 (156) (53) (20)
Retained Earnings 14,296 11,465 9,546 8,579 7,695
Total ........................................... 18,808 15,819 13,623 12,759 11,908
Less: Treasury Stock ........................... 1,694
447 447 481 295
Total Stockholders' Equity ...................... 17,114 15,372 13,176 12,278 11,613
Total ........................................... $ 201,998 $ 191,935 $ 171,100 $ 156,712 $ 156,449
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
Selected Financial Data
Consolidated Balance Sheets
As of December 31,
(in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Assets
Cash and Due from Banks .................................... $ 7,124 $ 7,667 $ 7,690 $ 7,003 $ 5,956
Investment Securities Held to Maturity:
Obligations of U.S. Government .......................... 0 2,003 2,008 2,014 3,020
Obligations of U.S. Government Agencies ................ 0 0 0 0 2,052
Mortgage-Backed Securities .............................. 4,582 7,237 9,003 10,227 34,761
Obligations of State and Political Subdivisions ......... 6,293 6,458 4,997 4,648 6,137
Other Securities ........................................ 0 0 0 0 0
Total ................................................ 10,875 15,698 16,008 16,889 45,970
Investment Securities Available for Sale:
Obligations of U.S. Government .......................... 6,152 6,176 0 3,009 10,056
Obligations of U.S. Government Agencies ................. 14,213 15,252 13,564 3,016 898
Mortgage-Backed Securities .............................. 19,129 36,190 34,219 13,155 2,046
Obligations of State and Political Subdivisions ......... 11,819 0 0 0 0
Other Securities ........................................ 857 856 600 599 127
Total ................................................ 52,170 58,474 48,383 19,779 13,127
Total Investment Securities .......................... 63,045 74,172 64,391 36,668 59,097
Federal Funds Sold ......................................... 12,500 8,300 0 6,750 200
Loans ...................................................... 118,101 100,404 101,151 98,069 80,491
Less: Unearned Discount ................................. 526 690 573 655 707
Allowance for Possible Loan Losses ................ 2,120 1,678 1,623 1,430 1,362
Loans, Net ................................................. 115,455 98,036 98,955 95,984 78,422
Bank Premises and Equipment ................................ 3,259 2,455 2,619 3,173 3,167
Other Assets
Other Real Estate Owned ................................. 1,073 3,928 5,088 5,046 5,590
Other ................................................... 3,370 3,098 2,886 2,904 4,520
Total ................................................ $ 205,826 $ 197,656 $ 181,629 $ 157,528 $ 156,952
Liabilities
Deposits:
Demand (Non-Interest Bearing) ............................ $ 49,752 $ 42,567 $ 42,563 $ 35,945 $ 34,656
Money Market ............................................. 42,807 36,326 27,412 23,376 22,654
Savings (including NOW) .................................. 55,057 56,283 60,196 59,656 63,069
Time ..................................................... 36,259 33,020 28,757 24,605 14,852
Total Deposits ........................................ 183,875 168,196 158,928 143,582 135,231
Dividend Payable ........................................... 166 152 139 121 107
Securities Sold Under Agreements to Repurchase ............. 0 2,800 2,800 0 9,003
Other Borrowings ........................................... 3,175 8,452 4,486 0 0
Other Liabilities .......................................... 1,198 1,077 1,179 988 1,005
Total Liabilities .................................... 188,414 180,677 167,532 144,691 145,346
Stockholders' Equity
Common Stock - $2.50 Par Value ............................. 2,240 2,240 2,240 2,240 2,240
Capital Surplus ............................................ 1,994 1,994 1,994 1,994 1,993
Accumulated Other Comprehensive Income ..................... 249 249 81 (28) (135)
Retained Earnings .......................................... 15,770 12,943 10,229 9,078 8,092
Total ................................................ 20,253 17,426 14,544 13,284 12,190
Less: Treasury Stock ................................ 2,841 447 447 447 584
Total Stockholders' Equity ........................... 17,412 16,979 14,097 12,837 11,606
Total ................................................ $ 205,826 $ 197,656 $ 181,629 $ 157,528 $ 156,952
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
Selected Financial Data
Consolidated Income Statements
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Interest Income
Interest and Fees on Loans ................................... $ 9,996,927 $ 9,731,626 $ 9,391,802 $ 8,278,027 $ 6,690,095
Interest on Balance due from Banks ........................... 7,631 5,973 1,493 0 0
Interest on Federal Funds Sold ............................... 707,252 382,157 417,107 221,857 117,440
Interest and Dividends on Investment Securities:
Taxable:
Obligations of U.S. Government ..................... 414,782 235,724 141,265 431,259 1,235,897
Obligations of U.S. Government Agencies ............ 920,343 1,038,404 569,716 178,689 177,332
Mortgage-Backed Securities ......................... 1,979,480 2,847,023 1,833,879 1,901,977 2,080,703
Other Securities ................................... 57,932 52,010 37,638 22,385 7,632
Total ................................................. 3,372,537 4,173,161 2,582,498 2,534,310 3,501,564
Exempt from Federal Income Taxes:
Obligations of State and Political Subdivisions ....... 656,858 308,609 293,774 318,174 369,338
Total Interest Income ................................. 14,741,205 14,601,526 12,686,674 11,352,368 10,678,437
Interest Expense
Money Market Accounts ........................................ 1,418,621 1,136,766 834,353 716,465 584,242
Certificates of Deposit of $100,000 and Over ................. 516,403 392,267 361,484 210,891 113,101
Other Time Deposits .......................................... 2,060,082 2,161,906 2,343,908 2,316,078 1,708,624
Interest on Securities Sold Under
Agreements to Repurchase ................................. 72,826 174,556 100,932 106,511 127,223
Interest on Other Borrowings ................................. 375,057 286,995 44,308 14,950 0
Total Interest Expense ................................ 4,442,989 4,152,490 3,684,985 3,364,895 2,533,190
Net Interest Income ................................... 10,298,216 10,449,036 9,001,689 7,987,473 8,145,247
Provision for Possible Loan Losses ........................... 525,000 805,000 370,000 110,000 120,000
Net Interest Income After Provision
for Possible Loan Losses ............................ 9,773,216 9,644,036 8,631,689 7,877,473 8,025,247
Other Non-Interest Income
Trust Department Income ...................................... 400,569 364,600 434,069 401,811 298,786
Service Charges on Deposit Accounts 1,479,577 1,518,765 1,337,449 1,278,668 1,344,754
Other Income ................................................. 952,721 751,137 540,588 482,538 433,731
Net Gain on Sales of Investment Securities ................... 40,676 0 16,724 1,393 22,695
Total Other Non-Interest Income ........................ 2,873,543 2,634,502 2,328,830 2,164,410 2,099,966
Other Operating Expenses
Salaries ..................................................... 3,252,761 2,949,150 3,379,214 3,470,680 3,556,241
Pensions and Other Employee Benefits ......................... 682,397 669,919 717,516 761,577 832,603
Net Occupancy Expense ........................................ 835,787 874,033 1,130,358 944,571 905,538
Furniture and Equipment Expense .............................. 621,808 589,897 637,029 622,775 582,663
Other Expenses ............................................... 1,726,923 1,793,602 2,393,013 1,922,109 2,354,157
Total Other Operating Expenses ......................... 7,119,676 6,876,601 8,257,130 7,721,712 8,231,202
Income Before Income Taxes ................................... 5,527,083 5,401,937 2,703,389 2,320,171 1,894,011
Provision for Income Taxes ................................... 2,026,670 2,081,118 997,891 848,790 662,500
Net Income ................................................... $ 3,500,413 $ 3,320,819 $ 1,705,498 $ 1,471,381 $ 1,231,511
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
Selected Financial Data
Supplementary Information
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Data
Net Income ........................................... $ 4.15 $ 3.83 $ 1.97 $ 1.70 $ 1.40
Book Value ........................................... 21.16 19.60 16.27 14.82 13.57
Dividends Declared
Cash Dividends per Share ............................. 0.80 0.70 0.64 0.56 0.50
Cash Dividends Declared .............................. 673,271 606,575 554,582 484,890 436,741
