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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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)
(631) 360-9300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $1.25 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-K or any amendment to this Form 10-K. [ ]
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 March 15, 2002
$1.25 Par Value 1,537,217
The aggregate market value of the Registrant's common stock held by
nonaffiliates was approximately $52,165,443 based on the price at which
stock was sold on March 15, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
1) Portions of the Annual Report for the fiscal year ended December 31, 2001
are incorporated herein by reference into Parts I and II.
2) Portions of the Prospectus dated July 26, 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 April 16, 2002 are incorporated herein by
reference into Part III.
Part I
Item 1: Description of Business
Smithtown Bancorp, Inc. ("Registrant")
Bank of Smithtown ("Bank")
Information regarding the Registrant's formation and business and a description
of the Bank's business is contained on:
Page 9 of the Registrant's Annual Report for the year ended
December 31, 2001, and
Page 8 of the Registrant's Prospectus dated July 26, 1984, both of which
are incorporated by reference.
Item 2: Description of Properties
The Registrant owns no materially important physical properties. Office
facilities of the Registrant are located at One East Main Street, Smithtown, New
York 11787.
The Bank owns in fee the following locations:
Smithtown Office Hauppauge Office
One East Main Street 548 Route 111
Smithtown, New York 11787 Hauppauge, New York 11788
Trust and Audit Building East Setauket Office
17 Bank Avenue 184 North Belle Mead Road
Smithtown, New York 11787 East Setauket, New York 11733
The Bank occupies the following locations under lease arrangements:
Commack Office Kings Park Office
2020 Jericho Turnpike 14 Park Drive
Commack, New York 11725 Kings Park, New York 11754
Centereach Office Lake Grove Office
1919 Middle Country Road 2921 Middle Country Road
Centereach, New York 11720 Lake Grove, New York 11755
Northport Office
836 Fort Salonga Road
Northport, New York 11768
All office facilities are well maintained. There are no other
owners of these properties and no mortgages or liens exist on the properties.
The Bank owns one property that it has acquired through the foreclosure process.
It is a vacant commercial property.
Item 3: Legal Proceedings
In the opinion of the Registrant and its counsel, there are no material
proceedings pending in which the Registrant or the Bank is a party, or of which
its property is the subject, or any which depart from the ordinary routine
litigation incident to the kind of business conducted by the Registrant and the
Bank; no proceedings are known to be contemplated by government authorities or
others.
Item 4: Submission of Matters to a Vote of Security Holders
No matter was submitted during the quarter ended December 31, 2001 to a vote of
our security holders through the solicitation of proxies or otherwise.
Part II
Item 5: Market for Common Equity and Related Stockholder Matters
Page 14 of the Registrant's Annual Report for the year ended December 31,
2001 is incorporated herein by reference.
672 shareholders of common stock at March 15, 2002.
Item 6: Selected Financial Data
Pages 11 through 14 inclusive of the Registrant's Annual Report for the year
ended December 31, 2001 is incorporated herein by reference.
Item 7: Management's Discussion and Analysis of Financial Plan and Results of
Operations
Pages 15 through 27, inclusive, of the Registrant's Annual Report for the year
ended December 31, 2001 are incorporated herein by reference.
Item 7A: Quantitative and Qualitative Disclosures About Market Risks
Pages 24 through 25, inclusive, of the Registrant's Annual Report for the year
ended December 31, 2001 are incorporated herein by reference.
Item 8: Financial Statements and Supplementary Data
Pages 28 through 49, inclusive, of the Registrant's Annual Report for the year
ended December 31, 2001 are incorporated herein by reference.
Quarterly Results of Operations (Unaudited)
Year Ended December 31, 2001
------------------------------------
First Second Third Forth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
------------------------------------
Interest Income $ 6,080 $ 6,250 $ 6,443 $ 6,410
Interest Expense 2,534 2,496 2,342 2,017
------------------------------------
Net Interest Income 3,546 3,754 4,101 4,393
Provision for Possible Loan Loss 210 210 210 360
------------------------------------
Net Interest Income After Provision for
Possible Loan Loss 3,336 3,544 3,891 4,033
Other Non-Interest Income 1,097 1,026 1,055 1,390
Other Operating Expenses 2,481 2,316 2,452 2,676
------------------------------------
Income Before Income Taxes 1,952 2,254 2,494 2,747
Provision for Income Taxes 694 812 884 985
------------------------------------
Net Income $ 1,258 $ 1,442 $ 1,610 $ 1,762
====================================
Earnings Per Share $ 0.81 $ 0.93 $ 1.04 $ 1.14
Year Ended December 31, 2000
------------------------------------
First Second Third Forth
(In Thousands, Except Per Share Data) Quarter Quarter Quarter Quarter
------------------------------------
Interest Income $ 5,118 $ 5,683 $ 6,046 $ 6,158
Interest Expense 2,055 2,316 2,511 2,562
------------------------------------
Net Interest Income 3,063 3,367 3,535 3,596
Provision for Possible Loan Loss 120 120 150 150
------------------------------------
Net Interest Income After Provision for
Possible Loan Loss 2,943 3,247 3,385 3,446
Other Non-Interest Income 894 925 779 834
Other Operating Expenses 2,052 2,168 2,158 2,333
------------------------------------
Income Before Income Taxes 1,785 2,004 2,006 1,947
Provision for Income Taxes 660 698 730 704
------------------------------------
Net Income $ 1,125 $ 1,306 $ 1,276 $ 1,243
====================================
Earnings Per Share $ 0.70 $ 0.81 $ 0.80 $ 0.79
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
There were no changes in or disagreements with accountants on accounting and
financial disclosure as defined in Item 304 of Regulation S-K.
Part III
Item 10: Directors and Executive Officers
Pages 2 through 3, inclusive, and page 8 of the Registrant's Proxy Statement
dated March 11, 2002 are incorporated herein by reference.
None of the individuals named in the Proxy Statement was selected as a director
or nominee by any arrangement or understanding between him/her and any other
person(s).
There are no family relationships between any director, executive officer, or
person nominated by the Registrant to become a director.
None of the individuals named in the Proxy Statement hold a directorship in any
company with a class of securities registered pursuant to Section 12 of the
Exchange Act or subject to the requirements of Section 15(d) of such Act or any
company registered as an investment company under the Investment Company Act of
1940.
None of the individuals named in the Proxy Statement are or have been involved
in a material legal proceeding that has effected or would effect his/her ability
or integrity while carrying out his/her term of office.
Item 11: Executive Compensation
Page 9 of the Registrant's Proxy Statement dated March 11, 2002 are
incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Pages 6 through 7, inclusive, of the Registrant's Proxy Statement dated March
11, 2002 are incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Page 10 of the Registrant's Proxy Statement dated March 11, 2002 and page 39 of
the Registrant's Annual Report for the year ended December 31, 2001 are
incorporated herein by reference.
Part IV
Item 14: Exhibits, Financial Statements Schedules, and Reports on Form 8-K
INDEX OF EXHIBITS
Exhibit No. Description Page
- ----------- ----------- -----
3a Articles of Incorporation *
3b By-Laws *
4 By-Laws Page Nos. 2,11,12,13,14 *
Articles of Incorporation Page No. 2 *
9 No voting trust agreements
10 No material contracts
11 Statement Re Computation of Per Share Earnings 99
13 Annual Report for the year ended 31 December 2001 9 - 81
Notice of Annual Meeting and Proxy Statement 82 - 97
16 Reference to Item 8 in 10-K 4
18 No change in accounting principles
19 Reference to Page 1 in 10-K 1
21 Bank of Smithtown
Smithtown, New York 11787
22 Notice of Annual Meeting And Proxy Statement 82 - 97
23 Consent of Independent Auditors 98
Report of Independent Auditors 79
24 None
99 None
* Incorporated by reference and filed as a part of the Registrant's Form S-14
Registration Statement under the Securities Act of 1933, Reg #2-91511, filed
on June 6, 1984.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
Date: 3/26/02 Smithtown Bancorp, Inc.
-----------------------
Registrant
/s/ Bradley E. Rock
--------------------------------------------------------
Bradley E. Rock, Chairman, President and Chief Executive
Officer
/s/ Anita M. Florek
--------------------------------------------------
Anita M. Florek, Treasurer, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below, by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Bradley E. Rock
- --------------------------------------------------------
Bradley E. Rock, Chairman, President and Chief Executive Date 3/26/02
Officer
/s/ Augusta Kemper
- --------------------------------------------------------
Augusta Kemper, Director Date 3/26/02
/s/ Patrick A. Given
- --------------------------------------------------------
Patrick A. Given, Director Date 3/26/02
/s/ Manny Schwartz
- --------------------------------------------------------
Manny Schwartz, Director Date 3/26/02
/s/ Edith Hodgkinson
- ------------------------------------------
Edith Hodgkinson, Director Date 3/26/02
/s/ Barry M. Seigerman
- ------------------------------------------
Barry M. Seigerman, Director Date 3/26/02
/s/ Robert W. Scherdel
- ------------------------------------------
Robert W. Scherdel, Director Date 3/26/02
/s/ Patricia C. Delaney
- ------------------------------------------
Patricia C. Delaney, Director Date 3/26/02
/s/ Sanford C. Scheman Date 3/26/02
- ------------------------------------------
Sanford C. Scheman, Director
FINANCIAL HIGHLIGHTS
A GREAT BANK
GETS GREAT NUMBERS
Ranked # 1 in the nation by U.S. Banker on a 5-year ranking of
similarly-sized community banks by profitability.
We have the numbers and the numbers say it all.
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
At Year End
Assets $380,220,901 $314,580,743 $266,081,443 $205,825,657 $197,656,435
Loans 281,739,238 228,319,535 176,200,017 117,575,281 99,713,204
Deposits 311,942,044 257,159,322 207,806,261 183,875,462 168,195,635
Stockholders' Equity 26,998,783 22,391,280 18,690,015 17,412,189 16,979,458
For the Year
Net Income $ 6,072,263 $ 4,949,880 $ 4,253,653 $ 3,500,413 $ 3,320,819
Return on Average Equity (%) 24.59 23.56 23.66 20.45 21.60
Return on Average Assets (%) 1.74 1.66 1.80 1.73 1.73
Efficiency (%) 47.1 50.3 51.7 52.7 51.9
Per Share
Net Income $ 3.92 $ 3.10 $ 2.63 $ 2.08 $ 1.92
Cash Dividends Declared 0.52 0.48 0.44 0.40 0.35
Stockholder's Equity 17.54 14.29 11.59 10.58 9.80
EARNINGS PER SHARE STOCK PRICE
[dollars] [dollars]
1.92 2.08 2.63 3.10 3.92 21.25 27.25 30.25 31.25 38.50
1997 1998 1999 2000 2001 1997 1998 1999 2000 2001
Per share figures have been adjusted to reflect stock splits in 1998 and 2001.
1
FINANCIAL HIGHLIGHTS
ROE COMPARISON LOAN GROWTH
[percent] [millions]
9.05 9.62 12.50 25.30 99.7 117.6 176.2 228.3 281.7
All NY NY Nat'l Bank of 1997 1998 1999 2000 2001
Banks Peer Peer Smithtown
ROA COMPARISON DEPOSIT GROWTH
[percent] [millions]
.84 .93 1.10 1.74 168.2 183.9 207.8 257.2 311.9
All NY NY Nat'l Bank of 1997 1998 1999 2000 2001
Banks Peer Peer Smithtown
EFFICIENCY COMPARISON NON-PERFORMING LOANS/TOTAL LOANS
[percent] [percent]
66.0 60.7 47.0 2.05 1.49 .79 .60 .22
NY Nat'l Bank of 1997 1998 1999 2000 2001
Peer Peer Smithtown
In virtually all categories of financial performance, Bank of Smithtown
consistently ranks at or near the top. In particular, over the past five years,
Smithtown Bancorp has produced a return to its shareholders of more than 20%
per year, a performance unequaled by any of its peers across the entire nation.
2
CHAIRMAN'S MESSAGE
The past year, for Bank of Smithtown, was a year of unprecedented achievement.
The Bank and its holding company achieved record levels of success in virtually
every category of performance and Smithtown Bancorp received national
recognition as the #1 publicly-held community bank holding company its size in
the country.
Net income exceeded $6 million, the sixth consecutive year that the Company has
achieved record levels of earnings. Return on equity was 24.59%, marking the
fifth year in a row that shareholder return has exceeded the lofty 20% mark. We
continue to be a leader among our peers in expense management, with the Bank
posting an efficiency ratio of 46.98%. Asset quality ratios are also excellent
with nonperforming loans at .22% of total loans at year-end. Deposits grew by
$54.8 million, an increase of more than 21%. Loans grew by $53.4 million, an
increase of more than 23%. In virtually every category of performance, the
Company is either the best or near best among its peers.
The extraordinarily successful operations of the Bank have resulted in
significantly increased value for the Company's shareholders. Earnings per
share grew by 26.4% to $3.92 per share. As a result of this remarkable earnings
growth, during a year when many bank stock indexes decreased in value, the
value of Smithtown Bancorp shares increased by more than 23%.
We look toward the future, both near-term and long-term, with great enthusiasm.
We are presently engaged in substantial efforts to extend our unique brand of
community banking by de novo branching throughout our market area. We presently
expect three of these new offices to open during 2002. Our efforts to bring the
look, feel and functionality of our customer areas into alignment with our
already-established special brand of personalized service has received much
attention, and we expect this brand extension to bring us benefits in the
future. Our various efforts to build our customer base and extend our markets
are costly, however, and may moderate near-term earnings growth. We are
confident, nonetheless, that these current expenditures on new branches and
other efforts to extend our markets represent sound investments in the future
of our Company.
Although we take pride in the recognition we have received for various
accomplishments on an annual basis, our focus is not upon short-term goals. Our
mission is to build long-term shareholder value. We believe that we have
succeeded in this mission throughout our 92-year history, and with your valued
support, we will continue to do so in the future.
Sincerely,
/s/ Bradley E. Rock
Bradley E. Rock
Chairman of the Board
President & Chief Executive Officer
3
SERVICE
GREAT SERVICE
MAKES A GREAT BANK
Bank of Smithtown has enjoyed a 92-year history of excellence. The foundation
of our success has always been to our people and their dedication to customers.
Our customers know this and surely, as shareholders, you've recongnized the
financial benefit of this single-minded focus.
Once again, we are hard at work proving that Bank of Smithtown doesn't just
preach superior service. We live it. As a result, our unique "Person-to-Person"
brand of banking continues to grow in philosophy, execution, and success -
success we're only too happy to share with you.
Here are some of our current highlights:
We've re-designed our logo to better reflect our "Person-to-Person"
philosophy and exemplify our 92-year commitment to exceeding customer
expectations.
The logo design contains two abstract figures and represents the guidance
offered by a warm and personal community bank while also presenting a
contemporary and corporate image.
Our new tagline, "Dedicated. To You." also affirms our long established
commitment to our unique brand of "Person-to-Person" banking.
4
SERVICE
We're revolutionizing the world of banking by announcing our new retail
concept. The idea is to eventually replace the traditional bank and
branch and start thinking like a retail store. Positioning ourselves this
way, as a destination for customers looking for an array of financial
products and services, is unique in our market place.
These informal retail environments are designed to put the customer at
ease, showcase our products and services, and improve opportunities for
dialogue that will more effectively get those products and services
directly into the hands of the customers.
We're introducing Bank Pros(SM) , our visionary interpretation of customer
service representatives. As members of our knowledgeable and helpful
staff, Bank Pros(SM) will greet and work with customers one-on-one
throughout their entire visit to the bank. It is our belief that this
approach will increase our opportunities to create lasting relationships,
exceed expectations, eliminate confusion, and directly supply customers
with products and services specific to their needs.
We're doing away with teller lines. We're eliminating the barriers
between our clientele and staff. We're replacing counters and desks with
comfortable conversation areas. We're once again improving our level of
customer service.
We're unveiling new in-store marketing technologies like our plasma
screens to communicate product and service messages to customers, pique
their interest, and encourage them to invest more heavily with us.
We're continuing to prove we're as dedicated to our customers outside the
bank as inside it. With fundraisers, local benefits, and philanthropic
works like our long-time support of the Long Island Museums, Guide Dog
Foundation, student of the month programs, and other community
involvement, we continue to demonstrate our solid corporate citizenship.
So with each and every interaction, we're striving to remind our customers of
our service and dedication. There's no better way to ensure a successful 2002
as well.
5
[Photo Appears Here]
6
GREAT FUTURE
BANKING ON
AN EVEN GREATER FUTURE
Yes, it was a banner year, but this is no time to rest on our laurels. To that
end, we plan on intensifying our unique and profitable approach to banking in
order to continue growing and increasing shareholder value.
What to look for in 2002:
In an effort to capitalize further on our unique brand of "Dedicated. To
You." banking, we intend to open three new state-of-the-art retail
stores. They will be our finest examples of the kind of creative
solutions we believe better enable us to engage in dialogues with
customers and deliver services more effectively.
Current sites for our new retail store include East Setauket, Rocky
Point, Wading River, and Bohemia.
We will gradually convert existing branches to our new state-of-the-art
concepts, which include no teller counters, plasma screens, computer bars
and our Bank Pros(SM) training.
We are taking a variety of steps to capture an increasing percentage of
our customers' insurance and investment business. Our new stores, the
conversion of our existing branches, and Bank Pros(SM) training will
gradually help us achieve our insurance and investment goals.
We will also be implementing new marketing and communication plans to get
our "Dedicated. To You." message out, create awareness, increase sales,
and build upon brand loyalty.
We believe that the exciting steps that we will take in 2002 will not
only elevate the visibility of our Company in the eyes of customers and
investors, but even more importantly, these steps represent sound
investments in the long-term future growth of our Company.
