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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, 2003
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. |X|
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 2, 2004
--------------------- ----------------------------
$1.25 Par Value 2,972,504
The aggregate market value of the Registrant's common stock held by
nonaffiliates as of June 30, 2003 was approximately $86,006,730.
DOCUMENTS INCORPORATED BY REFERENCE
1) Portions of the Proxy Statement relating to the annual meeting of
stockholders to be held on April 20, 2004 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 1 of the Registrant's Annual Report to Stockholders for the year
ended December 31, 2003.
Our reports, proxy statements and other information the Company files with the
SEC, as well as our news releases, are available free of charge through our
Internet site at www.bankofsmithtown.com. This information can be found on the
Investor Information page of our Internet site under Stock Price and SEC
Filings. The annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed and furnished
pursuant to Section 13(a) of the Exchange Act are available as soon as
reasonably practicable after they have been filed with the SEC. Reference to the
Company's Internet address is not intended to incorporate any of the information
contained on our Internet site into this document.
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 Rocky Point Office
836 Fort Salonga Road 293 Route 25A
Northport, New York 11768 Rocky Point, New York 11778
Wading River Office
6241 Route 25A
Wading River, New York 11792
There are no other owners of these properties and no mortgages or liens exist on
the properties.
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, 2003 to a vote of
the Registrant's stockholders through the solicitation of proxies or otherwise.
2
Part II
Item 5: Market for Common Equity and Related Stockholder Matters
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
April 2003 two-for-one stock split.
------------Per Share-----------
---------
Cash
Dividend
High Low Declared
---- --- --------
2003
First quarter $29.68 $29.50 $.090
Second quarter 28.50 28.50 .090
Third quarter 35.00 34.00 .090
Fourth quarter 43.40 42.83 .090
-----
Total cash dividends declared $.360
=====
2002
First quarter $22.00 $19.00 $.075
Second quarter 25.25 21.75 .075
Third quarter 29.00 23.58 .075
Fourth quarter 28.75 26.75 .075
-----
Total cash dividends declared $.300
=====
The Bancorp has 789 stockholders at December 31, 2003. The Bancorp stock is
traded on the OTC Bulletin Board. The Bancorp has applied to be listed on NASDAQ
and expects to be listed by quarter end under the symbol "SMTB."
Item 6: Selected Financial Data
Selected Financial Data
Consolidated Balance Sheets
-------------------As of December 31,-------------------
------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(in thousands)
Total cash and cash equivalents $ 14,765 $ 10,692 $ 10,952 $ 8,954 $ 20,545
Investment securities available for sale 57,285 55,248 62,719 52,359 51,109
Investment securities held to maturity 1,993 2,962 4,591 5,334 7,971
Restricted investment securities 2,162 2,634 2,174 3,601 3,581
Loans, net 454,870 354,104 278,648 225,819 173,948
Cash value of bank-owned life insurance 16,288 10,891 9,759 9,249 --
Total assets 565,085 451,803 380,221 314,581 266,081
Total deposits 481,331 377,920 311,942 257,159 207,806
Securities sold under agreements to repurchase -- -- 4,000 5,000 --
Other borrowings 31,000 38,000 35,750 28,500 38,000
Subordinated debt 11,000 -- -- -- --
Total stockholders' equity 39,178 33,944 26,999 22,392 18,690
3
Consolidated Income Statements
------------------------Year ended December 31,------------------------
-----------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Total interest income $30,170,495 $27,560,123 $25,224,286 $23,005,334 $17,220,065
Total interest expense 7,691,230 7,409,772 9,388,962 9,444,168 5,257,833
----------- ----------- ----------- ----------- -----------
Net interest income 22,479,265 20,150,351 15,835,324 13,561,166 11,962,232
Provision for loan losses 763,113 1,020,000 990,000 540,000 450,000
----------- ----------- ----------- ----------- -----------