Year-End Data
Total Assets ........................................ 205,825,657 197,656,436 181,629,049 157,528,274 156,951,687
Total Deposits ...................................... 183,875,462 168,195,635 158,928,455 143,581,497 135,230,577
Total Stockholders' Equity .......................... 17,412,189 16,979,459 14,097,239 12,837,073 11,605,718
Total Trust Assets .................................. 83,966,013 76,562,667 70,643,739 71,304,522 62,452,427
Number of Shares Outstanding ........................ 822,765 866,536 866,536 866,536 855,332
Selected Ratios ..................................... % % % % %
Net Income to:
Total Income ..................................... 19.87 19.27 11.36 10.89 9.64
Average Total Assets ............................. 1.73 1.73 1.00 0.94 0.79
Average Stockholders' Equity ..................... 20.45 21.60 12.94 11.98 10.61
Average Stockholders' Equity to Average Assets ...... 8.47 8.01 7.70 7.84 7.44
Dividend Payout Ratio ............................... 19.23 18.27 32.52 32.95 35.46
</TABLE>
Management is not always aware of the price for every transaction in Bancorp
stock. The following charts show the prices for the transactions of which
management is aware:
Per Share
Cash
Dividend
1998 High Low Declared
First Quarter ..................... $ 57.25 $ 41.00 $ 0.200
Second Quarter .................... 57.00 52.00 0.200
Third Quarter ..................... 57.00 55.50 0.200
Fourth Quarter .................... 55.88 54.50 0.200
Total Cash Dividends Declared ..... $ 0.800
1997
First Quarter ..................... $ 36.00 $ 34.00 $ 0.175
Second Quarter .................... 42.00 36.00 0.175
Third Quarter ..................... 51.00 38.50 0.175
Fourth Quarter .................... 85.00 52.75 0.175
Total Cash Dividends Declared ..... $ 0.700
1996
First Quarter...................... $ 32.00 $ 29.75 $ 0.160
Second Quarter..................... 32.00 29.75 0.160
Third Quarter...................... 32.00 31.00 0.160
Fourth Quarter..................... 35.00 32.00 0.160
Total Cash Dividends Declared $ 0.640
<PAGE> 36
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. The year 1998 was another outstanding year
for Bank of Smithtown. We achieved record high earnings, continued asset growth
and return on equity achieved only by the highest performing banks in the
country. Also remarkable, especially in light of the extremely volatile stock
market, was the continued upward trend in the Bank's stock price. The Board of
Directors approved a 2:1 stock split effective May 6, 1998, at which time the
price of the stock was $114 per share. Typically, after a split, the price per
share drops disproportionately to the split. Bank of Smithtown's stock price
regained its strength and was selling at $57 per share prior to June 30, a very
strong indication of the high confidence level investors felt toward the Bank.
The year 1998 was a year during which Bank of Smithtown invested time and
dollars to strengthen its existing product and service lines. It was during late
1997 that we introduced CHATS, our voice response system, which provides our
customers 24-hour telephone access to account information and transaction
abilities. We ironed out the kinks in that system this year, and as we can see
from the volume of calls recorded on CHATS during 1998, our customers are really
taking advantage of this time saving product. During 1998, we invested in an
upgraded computer mainframe, an IBM AS400 Riscbox. This very powerful computer
has already provided us with increased speed and disc space, which in turn
enables our staff to provide our customers with increased transaction speed.
Along with upgraded mainframe hardware and software, we also invested in higher
level communication lines between our data center and our branch offices. Prior
to year end 1998, our Hauppauge and Northport branches came up on a new "online"
teller system. Our tellers now use personal computers which are interfaced to
our mainframe computer. The installation of this wide area network has allowed
us to provide both up to the minute account information and significantly faster
service to our customers. Internally, we were able to achieve additional
efficiencies by relocating our support staff to our Data Center in Hauppauge.
This improvement was only one of many which contributed to a very strong
efficiency ratio of 53.75%. The year 1998 was also the year during which Bank of
Smithtown developed a website. Our customers can now obtain information
regarding our branch locations, hours of operation, and deposit rates. There are
some interactive dialogues available, with more to follow in the future. This
website is just the beginning of Bank of Smithtown's entry into Internet
banking. While merger and acquisition activity continues throughout the country,
the state and even on Long Island, Bank of Smithtown continues to strengthen its
position as a leading community bank in the nation. The challenge to remain
competitive and profitable in the "big bank" arena was our focus for 1998. As
our numbers reveal, we continue to meet that challenge successfully.
Bank of Smithtown's balance sheet was repositioned during 1998. Total assets
reached $205,825,657, a 4.13% increase over 1997. Investment securities declined
from $74,172,375 in 1997 to $63,044,370 in 1998, a 15.00% decrease. The
composition of the portfolio also changed this year, as Mortgage-Backed
Securities paid down quickly, and obligations of State and Political
Subdivisions became a more attractive investment for the Bank. Due to the low
interest rate environment of 1998, Mortgage-Backed Securities now represent
37.61% of our total portfolio, compared to 58.55% during 1997. Alternately, this
rate environment, along with the tax benefits provided by holdings of State and
Political Subdivisions, resulted in increased purchases of these obligations.
Municipal securities now comprise 28.73% of our portfolio as compared to 8.71%
in 1997. Loans, the highest yielding asset on the balance sheet, increased by
17.63% in1998, and now represent 56.09% of total assets, as compared to 49.60%
at December 31, 1997. Loan allocation remained relatively constant from 1997 to
1998, with the largest volume remaining in commercial real estate loans followed
by commercial loans to small businesses and construction loans. We continued to
originate mortgage loans, some of which were sold in secondary markets, and
others which remained in our own residential mortgage portfolio. Federal Funds
Sold increased at year end 1998 by 50.60% over the level at December 31, 1997,
to $12,500,000. As investment securities matured and paid down during the year,
a portion of these funds were channeled into new securities. A majority of the
funds were used to meet our increasing loan demand, and any remaining funds were
sold to our correspondent banks as a short term investment alternative. Bank
Premises and Equipment increased by 32.77% from 1997 to 1998, resulting from the
capital improvements in the Smithtown lobby renovation, and the investments in
computer hardware and software throughout all of our branches and our Data
Center. Other Real Estate Owned decreased by 72.69% from 1997 as two large
commercial and one large residential property were sold this year. This is the
lowest level of OREO held by the Bank since 1990. At year end 1998, there
remains only one large commercial and two small residential properties in
foreclosed assets owned by the Bank. On the liability side of our balance sheet,
total deposits increased by 9.32% from 1997 to 1998.
<PAGE> 37
The allocation of deposits remained constant from 1997 to 1998, with the largest
growth occurring in Certificates of Deposit $100,000 and over. At year end 1998,
total borrowings decreased by $8,077,895 due to the maturity of a Security Sold
Under Agreement to Repurchase in May and a lower level of Demand Notes Issued to
the U.S. Treasury. The Stockholders' Equity section of the balance sheet changed
significantly from 1997, due to two major initiatives from our Board of
Directors. Effective May 6, the Board of Directors approved a 2:1 stock split,
thereby increasing the number of authorized shares of common stock to 3,000,000.
Also approved by the Board during 1998, was a Stock Repurchase Plan totaling
$3,200,000. This aggressive Repurchase Plan was designed to control the rapid
growth of capital, while maintaining the high level of return on equity of
20.45% and a more than adequate leverage ratio of 8.47%. During 1998, 43,771
shares were repurchased by the Bancorp for a total cost of $2,394,798. The
remainder of the $3,200,000 dividend paid to the Bancorp by the Bank for the
Repurchase Plan will be used during 1999.