7
[Photo Appears Here]
8
BUSINESS DESCRIPTION
A DESCRIPTION OF OUR BUSINESS
Smithtown Bancorp (the "Bancorp") is a bank holding company incorporated in the
State of New York, subject to the regulation and supervision of the State of
New York Banking Department, the Federal Reserve Board and the Securities and
Exchange Commission. The Bancorp owns all of the outstanding stock of Bank of
Smithtown (the"Bank") and conducts no business other than holding the stock of
Bank of Smithtown. Therefore, the content of this annual report, as it pertains
to the description of the activities of the Bancorp, is in essence a
description of the activities of Bank of Smithtown.
Bank of Smithtown, chartered under the laws of the State of New York, is a
member of the Federal Reserve System and is insured by the Federal Deposit
Insurance Corporation. The Bank has been headquartered in Smithtown since 1910.
It is in its 93rd year of operation as an independent commercial bank. The Bank
operates eight offices in the following communities: Smithtown, Commack,
Hauppauge, Kings Park, Centereach, Lake Grove, Northport, and East Setauket.
Bank of Smithtown is a full-service bank offering a complete range of
commercial and consumer financial services. The Bank also extends its services
to local municipalities.
The Bank's Trust and Investment Management Division, introduced in 1970,
provides trust and estate administration, fiduciary and investment advisory
services, and acts as a bond and coupon paying agent for local municipalities.
The Bank's intention is to provide individuals, businesses, and municipalities
with a comprehensive array of financial services
9
2001 FINANCIAL DATA
10
Selected Financial Data
Consolidated Average Balance Sheet Data
- -----------------------------------------------------------------------------------------------------------
As of December 31,
(in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 8,428 $ 9,731 $ 9,695 $ 8,162 $ 7,796
Investment Securities:
Obligations of U.S. Government and Agencies 9,748 19,499 23,040 20,875 18,828
Mortgage-Backed Securities 28,233 23,094 26,667 34,339 45,452
Obligations of State and Political
Subdivisions 19,431 16,735 17,361 12,686 5,213
Other Securities 1,802 757 0 0 0
- ----------------------------------------------------------------------------------------------------------
Total Investment Securities 59,214 60,085 67,068 67,900 69,493
- ----------------------------------------------------------------------------------------------------------
Federal Funds Sold 7,312 8,100 8,177 12,943 6,884
- ----------------------------------------------------------------------------------------------------------
Loans (Net of Unearned Discount) 255,254 205,089 144,443 104,848 98,997
Less: Allowance for Possible Loan Losses 2,912 2,410 2,227 1,934 1,513
- ----------------------------------------------------------------------------------------------------------
Loans, Net 252,342 202,679 142,216 102,914 97,484
- ----------------------------------------------------------------------------------------------------------
Bank Premises and Equipment 4,077 3,198 3,153 2,900 2,515
- ----------------------------------------------------------------------------------------------------------
Other Assets
Other Real Estate Owned 730 796 908 2,891 4,245
Other 16,981 12,954 5,453 4,288 3,518
- ----------------------------------------------------------------------------------------------------------
Total $ 349,084 $ 297,543 $ 236,670 $ 201,998 $ 191,935
==========================================================================================================
Liabilities
Deposits:
Demand (Non-Interest Bearing) $ 59,247 $ 53,556 $ 50,682 $ 45,014 $ 42,664
Money Market 90,394 65,418 49,519 40,211 33,636
Savings (including NOW) 54,974 52,035 53,776 54,265 58,814
Time 85,564 71,304 42,184 35,965 31,506
- -----------------------------------------------------------------------------------------------------------
Total Deposits 290,179 242,313 196,161 175,455 166,620
Securities Sold Under Agreements to Repurchase 2,781 3,033 0 1,174 2,800
Other Borrowings 30,231 29,488 21,129 6,965 5,502
Other Liabilities 1,308 1,704 1,399 1,290 1,641
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 324,499 276,538 218,689 184,884 176,563
- -----------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common Stock - $1.25 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 (Loss) 181 (693) (270) 279 121
Retained Earnings 25,884 21,776 17,504 14,296 11,465
- -----------------------------------------------------------------------------------------------------------
Total 30,298 25,316 21,467 18,808 15,819
Less: Treasury Stock 5,713 4,311 3,486 1,694 447
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 24,585 21,005 17,981 17,114 15,372
- -----------------------------------------------------------------------------------------------------------
Total $ 349,084 $ 297,543 $ 236,670 $ 201,998 $ 191,935
===========================================================================================================
11
Selected Financial Data
Consolidated Balance Sheet
- -----------------------------------------------------------------------------------------------------------
As of December 31,
(in thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 10,912 $ 8,954 $ 10,195 $ 7,124 $ 7,667
Investment Securities Held to Maturity:
Obligations of U.S. Government 0 0 0 0 2,003
Mortgage-Backed Securities 923 1,280 2,829 4,582 7,237
Obligations of State and Political Subdivisions 3,668 4,054 5,142 6,293 6,458
- -----------------------------------------------------------------------------------------------------------
Total 4,591 5,334 7,971 10,875 15,698
- -----------------------------------------------------------------------------------------------------------
Investment Securities Available for Sale:
Obligations of U.S. Government 0 0 3,012 6,152 6,176
Obligations of U.S. Government Agencies 12,258 16,896 17,331 14,213 15,252
Mortgage-Backed Securities 26,054 22,513 19,613 19,129 36,190
Obligations of State and Political Subdivisions 20,400 11,950 11,153 11,819 0
Other Securities 4,007 1,000 0 0 0
- -----------------------------------------------------------------------------------------------------------
Total 62,719 52,359 51,109 51,313 57,618
- -----------------------------------------------------------------------------------------------------------
Total Investment Securities 67,310 57,693 59,080 62,188 73,316
- -----------------------------------------------------------------------------------------------------------
Federal Funds Sold 40 0 10,350 12,500 8,300
- -----------------------------------------------------------------------------------------------------------
Loans 282,090 229,063 176,820 118,101 100,404
Less: Unearned Discount 351 743 620 526 690
Allowance for Possible Loan Losses 3,091 2,501 2,252 2,120 1,678
- -----------------------------------------------------------------------------------------------------------
Loans, Net 278,648 225,819 173,948 115,455 98,036
- -----------------------------------------------------------------------------------------------------------
Equity Investment in SMTB Financial Group, LLC. 35 3 0 0 0
- -----------------------------------------------------------------------------------------------------------
Bank Premises and Equipment 5,001 3,571 3,207 3,259 2,455
- -----------------------------------------------------------------------------------------------------------
Other Assets
Other Real Estate Owned 730 730 856 1,073 3,928
Other 17,545 17,811 8,445 4,227 3,954
- -----------------------------------------------------------------------------------------------------------
Total $ 380,221 $ 314,581 $ 266,081 $ 205,826 $ 197,656
===========================================================================================================
Liabilities
Deposits:
Demand (Non-Interest Bearing) $ 67,011 $ 56,352 $ 50,008 $ 49,752 $ 42,567
Money Market 100,499 71,880 53,668 42,807 36,326
Savings (including NOW) 60,057 51,427 51,563 55,057 56,283
Time 84,375 77,500 52,567 36,259 33,020
- -----------------------------------------------------------------------------------------------------------
Total Deposits 311,942 257,159 207,806 183,875 168,196
Dividend Payable 200 188 177 166 152
Securities Sold Under Agreements to Repurchase 4,000 5,000 0 0 2,800
Other Borrowings 35,750 28,500 38,000 3,175 8,452
Other Liabilities 1,330 1,342 1,408 1,198 1,077
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 353,222 292,189 247,391 188,414 180,677
- -----------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common Stock - $1.25 Par Value 2,240 2,240 2,240 2,240 2,240
Capital Surplus 1,994 1,994 1,994 1,994 1,994
Accumulated Other Comprehensive Income (Loss) 95 (196) (1,069) 249 249
Retained Earnings 28,766 23,499 19,314 15,770 12,943
- -----------------------------------------------------------------------------------------------------------
Total 33,095 27,537 22,479 20,253 17,426
Less: Treasury Stock 6,096 5,145 3,789 2,841 447
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 26,999 22,392 18,690 17,412 16,979
- -----------------------------------------------------------------------------------------------------------
Total $ 380,221 $ 314,581 $ 266,081 $ 205,826 $ 197,656
===========================================================================================================
12
Selected Financial Data
Consolidated Income Statements
- ------------------------------------------------------------------------------------------------------------------
As of December 31,
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Interest Income
Interest and Fees on Loans $ 21,212,834 $ 18,409,086 $ 12,673,580 $ 9,996,927 $ 9,731,626
Interest on Balance due from Banks 3,271 13,877 45,609 7,631 5,973
Interest on Federal Funds Sold 293,713 484,185 411,031 707,252 382,157
Interest and Dividends on Investment
Securities:
Taxable:
Obligations of U.S. Government 0 23,602 339,877 414,782 235,724
Obligations of U.S. Government
Agencies 658,926 1,461,265 1,166,148 920,343 1,038,404
Mortgage-Backed Securities 1,770,809 1,483,068 1,659,362 1,979,480 2,847,023
Other Securities 140,768 80,580 0 0 0
- ------------------------------------------------------------------------------------------------------------------
Total 2,570,503 3,048,515 3,165,387 3,314,605 4,121,151
Exempt from Federal Income Taxes:
Obligations of State and Political
Subdivisions 887,555 801,175 821,512 656,858 308,609
Other Interest Income 215,461 248,496 102,946 57,932 52,010
- ------------------------------------------------------------------------------------------------------------------
Total Interest Income 25,183,337 23,005,334 17,220,065 14,741,205 14,601,526
- ------------------------------------------------------------------------------------------------------------------
Interest Expense
Money Market Account (Including Savings) 3,101,553 2,855,500 1,587,735 1,418,621 1,136,766
Certificates of Deposit of $100,000 and
Over 1,767,403 906,466 697,356 516,403 392,267
Other Time Deposits 2,696,114 3,665,202 1,827,508 2,060,082 2,161,906
Interest on Securities Sold Under
Agreements to Repurchase 161,417 221,692 0 72,826 174,556
Interest on Other Borrowings 1,662,475 1,795,308 1,145,234 375,057 286,995
- ------------------------------------------------------------------------------------------------------------------
Total Interest Expense 9,388,962 9,444,168 5,257,833 4,442,989 4,152,490
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income 15,794,375 13,561,166 11,962,232 10,298,216 10,449,036
Provision for Possible Loan Losses 990,000 540,000 450,000 525,000 805,000
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Possible Loan Losses 14,804,375 13,021,166 11,512,232 9,773,216 9,644,036
- ------------------------------------------------------------------------------------------------------------------
Other Non-Interest Income
Trust Department Income 491,376 443,169 461,383 400,569 364,600
Service Charges on Deposit Accounts 1,769,932 1,589,901 1,501,740 1,479,577 1,518,765
Other Income 2,278,701 1,408,225 1,201,272 952,721 751,137
Net Gain (Loss) on Sales of Investment
Securities (4,636) (41,264) 17,012 40,676 0
- ------------------------------------------------------------------------------------------------------------------
Total Other Non-Interest Income 4,535,373 3,400,031 3,181,407 2,873,543 2,634,502
- ------------------------------------------------------------------------------------------------------------------
Other Operating Expenses
Salaries 4,582,160 4,069,205 3,626,284 3,252,761 2,949,150
Pensions and Other Employee Benefits 889,289 890,976 704,559 682,397 669,919
Net Occupancy Expense 988,549 906,088 864,844 835,787 874,033
Furniture and Equipment Expense 877,952 818,633 807,080 621,808 589,897
Other Expenses 2,586,611 2,025,659 1,992,593 1,726,923 1,793,602
- ------------------------------------------------------------------------------------------------------------------
Total Other Operating Expenses 9,924,561 8,710,561 7,995,360 7,119,676 6,876,601
- ------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 9,415,187 7,710,636 6,698,279 5,527,083 5,401,937
Provision for Income Taxes 3,375,631 2,791,960 2,444,626 2,026,670 2,081,118
- ------------------------------------------------------------------------------------------------------------------
Income Before Net Income from Equity
Investment 6,039,556 4,918,676 4,253,653 3,500,413 3,320,819
Net Income from Equity Investment 32,707 31,204 0 0 0
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 6,072,263 $ 4,949,880 $ 4,253,653 $ 3,500,413 $ 3,320,819
==================================================================================================================
13
Selected Financial Data
Supplementary Information
- ------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Per Share Data
Net Income $ 3.92 $ 3.10 $ 2.63 $ 2.08 $ 1.92
Book Value 17.54 14.29 11.59 10.58 9.80
Dividends Declared
Cash Dividends per Share 0.52 0.48 0.44 0.40 0.35
Cash Dividends Declared 805,480 765,954 709,480 673,271 606,575
Year-End Data
Total Assets 380,220,901 314,580,743 266,081,443 205,825,657 197,656,436
Total Deposits 311,942,044 257,159,322 207,806,261 183,875,462 168,195,635
Total Stockholders' Equity 26,998,783 22,391,280 18,690,015 17,412,189 16,979,458
Total Trust Assets 80,708,621 90,646,248 90,386,444 83,966,013 76,562,667
Number of Shares Outstanding 1,539,257 1,567,214 1,612,336 1,645,530 1,733,072
Selected Ratios % % % % %
- ------------------------------------------------------------------------------------------------------------------
Net Income to:
Total Income 20.41 18.72 20.85 19.87 19.27
Average Total Assets 1.74 1.66 1.80 1.73 1.73
Average Stockholders' Equity 24.59 23.56 23.66 20.45 21.60
Average Stockholders' Equity to
Average Assets 7.07 7.06 7.60 8.47 8.01
Dividend Payout Ratio 13.26 15.47 16.75 19.23 18.27
Management is not necessarily aware of the price for every transaction of
Bancorp stock. The following charts show the prices for the transactions of
which management is aware. All per share data has been adjusted to reflect the
May 2001 two-for-one stock split.
Per Share
--------------------------------------------
Cash
Dividend
2001 High Low Declared
- -----------------------------------------------------------------------------
First Quarter $ 33.50 $ 30.88 $ 0.13
Second Quarter 40.00 32.65 0.13
Third Quarter 37.00 35.00 0.13
Fourth Quarter 41.00 36.29 0.13
- -----------------------------------------------------------------------------
Total Cash Dividends Declared $ 0.52
=============================================================================
2000
- -----------------------------------------------------------------------------
First Quarter $ 31.00 $ 29.44 $ 0.12
Second Quarter 29.50 28.38 0.12
Third Quarter 31.00 28.38 0.12
Fourth Quarter 32.50 31.00 0.12
- -----------------------------------------------------------------------------
Total Cash Dividends Declared $ 0.48
=============================================================================
1999
- -----------------------------------------------------------------------------
First Quarter $ 28.38 $ 27.50 $ 0.11
Second Quarter 31.00 27.50 0.11
Third Quarter 28.50 27.75 0.11
Fourth Quarter 30.25 27.88 0.11
- -----------------------------------------------------------------------------
Total Cash Dividends Declared $ 0.44
=============================================================================
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
- -------------------------------------------------------------------------------
OPERATIONS
- ----------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND ANALYST REPORTS
This report may contain certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on current expectations, but actual results may differ
materially from anticipated future results. Forward-looking statements may be
identified by use of the words "believe," "expect," "anticipate," "project,"
"estimate," "expect," "will be," "will continue," "will likely result," or
similar expressions. The Company's ability to predict results or the actual
effect of future strategic plans is inherently uncertain. Factors that could
have a material adverse effect on the operations of the Company and its
subsidiaries include, but are not limited to, changes in: general economic
conditions, interest rates, deposit flows, loan demand, competition, accounting
principles and guidelines, and governmental, regulatory and technological
factors affecting the Company's operations, pricing, products and services. The
factors included here are not exhaustive. Other sections of this report may
include additional factors that could adversely impact the Company's
performance.
Investors are cautioned not to place undue reliance on forward-looking
statements as a prediction of actual results. Except as required by applicable
law or regulation, the Company undertakes no obligation to republish or revise
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated results. Investors are
advised, however, to consult any further disclosures the Company makes on
related subjects in our reports to the Securities Exchange Commission.
SUMMARY
Smithtown Bancorp is a one-bank holding company formed in 1984. Its income is
derived primarily from the operations of its largest subsidiary, Bank of
Smithtown. The Bank operates eight full-service offices in the north central
region of Suffolk County and offers a full line of consumer and commercial
products, including a Trust and Investment Management Division. Bank of
Smithtown is committed to providing increased shareholder value through
superior customer service, efficiency of operations, and financial products
especially geared toward the community we serve. The year 2001 was another
record-breaking year for Bank of Smithtown. As one of the highest performing
banks in the nation, for the sixth consecutive year, the Bank was able to
achieve record earnings, balance sheet growth, and return on equity. Efficiency
reached an all-time peak level of 47.1%. Earnings per share attained an
unprecedented level in the Bank's history and demand and price for the Bank's
stock remain very strong, indicative of continued investor confidence in our
company.
Strength in our local economy continued throughout the year 2001 as evidenced
by the demand for real estate financing, both construction and permanent, as
well as home equity lines. Three consecutive years of loan growth greater than
20%, including 2001 growth of 23.40% is noteworthy. This asset growth demanded
corresponding growth on the liability side of the balance sheet for funding
purposes. Bank of Smithtown was once again extremely successful in managing its
balance sheet so as to maintain a steady growth in deposits to keep pace with
loan demand, thus reducing its need for alternative funding. For the second
year in a row, deposit growth nearly matched loan growth. This years' numbers
were $54,782,722 growth in deposits and $53,419,703 growth in loans. As in
2000, Bank of Smithtown used the year 2001 to further diversify its revenue
streams. Bank of Smithtown Insurance Agency, a wholly owned subsidiary of Bank
of Smithtown, began operations in August. The Agency was formed to sell various
non-bank investment vehicles including equities, mutual funds, annuities, and
insurance. Net income from Agency operations for 2001 was $53,521.