Net interest income after provision for
loan losses 21,716,152 19,130,351 14,845,324 13,021,166 11,512,232
Total other non-interest income 4,078,871 4,051,110 3,628,580 3,431,235 3,181,407
Total other operating expenses 11,435,042 10,812,766 9,026,010 8,710,561 7,995,360
----------- ----------- ----------- ----------- -----------
Income before income taxes 14,359,981 12,368,695 9,447,894 7,741,840 6,698,279
Provision for income taxes 5,261,355 4,326,948 3,375,631 2,791,960 2,444,626
----------- ----------- ----------- ----------- -----------
Net income $ 9,098,626 $ 8,041,747 $ 6,072,263 $ 4,949,880 $ 4,253,653
=========== =========== =========== =========== ===========
Selected Financial Data
Supplementary Information
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Per share data
Net income $ 3.02 $ 2.62 $ 1.96 $ 1.55 $ 1.32
Stockholders' equity 13.17 11.14 8.77 7.15 5.79
Dividends declared
Cash dividends per share .36 .30 .26 .24 .22
Cash dividends declared 1,083,175 920,443 805,480 765,954 712,279
Year-end data
Total assets 565,085,400 451,803,237 380,220,901 314,580,743 266,081,443
Total deposits 481,331,022 377,919,675 311,942,044 257,159,322 207,806,261
Total stockholders' equity 39,178,471 33,944,286 26,998,783 22,391,280 18,690,015
Total trust assets 86,734,338 74,160,521 80,708,621 90,646,248 90,386,444
Number of shares outstanding 2,974,237 3,047,498 3,078,514 3,134,428 3,224,672
Selected ratios
Net income to:
Total income 26.57% 25.44% 21.05% 18.72% 20.85%
Average total assets 1.80 1.89 1.74 1.66 1.80
Average stockholders' equity 24.74 26.31 24.59 23.56 23.66
Average stockholders' equity to
average assets 7.28 7.19 7.07 7.06 7.60
Dividend payout ratio 11.90 11.45 13.26 15.47 16.75
4
Item 7: Management's Discussion and Analysis of Financial Plan 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 Bancorp'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 Bancorp 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 Bancorp'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 Bancorp'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 Bancorp 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 Bancorp makes on
related subjects in our reports to the Securities Exchange Commission.
Summary
Smithtown Bancorp is a holding company formed in 1984. Its income is derived
primarily from the operations of its largest subsidiary, Bank of Smithtown. The
Bank operates ten full service banking 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.
During the year ended December 31, 2003, the Bank's balance sheet underwent
significant changes. Total assets grew from $451,803,237 to $565,085,400, an
increase of $113,282,163, or 25.07%. The largest area of growth was in the loan
portfolio, which increased from $358,171,477 at December 31, 2002 to
$459,677,553 at December 31, 2003, a 28.34% increase. Within the loan portfolio,
commercial real estate loans grew in volume by $80,036,246, representing a
44.69% increase. Commercial and industrial loans also saw a significant increase
of $12,397,610, or 46.21%. Bank premises and equipment increased from $8,780,182
at December 31, 2002 to $10,287,727 at December 31, 2003. This increase was
primarily the result of one new branch opening and the purchase of a check
imaging system. Other assets increased by $6,340,311 during 2003 due in the most
part to the purchase of additional bank-owned life insurance in the amount of
$4,913,600 as well as a gain in the cash value of this insurance. Bank-owned
life insurance is the informal funding vehicle used for various employee benefit
plans. The liability side of the balance sheet increased by $108,047,978. Total
deposits at December 31, 2003 grew by $103,411,348 from $377,919,674 to
$481,331,022, an increase of 27.36%. The largest area of growth within the
portfolio was in certificate of deposit accounts which increased by $45,007,848.
Money market accounts also grew by $23,875,939. Other borrowings, which
represent advances from the Federal Home Loan Bank of New York, decreased from
$38,000,000 at December 31, 2002 to $31,000,000 at December 31, 2003. In
September 2003, the bank issued subordinated debt in the amount of $11,000,000,
which was used to fund loan growth as well as for repurchase of Bancorp stock.