The Bank's income statement reflects the strength of its balance sheet. The
driving force behind earnings, and certainly its largest component, remains net
interest income. The interest earned on interest bearing assets less the cost of
interest paid on interest bearing liabilities provides the largest contribution
to Bank earnings and represents 58.46% of total income, as compared to 60.62% in
1997. This slight decrease is the result of the low interest rate environment of
1998. This decline in interest rates causes the Bank's interest margin to
tighten and applies pressure for increased earnings from less interest sensitive
business lines. As can be seen from the 9.07% increase in Other Non-Interest
Income during 1998, Bank of Smithtown met this challenge successfully. Income
from the Bank's Trust and Investment Management Division, as well as gains on
OREO sales and fees for ATM services are responsible for this growth in
non-interest income. Other Operating Expenses increased only slightly from 1997
by 3.53%. Net Income increased from 1997 to 1998 by 5.41% and for the second
year in a row, reached a record level of $3,500,413. Earnings Per Share also
reached a record level of $4.15 per share.
Interest Income
Interest income for the years ended December 31, 1998, 1997, and 1996 was
$14,741,205, $14,601,526, and $12,686,674, an increase of 16.19% over the three
years. The largest contributor to interest income is interest and fees on loans
which increased by 6.44% over the same three year period. This increased income
level is largely the result of the 16.76% increase in loan volume over the three
years ended December 31, 1998. Yield on the loan portfolio decreased from 9.98%
in 1997 to 9.71% in 1998, as can be seen from the Average Balance Sheet and
Yield Analysis Schedule. The next largest contributor to interest income is the
investment portfolio, which declined in volume to $63,044,370 at year end 1998.
Yield on the investment portfolio, however, for the three years ended December
31, 1998, was 6.35%, 6.60%, and 6.36%. Therefore, the reduced income level
during 1998 on Investment Securities is primarily a result of decreased volume.
Other contributors to interest income include Federal Funds Sold, and to a much
smaller extent to Interest on Balances Due from Banks. During 1998, interest on
Federal Funds Sold increased significantly over that of 1997 and 1996 to
$707,252, an increase of 85.07% and 69.56%, respectively. This increased income
is due primarily to the larger volume of sales.
Interest Expense
Interest expense for the three years ended December 31, 1998, 1997 and 1996 was
$4,442,989, $4,152,490, and $3,684,985, an increase of 7.00% over 1997 and
20.57% over 1996. Our interest expense is due primarily to the cost of our
deposits. In spite of the low rate environment of 1997 and 1998, the expense for
interest has climbed each year in line with the increased volume of deposits,
particularly the increased level of higher paying Time Deposits and Money Market
Accounts. The Bank has also increased its volume of "Preferred" accounts, which
are offered to our "relationship" customers. The balance of the Bank's interest
expense is a result of its borrowings. This expense decreased slightly from
$461,551 to $447,883 as a Security Sold Under Agreement to Repurchase matured in
May 1998. Increased average volume of Demand Notes issued by the U.S. Treasury
are largely responsible for the interest expense on borrowings during 1998. This
average volume was 66.14% higher in 1998 than 1997.
Net Interest Income
Net Interest Income is the largest contributor to net income and it represents
58.46% of total income at year end 1998. Net interest income decreased slightly
to $10,298,216 during 1998 as compared to $10,449,036 during 1997. The average
volume of interest earning assets increased by 5.70%, while the corresponding
average volume of interest bearing liabilities increased by 5.12%. As can be
seen from the Average Balance Sheet and Yield Analysis and the Rate Volume
Relationships of Interest Margin in Earning Assets, the 1.44% decrease in Net
Interest Income is primarily a result of the declining interest rate
environment, and the downward pressure it exerts on the Bank's interest spread.
In spite of this flat and at times inverted yield curve, the Bank was able to
maintain a 5.97% spread on its interest earning assets, only 10 basis points
below the level of 1997. This high spread places Bank of Smithtown at the top in
comparison to its peers and was accomplished by generating higher asset yields
while maintaining relatively lower cost funding. This lower cost of funds has
not been achieved at the expense of our customers, for we remain very
competitive in the rates offered on our deposit accounts. We offer the highest
rate on deposits and discounted rates on loans to our "Preferred" customers who
conduct all of their business at Bank of Smithtown.
<PAGE> 38
The tables below show a comparative analysis of the major areas of interest
income, interest expense and resultant changes in net interest income. Variances
in the rate volume relationship has been allocated to the rate.
Average Balance Sheet and Yield Analysis
<TABLE>
<CAPTION>
1998 1997
(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 ............................................. $ 56,071 $ 3,372 6.01 $ 65,103 $ 4,173 6.41
Nontaxable .......................................... 12,686 995 7.84 5,213 468 8.98
Total Investment Securities ............................ 68,757 4,367 6.35 70,316 4,641 6.60
Balances Due from Banks ................................ 166 8 4.82 131 6 4.58
Total Net Loans ........................................ 102,914 9,997 9.71 97,484 9,732 9.98
Federal Funds Sold ..................................... 12,943 707 5.46 6,884 382 5.55
Total Interest-Earning Assets .......................... 184,780 15,079 8.16 174,815 14,761 8.44
Non-Interest-Earning Assets ............................ 17,218 0 0.00 17,120 0 0.00
Total Assets ..................................... $201,998 $ 15,079 7.47 $191,935 14,761 7.60
Liabilities
Interest-Bearing Liabilities:
Savings Deposits (including NOW) ...................... $ 54,650 $ 781 1.43 $ 58,814 $ 967 1.64
Money Market Accounts ................................. 40,211 1,419 3.53 33,636 1,137 3.38
Certificates of Deposit ............................... 35,580 1,795 5.05 31,079 1,587 5.11
Total Interest-Bearing Deposits ........................... 130,441 3,995 3.06 123,529 3,691 2.99
Securities Sold Under Agreements to Repurchase ............ 1,174 73 6.22 2,800 174 6.21
Other Borrowings .......................................... 6,965 375 5.38 5,502 287 5.22
Total Interest-Bearing Liabilities ........................ 138,580 4,443 3.21 131,831 4,152 3.15
Non-Interest Bearing Liabilities:
Demand Deposits ....................................... 45,014 0 0.00 43,091 0 0.00
Other ................................................. 1,290 0 0.00 1,641 0 0.00
Total Liabilities ................................ 184,884 4,443 2.40 176,563 4,152 2.35
Stockholders' Equity ...................................... 17,114 0 0.00 15,372 0 0.00
Total Liabilities and Stockholders' Equity ........ $201,998 $ 4,443 2.20 $191,935 $ 4,152 2.16
Interest Margin ........................................... $ 10,636 $ 10,609
Interest Spread on:
Average Total Assets .................................. 5.27% 5.53%
Average Total Interest-Earning Assets ................. 5.76% 6.07%
</TABLE>
<PAGE> 39
<TABLE>
<CAPTION>
Rate Volume Relationships of Interest Margin on Earning Assets
1998/1997 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 ................................................. $ (579) $ (222) $ (801) $ 1,347 $ 244 $ 1,591
Nontaxable .............................................. 671 (144) 527 37 (14) 23
Total Investment Securities .......................... 92 (366) (274) 1,384 230 1,614
Total Net Loans ............................................ 542 (277) 265 (40) 380 340
Federal Funds Sold ......................................... 336 (11) 325 (43) 8 (35)
Balances Due from Banks .................................... 2 0 2 4 1 5
Total Interest-Earning Assets ........................ 972 (654) 318 1,305 619 1,924
Interest Expense:
Savings Deposits ........................................ (68) (118) (186) (38) (294) (332)
Money Market Accounts ................................... 222 60 282 220 83 303
Certificates of Deposits ................................ 230 (22) 208 162 18 180
Total Interest-Bearing Deposits ...................... 384 (80) 304 344 (193) 151
Securities Sold Under Agreements to Repurchase ............. (101) 0 (101) 71 2 73
Other Borrowings ........................................... 76 12 88 242 1 243
Total Interest-Bearing Liabilities ................... 359 (68) 291 657 (190) 467
Changes in Interest Margin ........................... $ 613 $ (586) $ 27 $ 648 $ 809 $ 1,457
</TABLE>
Other Operating Income
The schedule below details items of non-interest income for the years ended
December 31,
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Other Operating Income
Trust and Investment Management Department Income ................... $ 400,569 $ 364,600 $ 434,069
Service Charges on Deposit Accounts ................................. 1,479,577 1,518,765 1,337,449
Other Income ........................................................ 952,721 751,137 540,588
Net Gain on the Sales of Investment Securities ...................... 40,676 0 16,724
Total ............................................................ $2,873,543 $2,634,502 $2,328,830
</TABLE>
Other Operating Income increased by 9.07% over 1997 and 23.39% over 1996.