SMTBFinancialGroup, formed during the year 2000 for the purpose of insurance
sales, also continued to add to the bottom line with net income of $32,707 for
the year 2001. Fee income from products and services continues to generate
significant income. As well as providing additional revenue streams, the Bank
continues to provide more choices to our customers as to how they wish to
conduct their banking business. A Bank of Smithtown credit card, debit card, an
ATM at every branch, and online banking now allow our customers to choose their
preferred delivery channel. Providing our customers with a choice of high touch
or high tech, allowing them to find the right balance for themselves, remains
an important goal. Bank of Smithtown has continued to invest in technology,
which is really an investment in our most valuable assets: our employees. New
software and hardware enhance their ability and efficiency in providing
accurate information to management and customers. Once again, we look back at
the year 2001 with great pride and satisfaction. We attained all of the goals
with which we set out and continue to pave the road for ongoing success and
designation as the strongest community bank in the nation.
Bank of Smithtown's balance sheet changed significantly during 2001. Total
assets increased by 20.87% from $314,580,743 at year-end 2000 to $380,220,901
at December 31, 2001. As in the past two years, the area of largest growth was
the loan portfolio that grew from $228,319,535 to $281,739,238 from December
31, 2000 to December 31, 2001, and represents 23.40% growth. Loans now comprise
74.10% of total assets compared to 72.58% at year-end 2000. Composition of
credits within the portfolio remained stable with the highest
15
percentage of loans in the commercial real estate segment. These loans
represent 51.49% of total loans. The next largest category of loans remains
residential real estate loans, which comprise 26.20% of the portfolio. Total
real estate loans represent 90.16% of the loan portfolio, however, high credit
quality and low loan to value ratios mitigate this concentration, as evidenced
by the absence of any non-performing real estate loans. The Bank's loan to
deposit ratio increased from 2000 to 2001 from 88.79% to 90.32%. The investment
securities portfolio increased during 2001. The Available for Sale portfolio
comprises 93.18% of total securities and is predominantly made up of
Mortgage-Backed Securities and Obligations of State and Political Subdivisions.
During the year 2001, the Bank transacted multiple sales of securities in order
to take advantage of investments in higher yielding loans. The net loss on the
sales of these securities was $4,636. The sale of federal funds at December 31,
2001 was $40,327. During the year 2000, the Bank of Smithtown entered into a
limited liability company, SMTB Financial Group, LLC. The Bank's equity
investment in this Company at year-end 2001 was $35,207. Total other assets
decreased from $18,540,941 to $18,274,997 from December 31, 2000 to December
31, 2001, representing a 1.43% decrease. The liability side of the balance
sheet also underwent changes in allocations. Total deposits increased from
year-end 2000 to year-end 2001 from $257,159,322 to $311,942,044, a 21.30%
increase. Money market accounts represent the largest category of deposits,
currently at 32.22% of the total. They were also the largest growing segment of
deposits this year, with an increase of 39.81%. The next largest segment of
deposits is time deposits which represent 27.05% of the total. These time
deposits increased by 8.87% during 2001. Deposits as a percentage of total
liabilities were nearly identical at year-end 2001 compared to year-end 2000,
at an 88.31% level compared to 88.01%. Although the year 2001 was one of record
low interest rates, lower yielding assets could have compressed the Bank's net
interest margin. As evidenced by the balance sheet, the largest segments of the
Bank's deposits are in high interest paying accounts, but the 18.91% increase
in demand deposits was a major contributing factor in actually increasing the
Bank's net interest margin. Other borrowings increased by $6,250,000 or 18.66%
during 2001. Stockholders' equity increased by 20.58%, a result of $6,072,263
of net income, $805,480 of dividends declared, the purchase of 27,957 shares of
treasury stock at $951,042, and a reduction in the unrealized loss on
investment securities available for sale of $291,762. At year-end 2001, the
Bancorp retains 252,563 shares of Treasury Stock at cost with a value of
$6,095,915.
The Bank's income statement reflects a continued upward trend in earnings, with
net income of $6,072,263 as compared to $4,949,880 for the years ended December
31, 2001 and 2000. This represents an increase in earnings of 22.67% and is the
highest level ever achieved by the Bank in its 92 years of operation. The
driving force behind earnings and certainly its largest component, remains net
interest income. The difference between the interest earned on interest earning
assets and the interest paid on interest bearing liabilities, net interest
income, reached $15,794,375 for the period ended December 31, 2001, an increase
of $2,233,209 or 16.47% over 2000. Interest and fees on loans was the largest
contributor to this increase and represents a 15.23% higher level over 2000
income. Total interest expense decreased by 0.59% over the comparable period in
2000. This was the result of the significantly lower cost of funds during 2001
as well as the benefit accrued from the 18.91% increase in demand deposits.
Lower borrowing costs of 3.56% compared to 4.27% for 2001 and 2000 also
positively impacted the lower expense. The Bank's yield on interest earning
assets for the years 2001 and 2000 was 8.07% and 8.42% respectively. The
resulting net interest margin for the Bank for the years-ended December 31,
2001 and 2000 was 5.10% and 4.99%, respectively, a 2.20% reduction. The
downward pressure on margin resulting from reduced interest rates was
significantly mitigated by the increased volume of earning assets. Non-interest
income, the Bank's source of fee income on its deposit accounts, delivery
channel services, and loan originations increased from $3,400,031 for the
period ended December 31, 2000 to $4,535,373 for the same period in 2001. This
increase was partially the result of the increased collection of service charge
income during the year 2001. Also included in this category of non-interest
income are fees associated with debit and credit cards. The largest
contributors to the growth in non-interest income were the gains in cash value
on $9,000,000 of Bank-owned life insurance. As margins throughout the banking
industry are reduced, the importance of generating non-interest income becomes
much greater. Bank of Smithtown has placed significant emphasis on raising
additional fee income through additional financial revenue streams. The ratio
of the Bank's non-interest income to total income for the periods ended
December 31, 2001 and 2000 were 15.24% and 12.98%, respectively. Other
Operating Expenses increased by $1,214,000 or 13.94% over the period ended
December 31, 2000. These expenses represent the Bank's cost of doing business,
such as salary and benefit expense, overhead costs, and miscellaneous legal,
accounting, and computer expenses. The increase during 2001 was primarily due
to increased salary and benefit expense. Also during 2001, the remodeling and
renovation of our Bookkeeping and Retail Areas were completed and the resultant
amortization and depreciation expenses were incurred. Other Operating Expenses
as a percentage of total expenses increased from 41.58% for the year 2000 to
43.74% for the year 2001. Earnings per share at year-end 2001 were $3.92
compared to $3.10 at year-end 2000, with weighted average shares outstanding of
1,550,766 compared to 1,600,155. This 26.86% increase in EPS is the result of
the superior level of earnings.
16
INTEREST INCOME
Interest income for the three years-ended December 31, 2001, 2000, and 1999
were $25,183,337, $23,005,334, and $17,220,065, respectively. The largest
contributor to interest income was interest and fees on loans and represented
84.23%, 80.02%, and 73.60% of the total. This increased income during 2001 is
the result of 23.40% increase in loan volume. As can be seen from the Average
Balance Sheet and Yield Analysis Schedule, yield on the loan portfolio
decreased from 9.08% during 2000 to 8.41% during 2001. This yield reduction was
a result of the lower interest rate environment during 2001. The next largest
contributor to interest income was the investment portfolio, which increased in
volume during 2001, and now comprises 17.70% of total assets. Yield on the
portfolio declined, once again, as a result of the current rate environment.
The yield was 6.98% in 2001 as compared to 7.09% during 2000. New securities
that were added during 2001 carried lower yields than maturing securities and
Mortgage-Backed Securities experienced large paydowns. Interest on federal
funds sold contributed a lower percentage of interest income during 2001 than
2000, a result of lower rates and volume. This percentage of decline in
interest income was from 2.10% in 2000 to 1.17% during 2001. Yield on these
funds also declined from 5.98% to 4.02%. During periods of low rates, it
becomes even more important to keep the level of federal funds at a minimum and
invest all excess cash in the highest yielding vehicles.
INTEREST EXPENSE
Interest expense for the three years ended December 31, 2001, 2000, and 1999
were $9,388,962, $9,444,168, and $5,257,833, a decrease of 0.58% from 2000 and
an increase of 78.57% over the period ended December 31, 1999, respectively.
During 2001 and 2000, interest cost to the Bank was made up of the cost for its
deposits, which were 3.28% and 3.94% and the cost of other borrowings which
were 5.52% and 6.20%. Interest expense on deposit accounts remains the largest
percentage of total interest expense and at year-end 2001 and 2000 represented
80.58% and 78.64% of this total. The Bank's comparatively low interest cost on
deposit accounts is due to the composition of its deposit base, with lower
yielding savings and NOW accounts comprising 19.25% of this base. Competitive
and higher yielding money market and certificate of deposit rates are offered
to customers in return for higher balances and more extensive banking
relationships. "Preferred Customers" who conduct a majority of their banking
business with us and customers maintaining high balances in single accounts
receive rates that are the among the highest paid on Long Island. Overall, the
Bank's deposit pricing strategy provides our customers many different types of
accounts and terms and delivery channels to suit their needs while rewarding
them for maintaining balances with us. Other borrowings have been an
alternative source of funding for the Bank as it continues to expand its
current deposit base. The use of other borrowings as both a temporary and
long-term source of funding is common and cost-effective for financial
institutions, as long as it is part of a carefully planned and executed asset
liability management program.
NET INTEREST INCOME
Net interest income was the largest contributor to net income and represented
53.09% of total income at year-end 2001 compared to 51.30% at year-end 2000.
Net interest income increased from $13,561,166 during 2000 to $15,794,375
during 2001. The average volume of non-interest earning assets decreased from
8.76% at year-end 2000 to 8.63% at year-end 2001, while the volume of
non-interest bearing liabilities decreased from 18.57% to 17.35% for the same
period. The result of these changes in the balance sheet was an interest margin
of 5.10%, an increase from the 4.99% margin achieved during 2000. This interest
margin remains very high compared to the Bank's peers. In spite of the lower
rate environment characteristic of 2001, which placed downward pressure on
margins, the Bank's margin to date has been unaffected. This result has been
achieved through the addition of $62,485,342 of interest earning assets as well
as $10,658,835 of non-interest bearing deposits.
17
The tables below show a comparative analysis of the major areas of interest
income, interest expense and resultant changes in net interest income.
Variances in the rate volume relationship have been allocated to the rate.
Average Balance Sheet and Yield Analysis
2001 2000
--------------------------------- ----------------------------
(in thousands) Average Average Average Average
Tax Equivalent Basis Balance Interest Rate(%) Balance Interest Rate(%)
- ----------------------------------------------------------------------------------------------------------
Assets
Interest-Earning Assets:
Investment Securities:
Taxable $ 39,783 $ 2,786 7.00 $ 43,350 $ 3,049 7.03
Nontaxable 19,431 1,345 6.92 16,735 1,214 7.25
- ----------------------------------------------------------------------------------------------------------
Total Investment Securities 59,214 4,131 6.98 60,085 4,263 7.09
- ----------------------------------------------------------------------------------------------------------
Balances Due from Banks 75 3 4.00 628 14 2.23
Total Net Loans 252,342 21,213 8.41 202,679 18,409 9.08
Federal Funds Sold 7,312 294 4.02 8,100 484 5.98
- ----------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 318,943 25,641 8.04 271,492 23,170 8.53
Non-Interest-Earning Assets 30,141 0 0.00 26,051 0 0.00
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 349,084 $ 25,641 7.35 $ 297,543 $ 23,170 7.79
==========================================================================================================
Liabilities
Interest-Bearing Liabilities:
Savings Deposits (including NOW) $ 54,974 $ 425 0.77 $ 52,035 $ 511 0.98
Money Market Accounts 90,394 2,677 2.96 65,418 2,856 4.37
Certificates of Deposit 85,564 4,464 5.22 71,304 4,061 5.70
- ----------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 230,932 7,566 3.28 188,757 7,428 3.94
Securities Sold Under Agreements
to Repurchase 2,840 161 5.67 3,033 222 7.32
Other Borrowings 30,172 1,662 5.51 29,488 1,795 6.09
- ----------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 263,944 9,389 3.56 221,278 9,445 4.27
Non-Interest Bearing Liabilities:
Demand Deposits 59,247 0 0.00 53,556 0 0.00
Other 1,308 0 0.00 1,704 0 0.00
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 324,499 9,389 2.89 276,538 9,445 3.42
Stockholders' Equity 24,585 0 0.00 21,005 0 0.00
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 349,084 $ 9,389 2.69 $ 297,543 $ 9,445 3.17
==========================================================================================================
Interest Margin $ 16,252 $ 13,725
--------- ----------
Interest Spread on:
Average Total Assets 4.66% 4.61%
Average Total Interest - Earning Assets 5.10% 4.99%
18
Rate Volume Relationships of Interest Margin on Earning Assets
2001/2000 2000/1999
------------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------------------- --------------------------------
Net Net
(in thousands) Volume Rate Change Volume Rate Change
- -------------------------------------------------------------------------------------------------------------
Interest Income:
Investment Securities:
Taxable $ (507) $ (4) $ (511) $ (502) $ 335 $ (167)
Nontaxable 196 (56) 140 (45) 14 (31)
- -------------------------------------------------------------------------------------------------------------
Total Investment Securities (311) (60) (371) (547) 349 (198)
Total Net Loans 4,511 (1,372) 3,139 5,388 245 5,633
Federal Funds Sold (47) (154) (201) (4) 78 74
Balances Due from Banks (12) 11 (1) (12) (27) (39)
- -------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 4,141 (1,575) 2,566 4,825 645 5,470
- -------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits 289 (1,065) (776) (18) 4,728 4,710
Money Market Accounts 1,090 (919) 171 510 574 1,084
Certificates of Deposits 812 (341) 471 1,361 431 1,792
- -------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 2,191 (2,325) (134) 1,853 5,733 7,586
Securities Sold Under Agreements
to Repurchase (14) (50) (64) 3,033 0 3,033
Other Borrowings 42 (171) (129) 453 141 594
- -------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 2,219 (2,546) (327) 5,339 5,874 11,213
- -------------------------------------------------------------------------------------------------------------
Changes in Interest Margin $ 1,922 $ 971 $ 2,893 $ (514) $ (5,229) $ (5,743)
=============================================================================================================
Other Operating Income
The schedule below details items of non-interest income for the years ended
December 31,
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Other Operating Income
Trust and Investment Management Department Income $ 491,376 $ 443,169 $ 461,383
Service Charges on Deposit Accounts 1,769,932 1,589,901 1,501,740
Other Income 2,278,701 1,408,225 1,201,272
Net Gain (Loss) on the Sales of Investment Securities (4,636) (41,264) 17,012
- ------------------------------------------------------------------------------------------------
Total $ 4,535,373 $ 3,400,031 $ 3,181,407
================================================================================================
Other Operating Income represents fee income collected by the Bank on non-rate
sensitive transactions. As margins tighten due to the low interest rate
environment, the generation of fee income plays a larger role in the level of
net income. Other operating income increased by 33.39% and 6.87% over 2000 and
1999, respectively. Service charges on deposit accounts were the single largest
contributor to Other Operating Income and increased from $1,589,901 to
$1,769,932 or 11.32% from 2000 to 2001. This increase is due to the large
number of demand accounts and their associated fees. Income from Trust and
Investment Management Services increased by 10.88% over the 2000 level due to
increased fees. Other income rose by 61.81% and 19.83% over 2000 and 1999
levels. This increase can be attributed to the gain in cash value of life
insurance investments and the increased fee income on a higher volume of ATM
and debit card transactions. Loan fees are also a large part of Other Income
and they increased due to the large increase in the portfolio. During 2001, the
Bank also recognized a net loss of $4,636 on the sales of investments
securities held in the available for sale portfolio.
19
Other Operating Expenses
Detailed below are the components of the Other Operating Expenses for the years
ended December 31,
2001 2000 1999
- ----------------------------------------------------------------------------
Other Operating Expenses
Salaries $ 4,582,160 $ 4,069,205 $ 3,626,284
Pensions and Other Employee Benefits 889,289 890,976 704,559
Net Occupancy Expense 988,549 906,088 864,844
Furniture and Equipment Expense 877,952 818,633 807,080
Other Expenses 2,586,611 2,025,659 1,992,593
- ----------------------------------------------------------------------------
Total $ 9,924,561 $ 8,710,561 $ 7,995,360
============================================================================
Other Operating Expenses represent various categories of non-interest expense.
These expenses increased by 13.94% over 2000 levels and 8.94% over 1999 levels.
Salary and benefit expense increased during 2001 partially due to the
increasing costs of health insurance, as well as additions to Senior
Management. The large increases in balance sheet assets experienced over the
last three years, have required additional staff in order to maintain superior
customer service and achieve the highest returns for our shareholders. Net
occupancy expense increased from $906,088 during 2000 to $988,549 during 2001.
This resulted from increased lease payments on branch properties and
depreciation expenses attributed to leasehold and building improvements.
Expenses related to the maintenance of Other Real Estate Owned declined during
2001, as only one property remains to be sold. Furniture and equipment expense
rose by 7.25% and 1.43% over 2000 and 1999. This was due to the purchase and
resultant depreciation on new computer hardware and software, as well as
expenses related to Retail and Bookkeeping department renovations. Other
expenses increased by 27.69%, reflective of increased overhead and operating
expenses related to an increased asset and deposit base.
INVESTMENT SECURITIES
Investment securities at December 31, 2001 totaled $67,309,548 as compared to
$57,693,375 at year-end 2000, an increase of 16.67%. As the interest rates
decreased during 2001, principal payment reductions on Mortgage-Backed
Securities increased. Proceeds from maturities of investment securities were
reinvested into lower yielding securities and were re-channeled into new loan
originations. The majority of investment securities are held in the Available
for Sale portfolio which represent 93.18% of the total portfolio. This provides
maximum liquidity for the Bank, as these securities may be sold, if necessary.
It remains, however, management's intent to hold most securities to maturity.
The composition of the portfolio has changed somewhat during 2001. At December
31, 2001, Obligations of the U.S. Government Agencies represented 18.21% of the
portfolio versus 28.79% at December 31, 2000. At December 31, 2001, Obligations
of State and Political Subdivisions represented 35.76% of the portfolio verses
27.27% at December 31, 2000. Mortgage-Backed Securities remained stable with
Mortgage-Backed Securities representing 40.08% and 40.54% at December 31, 2001
and 2000, respectively. "Other securities" is comprised solely of other equity
investments. As can be seen from the accompanying Weighted Average Maturity
Schedule, the entire portfolio has lengthened in term and has moved from 16
years, 5 months in average term to 17 years, 2 months. This maturity term is
the result of replacement of Obligations of U.S. Government Agencies which were
called during 2001 with Obligations of State and Political Subdivisions having
longer terms. The Weighted Average Yield Table and the Average Balance Sheet
and Yield Analysis both indicate the decreased yield on the investment
portfolio. During 2001 the yield decreased from 7.08% to 6.98% as would be
anticipated given the interest rate environment for this period.
20
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 2001 2000
- -----------------------------------------------------------------------------------------------
Mortgage-Backed Securities $ 922,879 $ 1,280,026
Obligations of State and Political Subdivisions 3,667,584 4,054,155
- -----------------------------------------------------------------------------------------------
Total $ 4,590,463 $ 5,334,181
===============================================================================================
Investment Securities Available for Sale
- -----------------------------------------------------------------------------------------------
Obligations of U.S. Government Agencies $ 12,258,139 $ 16,896,345
Mortgage-Backed Securities 26,053,874 22,512,702
Obligations of State and Political Subdivisions 20,399,572 11,950,147
Other Securities 4,007,500 1,000,000
- -----------------------------------------------------------------------------------------------
Total $ 62,719,085 $ 52,359,194
===============================================================================================
The tables below set forth the investment securities by portfolio, weighted
average maturity,and weighted average yield as of December 31:
Weighted Average Maturity
Investment Securities Held to Maturity 2001 2000
- -----------------------------------------------------------------------------------------------
Mortgage-Backed Securities 6 yrs. 4 mos. 7 yrs. 4 mos.
Obligations of State and Political Subdivisions 2 yrs. 2 mos. 3 yrs. 11 mos.
- -----------------------------------------------------------------------------------------------
Total 3 yrs. 0 mos. 6 yrs. 2 mos.
- -----------------------------------------------------------------------------------------------
Investment Securities Available for Sale
- -----------------------------------------------------------------------------------------------
Obligations of U.S. Government Agencies 15 yrs. 3 mos. 8 yrs. 0 mos.
Mortgage-Backed Securities 27 yrs. 8 mos. 27 yrs. 10 mos.
Obligation of State and Political Subdivisions 9 yrs. 2 mos. 9 yrs. 3 mos.
- -----------------------------------------------------------------------------------------------
Total 18 yrs. 0 mos 18 yrs. 7 mos
- -----------------------------------------------------------------------------------------------
Total Investment Securities 17 yrs. 2 mos. 16 yrs. 5 mos.
===============================================================================================
21
The tables below set forth the investment securities by portfolio, weighted
average maturity and weighted average yield as of December 31, 2001.
Weighted Average Yield
Weighted
Amortized Estimated Average
Investment Securities Held to Maturity Cost Fair Value Yield (%)
- -------------------------------------------------------------------------------------------------------
Mortgage-Backed Securities:
After 5 years, but within 10 years $ 922,879 $ 944,689 6.50
Obligations of State and Political Subdivisions:
Within 1 year 1,420,618 1,448,555 5.67
After 1 year, but within 5 years 2,075,966 2,164,794 5.23
After 5 years, but within 10 years 171,000 180,378 5.62
- -------------------------------------------------------------------------------------------------------
Total $ 4,590,463 $ 4,738,416 5.64
=======================================================================================================
Investment Securities Available for Sale
- -------------------------------------------------------------------------------------------------------
Obligations of U.S. Government Agencies:
After 1 year, but within 5 years
After 5 years, but within 10 years $ 4,133,534 $ 4,166,876 7.33
After 10 years 8,255,535 8,091,263 6.94
Mortgage-Backed Securities:
After 1 years, but within 5 years 514,986 521,319 8.00
After 10 years 25,219,681 25,532,555 6.52
Obligation of State and Political Subdivisions
Within 1 year 1,058,756 1,066,215 4.62
After 1 year, within 5 years 5,513,848 5,589,537 4.65
After 5 years, but within 10 years 7,088,776 7,128,357 4.43
After 10 years 6,769,063 6,615,463 4.58
- -------------------------------------------------------------------------------------------------------
Total $ 58,554,179 $ 58,711,585 5.69
=======================================================================================================
LOANS
The Bank's loan portfolio at December 31, 2001 and 2000 was $282,090,123 and
$229,062,660, respectively, an increase of 23.15%. The classification of the
portfolio is as follows:
2001 % 2000 %
- ------------------------------------------------------------------------------------------------------
Real Estate Loans, Construction $ 35,187,562 12.47 $ 23,736,992 10.36
Real Estate Loans, Other:
Commercial 145,255,133 51.49 114,200,418 49.85
Residential 73,902,211 26.20 55,362,167 24.17
Commercial and Industrial Loans 24,650,724 8.74 31,605,659 13.80
Loans to Individuals for Household,
Family and Other Personal Expenditures 2,821,630 1.00 3,954,201 1.73
All Other Loans (including Overdrafts) 272,863 0.10 203,223 0.09
- ------------------------------------------------------------------------------------------------------
Total Loans $ 282,090,123 100.00 $ 229,062,660 100.00
======================================================================================================
The areas of largest growth in the portfolio have been in the residential and
commercial mortgage portfolio. Average yield on the portfolio decreased from
9.08% to 8.41% due primarily to the current rate environment. Real estate loans
comprise 90.16% of the entire portfolio, but credit concentration risk in this
segment has been minimized through low loan to value ratios and high credit
quality of borrowers. A high percentage of loans made by Bank of Smithtown are
to residents and businesses located in the Bank's primary lending area and
credit is extended to a wide spectrum of borrowers, including individuals,
not-for-profit organizations, and small to middle market businesses.
22
The following table shows the maturities of loans (excluding real estate
mortgages and installment loans) outstanding as of December 31, 2001:
After One
Within Year but After
One Within Five Five
(in thousands) Year Years Years Total
- -----------------------------------------------------------------------------------------------------------------------
Commercial (and all other loans including overdrafts) $ 8,454,495 $ 4,073,092 $ 321,665 $ 12,849,252
Real Estate - Construction 3,286,030 2,290,606 0 5,576,636
- -----------------------------------------------------------------------------------------------------------------------
Total $ 11,740,525 $ 6,363,698 $ 321,665 $ 18,425,888
=======================================================================================================================
Deposits
Average deposits for 2001 increased by 19.75% over 2000. Year end deposits
increased by 21.30% over the same period in 2000. The largest areas of growth
in average deposits for 2001 were money market accounts and time deposits,
respectively. The resultant increase in interest expense on this increased
deposit base was $137,902. The average costs of deposits during 2001 and 2000
were 3.28% and 3.94%, respectively
Average Balance
(in thousands) 2001 2000
- ------------------------------------------------------------------------
Demand (Non-Interest Bearing) $ 59,247 $ 53,556
Money Market 90,394 65,418
Savings (Including NOW) 54,974 52,035
Time 85,564 71,304
- ------------------------------------------------------------------------
Total Deposits $ 290,179 $ 242,313
========================================================================
At December 31, 2001, the remaining maturities of the Bank's Certificates of
Deposit in amounts of $100,000 or greater were as follows:
(in thousands)
3 months or less......................... $ 20,469
Over 3 through 6 months.................. 4,295
Over 6 through 12 months................. 4,027
Over 12 months........................... 9,365
- -------------------------------------------------------
Total.................................... $ 38,156
=======================================================
Other Borrowings
During 2001 borrowings increased from $38,750,000 to $38,000,000. These
borrowings are in the form of six advances from the Federal Home Loan Bank of
New York, a Repo advance with Salomon Smith Barney, and federal funds purchased
from JP Morgan Chase. A description of the advances is detailed below:
Description Rate (%) Type Maturity Amount
- -----------------------------------------------------------------------------------------------------
Federal Home Loan Bank
1 Year Advance 2.540 Fixed 11/15/2002 $ 5,000,000
1 Year Advance 5.350 Fixed 1/8/2002 10,000,000
4 Year Advance 6.400 Fixed 11/14/2003 7,000,000
5 Year Advance 6.560 Fixed 12/3/2004 3,000,000
10 Year Repo Advance 4.690 Fixed 3/14/2011 5,000,000
10 Year Repo Advance 4.935 Fixed 1/15/2009 5,000,000
Salomon Smith Barney
1 Year Repo Advance 2.470 Fixed 10/16/2002 4,000,000
JP Morgan Chase
Federal Funds Purchased 2.000 Fixed 1/2/2002 750,000
- -----------------------------------------------------------------------------------------------------
Total $ 39,750,000
=====================================================================================================
The weighted average interest rate for these borrowings is 4.78%. The
underlying collateral for the borrowings is comprised of various U.S.
government agency securities and Mortgage-Backed Securities. These borrowings
were also secured by residential mortgages. The average maturity is 30 years.
The average interest rate is approximately 7.70%. Total estimated fair value of
these residential mortgages at December 31, 2001, was approximately $47,100,000.
23
Quantitative and Qualitative Disclosures About Market Risk
Liquidity provides the source of funds for anticipated and unanticipated
deposit outflow and loan growth. The Bank's primary sources of liquidity
include deposits, repayments of loan principal, maturities of investment
securities, principal reductions on Mortgage-Backed Securities, "unpledged"
securities available for sale, overnight federal funds sold, and borrowing
potential from correspondent banks. The primary factors affecting these sources
of liquidity are their immediate availability if necessary and their market
rate of interest, which can cause fluctuations in levels of deposits and
prepayments on loans and securities. The method by which the Bank controls its
liquidity and interest rate sensitivity is through asset liability management.
The goal of asset liability management is the combination of maintaining
adequate liquidity levels without sacrificing earnings. The Bank matches the
maturity of its assets and liabilities in a way that takes advantage of the
current and anticipated rate environment. Asset liability management is of
great concern to management and is reviewed on an ongoing basis. The Chief
Executive Officer, Chief Financial Officer, Chief Lending Officer, Chief
Commercial Lending Officer, and the Chief Retail Officer of the Bank serve on
the Asset Liability Management Committee. Reports detailing current liquidity
position and projected liquidity as well as projected funding requirements are
reviewed monthly, or as often as deemed necessary. Semi-annually, the Bank
collects the necessary information to run an income simulation model, which
tests the Bank's sensitivity to fluctuations in interest rates. These rate
fluctuations are large and immediate and actually reflect the Bank's earnings
under these simulations. These income simulations are reviewed by the Board of
Directors. Both simulations performed during 2001 reflected minimal sensitivity
to upward or downward rate fluctuations. Interest income, margins, and net
income remain stable regardless of changes in market interest rates. These
models then lead to investment, loan, and deposit strategies and decisions for
earnings maximization within acceptable risk levels.
The Bank's market risk is primarily its exposure to interest rate risk.
Interest rate risk is the effect that changes in interest rates have in future
earnings. The principal objective in managing interest rate risk is to maximize
net interest income within acceptable levels of risk that have been previously
established by policy.
The following table sets forth the amounts of estimated cash flows for the
various interest earning assets and interest bearing liabilities that are
sensitive to changes in interest rates at December 31, 2001. Adjustable rate
assets are included in the period in which interest rates are next scheduled to
adjust rather than in the period in which they are due. Money Market deposit
accounts are assumed to decline over a two-year period. Savings and NOW deposit
accounts are assumed to decline over a five-year period.
24
Expected Maturity Between
--------------------------------------------------------------------------
1/1/02 - 12/31/02 1/1/03 - 12/31/03 1/1/04 - 12/31/04
--------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
(In thousands) Balance Rate (%) Balance Rate (%) Balance Rate (%)
--------------------------------------------------------------------------
Other Financial Instruments
Interest Earning Assets
Investments
Available for Sale (Fair Value) $ 12,008 5.37 $ 463 4.00 $ 1,677 4.62
Held to Maturity (Book Value) 1,421 5.67 736 5.40 252 5.11
Federal Funds Sold 40 1.65 0 0
Loans:
Fixed Rate
Real Estate Loans, Construction 0 0 175 9.50
Real Estate Loans, Other
Commercial 16 10.50 467 9.37 54 13.25
Residential 53 9.99 39 11.54 303 8.49
Commercial and Industrial Loans 4,224 8.76 525 9.08 1,645 9.25
Loans to Individuals for
Household, Family and
Other Personal Expenditures 291 9.68 1,115 7.67 587 10.89
All Other Loans (Including Overdrafts) 273 0.00 0 0
Variable Rate
Real Estate Loans, Construction 34,974 6.13 0 0
Real Estate Loans, Other
Commercial 13,761 8.18 13,095 7.97 21,618 7.95
Residential 13,805 5.25 1,347 7.99 4,565 7.99
Commercial and Industrial Loans 10,973 6.04 243 9.00 721 7.24
------------ ----------- -----------
Total Interest Earning Assets $ 91,839 $ 18,030 $ 31,597
============ =========== ===========
Interest Bearing Liabilities
Expected Maturity Between
--------------------------------------------------------------------------------
1/1/05 - 12/31/05 1/1/06 - 12/31/06 Thereafter
--------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Fair
(In thousands) Balance Rate (%) Balance Rate (%) Balance Rate (%) Value
--------------------------------------------------------------------------------
Other Financial Instruments
Interest Earning Assets
Investments
Available for Sale (Fair Value) $ 3,496 5.31 $ 475 4.40 $ 44,600 5.59 $ 62,719
Held to Maturity (Book Value) 427 5.09 661 5.19 1,093 6.36 4,738
Federal Funds Sold 0 0 0 40
Loans:
Fixed Rate
Real Estate Loans, Construction 0 0 38 8.75 213
Real Estate Loans, Other
Commercial 9,471 8.82 304 11.71 11,681 8.15 22,425
Residential 388 8.38 3,457 7.63 42,035 7.65 46,396
Commercial and Industrial Loans 1,360 10.19 1,424 9.34 598 10.63 9,807
Loans to Individuals for
Household, Family and
Other Personal Expenditures 372 11.54 240 11.37 217 17.07 2,821
All Other Loans (Including Overdrafts) 0 0 0 273
Variable Rate
Real Estate Loans, Construction 0 0 0 34,974
Real Estate Loans, Other
Commercial 19,365 8.91 35,525 8.12 19,898 8.16 124,376
Residential 1,422 8.55 6,488 8.22 0 27,831
Commercial and Industrial Loans 626 7.92 467 7.88 1,845 8.13 14,877
------------ ----------- ---------
Total Interest Earning Assets $ 36,927 $ 49,041 $ 122,005
============ =========== =========
Interest Bearing Liabilities
Deposits
Savings $ 7,393 0.62 $ 7,393 0.62 $ 7,393 0.62
Money Market 50,250 1.65 50,249 1.65 0
NOW 4,618 0.30 4,618 0.30 4,618 0.30
Time Deposits of 100,000 or more 28,494 2.96 1,304 1.72 1,775 6.55
Other Time Deposits 30,107 3.91 3,035 3.16 2,043 5.80
Other Borrowings 22,750 4.28 7,000 6.40 10,000 4.81
------------ ----------- -----------
Total Interest Bearing Liabilities $ 143,612 $ 73,599 $ 25,829
============ =========== ===========
Deposits
Savings $ 7,393 0.62 $ 7,394 0.62 0 36,966
Money Market 0 0 0 100,499
NOW 4,618 0.30 4,619 0.30 0 23,091
Time Deposits of 100,000 or more 5,317 6.81 969 5.17 0 37,859
Other Time Deposits 8,848 6.80 2,483 4.77 0 46,516
Other Borrowings 0 0 0 39,750
----------- ----------- -----------
Total Interest Bearing Liabilities $ 26,176 $ 15,465 $ 0
=========== =========== ===========
25
Stockholders' Equity
Shown below are the components of Stockholders' Equity as of December 31:
2001 2000
- -----------------------------------------------------------------------------------------------
Common Stock - $1.25 Par Value (7,000,000 Shares Authorized;
1,791,820 Shares Issued) $ 2,239,775 $ 2,239,775
Capital Surplus 1,993,574 1,993,574
Retained Earnings 28,765,704 23,498,921
Accumulated Other Comprehensive Income (Loss) 95,645 (196,117)
- -----------------------------------------------------------------------------------------------
Total 33,094,698 27,536,153
Less: Treasury Stock (252,563 and 224,606 Shares at Cost
At December 31, 2001 and 2000, respectively 6,095,915 5,144,873
- -----------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 26,998,783 $ 22,391,280
===============================================================================================
Stockholders' equity increased by 20.58% from year-end 2000 to year-end 2001.
Effective May 4, 2001 the Board of Directors approved a 2:1 stock split which
increased the number of authorized shares from 3,000,000 to 7,000,000, and
reduced the par value of the stock from $2.50 per share to $1.25 per share.
During 1998, the Board approved a Stock Repurchase Plan authorizing the
repurchase of Bancorp stock at market prices. Pursuant to this Plan, the
Bancorp has repurchased an adjusted equivalent of 16,597, 45,122, and 27,954
shares during 1999, 2000, and 2001 at a cost of $947,516, $1,355,921 and
$951,039, respectively. During the year 2001, retained earnings increased by
22.41% as a result of net income of $6,072,263 and dividends declared of
$805,480.