Service charges on deposit accounts is the single largest contributor to Other
Operating Income and it decreased slightly by 2.58% from 1997 to 1998. This is
the result of an increased number of "Preferred" accounts for which service
charges are waived. Other Income rose by 26.84% during 1998, which is in small
part due to gains on the sale of OREO properties and in large part to increased
fee income on a higher volume of ATM transactions. This ATM fee income increased
from $44,666 during 1997 to $145,870 during 1998, a 226.58% increase. Loan fees
are also a large contributor to Other Income. During 1998, this fee income
reached $631,089, an increase of 28.21% over 1997. During 1998, the Bank also
realized $40,676 in gains on the sale of an investment security.
<PAGE> 40
Other Operating Expenses
Detailed below are the components of the Other Operating Expenses for the years
ended December 31,
1998 1997 1996
Other Operating Expenses
Salaries ............................. $3,252,761 $2,949,150 $3,379,214
Pensions and Other Employee Benefits . 682,397 669,919 717,516
Net Occupancy Expense ................ 835,787 874,033 1,130,358
Furniture and Equipment Expense ...... 621,808 589,897 637,029
Other Expenses ....................... 1,846,923 1,793,602 2,393,013
Total ............................. $7,239,676 $6,876,601 $8,257,130
Other Operating Expenses represent various categories of noninterest expense.
These expenses increased by 5.28% during 1998. Salary and benefit expense
increased during 1998 partially due to the increasing costs of health insurance,
as well as two additions to our lending staff including a new Executive Vice
President and Chief Lending Officer. Also reflected in 1998 Salary and Benefit
Expenses are increased levels of compensation to consultants for their
assistance with our large purchases of hardware and software. Net Occupancy
Expense decreased by 4.38% from 1997 to 1998 due to the recognition of benefits
resulting from capital improvements made in 1997 and 1998. Expenses related to
the maintenance of Other Real Estate Owned declined during 1998 as three large
properties were sold during the year. These expenses decreased by 24.21% from
$120,254 in 1997 to $91,141 in 1998. The Loss on Other Real Estate Owned, the
expense account used to provide for declining values in OREO properties,
actually reflected income for the Bank this year. It is through this expense
account that the Valuation Reserve Account is increased. The OREO Valuation
Reserve Account serves as a cushion for sales of Other Real Estate Owned
properties below their carrying value. During the course of the year, it became
apparent to management that sales of OREO properties would result in net gains
for the Bank, and therefore, the Valuation Reserve Account would contain a
surplus of funds. An amount deemed adequate by management was retained in the
OREO Valuation Reserve Account, and the balance of $150,000 was transferred back
to the Loss on Other Real Estate Owned expense account, resulting in a net gain
of $35,437 for the Bank. Furniture and Equipment Expense increased by 5.41% from
$589,897 in 1997 to $621,808 in 1998. This was the result of depreciation
expense on new computer hardware and software. Other Miscellaneous Expenses
increased by 2.97% during 1998. A major component of this category of expense
during 1998 was related to Year 2000 (Y2K) compliance expense. Of this $70,998
in Y2K expense, 72.43% of it was related to the accumulation of a special
Allowance for Possible Loan Losses due to possible noncompliance by loan
customers. The remainder of this expense was used to purchase test data from our
core banking software vendor and for expenses related to Y2K training. A large
component of non-interest expense on the Bank's income statement is the
Provision for Possible Loan Loss Account which provides coverage for losses in
the Bank's loan portfolio. Based on both the size of the loan portfolio and the
level of nonperforming loans, management felt it prudent to reserve $525,000
this year as compared to $805,000 reserved during 1997. The level of the
Allowance for Possible Loan Losses represents 1.80% of total loans and provided
121.18% coverage of nonperforming loans. This level has been reviewed and deemed
adequate based on management's evaluation.
Net Income
Net Income for 1998 reached $3,500,413 as compared to $3,320,819 in 1997 and
$1,705,498 in 1996. Growth in earnings has been 105.24% since 1996. This record
high level of net income has been the result of increased investment and loan
interest income, increased levels of non-interest income and reduced operating
expenses. The budget process established in 1997 and our bankwide incentive
compensation program have also contributed to our excellent bottom line results.
All employees total compensation package including salary and incentive
compensation are tied to the achievement of various goals by the employees and
the Bank. This system has helped keep over staff focused on bottom line results.
Efficiencies have also increased in opposite proportion to expense reduction.
The Bank's efficiency ratio, which measures the amount of expense required to
produce $1.00 of income, is now 53.75%. In the past, this ratio has been as high
as 75%. Two highly recognized indicators of overall strength of a bank are
derived from its net income. The first and most important indicator is the
Bancorp's return on average equity (ROAE) which measures shareholder value. At
December 31, 1998 this ratio was at an outstanding level of 20.45% as compared
to 21.60% and 12.94% at year end 1997 and 1996. The high level of this ratio
places Bank of Smithtown as one of the highest performing banks in the country,
and the highest performer compared to our peers on Long Island. The second ratio
indicative of overall strength is Return on Average Assets (ROAA) which
indicates how efficiently the bank is employing its assets. For 1996, 1997 and
1998, Bank of Smithtown's ROAA reached 1.00, 1.73 and 1.73, respectively. The
strength of these two ratios, in conjunction with other results of operations
achieved during 1998 have placed Bank of Smithtown as one of the highest
performing community banks in the nation.
<PAGE> 41
Investment Securities
Investment Securities at December 31, 1998 totaled $63,044,370 as compared to
$74,172,375 at year end 1997, a decrease of 15.00%. During 1998, a continuation
of low interest rates remained in effect and as a result the proceeds from
principal payment reductions of Mortgage-Backed Securities increased. Proceeds
from these principal reductions as well as matured investments were reinvested
primarily in Obligation of State and Political Subdivisions. The attractive
yields, in comparison to other investment securities, and tax benefits offered
by these securities, led to an increase in our holdings. These obligations now
represent 28.73% of total Investment Securities. Of the $63,044,370 Investment
Portfolio, 82.75% is classified as Available for Sale (AFS) and 17.25% as Held
to Maturity (HTM). The majority of the portfolio is classified AFS so as to
provide maximum 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 slightly,
with U.S. Treasury Notes representing 9.76%, U.S. Government Agencies
representing 22.54%, Mortgage-Backed Securities 37.61%, Municipal Bonds 28.73%,
and Other Securities 1.36%. Other Securities consist of $127,200 of Federal
Reserve Bank 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 schedule detailing
the Weighted Average Maturity of the Investment Portfolio, the entire portfolio
has shortened and maturity has gone from 14 years 7 months to 12 years 11
months. This decreased time frame to maturity has been the result of "called"
securities and rapid pay downs of Mortgage-Backed Securities. The actual
maturity, or average life of the portfolio remains considerably shorter, again
due to anticipated repayment speeds on Mortgage-Backed Securities. The Weighted
Average Yield of the Investment Portfolio has increased for Securities Held to
Maturity from 5.83% in 1997 to 5.91% in 1998, and decreased for Securities
Available for Sale from 7.09% in 1997 to 6.40% in 1998. Overall yield for
Investment Securities has declined from 6.60% in 1997 to 6.35% in 1998.