Capital ratios are regarded as one of the most important indicators of a
banking institution's strength. There are two capital ratios that are most
significant: leverage ratio and risk based capital. Leverage at year-end 2001
and 2000 was 7.73% and 7.54%, respectively. The minimum regulatory leverage
ratio is 4.00%. Total risk based capital at year-end 2001 and 2000 were 10.46%
and 10.95%. The minimum regulatory total risk based capital ratio is 10%. Bank
of Smithtown is considered well capitalized by all guidelines.
26
Analysis of the Allowance for Possible Loan Losses
The Allowance for Possible Loan Loss Account at year-end 2001 was $3,091,585
compared to $2,500,724 at year-end 2000. The change in the Allowance Account is
the result of net charge-offs of $399,138 and a Provision for Possible Loan
Losses of $990,000. Based on the high quality of the loan portfolio and the low
level of non-performing assets, management feels the Allowance for Possible
Loan Losses provides adequate coverage.
The following tables describe the activity in the Allowance for Possible Loan
Losses Account for the years-ended December 31:
(in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
Allowance for Possible Loan Losses at Beginning of Period $ 2,501 $ 2,252
- --------------------------------------------------------------------------------------------------------
Loans Charged Off:
Commercial 455 375
Real Estate 0 0
Consumer 28 21
- --------------------------------------------------------------------------------------------------------
Total Loans Charged-Off 483 396
- --------------------------------------------------------------------------------------------------------
Recoveries on Amounts Previously Charged-Off:
Commercial 30 62
Real Estate 27 10
Consumer 27 33
- --------------------------------------------------------------------------------------------------------
Total Recoveries 84 105
- --------------------------------------------------------------------------------------------------------
Net Charge-Offs 399 291
- --------------------------------------------------------------------------------------------------------
Current Year's Provision for Possible Loan Losses 990 540
- --------------------------------------------------------------------------------------------------------
Allowance for Possible Loan Losses at End of Period $ 3,092 $ 2,501
- --------------------------------------------------------------------------------------------------------
Total Loans:
Average (Net of Unearned Discount and Allowance for Possible Loan Loss) $ 252,342 $ 202,679
End of Period (Net of Unearned Discount) 281,739 228,320
Ratios:
- -----------------------------------------------------------------------------------------------------
Net Loans Charged-Off to:
Average Loans 0.16% 0.14%
Loans at End of Period 0.14 0.13
Allowance for Possible Loan Losses 12.91 11.64
Provision for Possible Loan Losses 40.32 53.89
Last Year's Charge-Off to this Year's Recovery 471.43 351.43
Allowance for Possible Loan Losses at Year End To:
Average Loans (Net of Unearned Discount) 1.21 1.22
End of Period Loans (Net of Unearned Discount) 1.10 1.10
The following table shows the Bank's non-accrual and contractually past due
loans:
At December 31,
(in thousands) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Accruing Loans Past Due 90 Days or More $ 0 $ 446 $ 0 $ 0 $ 432
Non-Accrual Loans 631 918 1,388 1,749 1,593
- --------------------------------------------------------------------------------------------------------
Total $ 631 $ 1,364 $ 1,388 $ 1,749 $ 2,025
========================================================================================================
For 2001 and 2000 the difference between interest income on non-accrual loans
and income that would have been recognized at original contractual rates and
terms is $57,545 and $90,144, respectively.
The composition of Other Real Estate Owned at December 31 is as follows:
2001 2000
- -------------------------------------------------------------------------------------------------------
Commercial Land $ 730,353 $ 730,353
Single Family 0 0
- -------------------------------------------------------------------------------------------------------
Total $ 730,353 $ 730,353
=======================================================================================================
The value of Other Real Estate Owned shown above is net of the Valuation
Reserve.
27
Consolidated Balance Sheets
Smithtown Bancorp
- --------------------------------------------------------------------------------------------------------
As of December 31
2001 2000
- --------------------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 10,911,762 $ 8,953,761
Investment Securities:
Investment Securities Held to Maturity:
Mortgage-Backed Securities 922,879 1,280,026
Obligations of State and Political Subdivisions 3,667,584 4,054,155
- --------------------------------------------------------------------------------------------------------
Total (Estimated Fair Value $4,738,416 in 2001 and $5,393,473 in 2000) 4,590,463 5,334,181
- --------------------------------------------------------------------------------------------------------
Investment Securities Available for Sale:
Obligations of U.S. Government Agencies 12,258,138 16,896,345
Mortgage-Backed Securities 26,053,874 22,512,702
Obligations of State and Political Subdivisions 20,399,573 11,950,147
Other Securities 4,007,500 1,000,000
- --------------------------------------------------------------------------------------------------------
Total (At Estimated Fair Value) 62,719,085 52,359,194
- --------------------------------------------------------------------------------------------------------
Total Investment Securities 67,309,548 57,693,375
- --------------------------------------------------------------------------------------------------------
Federal Funds Sold 40,327 0
- --------------------------------------------------------------------------------------------------------
Loans 282,090,123 229,062,660
Less: Unearned Discount 350,885 743,125
Allowance for Possible Loan Losses 3,091,585 2,500,724
- --------------------------------------------------------------------------------------------------------
Loans, Net 278,647,653 225,818,811
- --------------------------------------------------------------------------------------------------------
Equity Investment on SMTB Financial Group, LLC. 35,207 2,500
- --------------------------------------------------------------------------------------------------------
Bank Premises and Equipment 5,001,407 3,571,355
- --------------------------------------------------------------------------------------------------------
Other Assets
Other Real Estate Owned 730,353 730,353
Other 17,544,644 17,810,588
- --------------------------------------------------------------------------------------------------------
Total Other Assets 18,274,997 18,540,941
- --------------------------------------------------------------------------------------------------------
Total $ 380,220,901 $314,580,743
========================================================================================================
Liabilities
Deposits:
Demand (Non-Interest Bearing) $ 67,011,152 $ 56,352,317
Money Market 100,499,126 71,880,093
NOW 23,091,022 18,211,339
Savings 36,965,936 33,215,757
Time 84,374,808 77,499,816
- --------------------------------------------------------------------------------------------------------
Total Deposits 311,942,044 257,159,322
Dividend Payable 200,103 188,522
Other Borrowings 39,750,000 33,500,000
Other Liabilities 1,329,971 1,341,619
- --------------------------------------------------------------------------------------------------------
Total Liabilities 353,222,118 292,189,463
- --------------------------------------------------------------------------------------------------------
Commitments and Contingent Liabilities
Stockholders' Equity
Common Stock - $1.25 Par Value:
(7,000,000 Shares Authorized; 1,791,820 Shares Issued) 2,239,775 2,239,775
Capital Surplus 1,993,574 1,993,574
Retained Earnings 28,765,704 23,498,921
Accumulated Other Comprehensive Income (Loss) 95,645 (196,177)
- --------------------------------------------------------------------------------------------------------
Total 33,094,698 27,536,153
Less: Treasury Stock (252,563 and 224,606 Shares at Cost
At December 31, 2001 and 2000, respectively) 6,095,915 5,144,873
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 26,998,783 22,391,280
- --------------------------------------------------------------------------------------------------------
Total $ 380,220,901 $314,580,743
========================================================================================================
See notes to consolidated financial statements.
28
Consolidated Statements of Income
Smithtown Bancorp
- --------------------------------------------------------------------------------------------------------
As of December 31
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Interest Income
Interest and Fees on Loans $ 21,212,834 $ 18,409,086 $ 12,673,580
Interest on Balances Due from Banks 3,271 13,877 45,609
Interest on Federal Funds Sold 293,713 484,185 411,031
Interest and Dividends on Investment Securities:
Taxable:
Obligations of U.S. Government 0 23,602 339,877
Obligations of U.S. Government Agencies 658,926 1,461,265 1,166,148
Mortgage-Backed Securities 1,770,809 1,483,068 1,659,362
Other Securities 140,768 80,580 0
- --------------------------------------------------------------------------------------------------------
Total 2,570,503 3,048,515 3,165,387
Exempt from Federal Income Taxes:
Obligations of State and Political Subdivisions 887,555 801,175 821,512
Other Interest Income 215,461 248,496 102,946
- --------------------------------------------------------------------------------------------------------
Total Interest Income 25,183,337 23,005,334 17,220,065
- --------------------------------------------------------------------------------------------------------
Interest Expense
Money Market Accounts 2,676,699 2,855,500 1,587,735
Savings 424,854 510,807 553,069
Certificates of Deposit of $100,000 and Over 1,767,403 906,466 697,356
Other Time Deposits 2,696,114 3,154,395 1,274,439
Securities Sold Under Agreements To Repurchase 161,417 221,692 0
Other Borrowings 1,662,475 1,795,308 1,145,234
- --------------------------------------------------------------------------------------------------------
Total Interest Expense 9,388,962 9,444,168 5,257,833
- --------------------------------------------------------------------------------------------------------
Net Interest Income 15,794,375 13,561,166 11,962,232
Provision for Possible Loan Losses 990,000 540,000 450,000
- --------------------------------------------------------------------------------------------------------
Net Interest Income, After Provision
for Possible Loan Losses 14,804,375 13,021,166 11,512,232
- --------------------------------------------------------------------------------------------------------
Other Non-Interest Income
Trust Department Income 491,376 443,169 461,383
Service Charges on Deposit Accounts 1,769,932 1,589,901 1,501,740
Other Income 2,278,701 1,408,225 1,201,272
Net Gain (Loss) on Sales of Investment Securities (4,636) (41,264) 17,012
- --------------------------------------------------------------------------------------------------------
Total Other Non-Interest Income 4,535,373 3,400,031 3,181,407
- --------------------------------------------------------------------------------------------------------
Other Operating Expenses
Salaries 4,582,160 4,069,205 3,626,284
Pensions and Other Employee Benefits 889,289 890,976 704,559
Net Occupancy Expense of Bank Premises 988,549 906,088 864,844
Furniture and Equipment Expense 877,952 818,633 807,080
Other Expense 2,586,611 2,025,659 1,992,593
- --------------------------------------------------------------------------------------------------------
Total Other Operating Expenses 9,924,561 8,710,561 7,995,360
- --------------------------------------------------------------------------------------------------------
Income Before Income Taxes 9,415,187 7,710,636 6,698,279
Provision for Income Taxes 3,375,631 2,791,960 2,444,626
- --------------------------------------------------------------------------------------------------------
Income Before Net Income from Equity Investment 6,039,556 4,918,676 4,253,653
Net Income from Equity Investment 32,707 31,204 0
- --------------------------------------------------------------------------------------------------------
Net Income $ 6,072,263 $ 4,949,880 $ 4,253,653
========================================================================================================
Earnings Per Share
Net Income $ 3.92 $ 3.10 $ 2.63
Weighted Average Shares Outstanding 1,550,766 1,600,156 1,620,260
See notes to consolidated financial statements.
29
Consolidated Statements of Comprehensive Income
Smithtown Bancorp
- --------------------------------------------------------------------------------------------------------
As of December 31
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Net Income $ 6,702,263 $ 4,949,880 $ 4,253,653
Other Comprehensive Income (Loss), Before Tax:
Unrealized Holding Gain (Loss) Arising During the Period 507,674 1,546,883 (2,290,858)
Less: Reclassification Adjustment for Gains
(Loss) Included in Net Income (4,636) (41,264) 17,012
- --------------------------------------------------------------------------------------------------------
503,038 1,505,619 (2,273,846)
Income Tax Related to Other Comprehensive Income 211,276 632,360 955,015
- --------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss), Net of Tax 291,762 873,259 (1,318,831)
- --------------------------------------------------------------------------------------------------------
Total Comprehensive Income $ 6,994,025 $ 5,823,139 $ 2,934,822
========================================================================================================
See notes to consolidated financial statements.
30
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 1,645,530 $ 2,239,775 $ 1,993,574 $ 15,770,822 $ (2,841,437) $ 249,455 $ 17,412,189
Comprehensive Income:
Net Income 4,253,653 4,253,653
Other Comprehensive Income,
Net of Tax (1,318,831) (1,318,831)
--------------
Total Comprehensive Income 2,934,822
Cash Dividends Declared (709,480) (709,480)
Treasury Stock Purchases (33,194) (947,516) (947,516)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 1,612,336 2,239,775 1,993,574 19,314,995 (3,788,953) (1,069,376) 18,690,015
Comprehensive Income:
Net Income 4,949,880 4,949,880
Other Comprehensive Income,
Net of Tax 873,259 873,259
--------------
Total Comprehensive Income 5,823,139
Cash Dividends Declared (765,954) (765,954)
Treasury Stock Purchases (45,122) (1,355,920) (1,355,920)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 1,567,214 2,239,775 1,993,574 23,498,921 (5,144,873) (196,117) 22,391,280
Comprehensive Income:
Net Income 6,072,263 6,072,263
Other Comprehensive Income,
Net of Tax 291,762 291,762
--------------
Total Comprehensive Income 6,364,025
Cash Dividends Declared (805,480) (805,480)
Treasury Stock Purchases (27,957) (951,042) (951,042)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,539,257 $ 2,239,775 $ 1,993,574 $ 28,765,704 $ (6,095,915) $ 95,645 $ 26,998,783
====================================================================================================================================
Cash dividends declared per share were $0.52 in 2001, $0.48 in 2000, and $0.44
in 1999.
See notes to consolidated financial statements.
31
Consolidated Statements of Cash Flows
Smithtown Bancorp
- --------------------------------------------------------------------------------------------------
As of December 31
2001 2000 1999
- --------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net Income $ 6,072,263 $ 4,949,880 $ 4,253,653
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation on Premises and Equipment 536,129 476,283 509,946
Provision for Possible Loan Losses 990,000 540,000 450,000
Net (Gain) Loss on Sale of Investment
Securities 4,636 41,264 (17,012)
Gain on Disposition of Fixed Assets 0 (12,690) 0
Amortization of Transition Obligation 22,146 78,222 90,219
Gain on Sale of Other Real Estate Owned 0 (10,106) (29,281)
Increase (Decrease) in Interest Payable (99,873) 30,250 311,030
Increase (Decrease) in Miscellaneous
Payables and Accrued Expenses 136,210 (89,154) 28,895
(Increase) Decrease in Fees and Commissions
Receivables (80,226) 40,178 46,200
(Increase) Decrease in Interest Receivable 44,683 (319,476) (415,783)
Increase in Prepaid Expenses (324,020) (294,039) (157,504)
(Increase) Decrease in Miscellaneous
Receivables 1,194,921 (41,262) (26,316)
Decrease in Income Taxes Receivable 21,993 36,342 915
Increase in Deferred Taxes (364,053) (165,142) (118,579)
Decrease in Accumulated Postretirement
Benefit Obligation (32,972) (37,019) (87,233)
Amortization of Investment Security
Premiums and Accretion of Discounts (445,359) (360,609) 117,691
Net Gain on Investment in SMTB
Financial Group, LLC (32,707) 0 0
Increase in Cash Surrender Value of
Officer's Life Insurance Policies (510,786) (248,600) 0
- ----------------------------------------------------------------------------------------------------
Cash Provided by Operating Activities 7,132,985 4,614,322 4,956,841
- ----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from Disposition of Mortgage-Backed
Securities:
Held to Maturity 357,146 2,004,922 1,675,055
Available for Sale 11,019,951 4,197,803 14,237,579
Proceeds from Disposition of Other
Investment Securities:
Held to Maturity 424,002 1,077,501 1,478,604
Available for Sale 24,667,387 14,601,851 7,057,714
Purchase of Mortgage-Backed Securities:
Available for Sale (14,212,104) (6,985,891) (15,492,620)
Purchase of Other Investment Securities
Held to Maturity (44,000) 0 (723,862)
Available for Sale (30,849,796) (11,739,026) (10,223,900)
Purchase of Officers' Life Insurance Policies 0 (9,000,000) 0
Federal Funds Sold, Net (40,327) 10,350,000 2,150,000
Loans Made to Customers, Net (53,818,841) (52,410,460) (58,943,439)
Investment in SMTB Financial Group, LLC 0 (2,500) 0
Purchase of Premises and Equipment (1,966,182) (847,743) (458,004)
Proceeds from Disposition of Fixed Assets 0 20,142 0
Proceeds from Sale of Other Real Estate Owned 0 135,106 246,423
- ----------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (64,462,764) (48,598,295) (58,996,450)
- ----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net Increase in Demand Deposits, NOW Accounts
and Savings Accounts 47,907,727 24,420,150 7,622,979
Net Increase in Time Accounts 6,874,993 24,932,916 16,307,819
Cash Dividends Paid (793,898) (754,789) (698,015)
Securities Sold Under Agreements to Repurchase
and Other Borrowings, Net 6,250,000 (4,500,000) 34,825,355
Purchase of Treasury Stock (951,042) (1,355,921) (947,516)
- ----------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 59,287,780 42,742,356 57,110,622
- ----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Due from
Banks 1,958,001 (1,241,617) 3,071,013
Cash and Due from Banks, Beginning of Year 8,953,761 10,195,378 7,124,365
- ----------------------------------------------------------------------------------------------------
Cash and Due from Banks, End of Year $ 10,911,762 $ 8,953,761 $ 10,195,378
====================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest $ 1,882,543 $ 2,155,377 $ 1,145,234
Income Taxes 3,701,272 2,920,760 2,562,290
Schedule of Noncash Investing Activities
Unrealized (Gain) Loss on Securities Available
for Sale (291,762) (873,259) 1,318,831
See notes to consolidated financial statements
32
Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
The accounting and reporting policies of Smithtown Bancorp (the "Bancorp") and
its subsidiary, Bank of Smithtown (the "Bank") reflect banking industry
practices and conform to generally accepted accounting principles. A summary of
the significant accounting policies followed by the Bancorp in the preparation
of the accompanying consolidated financial statements is set forth below.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Smithtown
Bancorp, and its wholly-owned subsidiary, Bank of Smithtown, and its
wholly-owned subsidiary, Bank of Smithtown Insurance Agency, Inc. All material
intercompany transactions have been eliminated.