The following schedule presents the amortized cost for Investment Securities
Held to Maturity and estimated fair value for Investment Securities Available
for Sale as detailed in the Bank's balance sheet as of December 31:
Investment Securities Held to Maturity 1998 1997
Obligations of U.S. Government ..................... $ 0 $ 2,002,757
Mortgage-Backed Securities ......................... 4,582,024 7,237,038
Obligations of State and Political Subdivisions .... 6,292,248 6,458,344
Total ........................................... $10,874,272 $15,698,139
Investment Securities Available for Sale
Obligations of U.S. Government ..................... $ 6,151,890 $ 6,175,710
Obligations of U.S. Government Agencies ............ 14,213,318 15,251,638
Mortgage-Backed Securities ......................... 19,129,406 36,190,088
Obligations of State and Political Subdivisions .... 11,818,684 0
Other Securities ................................... 856,800 856,800
Total ........................................... $52,170,098 $58,474,236
The tables below set forth the investment securities by portfolio, weighted
average maturity, and weighted average yield as of December 31, 1998 and 1997.
Weighted Average Maturity
Investment Securities Held to Maturity 1998 1997
Obligations of U.S. Government ................ - 0 yrs. 6 mos.
Mortgage-Backed Securities .................... 5 yrs. 7 mos. 6 yrs. 7 mos.
Obligations of State and Political Subdivisions 3 yrs. 4 mos. 4 yrs. 1 mos.
Total ...................................... 4 yrs. 4 mos. 4 yrs. 9 mos.
Investment Securities Available for Sale
Obligations of U.S. Government ................ 1 yrs. 0 mos. 2 yrs. 0 mos.
Obligations of U.S. Government Agencies ....... 9 yrs. 8 mos. 8 yrs. 6 mos.
Mortgage-Backed Securities .................... 25 yrs. 10 mos. 23 yrs. 8 mos.
Obligation of State and Political Subdivisions 10 yrs. 1 mos. -
Total ...................................... 14 yrs. 9 mos. 17 yrs. 4 mos.
Total Investment Securities ................ 12 yrs. 11 mos. 14 yrs. 7 mos.
<PAGE> 42
<TABLE>
<CAPTION>
Weighted Average Yield Weighted
Amortized Estimated Average
Investment Securities Held to Maturity Cost Fair Value Yield (%)
<S> <C> <C> <C> >
Mortgage-Backed Securities:
After 1 year, but within 5 years .................................. $ 2,109,778 $ 2,110,703 5.84
After 5 years, but within 10 years ................................ 2,472,246 2,489,191 6.31
Obligations of State and Political Subdivisions:
Within 1 year ..................................................... 1,864,243 1,884,271 6.60
After 1 year, but within 5 years .................................. 2,897,921 3,017,547 5.54
After 5 years, but within 10 years ................................ 1,530,084 1,623,963 5.21
Total ......................................................... $10,874,272 $11,125,675 5.91
Investment Securities Available for Sale
Obligations of U.S. Government:
Within 1 year ..................................................... $ 2,998,111 $ 3,029,070 5.88
After 1 year, but within 5 years .................................. 3,079,138 3,122,820 8.50
Obligations of U.S. Government Agencies:
After 5 years, but within 10 years ................................ 9,531,548 9,595,975 6.85
After 10 years .................................................... 4,604,419 4,617,343 7.55
Mortgage-Backed Securities:
Within 1 year ..................................................... 109,152 109,343 6.00
After 10 years .................................................... 18,841,633 19,020,063 7.15
Obligations of State and Political Subdivisions:
After 1 year, but within 5 years .................................. 776,629 787,316 4.00
After 5 years, but within 10 years ................................ 4,386,613 4,459,239 4.45
After 10 years .................................................... 6,555,960 6,572,129 4.36
Total ......................................................... $50,883,203 $51,313,298 6.49
</TABLE>
Loans
The Bank's loan portfolio at December 31, 1998 and 1997 (net of unearned income)
was $117,575,281 and $99,713,203, respectively, representing an increase of
17.91% over 1997. The classification of the portfolio is as follows:
<TABLE>
<CAPTION>
1998 % 1997 %
<S> <C> <C> <C> <C>
Real Estate Loans, Construction ............................ $ 17,349,704 14.69 $ 13,032,541 12.98
Real Estate Loans, Other:
Commercial .............................................. 54,025,411 45.75 43,520,062 43.35
Residential ............................................. 13,455,104 11.39 12,506,653 12.46
Commercial and Industrial Loans ............................ 27,663,218 23.42 23,745,418 23.65
Loans to Individuals for Household,
Family and Other Personal Expenditures .................. 4,782,592 4.05 7,492,586 7.46
All Other Loans (including Overdrafts) ..................... 825,129 0.70 106,272 0.10
Total Loans ......................................... $118,101,158 100.00 $100,403,532 100.00
</TABLE>
The areas of largest growth in the portfolio remain in the Construction and
Commercial Real Estate loan categories. Average Yield on the entire loan
portfolio for 1998 was 9.71% as compared to 9.98% during 1997. The Bank has
entered into various participation agreements with other Long Island banks in
order to provide funding for high quality commercial real estate loans, yet
still avoid credit concentrations. These participation loans totaled $12,350,921
for Bank of Smithtown at December 31, 1998. 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,
not for 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.
<PAGE> 43
The following table shows the maturities of loans (excluding real estate
mortgages and installment loans) outstanding as of December 31, 1998:
<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) .................. $2,275 $ 0 $ 0 $2,275
Real Estate - Construction ............................................. 828 2,503 0 3,331
Total .................................................................. $3,103 $2,503 $ 0 $5,606
</TABLE>
Deposits
Average deposits for 1998 were $175,454,627 as compared with $166,619,073 in
1997, a 5.30% increase. Year end deposits for 1998 increased by 9.32% over the
same period in 1997. The largest growth in deposits for 1998 was in Time
Deposits and Money Market Accounts, which together increased by $8,374,300. The
resultant increase in interest expense due to this greater volume was $496,081.
"Preferred" account customers are paid higher interest rates on their deposits
in exchange for maintaining their primary checking account plus larger balances
with us. It is these customers who constitute a significant portion of our
deposit increase.
Average Balance
(in thousands) 1998 1997
Demand (Non-Interest Bearing) ................ $ 45,014 $ 42,664
Money Market ................................. 40,211 33,636
Savings (Including NOW) ...................... 54,265 58,814
Time ......................................... 35,965 31,506
Total Deposits ............................... $175,455 $166,620
At December 31, 1998, 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 .......................................... $ 5,568
Over 3 through 6 months ................................... 1,546
Over 6 through 12 months .................................. 1,050
Over 12 months ............................................ 2,503
Total ..................................................... $10,667
Other Borrowings
Year end 1998 Borrowings decreased by 71.79% from year end 1997, but average
balances for the two years indicate a higher level of Borrowings existed during
1998. This was due to the investments made by the U.S. Treasury under the
Treasury Tax and Loan Note Option Depository Program and the 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. The funds are
invested at Bank of Smithtown when the Treasury has excess funds, and are
returned to them as needed. The only limitation placed by the U.S. Treasury on
these funds is the level of collateral provided by the Bank. During May 1998,
the $2,800,000 Repurchase Agreement which carried a 6.16% interest rate was
paid. At December 31, 1998, the Bank had one outstanding advance from the
Federal Home Loan Bank of New York. This advance represents a loan agreement
with a stated maturity date of December 2001, a call date of December 1999, and
a 5.56% interest rate. Underlying collateral for the advance is held at the
Federal Home Loan Bank.
Liquidity and Rate Sensitivity
Liquidity provides the source of funds for anticipated or unanticipated deposit
outflow and loan growth. The Bank's primary sources 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.
<PAGE> 44
The goal of asset/liability management is the combination of maintaining
adequate liquidity levels without sacrificing earnings. The Bank matches the
maturity of its assets and liabilities in a way that takes advantage of the
current and anticipated rate environment. Asset/liability management is of great
concern to management and is reviewed on an ongoing basis. The Chief Executive
Officer, Chief Financial Officer, Chief Lending Officer and Chief Commercial
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. Semiannually, 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 1998 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 investments, loan and
deposit strategies for earnings maximization within acceptable risk levels.The
following table details the interest rate sensitivity of the Bank over various
periods as of December 31, 1998.