On May 6, 1998, the Bank effected a two-for-one split of common stock. All
references in the accompanying consolidated financial statements and notes
thereto relating to common stock, capital surplus, earnings per share, and
share data have been retroactively adjusted to reflect the two-for-one stock
split.
On May 4, 2001, the Bank effected a two-for-one split of common stock. All
references in the accompanying consolidated financial statements and notes
thereto relating to common stock, capital surplus, earnings per share and share
data have been retroactively adjusted to reflect the two-for-one stock split.
NATURE OF OPERATIONS
Smithtown Bancorp operates under a state bank charter and provides full banking
services, including trust and investment management services. As a state bank,
the Bank is subject to regulation by the State of New York Banking Department
and the Federal Reserve Board. The area primarily served by Smithtown Bancorp
is the north central region of Suffolk County, New York and services are
provided at eight branch offices.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. It is reasonably possible
that the Allowance for Possible Loan Losses and the Valuation Reserve for OREO
could differ from actual results.
INVESTMENT SECURITIES
The Bank evaluates its investment policies consistent with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). Accordingly, the Bank's investments in
securities are classified in two categories and accounted for as follows:
. Securities to be Held to Maturity - Bonds, notes, and debentures for which
the Bank has the positive intent and ability to hold to maturity are reported
at cost, adjusted for amortization of premiums, and accretion of discounts,
which are recognized in interest income using the interest method over the
period to maturity.
. Securities Available for sale - Bonds, notes, debentures, and certain equity
securities are carried at estimated fair value.
Unrealized holding gains and losses, net of tax, arising on securities
available for sale are reported as a component of accumulated other
comprehensive income, in accordance with SFAS No. 130, "Reporting Comprehensive
Income". Bank of Smithtown has adopted the Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income". This statement establishes requirements for disclosure
of comprehensive income and became effective for the Bank in 1998, with
reclassification of earlier financial statements for comparative purposes.
Comprehensive income generally represents all changes in stockholders' equity
except those resulting from investments by and distributions to stockholders.
Gains and losses on the sale of securities are determined using the
specific-identification method.
EQUITY METHOD OF ACCOUNTING
The Equity Method of Accounting is used when the Bank has a 20% to 50% interest
in other entities. Under the Equity Method, original investments are recorded
at cost and adjusted by the Bank's share of undistributed earnings or losses of
these entities. Non-marketable investments in which the Bank has less than 20%
interest and in which it does not have the ability to exercise significant
influence over the investee are initially recorded at cost and periodically
reviewed for impairment.
33
LOANS
Bank of Smithtown has adopted Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114). SFAS 114
applies only to impaired loans, with the exception of groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment (generally
consumer loans). A loan is defined as impaired by SFAS 114 if, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due, both interest and principal, according to the
contractual terms of the loan agreement. Specifically, SFAS 114 requires that a
portion of the overall Allowance for Possible Loan Losses be determined based
on the present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, the loan's observable market price
or the fair value of the collateral. Prior to the adoption of SFAS 114, Bank of
Smithtown's methodology for determining the adequacy of the Allowance for
Possible Loan Losses did not incorporate the concept of the time value of money
and expected future interest cash flows. In addition, SFAS 114 modifies the
accounting for insubstance foreclosures (ISF). A collateralized loan is now
considered an ISF and reclassified to Other Assets only when a creditor has
taken physical possession of the collateral regardless of whether formal
foreclosure proceedings have taken place.
Bank of Smithtown has also adopted SFAS 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure," (SFAS 118) which
amends SFAS No.114 to permit a creditor to use existing methods for recognizing
interest revenue on impaired loans. Generally, interest revenue received on
impaired loans continues either to be applied by the Bank against principal or
to be realized as interest revenue, according to management's judgment as to
the collectibility of principal.
Loans are generally recorded at the principal amount outstanding net of
unearned discount and the allowance for possible loan losses. Unearned
discounts are generally amortized over the term of the loan using the interest
method. Interest on loans is credited to income based on the principal amount
outstanding. The accrual of interest on a loan is discontinued when in the
opinion of management there is doubt about the ability of the borrower to pay
interest or principal. Management may continue to accrue interest when it
determines that a loan and related interest are adequately secured and in the
process of collection. Loans held for sale are carried at the lower of
aggregate cost or estimated fair value. The Bank sells or securitizes certain
loans. Such sales are with recourse and no reserve is considered necessary at
December 31, 2001 and 2000. Gains are reported in Other Income.
Loan-related fees and cost are recognized as income when received in accordance
with generally accepted accounting principles.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is established through a provision for
loan losses charged to expense. Loans are charged against the allowance for
possible loan losses when management believes the collectibility of the
principal is unlikely. The allowance for possible loan losses is based on
management's evaluation of the loan portfolio. Management believes that the
allowance for possible loan losses is adequate. While management uses available
information, including appraisals, to estimate potential losses on loans,
further additions to the allowance may be necessary based on changes in
economic conditions.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. The depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the related assets as
follows:
Bank Premises 25-30 years
Leasehold Improvements 5-40 years
Furniture and Equipment 10 years
OTHER REAL ESTATE OWNED
Included in other assets is real estate held for sale which is acquired
principally through foreclosure or a similar conveyance of title and is carried
at the lower of cost or fair value minus estimated costs to sell the property.
Any write-downs at the dates of acquisition are charged to the Allowance for
Possible Loan Losses. Revenues and expenses associated with holding such assets
are recorded through operations when realized.
OTHER REAL ESTATE OWNED VALUATION RESERVE ACCOUNT
The valuation reserve account is established through a loss on other real
estate owned charged to expense. Properties held in Other Real Estate Owned
(OREO) are periodically valued through appraisals, and are written down to
estimated fair value based on management's evaluation of these appraisals.
Specific reserves are allocated to the properties as necessary, and these
reserves may be adjusted based on changes in economic conditions.
INCOME TAXES
The tax provision as shown in the consolidated statements of income relates to
items of income and expense reflected in the statements after appropriate
deduction of tax-free income, principally nontaxable interest from obligations
of state and political subdivisions. Deferred taxes are provided for timing
differences related to depreciation, loan loss provisions, postretirement
benefits, and investment securities which are recognized for financial
accounting purposes in one period and for tax purposes in another period.
34
TRUST ASSETS
Assets belonging to trust customers that are held in fiduciary or agency
capacity by the Bank are not included in the financial statements since they
are not assets of the Bank. Deposits held in fiduciary or agency capacity in
the normal course of business are reported in the applicable deposit categories
of the Consolidated Balance Sheets.
EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of shares
outstanding. There are no shares issuable through stock options or warrants.
STATEMENTS OF CASH FLOWS
For the purposes of the Statements of Cash Flows, the Bank considers Cash and
Due from Banks as Cash and Cash Equivalents.
RETIREMENT BENEFITS
The Bank accounts for post-retirement benefits other than pensions in
accordance with Statement of Financial Accounting Standards No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106). This
statement requires that the estimated costs of post-retirement benefits other
than pensions be accrued over the period earned rather than expensed as
incurred.
In addition, the Bank adopted the provisions of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", (SFAS No. 132),
in 1998. This Statement supersedes the disclosure requirements in SFAS No. 106.
It does not address the measurement or recognition issues as prescribed by SFAS
No. 106.
COLLATERALIZED SECURITIES TRANSACTIONS
Transactions involving purchases of securities under agreements to resell
("reverse repurchase agreements") or sales of securities under agreements to
repurchase ("repurchase agreements") are treated as collateralized financing
transactions and are recorded at their contracted resale or repurchase amounts
plus accrued interest. The Bank is required to provide securities to
counterparties in order to collateralize repurchase agreements. The Bank's
agreements with counterparties generally contain contractual provisions
allowing for additional collateral to be obtained, or excess collateral
returned, when necessary. It is the Bank's policy to value collateral
periodically and to obtain additional collateral, or to retrieve excess
collateral from counterparties, when deemed appropriate.
35
NOTE B. INVESTMENT SECURITIES
- ------------------------------------------------------------------------------
The carrying amounts of investment securities as shown in the Consolidated
Balance Sheets and their fair values at December 31 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
Securities to be Held to Maturity:
December 31, 2001
Mortgage-Backed Securities $ 922,879 $ 21,810 $ 0 $ 944,689
Obligations of State and Political Subdivisions 3,667,584 126,143 0 3,793,727
- ---------------------------------------------------------------------------------------------------------------
Total 4,590,463 147,953 0 4,738,416
===============================================================================================================
December 31, 2000
Mortgage-Backed Securities 1,280,026 0 (2,193) 1,277,833
Obligations of State and Political Subdivisions 4,054,155 67,055 (5,570) 4,115,640
- ---------------------------------------------------------------------------------------------------------------
Total 5,334,181 67,055 (7,763) 5,393,473
===============================================================================================================
Securities Available for Sale:
December 31, 2001
Obligations of U.S. Government Agencies 20,430,442 144,449 (175,318) 20,399,573
Mortgage-Backed Securities 25,734,668 346,927 (27,721) 26,053,874
Obligations of State and Political Subdivisions 12,389,069 33,341 (164,272) 12,258,138
Other Securities 4,000,000 20,000 (12,500) 4,007,500
- ---------------------------------------------------------------------------------------------------------------
Total 62,554,179 544,717 (379,811) 62,719,085
===============================================================================================================
December 31, 2000
Obligations of U.S. Government Agencies 17,004,091 3,910 (111,656) 16,896,345
Mortgage-Backed Securities 22,567,352 151,597 (206,247) 22,512,702
Obligations of State and Political Subdivisions 12,125,885 5,291 (181,029) 11,950,147
Other Securities 1,000,000 0 0 1,000,000
- ---------------------------------------------------------------------------------------------------------------
Total $ 52,697,328 $ 160,798 $ (498,932) $ 52,359,194
===============================================================================================================
36
The following table presents the amotized costs of and estimated fair values of
investment in debt securities by scheduled maturity at respective year-ends.
2001 2000
--------------------------- ----------------------------
Amortized Estimated Fair Amortized Estimated Fair
Type and Maturity Grouping Costs Value Costs Value
- ---------------------------------------------------------------------------------------------------------------
Investment Securities Held to Maturity:
Mortgage-Backed Securities
After 5 years, but within 10 years $ 922,879 $ 944,689 $ 1,280,026 $ 1,277,833
- ---------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities 922,879 944,689 1,280,026 1,277,833
===============================================================================================================
Obligations of State and Political Subdivisions
Within 1 year 1,420,618 1,448,555 422,986 423,207
After 1 year, but within 5 years 2,075,966 2,164,794 2,799,419 2,835,423
After 5 years, but within 10 years 171,000 180,378 831,750 857,010
- ---------------------------------------------------------------------------------------------------------------
Total Obligations of State and
Political Subdivisions 3,667,584 3,793,727 4,054,155 4,115,640
===============================================================================================================
Investment Securities Available for Sale:
Obligations of U.S. Government Agencies
After 1 year, but within 5 years 0 0 5,004,091 4,962,055
After 5 years, but within 10 years 4,133,534 4,166,875 10,000,000 9,982,410
After 10 years 8,255,535 8,091,263 2,000,000 1,951,880
- ---------------------------------------------------------------------------------------------------------------
Total Obligations of U.S. Government
Agencies 12,389,069 12,258,138 17,004,091 16,896,345
===============================================================================================================
Mortgage-Backed Securities
After 1 year, but within 5 years 514,986 521,319 0 0
After 5 years, but within 10 years 0 0 1,688,035 1,704,406
After 10 years 25,219,681 25,532,555 20,879,317 20,808,296
- ---------------------------------------------------------------------------------------------------------------
Total Mortgage-Backed Securities 25,734,667 26,053,874 22,567,352 22,512,702
===============================================================================================================
Obligations of State and Political Subdivisions
Within 1 year 1,058,756 1,066,215 0 0
After 1 year, but within 5 years 5,513,847 5,589,537 3,069,741 3,067,654
After 5 years, but within 10 years 7,088,776 7,128,357 6,257,848 6,199,726
After 10 years 6,769,063 6,615,463 2,798,296 2,682,767
- ---------------------------------------------------------------------------------------------------------------
Total Obligations of State and
Political Subdivisions $ 20,430,442 $ 20,399,572 $ 12,125,885 $ 11,950,147
===============================================================================================================
Mortgage-Backed Securities are classified in the above schedule by their
contractual maturity. Actual maturities can be expected to differ from
scheduled maturities due to prepayment or early call privileges of the issuer.
Gross unrealized gains for the above investments amounted to $692,670 and
$227,853 in 2001 and 2000, respectively, while gross unrealized losses amounted
to $379,811 and $506,695 in 2001 and 2000, respectively.
Obligations of the U.S. Government, U.S. Government Agencies, Mortgage-Backed
Securities and Obligations of State, and Political Subdivisions having an
amortized cost of $28,595,655 and an estimated fair value of $28,900,868 were
pledged to secure public deposits, treasury tax, and loan deposits, repurchase
agreements and advances.
Gross realized gains (losses) on sales of Investment Securities Available for
Sale for the years ended December 31,
2001 2000 1999
- ----------------------------------------------------------------------------------------------
Obligations of U.S. Government Agencies $ 6,851 $ (50,270) $ 0
Mortgage-Backed Securities 33,679 (28,070) 17,012
Obligations of State and Political Subdivisions 0 17,400 0
Other Securities (45,166) 19,676 0
- ----------------------------------------------------------------------------------------------
Total $ (4,636) $ (41,264) $ 17,012
==============================================================================================
37
As a member of the Federal Reserve Bank of New York, the Bank owns Federal
Reserve Bank stock with a book value of $127,200. The stock has no maturity and
has paid dividends at the rate of 6.00% for 2001 and 2000. The Bank is a member
of the Federal Home Loan Bank of New York and now holds $1,840,000 of its
stock. This stock also has no maturity and has paid average dividends of
approximately 8.13% and 7.00% for 2001 and 2000, respectively. Stock of both
the Federal Reserve Bank and the Federal Home Loan Bank are restricted.
The Bank invested $30,000 in the Nassau-Suffolk Business Development Fund. This
consortium of banks provides loans to low income homeowners.
During 1999, the Bank invested $35,000 in Metro Bankers Title Agency, LLC. This
consortium of banks was formed and organized to act as a title insurance agent
or agency. Due to inactivity the member banks ended operations. The Bank's
investment was written off and there are no further liabilities for the Bank
resulting from this transaction.
Note C. Loans and Oreo
- ----------------------
Loans as of December 31, consisted of the following:
2001 2000
- ---------------------------------------------------------------------------------------------------------------
Real Estate Loans, Construction $ 35,187,562 $ 23,736,992
Real Estate Loans, Other
Commercial 145,255,133 114,200,418
Residential 73,902,211 55,362,167
Commercial and Industrial Loans 24,650,724 31,605,659
Loans to Individuals for Household, Family and Other Personal Expenditures 2,821,630 3,954,201
All Other Loans (Including Overdrafts) 272,863 203,223
- ---------------------------------------------------------------------------------------------------------------
Total Loans, Gross 282,090,123 229,062,660
Less:Unearned Discount on Loans 350,885 743,125
- ---------------------------------------------------------------------------------------------------------------
Total (Net of Unearned Discount) $ 281,739,238 $ 228,319,535
===============================================================================================================
Collateral varies, but generally includes residential and income producing
commercial properties, as well as automobiles on personal loans. Estimated fair
values of loans at December 31, 2001 and 2000 totaled $283,993,482 and
$228,659,679, respectively.
Bank of Smithtown adopted SFAS 114 and SFAS 118 effective January 1, 1995. This
did not have any impact on Bank of Smithtown's results of operations nor on its
financial position, including the level of the Allowance for Possible Loan
Losses. All loans considered impaired under SFAS 115 are included in the Bank's
90-day or more past-due or non-accrual categories. At December 31, 2001, the
recorded investment in loans that are considered impaired under SFAS 114 was
$631,318. No additional SFAS 114 reserve is required for the $631,318 of
recorded investment in impaired loans, since previously taken charge-offs have
reduced the recorded investment values to amounts that are less than the SFAS
114 calculated values. The average recorded investment in impaired loans during
the twelve months ended December 31, 2001 was $1,243,927. The total allowance
on impaired loans, at December 31, 2001 and 2000 totaled $137,447 and $453,822,
respectively.
Recognition of interest income on impaired loans, as for all other loans, is
discontinued when reasonable doubt exists as to the full collectibility of
principal or interest. Bank of Smithtown recognized $705, $40,119, and $18,149
in interest revenue in 2001, 2000, and 1999, respectively. Any cash receipts
would first be applied to accrued interest on impaired loans and then to the
principal balance outstanding.
At December 31, 2001 and 2000, loans with unpaid principal balances of $631,318
and $917,860, respectively, on which the Bank is no longer accruing interest
income, are included in the total loans listed above. The Bank expects to
recover a portion of the principal balance included in the nonaccrual category
at December 31, 2001 through work-out arrangements and the liquidation of
collateral. If the Bank had accrued interest income on loans which were in a
nonaccrual status at year-end, its interest income would have increased by
approximately $58,250 in 2001 and $90,144 in 2000. There were no loans
contractually past-due 90 days or more and still accruing interest at December
31, 2001. At December 31, 2000, $445,839 in loans were past due 90 days or more
and still accruing.
No loans were transferred to Other Real Estate Owned (OREO) during 2001 and
2000. The estimated fair value at OREO as of December 31, 2001 and 2000 was
$750,000.