<TABLE>
<CAPTION>
Three One Three
Months Six Total Year 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 $49,466 $7,583 $7,764 $27,260 $92,073 $30,363 $39,524 $28,254 $2,606 $192,820
Total Interest Bearing
Liabilities and
Demand Deposits (2) 1,193 23,791 15,251 25,196 65,431 61,623 35,120 0 24,876 187,050
Interest Sensitivity
Gap Per Period 48,273 (16,208) (7,487) 2,064 26,642 (31,260) 4,404 28,254 (22,270) 5,770
Cumulative Interest
Sensitivity Gap 48,273 32,065 24,578 26,642 26,642 (4,618) (214) 28,040 5,770 5,770
Percent of Cumulative
Gap to Total Assets 23.45% 15.58% 11.94% 12.94% 12.94% (2.24)% (0.10)% 13.62% 2.80% 2.80%
</TABLE>
(1) Includes interest-earning assets and interest-bearing liabilities that do
not reprice as well as $1,749,751 in non-accrual loans.
(2) Money MarketAccounts 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.
Stockholders' Equity
Shown below are the components of Stockholders' Equity as of December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Common Stock - $2.50 Par Value (3,000,000 shares authorized; 895,910 shares issued) .................... $ 2,239,775 $ 2,239,775
Capital Surplus ........................................................................................ 1,993,574 1,993,574
Retained Earnings ...................................................................................... 15,770,822 12,943,680
Accumulated Other Comprehensive Income ................................................................. 249,455 249,068
Total ............................................................................................. 20,253,626 17,426,097
Less: Treasury Stock (73,145 and 29,374 Shares at Cost at December 31, 1998 and 1997, respectively) .... 2,841,437 446,639
Total Stockholders' Equity ....................................................................... $17,412,189 $16,979,458
</TABLE>
Stockholder's Equity increased by 2.55% from year end 1997 to year end 1998.
Effective May 6, 1998 the Board of Directors approved a 2:1 stock split which
increased the number of authorized shares from1,500,000 to 3,000,000, and
reduced the par value of the stock from $5 per share to $2.50 per share. Also
during 1998, the Board approved $3,200,000 to be paid in the form of a dividend
from the Bank to the Bancorp for the purpose of stock repurchase. During the
year, the Bancorp repurchased 35,714 shares at a total cost of $2,394,798. At
year end 1998, the Bancorp held 73,145 shares of Treasury Stock at cost.
Retained earnings increased 21.84% from December 31, 1997 to December 31, 1998.
This increase was the result of $3,500,413 of net income less $673,271 of
dividends declared.
Capital ratios are regarded as one of the most important indicators of a banking
institution's strength. There are two capital ratios that are most significant:
leverage ratio and total risk based capital ratio. Leverage at year end 1998 and
1997 was 8.47% and 8.01% respectively. The required minimum leverage ratio for
Bank of Smithtown is 4.00%. Total risk based capital ratio at year end 1998 and
1997 was 14.14% and 15.63%, respectively. The minimum required ratio is 8.00%.
By all guidelines, the Bank is considered well capitalized.
<PAGE> 45
Analysis of the Allowance for Possible Loan Losses
The Allowance for Possible Loan Loss Account at year end 1998 was $2,120,371
compared to $1,677,594 at year end 1997. The change in the Allowance Account is
the result of net charge-offs of $82,223 and a Provision for Possible Loan
Losses of $525,000. Based on the size of the loan portfolio and the volume of
nonperforming loans, management feels the Allowance for Possible Loan Account
provides adequate coverage.
The following tables describe the activity in the Allowance for Possible Loan
Losses for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997
<S> <C> <C>
Allowance for Possible Loan Losses at Beginning of Period ...................................... $ 1,678 $ 1,623
Loans Charged Off:
Commercial .................................................................................. 82 181
Real Estate ................................................................................. 0 382
Consumer .................................................................................... 52 286
Total Loans Charged-Off .................................................................. 134 849
Recoveries on Amounts Previously Charged-Off:
Commercial .................................................................................. 6 4
Real Estate ................................................................................. 10 60
Consumer .................................................................................... 35 35
Total Recoveries ......................................................................... 51 99
Net Charge-Offs ................................................................................ 83 750
Current Year's Provision for Possible Loan Losses .............................................. 525 805
Allowance for Possible Loan Losses at End of Period ............................................ $ 2,120 $ 1,678
Total Loans:
Average (Net of Unearned Discount and Allowance for Possible Loan Loss) .................... $102,914 $ 97,484
End of Period (Net of Unearned Discount) ................................................... 117,575 99,713
</TABLE>
Ratios: 1998 1997
Net Loans Charged-Off to:
Average Loans ...................................... 0.08% 0.77%
Loans at End of Period ............................. 0.07 0.75
Allowance for possible Loan Losses ................. 3.92 44.70
Provision for Possible Loan Losses ................. 15.81 93.17
Last Year's Charge-Off to this Year's Recovery ......... 1,664.71 201.01
Allowance for Possible Loan Losses at Year End To:
Average Loans (Net of Unearned Discount) ........... 2.02 1.70
End of Period Loans (Net of Unearned Discount) ..... 1.80 1.68
The following table shows the Bank's non-accrual and contractually past due
loans:
<TABLE>
<CAPTION>
At December 31,
(in thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Accruing Loans Past Due 90 Days or More ................. $ 0 $ 432 $ 3 $ 90 $ 97
Non-Accrual Loans ....................................... 1,749 1,593 2,001 2,849 1,214
Total ................................................ $1,749 $2,025 $2,004 $2,939 $1,311
</TABLE>
For 1998 and 1997 the difference between interest income on non-accrual loans
and income that would have been recognized at original contractual rates and
terms is $90,166 and $94,872, respectively.
The composition of Other Real Estate Owned at December 31, is as follows:
1998 1997
Commercial ........................... $ 0 $ 321,919
Commercial Land ...................... 712,495 2,835,831
Single Family ........................ 360,000 770,036
Total ................................ $1,072,495 3,927,786
The value of Other Real Estate Owned shown above is net of the Valuation
Reserve.
<PAGE> 46
Impact of Year 2000 Compliance
The Bank is devoting necessary resources throughout the organization to minimize
the risk of possible disruption from the "Year 2000 (Y2K) Problem". The
potential "Problem" is the result of computer programs having been written using
two digits rather than four to define the applicable year and effects all
programs which use dates to provide information. The "Problem" extends itself
beyond many "non-information technology" systems; that is operating and control
systems that rely on embedded chips. In addition, the Bank, as with every other
business organization, is at risk from Y2K failures on the part of its major
counterparties, including commercial loan customers, corporations, government
agencies and municipalities recommended for investment by our Trust and
Investment Management Division, vendors who supply our critical software
applications as well as potential failures in public services including
electricity, water, and communications. The Bank has developed a Plan for
identifying and resolving Y2K issues that are reasonably within its control. All
of the efforts are coordinated through a senior-level Y2K Steering Committee
chaired by the Bank's Chief Financial Officer (CFO). There are eleven senior
level employees, the Bank's attorney, and two members of the Board of Directors
on the steering committee. The CFO reports periodically to the Board of
Directors with respect to the Bank's Y2K efforts. The Bank is also subject to
review and assessment of its Y2K efforts by regulators on a periodic basis. The
Federal Reserve Bank and the New York State Banking Department have set up
stringent guidelines and time frames for completion of the required phases of
the Bank's Y2K efforts.
The Bank's approach and anticipated timing of each phase are described below:
Phase 1 - Awareness - The Bank defined the Y2K Problem and established an Action
Team to address the Problem. This phase was completed during fourth quarter
1997.
Phase II - Assessment - The Team developed a strategy to identify all areas in
the Bank effected by the Y2K Problem. A complete inventory was taken of
hardware, software and all processes and systems within the Bank through work
flow analysis. A priority list was developed accessing each effected area with a
criticality (risk) rating of A, B1, B2, and B3. (A is the highest criticality.
the absence or failure of the system would result in significant losses to the
Bank. B3 is the lowest criticality rating. The absence or failure of this system
would have little or no impact upon the Bank.) All applicable vendors of
software/hardware with criticality ratings of B2 and above were contacted and
their plans to supply compliant software/hardware reviewed. The Assessment Phase
was completed during first quarter 1998.
Phase III - Renovation - Communication with critical vendors continues, and
purchases of additional resources required for Y2K compliance were begun.
Alternative solutions have been identified in the event of the vendor's failure
to provide a compliant product. Contingency plans are being developed with an
expected completion date of September 30, 1999.
Phase IV - Validation - This is by far the most important Phase and involves
testing of all of the Bank's operations. Testing will first be done on a vendor
by vendor basis, and then interfaces between software systems will be tested.
The Bank is currently testing all systems on an individual basis. Following
completion of individual software testing, the Bank will test all interfaces.
Expected completion date is September 30, 1999.
Phase V - Implementation - This is the final Phase whereby compliant
applications, after having been tested during the Validation Phase, are
implemented. Contingency plans may need to be reverted to if any failures occur.
Expected dates for Implementation are during fourth quarter of 1999.
The nature and focus of the Bank's efforts to address the Year 2000 Problem may
be revised periodically as interim goals are achieved or new issues are
identified. Estimates of completion dates of various Phases involve projections
of future activities. These estimates and projections may change as work
continues and we progress toward year end.
As of December 31, 1998, the Bank has incurred $411,403 in Y2K expenses, which
includes the purchase of a new teller system for all seven branches at a cost of
$340,405. The new teller system was a purchase that had been planned by the Bank
prior to its Y2K review, but which was accelerated to ensure that the system
would be in place before the year 2000. These costs are not expected to have any
material adverse effects on the operations or financial results of Bank of
Smithtown. As Bank of Smithtown has been able to reprioritize work projects to
largely address Year 2000 readiness within the Bank, most of our costs represent
costs that would have been incurred in any event. These amounts cover the costs
of Year 2000 readiness work for inventory, assessment, renovation, validation,
implementation and contingency planning. In the event that there is a failure in
either a Bank system or one of its major counterparts, there may be lost revenue
resulting therefrom. The amount of lost revenue is uncertain, however management
is working diligently to minimize and compensate for any loss resulting from the
Y2K Problem.
<PAGE> 47
<TABLE>
<CAPTION>
CORPORATE DIRECTORY
<S> <C> <C>
SMITHTOWN BANCORP AND Bank of Smithtown Bank of Smithtown
Bank of Smithtown Officers Corporate Headquarter's
DIRECTORS Bradley E. Rock SMITHTOWN, NY 11787-2801
Bradley E. Rock, Chairman Chairman, President One East Main Street
Patrick A. Given & Chief Executive Oficer (516) 360-9300
Manny Schwartz
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 Robert Anrig Commack, NY 11725-3097
Barry M. Seigerman Executive Vice President 2020 Jericho Turnpike
& Chief Lending Officer (516) 543-7400
SMITHTOWN BANCORP Thomas J. Stevens Hauppauge, NY 11788-4346
Executive Vice President 548 Route 111
& Chief Lending Officer (516 265-7922
OFFICERS Cynthia Vernuanc Kings Park, NY 11754-3811
Bradley E. Rock Senior Vice President,Marketing 14 parks Drive
CHAIRMAN, PRESIDENT & New Business Development (516) 269-4900
& CHIEF EXECUTIVE OFFICER
Ellen Metzger
Anita M. Florek Vice President, Marketing & Training Lake Grove, NY 11755-2107
EXECUTIVE VICE PRESIDENT 2921 Middle Country Road
& TREASURER Rosanna Dill (516) 588-0700
Vice President, Human Resources
Rosanna Dill Northport, NY 11768-3151
VICE PRESIDENT Edward Benedetto 836 Fort Salonga Road
Vice President & Auditor (516) 262-1353
Judith Barber
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
25 Suffolk Court Elizabeth Woreth on Thursday, April 15, 1999
Hauppauge.NY 11788 at 10:30 AM, at the:
Islandia Marriott
GENERAL COUNSEL 3635 Express Drive North
Patricia C. Delaney, Esq. Andrew J. Enrico, Trusr Officer Hauppauge, New York 11788
Carol Schofield, Ass't Trust Officer
Judith Barber,Corporate Secretary Register and Transfer Agent
& Cashier Bank of Smithtown
One East Main Street
Smithtown, New York 11787-2801
Assistant Vice Presidents
Helene Caspar
Robert Staron
Managers
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
Donna Maresca
Phyllis Kaiserman
Mae Russo
Ardene signorelli Member Federal Reserve System and
Beth Tramontana Federal Deposit Insurance Corporation
</TABLE>
<PAGE> 48
SMITHTOWN BANCORP
ONE EAST MAIN STREET
SMITHTOWN, NEW YORK 11787-2801
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held
THURSDAY, APRIL 15, 1999
The Annual Meeting of Shareholders of Smithtown Bancorp (the "Bancorp"), will be
held at the Islandia Marriott L.I., 3635 Express Drive North, Hauppauge, New
York, on April 15, 1999, at 10:30 a.m., for the following purposes:
1. The election of three directors to serve a term of three years.
2. To approve the appointment of Albrecht, Viggiano, Zureck & Company, P.C. as
independent auditors for the year ending December 31, 1999.
3. To transact such other business as may properly come before the meeting for
any adjournment thereof.
Pursuant to a resolution of the Board of Directors adopted at the Board of
Directors meeting on January 26, 1999, only shareholders of record at the close
of business on February 25, 1999, shall be entitled to notice of and to vote at
this meeting.
Dated: March 10, 1999
Smithtown, New York
BY ORDER OF THE BOARD OF DIRECTORS
Bradley E. Rock
Chairman of the Board, President
& Chief Executive Officer
<PAGE> 49
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 Islandia Marriott L.I., 3635
Express Drive North, Hauppauge, New York, on April 15, 1999, 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 10, 1999, 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 25,
1999 (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 815,327 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, 1998, has heretofore been
mailed to the shareholders.
Matters To Be Voted On At The Meeting
There are two matters that are scheduled to be voted on at the Annual Meeting.
Shareholders are being asked to vote on (1) the election of three directors, and
(2) the approval of Albrecht, Viggiano, Zureck & Co., P.C., as the Bancorp's
independent auditors for the year ending December 31, 1999.
It is intended that the shares of stock represented by the accompanying form of
Proxy will be voted for the election of the director nominees listed in Table I
and in favor of the other proposals, unless a contrary direction is indicated on
the form of Proxy. With respect to the director nominees, if any of such
nominees should become unavailable for any reason, which the directors do not
now contemplate, it is intended that, pursuant to the accompanying form of
Proxy, votes will be cast for a substitute nominee designated by the Board of
Directors.
<PAGE> 50
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 (2), was obtained.
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 2002:
Augusta Kemper, Barry M. Seigerman and Manny Schwartz . Manny Schwartz was
elected to the board on May 28, 1998, pursuant to Article 2, Section 1, of the
Bancorp`s By-Laws to fill the unexpired term of James Glamore, who retired in
March, 1998.
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
Manny Schwartz, 56 2002 1998 President, Quality Enclosures,
Inc., located Central Islip, N.Y.
President, Sarasota Shower Door
Company, Inc., Quality Powder
Coating Company, Inc., and MSS
Properties, located in Sarasota, Fla. 2,000 .24
Barry M. Seigerman, 58 2002 1993 Chairman & Chief Executive
Officer Seigerman-Mulvey Co., Inc.,
Insurance Brokers, located at
45 Research Way, East Setauket,
New York. Active in business and
community non-profit organizations. 2,163 .26
Augusta Kemper, 76 2002 1992 Horticulturist and Owner of Kemper
Nurseries until retirement in 1985. 49,866 6.11
</TABLE>
<PAGE> 51
<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
Attmore Robinson, Jr., 87 2000 1948 Partner, Elzon & Robinson,
Real Estate Brokers, until
retirement in 1993. 18,526 2.27
Bradley E. Rock, 46 2000 1988 Chairman of the Board, President
& Chief Executive Officer of the
Bancorp and the Bank. 5,506 .67
Charles E. Rockwell, 82 2000 1984 Retired in 1976. Formerly a
commercial airline captain. Active
in community non-profit organizations. 8,836 1.08
Patrick A. Given, 54 2001 1989 Real Estate Appraiser and
Consultant; Given Associates,
located at 550 Route 111,
Hauppauge, New York. 4,179 .51
Edith Hodgkinson, 76 2001 1979 Retired Restaurateur, active in community
non-profit organizations. 50,655 6.21
Robert W. Scherdel, 44 2001 1996 President & CEO
Sunrest Health Facilities, Inc. 11,191 1.37
</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 25,
1999.