38
The composition of OREO at December 31, follows:
2001 2000
- ------------------------------------------------------------------------------
OREO $ 1,032,500 $ 1,032,500
Less: Valuation Reserve 302,147 302,147
- ------------------------------------------------------------------------------
Net $ 730,353 $ 730,353
- ------------------------------------------------------------------------------
Other net OREO costs, which include operating revenue and expense and gains and
losses on the sale or disposition of Other Real Estate Owned, were
approximately $19,700, $11,250, and $53,000 for the years ended December 31,
2001, 2000, and 1999, respectively.
A summary of information concerning interest income on non accrual loans and
OREO at December 31, follows:
OREO Nonaccrual
--------------------- ------------------------
(in thousands) 2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------------------
Gross interest income which would have been
recorded during the year under original
contract terms $ 62 $ 62 $ 75 $ 58 $ 90 $ 138
Gross interest income recorded during the year 0 0 0 1 0 18
- -------------------------------------------------------------------------------------------------
The Bank has granted loans to officers, directors, and principal shareholders
of the Bancorp and to their associates. Related party loans are made in the
ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons. The aggregate dollar amount of these loans
were $2,159,141 and $2,417,507 at December 31, 2001 and 2000. During 2001,
$235,500 of new loans were made. Repayments totaled $584,495.
During December 2001, the Bank sold one residential mortgage in the amount of
$85,522 to the Federal National Mortgage Association. The Bank retained
servicing on this mortgage, but has not yet begun to earn fee income from the
servicing. This one sale resulted in a premium in the amount of $162. It is the
intent of management to continue to originate residential mortgages during 2002
for its own portfolio as well as for sale to investors. There were no mortgages
sold during the year 2000.
Note D. Allowance for Possible Loan Losses
- -------------------------------------------------------------------------------
Transactions in the allowance for the year ending December 31 were as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------
Balance, January 1 $ 2,500,724 $ 2,251,668 $ 2,120,371
Recoveries 84,279 105,675 50,852
Provision Charged to Current Expense 990,000 540,000 450,000
- ------------------------------------------------------------------------------------------------
Total 3,575,003 2,897,343 2,621,223
Less: Charge-Offs 483,418 396,619 369,555
- ------------------------------------------------------------------------------------------------
Balance, December 31 $ 3,091,585 $ 2,500,724 $ 2,251,668
================================================================================================
Note E. Bank Premises and Equipment
- -------------------------------------------------------------------------------
Bank premises and equipment as of December 31 at cost is as follows:
2001 2000
- ---------------------------------------------------------------------------------------------
Land $ 321,044 $ 321,044
Bank Premises 4,006,375 2,379,633
Leasehold Improvements 2,169,414 2,152,332
Furniture and Equipment 4,406,977 4,084,619
- ---------------------------------------------------------------------------------------------
Total 10,903,810 8,937,628
Less: Accumulated Depreciation and Amortization 5,902,403 5,366,273
- ---------------------------------------------------------------------------------------------
Total $ 5,001,407 $ 3,571,355
=============================================================================================
Note F. Employee Benefits
- -------------------------------------------------------------------------------
A 401(k) Defined Contribution Plan (the "Plan") was established by the Bank
during 1986. All employees who have attained age 21, with one continuous year
of service, may participate in the Plan through voluntary contributions of up
to 14% of their compensation. The Plan requires that the Bank match 50% of an
employee's contribution up to 3% of the participating employee's compensation.
The Bank's 401(k) contributions for 2001, 2000, and 1999, amounted to $78,862,
$69,088, and $53,551, respectively.
39
During 1995, the Bank established an Employee Stock Ownership Plan (ESOP) for
substantially all of its employees. The ESOP replaced the Profit Sharing Plan.
Eligibility requirements for the ESOP remain the same as for the Defined
Contribution Plan and include one year of continuous service, 1,000 hours and
attaining an age of 21. Eligible compensation is defined as gross wages less
contributions to any qualified plans to the extent that these contributions are
not includable in the gross income of the participant. Contributions to the
ESOP are in the form of cash and made at the discretion of the Board of
Directors. The ESOP uses this contribution to purchase shares of Smithtown
Bancorp stock which are then allocated to eligible participants. ESOP benefits
are 100% vested after five years of service with the Bank. Forfeitures are
reallocated among participating employees, in the same proportion as
contributions. Benefits are payable upon death, retirement, early retirement,
disability, or separation from service and may be payable in cash or stock. The
Bank reported a net expense of $130,000, related to the ESOP for each of the
years-ended December 31, 2001, 2000, and 1999. During 2001, 2000, and 1999, the
ESOP used the Bank's contribution to purchase 4,080, 4,290 and 4,470 shares of
common stock at an average cost of $31.85, $31.13, and $29.21 per share,
respectively. The 2001 contribution represents 4% of eligible compensation. As
of December 31, 2001 and 2000 the ESOP held 65,738 and 61,658 allocated shares,
respectively. There were no unallocated shares in the ESOP effective December
31, 2001 and 2000. ESOP shares are included in Weighted Average Shares
Outstanding in the calculations of earnings per share.
The Bank of Smithtown sponsors post-retirement medical and life insurance plans
for a closed group of prior employees. The following tables provide a
reconciliation of the changes in the Plans' benefit obligations and fair value
of assets over the two-year period ended December 31, 2001, and a statement of
the funded status as of December 31 of both years:
Retiree Health Benefits
----------------------------
2001 2000
- --------------------------------------------------------------------------------------------------
Reconciliation of Benefit Obligation
Obligation at January 1 $ 508,293 $ 530,909
Interest Cost 33,794 35,354
Actuarial Gain (68,614) (5,358)
Benefit Payments (38,974) (52,612)
- --------------------------------------------------------------------------------------------------
Obligation at December 31 434,499 508,293
- --------------------------------------------------------------------------------------------------
Reconciliation of Fair Value of Plan Assets
Employer Contributions 38,974 52,612
Benefit Payments (38,974) (52,612)
- --------------------------------------------------------------------------------------------------
Fair Value of Plan Assets at December 31 0 0
- --------------------------------------------------------------------------------------------------
Funded Status
Funded Status at December 31 (494,499) (508,293)
Unrecognized Transition (Asset) Obligation 349,000 380,800
Unrecognized (Gain) Loss (82,529) (13,915)
- --------------------------------------------------------------------------------------------------
Net Amount Recognized, before Additional Minimum Liability $ (168,028) $ (141,408)
- --------------------------------------------------------------------------------------------------
The following table provides the amounts recognized in the statement of
financial position as of December 31 of both years:
Retiree Health Benefits
-----------------------------
2001 2000
- ----------------------------------------------------------------------------------------------
Accrued Benefit Liability, after Additional Minimum Liability $ (168,028) $ (141,408)
- ----------------------------------------------------------------------------------------------
Net Amount Recognized (168,028) $ (141,408)
==============================================================================================
Additional year-end information for plans with obligations in excess of plan
assets:
Projected Benefit Obligation $ 434,499 $ 508,293
==============================================================================================
The following table provides the components of net periodic benefit cost for
the plans for fiscal years 2001 and 2000:
Retiree Health Benefits
-----------------------------
2001 2000
- ---------------------------------------------------------------------------------------------------
Interest Cost $ 33,794 $ 35,354
Amortization of Unrecognized Transition Obligation 31,800 31,800
- ---------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost 65,594 67,154
- ---------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost after Curtailments and Settlements $ 65,594 $ 67,154
===================================================================================================
40
The assumption used in the measurement of the Company's benefit obligation are
shown in the following table:
Retiree Health Benefits
-------------------------
2001 2000
- ------------------------------------------------------------------------------
Weighted Average Assumptions as of December 31
Discount 6.75% 7.00%
Initial Rate for Health Care Costs 10.00% 9.00%
Ultimate Rate for Health Care Costs 6.00% 6.00%
Ultimate Year of Health Care Increase 2010 2007
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
1% Increase 1% Decrease
- --------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components
net of periodic postretirement health care benefit cost $ 158 $ (150)
Effect on health care component of the accumulated
postretirement benefit obligation 2,247 (2,148)
Note G. Income Taxes
- -------------------------------------------------------------------------------
Federal and State Income Taxes payable as of December 31, included in other
assets in 2001 and 2000 are as follows:
2001 2000
- -----------------------------------------------------------
Current $ 68,826 $ 90,820
Deferred 1,289,170 1,136,392
- -----------------------------------------------------------
Total $ 1,357,996 $ 1,227,212
- -----------------------------------------------------------
Provisions for current income taxes for the years ended December 31, are as
follows:
2001 2000 1999
- ----------------------------------------------------------------------------------------
Federal:
Current $ 2,157,183 $ 1,922,475 $ 1,683,452
Deferred 294,763 128,443 95,991
- ----------------------------------------------------------------------------------------
Total Federal 2,451,946 2,050,918 1,779,443
- ----------------------------------------------------------------------------------------
New York State:
Current 837,975 710,820 642,595
Deferred 69,291 30,222 22,588
- ----------------------------------------------------------------------------------------
Total New York State 907,266 741,042 665,183
- ----------------------------------------------------------------------------------------
Total $ 3,359,212 $ 2,791,960 $ 2,444,626
========================================================================================
A reconciliation of the federal statutory tax rate to the required tax rate
based on income before income taxes is as follows:
2001 2000 1999
-----------------------------------------------------------------
Tax Pretax Tax Pretax Tax Pretax
Amount Income(%) Amount Income(%) Amount Income(%)
- ----------------------------------------------------------------------------------------------------------------------
Federal Statutory Rate $ 3,212,284 34.00 $ 2,632,226 34.00 $ 2,277,415 34.00
Increase (Reduction) of Taxes
Resulting From:
Tax Exempt Interest (266,211) (2.82) (236,280) (3.05) (253,086) (3.75)
State Income Taxes Net
of Federal Income
Tax Benefit 598,796 6.34 489,088 6.31 439,021 6.55
Other (185,657) (1.97) (93,074) (1.20) (18,724) (0.28)
- ----------------------------------------------------------------------------------------------------------------------
Total $ 3,359,212 35.55 $ 2,791,960 36.06 $ 2,444,626 36.52
======================================================================================================================
Income tax expense (benefit) on investment securities transactions amounted to
approximately $(2,000) in 2001, $(17,300) in 2000, and $7,100 in 1999.
41
Deferred income tax assets and liabilities are calculated based on their
estimated effect on future cash flows. The calculations under this method
resulted in a net deferred tax asset of $1,289,170 and $1,136,390 as of the end
of 2001 and 2000, respectively.
Deferred tax assets and liabilities were recognized as of December 31, 2001 and
2000 for the taxable temporary differences related to loan loss provisions,
depreciation, OREO losses, Accounting for Postretirement Benefits Other than
Pensions (SFAS 106), and Accounting for Investment Securities (SFAS 115), as
presented below:
Bank
Loan Loss OREO SFAS SFAS Owned Life
December 31, 2001: Provision Depreciation Losses No. 106 No.115 Insurance Total
- ---------------------------------------------------------------------------------------------------------
Federal Deferred Tax
Asset (Liability) $ 776,841 $ 44,868 $ 128,909 $ 51,851 $(56,068) $ 62,659 $ 1,009,060
New York State Deferred
Tax Asset (Liability) 182,626 53,406 30,331 12,199 (13,192) 14,740 280,110
- ---------------------------------------------------------------------------------------------------------
Net Deferred Tax
Asset (Liability) $ 959,467 $ 98,274 $ 159,240 $ 64,050 $(69,260) $ 77,399 $ 1,289,170
=========================================================================================================
December 31, 2000:
- ---------------------------------------------------------------------------------------------------------
Federal Deferred Tax
Asset (Liability) $ 575,640 $(18,505) $ 128,909 $ 55,531 $ 114,964 $ 28,842 $ 885,381
New York State Deferred
Tax Asset 135,284 38,495 30,331 13,065 27,051 6,785 251,011
- ---------------------------------------------------------------------------------------------------------
Net Deferred Tax
Asset (Liability) $ 710,924 $ 19,990 $ 159,240 $ 68,596 $ 142,015 $ 35,627 $ 1,136,392
=========================================================================================================
Note H. Deposits
- -------------------------------------------------------------------------------
At December 31, 2001 and 2000, time deposits in principal amounts of $100,000
or more were $38,155,529 and $24,315,657, respectively. Interest expense on
such deposits for the years-ended December 31, 2001, 2000, and 1999, were
$1,767,403, $906,466, and $679,756, respectively.
A schedule of all time deposits having a remaining term of more than one year
and the aggregate amount of maturities is set forth as follows:
2003..................................................$ 4,339,484
2004.................................................. 3,817,984
2005.................................................. 14,165,144
- ------------------------------------------------------------------
Total.................................................$ 22,322,612
==================================================================
DEPOSITS OF MAJOR SHAREHOLDERS, OFFICERS, DIRECTORS AND THEIR AFFILIATES
Deposits due to major shareholders, officers, directors and their affiliates
aggregated $4,588,698 and $4,862,576 at December 31, 2001 and 2000,
respectively.
NOTE I. STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
The Banking Law of the State of New York and the Federal Reserve Board regulate
the amount of cash dividends that may be paid without prior approval. Retained
Earnings available for cash dividends were $13,797,564 and $11,318,397 at
December 31, 2001 and 2000, respectively.
During 1998, the Board of Directors approved a Stock Repurchase Plan
authorizing the repurchase of Bancorp stock at market prices. Pursuant to the
plan, the Bancorp has repurchased an adjusted equivalent of 16,597, 45,122 and
27,954 shares during 1999, 2000 and 2001 at a cost of $947,516, $1,355,921 and
$951,039, respectively
42
NOTE J. SMITHTOWN BANCORP (PARENT COMPANY ONLY)
- -------------------------------------------------------------------------------
Smithtown Bancorp has one wholly-owned subsidiary, Bank of Smithtown.
Balance Sheets
As of December 31,
2001 2000
- ------------------------------------------------------------------------------------------------
Assets
Non-Interest-Bearing Deposits with Subsidiary Bank $ 650,549 $ 491,005
Prepaid Expense 17,500 0
Investment in Bank of Smithtown 26,396,372 22,282,115
- ------------------------------------------------------------------------------------------------
Total 27,064,421 22,773,120
================================================================================================
Liabilities
Cash Dividends Payable 200,103 188,522
Due to Bank of Smithtown 17,500 0
- ------------------------------------------------------------------------------------------------
Total 217,603 188,522
================================================================================================
Stockholders' Equity
Common Stock - $1.25 Par Value:
(7,000,000 Shares Authorized; 1,791,820 Shares Issued) $ 2,239,775 $ 2,239,775
Capital Surplus 7,859,918 7,859,918
Retained Earnings 22,843,040 17,629,778
Less: Treasury Stock (252,563 and 224,606 Shares at Cost
at December 31, 2001 and 2000, respectively 6,095,915 5,144,873
- ------------------------------------------------------------------------------------------------
Total Stockholders' Equity 26,846,818 22,584,598
- ------------------------------------------------------------------------------------------------
Total $ 27,064,421 $ 22,773,120
================================================================================================
Statements of Income and Retained Earnings
Year ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Income
Dividends from Bank of Smithtown $ 1,955,480 $ 1,766,032 $ 1,509,480
Expenses 50,995 40,637 0
- -----------------------------------------------------------------------------------------------------------------------
Net Income Before Equity in Undistributed Earnings of Subsidiary 1,904,485 1,725,395 1,509,480
Equity in Undistributed Earnings of Subsidiary 4,114,257 3,224,485 2,744,173
- -----------------------------------------------------------------------------------------------------------------------
Net Income 6,018,742 4,949,880 4,253,653
Retained Earnings, Beginning of Year 17,629,778 13,445,852 9,904,478
Dividends Declared (805,480) (765,954) (712,279)
- -----------------------------------------------------------------------------------------------------------------------
Retained Earnings, End of Year $ 22,843,040 $ 17,629,778 $ 13,445,852
=======================================================================================================================
Statements of Cash Flows
Year ended December 31,
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Cash Flow From Operating Activities:
Net Income $ 6,018,742 $ 4,949,880 $ 4,253,653
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in Undistributed Net Earnings of Subsidiary (4,114,257) (3,224,485) (2,741,374)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 1,904,485 1,725,395 1,512,279
- -----------------------------------------------------------------------------------------------------------------------
Cash Flow from Financing Activities:
Dividends Paid (793,899) (754,788) (700,815)
Purchases of Treasury Stock (951,042) (1,355,921) (947,516)
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (1,744,941) (2,110,709) (1,648,331)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Non-Interest-Bearing Deposits with
Subsidiary Bank 159,544 (385,314) (136,052)
Non-Interest Bearing Deposits with Subsidiary Bank,
Beginning of Year 491,005 876,319 1,012,371
- -----------------------------------------------------------------------------------------------------------------------
Non-Interest-Bearing Deposits with Subsidiary Bank,
End of Year $ 650,549 $ 491,005 $ 876,319
=======================================================================================================================
43
NOTE K. COMMITMENTS AND CONTINGENT LIABILITIES
- -------------------------------------------------------------------------------
As of December 31, 2001, the minimum rental commitments under non-cancelable
operating leases for premises and equipment with initial terms in excess of one
year are as follows:
- -------------------------------------------------------------
2002............................................ $ 199,683
2003............................................ 201,328
2004............................................ 194,906
2005............................................ 148,376
2006............................................ 109,867
Subsequent to 2007.............................. 808,849
- -------------------------------------------------------------
Total........................................... $ 1,663,009
=============================================================
A number of leases include escalation provisions relating to real estate taxes
and expenses.
Rental expenses for all leases on premises and equipment amounted to $394,463
in 2001, $383,615 in 2000, and $366,217 in 1999.
The Bank is required to maintain reserve balances with the Federal Reserve Bank
of New York for reserve and clearing purposes. The average amount of these
reserve balances for the year-ended December 31, 2001 was $815,505.
At December 31, 2001, the Bank has a $4,000,000 unsecured overnight line of
credit from M & T Bank. The rate of interest is determined at drawdown and is
payable the next banking day.