<PAGE> 52
Board of Directors
The Board of Directors holds regular monthly meetings. The Board held twelve
meetings during 1998 in addition to one special meeting of Bank of Smithtown.
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 1998.
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 1998.
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 Edith Hodgkinson, Augusta Kemper, Attmore Robinson, Jr.,
Charles E. Rockwell, Patrick A. Given, Barry M. Seigerman, Robert Scherdel and
Manny Schwartz.
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 $750 per month during 1998. 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
1998 was $90,300.00.
The Board of Directors recommends a vote FOR the election of all Nominees.
(Proposal No. 1 on the Proxy).
APPROVAL OF INDEPENDENT AUDITORS
(PROPOSAL NO. 2)
The Audit Committee has recommended that Albrecht, Viggiano, Zureck & Co., P.C.,
Certified Public Accountants, continue as the independent auditors for the Bank
and the Bancorp for 1999. The firm has served as the independent auditors for
the Bank and the Bancorp since 1992. Representatives of the firm will be present
at the annual meeting to answer questions and are free to make statements during
the course of the meeting.
The Board of Directors recommends a vote FOR the proposal to approve the
independent auditors (Proposal No. 2 on the Proxy).
EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS
Security Ownership of Certain Beneficial Owners
The persons listed below are beneficial owners of more than 5% of the
outstanding Common Shares of the Bancorp as of February 25, 1999.
Name and Address Common Shares Percent
of Beneficial Owner Beneficially Owned of Class
Elizabeth Radau 60,592 7.43%
43 Edgewood Avenue
Smithtown, New York 11787-2723
Edith Hodgkinson 50,655 6.21%
81 Governors Road
Sea Pines Plantation
Hilton Head, South Carolina 29928
Augusta Kemper 49,866 6.11%
51 Mills Pond Road
St. James, New York 11780-2111
<PAGE> 53
The following table shows stock ownership as of February 25, 1999, of all
directors and officers of the Bancorp and the Bank as a group:
TABLE II
Number of Common Percentage
SHARES BENEEFICIALLY of Outstanding
Owned (Note 1) Common Shares
Patrick A. Given 4,179 .51
Anita M. Florek 2,479 .30
Edith Hodgkinson 50,655 6.21
Robert W. Scherdel 11,191 1.37
Manny Schwartz 2,000 .24
Barry M. Seigerman 2,163 .26
Augusta Kemper 49,866 6.11
Attmore Robinson, Jr. 18,526 2.27
Bradley E. Rock 5,506 .67
Charles E. Rockwell 8,836 1.08
Thomas J. Stevens 1,665 .20
Eleven directors and executive officers
of the Bancorp and the Bank as a group 157,066 19.26
Note 1 - Includes Common Shares owned by family members of directors as to which
the directors disclaim any interest. Material Proceedings
There are no material proceedings to the best of management's knowledge to which
any director, officer or affiliate of the Bancorp or any record holder or
beneficial owner of more than five percent of the Bancorp's stock, or any
associate of any such director, officer, affiliate of the Bancorp, or security
holder is a party adverse to the Bancorp or any of its subsidiaries or has a
material interest adverse to the Bancorp.
Executive Officers
The following table sets forth information as to each executive officers of the
Bancorp and the Bank as of Feburary, 1999.
TABLE III
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Name Age Position
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bradley E. Rock 46 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 48 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 40 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>
<PAGE> 54
Executive Compensation
The table appearing below sets forth all compensation paid in 1998 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 1996 $200,000.00 $ 17,372.54 $21,045.96
Chairman, President & CEO 1997 $212,000.00 $ 38,000.00 $25,373.42
of the Bancorp and the Bank 1998 $223,741.38 $105,665.52 $28,523.15
- ------------------------------------------------------------------------------------------------------------------------------------
Anita M. Florek 1996 $102,000.00 $ 9,673.23 $ 8,505.85
Executive Vice President 1997 $108,120.00 $ 14,000.00 $12,687.42
of the Bancorp and the Bank 1998 $121,702.70 $ 26,416.38 $14,087.42
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Stevens 1996 $ 74,000.00 $ 18,799.10 $ 6,822.08
Executive Vice President 1997 $ 88,538.34 $ 13,332.11 $ 9,525.43
of the Bank 1998 $105,538.38 $ 35,723.19 $12,483.48
- ------------------------------------------------------------------------------------------------------------------------------------
</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 1998 under the ESOP and premiums paid on
behalf of the officers for a group term life insurance policy.
(2) Amounts reported do not include any amount expended by the Bank which may
have provided an incidental benefit to the persons listed in the table above,
but which were made by the Bank in connection with its business. While the
specific amounts of such incidental benefits cannot be precisely determined,
after due inquiry, management does not believe that such value would exceed
$5,000 in the aggregate for any of such persons.
Certain Transactions
Some of the directors and officers of the Bancorp, and some of the corporations
and firms with which these individuals are associated, are also customers of
Bank of Smithtown in the ordinary course of business, or are indebted to the
Bank in respect of loans of $60,000.00 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, 1998, through December 31, 1998.
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.
<PAGE> 55
SHAREHOLDER PROPOSALS
Shareholder proposals to be presented at the 2000 Annual Meeting must be
received by the Secretary of the Board of Directors by November 2, 1999, to be
included in the proxy statement.
OTHER BUSINESS
So far as the Board of Directors of the Bancorp now knows, no business other
than that referred to above will be transacted at the Annual Meeting. The
persons named in the Board of Directors' Proxies may, in the absence of
instructions to the contrary, vote upon all matters presented for action at the
Meeting according to their best judgment.
Dated: March 10, 1999
SMITHTOWN BANCORP
Bradley E. Rock
Chairman of the Board, President
& Chief Executive Officer
<PAGE> 56
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 withtin 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 sevrance
allowance equivalent to three years compensation and benefits at the rate as
payable to the executives immediately prior to the change in control.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 2,947,685
<INT-BEARING-DEPOSITS> 76,837
<FED-FUNDS-SOLD> 12,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,170,098
<INVESTMENTS-CARRYING> 10,874,272
<INVESTMENTS-MARKET> 63,295,773
<LOANS> 118,101,158
<ALLOWANCE> 2,120,371
<TOTAL-ASSETS> 205,825,657
<DEPOSITS> 183,875,462
<SHORT-TERM> 174,645
<LIABILITIES-OTHER> 1,197,468
<LONG-TERM> 3,000,000
<COMMON> 2,239,775
0
0
<OTHER-SE> 15,172,414
<TOTAL-LIABILITIES-AND-EQUITY> 205,825,657
<INTEREST-LOAN> 9,996,927
<INTEREST-INVEST> 4,736,647
<INTEREST-OTHER> 7,631
<INTEREST-TOTAL> 14,741,205
<INTEREST-DEPOSIT> 3,995,106
<INTEREST-EXPENSE> 4,442,988
<INTEREST-INCOME-NET> 10,298,216
<LOAN-LOSSES> 525,000
<SECURITIES-GAINS> 40,676
<EXPENSE-OTHER> 7,119,676
<INCOME-PRETAX> 5,527,083
<INCOME-PRE-EXTRAORDINARY> 3,500,413
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,500,413
<EPS-PRIMARY> 4.15
<EPS-DILUTED> 4.15
<YIELD-ACTUAL> 8.16
<LOANS-NON> 1,749,751
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,677,594
<CHARGE-OFFS> 133,949
<RECOVERIES> 51,726
<ALLOWANCE-CLOSE> 2,120,371
<ALLOWANCE-DOMESTIC> 2,120,371
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 692,680
</TABLE>