At December 31, 2001, the Bank has a $1,500,000 unsecured overnight line of
credit from J.P. Morgan Chase. The rate of interest is determined at drawdown
and is payable the next banking day.
NOTE L. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Fair value estimates are based on many judgments. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumption could significantly affect the estimates.
Fair value estimates do not apply to the value of anticipated future business
and the value of assets and liabilities that are not considered financial
instruments in accordance with generally accepted accounting principles.
Significant assets and liabilities that are not considered financial
instruments include the mortgage banking operation, deferred income taxes, and
premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the Bank to disclose estimated fair values of its financial instruments. SFAS
107 was amended in October, 1994 by SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments". Financial
Instruments are defined as cash, evidence of an ownership in an entity, or a
contract that conveys or imposes on an entity the contractual right or
obligation to either receive or deliver cash or another financial instrument.
Fair value is defined as the amount at which such financial instruments could
be exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted price, or one
exists. Fair value estimates, methods and assumptions are set forth below for
the Bank's financial instruments.
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, DIVIDEND PAYABLE AND OTHER
LIABILITIES
Cash, due from banks, Federal funds sold, dividend payable, and
other liabilities because of their short-term nature, have been valued at their
respective carrying vales.
INVESTMENT SECURITIES
For securities held-to-maturity and available-for-sale, fair values are
estimated based on quoted market prices or dealer quotes.
44
LOANS
The fair value of fixed-rate loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. The fair value of mortgage loans held for
sale approximates cost based on current estimated disposition values.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable at the reporting date. The fair value of fixed
maturity certificates of deposit are estimated using the rates currently
offered for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWINGS
The fair value of securities sold under agreements to repurchase and other
borrowings are estimated based on quoted market prices or dealer quotes.
NOTE M. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
- -------------------------------------------------------------------------------
On October 16, 2001, the Bank entered into a $4,000,000 Security Sold Under
Agreement to Repurchase (REPO) with Salomon Smith Barney. The REPO rate is
2.47% and the maturity date is October 16, 2002. The REPO is secured by a U.S.
Government Agency with a stated interest rate of 0.00%. The estimated fair
value for this security was $4,484,250 and is held at Salomon Smith Barney.
Interest is payable quarterly.
On May 24, 2000, the Bank entered into a $5,000,000 Security Sold Under
Agreement to Repurchase (REPO) with Morgan Stanley Dean Witter, Inc. The REPO
rate is 7.19% and the maturity date is May 24, 2001. The REPO is secured by a
U.S. Government Agency with a stated interest rate of 7.225% and by two
Mortgage-Backed Securities with stated interest rates of 8.00% and 5.50%. The
estimated fair value for these securities was $6,074,000 and are held at Morgan
Stanley Dean Witter, Inc. Interest is payable quarterly.
During 2001 and 2000, the average balance outstanding was $2,816,438 and
$3,032,787, respectively.
NOTE N. OTHER BORROWINGS
- -------------------------------------------------------------------------------
FEDERAL HOME LOAN BANK OF NEW YORK
The Bank has available to it, under various lines of credit from the Federal
Home Loan Bank of New York (FHLBNY). The borrowing limit at the Federal Home
Loan Bank of New York (FHLBNY) is calculated on 25% of the Bank's total average
assets and is subject to specific collateral requirements.
At December 31, 2001, the outstanding balances on these lines of credit totaled
$35,000,000. The outstanding balance consisted of the following advances:
. Repo Convertible Rate Advance dated March 13, 2001 in the amount of
$5,000,000, maturity date March 14, 2011 bearing an interest rate of 4.69%. On
March 13, 2004 and quarterly thereafter on each payment date, FHLBNY has the
option to convert this Convertible Advance with four business days prior notice
into replacement funding for the same or lesser principal amount based on any
advance then offered by FHLBNY at the current market rates. Advance is not
prepayable. Interest is payable quarterly on the 13th of June, September,
December and March.
. Repo Convertible Rate Advance dated January 15, 1999 in the amount of
$5,000,000, maturity date January 15, 2009 bearing an interest rate of 4.935%.
On January 15, 2004 and quarterly thereafter on each payment date, FHLBNY has
the option to convert this Convertible Advance with four business days prior
notice into replacement funding for the same or lesser principal amount based
on any advance then offered by FHLBNY at the current market rates. Advance is
not prepayable. Interest is payable quarterly on the 15th of April, July,
October and January.
. Fixed Rate Advance dated November 15, 2001 in the amount of $5,000,000,
maturity date November 15, 2002, bearing an interest rate of 2.54%. Advance is
not prepayable. Interest is payable monthly.
. Fixed Rate Advance dated January 8, 2001 in the amount of $10,000,000,
maturity date January 8, 2002, bearing an interest rate of 5.35%. Advance is
not prepayable. Interest is payable monthly.
45
. Fixed Rate Advance dated December 3, 1999 in the amount of $3,000,000,
maturity date December 3, 2002 bearing an interest rate of 6.56%. Interest
payments are due on the 1st of each month. Advance is not prepayable.
. Fixed Rate Advance dated November 8, 1999 in the amount of $7,000,000,
maturity date November 14, 2003 bearing an interest rate of 6.40%. Advance is
not prepayable. Interest is payable semi-annually on May 15th and November 15th.
The borrowings are secured by securities issued by the Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation (FHLMC), and Government National
Mortgage Association (GNMA). The maturity dates of these securities range from
April 2005 to August 2030, with coupon interest rates paying between 7.33% and
5.00%. Total estimated fair value of the securities at December 31, 2001 was
$5,933,281. These securities are held in safekeeping at the Federal Home Loan
Bank of New York.
These borrowings were also secured by residential mortgages. The average
maturity is 30 years. The average interest rate is approximately 7.70%. Total
estimated fair value of these residential mortgages at December 31, 2001, was
approximately $47,100,000.
The average balance of Other Borrowings for 2001 was $33,223,788 and the
maximum outstanding amount at any month end was $35,000,000.
At December 31, 2000, the outstanding balances on these lines of credit totaled
$28,500,000. The outstanding balance consisted of the following advances:
. Repo Convertible Rate Advance dated January 15, 1999 in the amount of
$5,000,000, maturity date January 15, 2009 bearing an interest rate of 4.935%.
On January 15, 2004 and quarterly thereafter on each payment date, FHLBNY has
the option to convert this Convertible Advance with four business days prior
notice into replacement funding for the same or lesser principal amount based
on any advance then offered by FHLBNY at the current market rates. Advance is
not prepayable. Interest is payable quarterly on the 15th of April, July,
October and January.
. Fixed Rate Advance dated December 6, 2000 in the amount of $10,000,000,
maturity date January 8, 2001, bearing an interest rate of 6.64%. Advance is
not prepayable, interest payable at maturity.
. Fixed Rate Advance dated November 8, 1999 in the amount of $7,000,000,
maturity date November 14, 2003 bearing an interest rate of 6.40%. Advance is
not prepayable. Interest is payable semi-annually on May 15th and November
15.th
. Fixed Rate Advance dated December 3, 1999 in the amount of $3,000,000,
maturity date December 3, 2002 bearing an interest rate of 6.56%. Interest
payments are due on the 1st of each month. Advance is not prepayable.
. Overnight line of credit dated December 29, 2000 in the amount of $3,000,000,
maturity date of January 2, 2001, bearing an interest rate of 6.60%. Advance is
not prepayable and interest is payable at maturity.
. Overnight line of credit dated December 29, 2000 in the amount of $500,000,
maturity date of January 2, 2001, bearing an interest rate of 6.35%. Advance is
not prepayable and interest is payable at maturity.
The borrowings were secured by a U.S. Treasury Note, Federal Home Loan Mortgage
Corporation (FHLMC), and Federal National Mortgage Association (FNMA)
securities. The maturity dates of these securities range from July 2004 to
February 2008, with coupon interest rates paying between 6.57% and 6.00%. Total
estimated fair value of the securities at December 31, 2000 was $5,440,000.
These securities are held in safekeeping at the Federal Home Loan Bank of New
York.
These borrowings were also secured by residential mortgages. The average
maturity is 30 years. The average interest rate is 10%. Total estimated fair
value of these residential mortgages at December 31, 2000, was $35,208,927.
46
The average balance of Other Borrowings for 2000 was $29,481,854 and the
maximum outstanding amount at any month end was $38,000,000.
At December 31, 2001 and 2000, the estimated fair value of Other Borrowings
approximated cost.
J.P. MORGAN CHASE
At December 31, 2001, the Bank borrowed $750,000 against the Bank's $1,500,000
unsecured overnight line of credit from J.P. Morgan Chase. The rate of interest
was 2.00% and was payable the next banking day.
At December 31, 2000, the amount borrowed against the Bank's $1,500,000
unsecured overnight line of credit from J.P. Morgan Chase was zero.
Future maturities of Other Borrowings are as follows as of December 31, 2001:
2002......................................................... $ 18,750,000
2003......................................................... 7,000,000
2004......................................................... 10,000,000
- -----------------------------------------------------------------------------
Total........................................................ $ 35,750,000
=============================================================================
NOTE O. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
- -------------------------------------------------------------------------------
CREDIT RISK
- -----------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. The
Bank uses the same credit policies in making these commitments as it does for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
may have fixed expiration dates or other termination clauses. At December 31,
2001 the Bank's total commitments to extend credit were $5,064,000 at fixed
rates and $26,258,560 at variable rates. Standby letters of credit are written
conditional instruments issued by the Bank to guarantee the financial
performance of a customer to a third party. There were 33 performance standby
letters of credit totaling $3,472,287 as of December 31, 2001. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained by the Bank upon extension of credit is based on
management's credit evaluation of the customer. Collateral held varies but
generally includes residential and income-producing properties.
Residential mortgage loans which have been sold in the secondary market present
off-balance sheet risk to the Bank in the form of first payment buyback
obligation. This buyback obligation commences with the date of sale of the loan
to the investor. During 2001, one residential mortgage loan was sold, and
therefore the value of the buyback obligation at December 31, 2001 was $85,522.
There were no mortgage loan sales during 2000.
NOTE P. REGULATORY MATTERS
- -------------------------------------------------------------------------------
In January 1989, the Board of Governors of the Federal Reserve Bank issued
guidelines for the implementation of risk-based capital requirements by U.S.
Banks and bank holding companies. These guidelines have been revised along with
minimum leverage ratios also set by the Federal Reserve Bank. The Bank's
capital remains extremely strong by all regulatory guidelines. The following is
a listing of the Bank's required and actual capital ratios.
2001 Actual(%) 2000 Actual(%) Required(%)
- ---------------------------------------------------------------------
Tier I 9.38 9.72 6.00
Tier II 1.08 1.09 **
Total Risk-Based Capital 10.46 10.95 10.00
Leverage Ratio 7.73 7.54 4.00
**Tier II Capital is limited to maximum of 100% of Tier 1 Capital.
47
NOTE Q. DISCLOSURE OF SUMMARIZED INFORMATION OF ASSETS, LIABILITIES, AND
RESULTS OF OPERATIONS OF SMTB FINANCIAL GROUP, LLC., ACCOUNTED FOR ON THE
EQUITY METHOD
- -------------------------------------------------------------------------------
The Bank has a 50% interest in SMTB Financial Group, LLC (SMTB), which was
formed to sell insurance and investment products. The investment amounted to
$35,207 and $2,500 at December 31, 2001 and 2000, respectively.
The combined results of operations and financial position of the Bank's equity
basis investment are summarized below:
December 31,
Condensed Income Statement Information: 2001 2000
- ---------------------------------------------------------------------
Commission Revenue $ 92,218 $ 81,332
Net Income 65,415 62,408
Bank's Equity in Net Income of Affiliates 32,707 31,204
Condensed Balance Sheet Information:
Current Assets 74,857 5,000
- ---------------------------------------------------------------------
Total Assets 74,857 5,000
Current Liabilities 4,443 0
- ---------------------------------------------------------------------
Equity 70,414 0
- ---------------------------------------------------------------------
Total Liabilities and Equity $ 74,857 $ 5,000
=====================================================================
NOTE R. DEFERRED INCENTIVE PLAN FOR EXECUTIVE OFFICERS AND DIRECTORS
- -------------------------------------------------------------------------------
The Bank has adopted a non-tax qualified retirement plan for certain executives
and directors. While the Plan is to be funded from the general assets of the
Company, life insurance policies were acquired for the purpose of serving as
the primary funding source. A participating executive and director may receive
an annual award based upon the bank's Return on Equity and Earnings for each
plan year. The award will be deferred into an account and the award will be
credited with interest at a rate based upon the growth rate of the stock for
the plan year. The benefit may be paid in 180 equal monthly installments or a
lump sum at Normal Retirement. If the participant attains the age of 55 and has
completed 20 years of service, he may elect Early Retirement and may receive
the balance in the deferral account on the Early Retirement Date. In case of
the participant's Early Termination prior to Early Retirement, the Executive is
entitled to receive a benefit equal to his or her vested portion of the
Deferral Account balance on the Termination Date. In the event of the
participant's termination of employment due to disability, the participant may
request to receive a disability benefit equal to the Deferral Account Balance
at the date of Termination. The Deferred Incentive Plan has five executives and
five director participants. Total contributions accrued under the Plan for the
year 2001 and 2000 were $89,049 and $83,355. At December 31, 2001 and 2000, the
cash values of these policies were $5,519,800 and $5,248,600 and the liability
accrued for the benefits payable under the Plan was $184,277.
The Bank has a similar supplemental life insurance plan for all members of
management, funded with similar life insurance policies. The benefit provides
post retirement life insurance up to a maximum of two and one half times annual
salary.
48
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Directors
and Stockholders of
Smithtown Bancorp
We have audited the accompanying consolidated balance sheets of Smithtown
Bancorp as of December 31, 2001 and 2000, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 2001. These consolidated financial statements are the responsibility of
Smithtown Bancorp's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Smithtown Bancorp at December 31, 2001 and 2000, and the consolidated results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
Albrecht, Viggiano, Zureck & Company, P.C.
Hauppauge, New York
January 22, 2002
49
CORPORATE DIRECTORY
SMITHTOWN BANCORP AND BANK OF SMITHTOWN BANK OF SMITHTOWN
BANK OF SMITHTOWN
BOARD OF DIRECTORS OFFICERS MAIN OFFICE AND CORPORATE
Bradley E. Rock, Chairman Bradley E. Rock HEADQUARTERS
Patricia C. Delaney Chairman, President SMITHTOWN, NY 11787-2828
Patrick A. Given & Chief Executive Officer One East Main Street (631) 360-9300
Edith Hodgkinson
Augusta Kemper Anita M. Florek BANKING OFFICES
Sanford C. Scheman Executive Vice President CENTEREACH, NY 11720-3501
Robert W. Scherdel & Chief Financial Officer 1919 Middle Country Road (631) 585-6644
Manny Schwartz
Barry M. Seigerman Robert J. Anrig COMMACK, NY 11725-3097
Executive Vice President 2020 Jericho Turnpike (631) 543-7400
Attmore Robinson, Jr., & Chief Lending Officer
Director Emeritus HAUPPAUGE, NY 11788-4346
Thomas J. Stevens 548 Route 111 (631) 265-7922
SMITHTOWN BANCORP Executive Vice President
& Chief Commercial Lending Officer KINGS PARK, NY 11754-3811
OFFICERS 14 Park Drive (631) 269-4900
Bradley E. Rock John A. Romano
Chairman, President Executive Vice President LAKE GROVE, NY 11755-2107
& Chief Executive Officer & Chief Retail Officer 2921 Middle Country Road (631) 588-0700
Anita M. Florek Patricia Guidi NORTHPORT, NY 11768-3151
Executive Vice President Senior Vice President, Operations 836 Fort Salonga Road (631) 262-1353
& Treasurer
Edward Benedetto EAST SETAUKET, NY 11733-3455
Rosanna Dill Senior Vice President & Comptroller 184 N. Belle Mead Rd. (631) 689-1221
Vice President
Ellen M. Drinkwine SHAREHOLDER INFORMATION
Judith Barber Vice President, Marketing & Training
Corporate Secretary REGISTRAR AND TRANSFER AGENT
Rosanna Dill Bank of Smithtown
INDEPENDENT AUDITORS Vice President, Human Resources One East Main Street
Smithtown, New York 11787-2801
Albrecht, Viggiano, Daniel J. Viola
Zureck & Company, P.C. Vice President, Information Technology DIVIDEND REINVESTMENT PLAN
25 Suffolk Court Smithtown Bancorp's Dividend Reinvestment
Hauppauge, NY 11788 Susan Ladone Plan extends to shareholders an inexpensive
Vice President, Consumer Lending and convenient method of acquiring
GENERAL COUNSEL additional shares of stock through reinvesting
Robert Staron dividends and/or making optional cash
Patricia C. Delaney, Esq. Vice President payments without brokerage commission or
service charges. For enrollment information,
John R. Emanuele please contact Rosanna Dill at: (631)360-
Vice President 9398.
Helene Caspar DIRECT DEPOSIT OF DIVIDENDS
Vice President Direct deposit of dividends provides a
convenient and safe way for shareholders to
Stacy L. Germano receive their dividends. Shareholders can
Trust Officer automatically have their dividends deposited
to a Bank of Smithtown checking, savings or
Assistant Trust Officers money market account, or to any other
Annette Puglia financial institution that provides Automated
Carol Schofield Clearing House Services. For enrollment
information, please contact Rosanna Dill at:
Assistant Vice President (631) 360-9398.
John Schneider
Sharon Wittschen INVESTOR RELATIONS
Shareholders seeking information about the
Judith Barber company or the annual report may contact
Corporate Secretary & Cashier the Corporate Secretary, Smithtown
Bancorp, One East Main Street, Smithtown
NY 11787-2828, (631) 360-9300.
Further information can also be found by
visiting our web site at
www.bankofsmithtown.com. The company's
shares are traded on the OTC Bulletin Board
under the symbol SMTB.