Stockholders' equity increased by $5,234,185 resulting from $9,202,661 of net
income from Bank of Smithtown, $93,711 of net income from the operation of Bank
of Smithtown Insurance Agency, $1,083,175 of dividends declared, a decrease in
other comprehensive income of $313,566, $197,745 of Bancorp expenses and the
purchase of $2,467,700 of treasury stock.
Net income for the year ended December 31, 2003 was $9,098,626 as compared to
$8,041,747 at December 31, 2002, an increase of $1,056,879, or 13.14%. This
increase was primarily the result of increased loan interest and fee income of
$3,221,466, resulting in the most part from the increased volume of loans
originated during 2003. Interest income on investment securities during 2003 was
$2,625,578 as compared to $3,149,792 for 2002, due to the increased paydown of
mortgage-backed securities as well as the purchase of lower yielding investment
securities. As a result of the continued low interest rate environment, interest
expense on deposit accounts and other borrowings only rose by $281,458. This
combination of increased loan interest, slightly decreased investment income,
and only marginally increased interest expense is responsible for the growth in
net interest income of $2,328,914. The provision for loan losses during 2003 was
$763,113 as compared to $1,020,000 for 2002. As there were no impaired loans at
December 31, 2003, it was management's decision that the current reserve level
was adequate, and this was able to be attained with a lower provision than was
required in 2002. Other non-interest income increased slightly resulting from
both increased trust department income and the gain on the sale of securities.
Other operating expenses increased by $622,276 from $10,812,766 to $11,435,042,
primarily resulting from increased salary and benefit expense.
5
Interest Income
Interest income for the three years ended December 31, 2003, 2002, and 2001 was
$30,170,495, $27,560,123, and $25,224,286. The largest contributor to interest
income was interest on loans, and it represents 90.77%, 87.72%, and 84.26% of
the total. This increased loan income during 2003 is the result of the 28.34% in
loan volume. Loans at year end 2003 represent 81.35% of total assets. The yield
on the loan portfolio decreased from 7.46% in 2002 to 6.90% during 2003. This
yield reduction was a result of the continued low interest rate environment of
2003. The next largest contributor to interest income is the investment
portfolio, which decreased in volume during 2003 and now comprises 10.49% of
total assets. The yield on taxable investment securities declined from 5.94% in
2002 to 5.15% in 2003. Correspondingly, the yield on nontaxable securities in
2002 was 6.74% and in 2003 was 6.39%. New securities that were added during 2003
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 2003 than 2002 as a result of lower rates.
The average yield on federal funds during 2003 was 1.01% as compared to 1.56%
during 2002. The yield on interest earning assets during 2003 declined by 55
basis points from 7.09% in 2002 to 6.54% in 2003.
Interest Expense
Interest expense for the three years ended December 31, 2003, 2002, and 2001 was
$7,691,230, $7,409,772, and $9,388,962, a decrease of $1,697,732, or 18.08%,
over the period. Interest cost for the Bank is comprised of interest expense on
deposit accounts totaling $6,187,497, $5,655,773, and $7,565,070 for the three
years and, to a lesser extent, interest expense on other borrowings. This cost
was $1,503,733, $1,753,999, and $1,823,892 for the three year period from
December 31, 2003 to December 31, 2001. Other borrowings include advances from
Federal Home Loan Bank of New York as well as repurchase agreements, which are
used as alternative funding sources to deposit accounts. The cost of
interest-bearing deposits during 2003 was 1.83% as compared to 2.06% during
2002. The cost of other borrowings for both years was 3.67%. The Bank's overall
cost of funds for the year ended December 31, 2003 was 2.03%.
Net Interest Income
Net interest income remains the largest contributor to net income and comprises
65.63%, 63.74%, and 54.88% of total income for 2003, 2002, and 2001. Net
interest income increased from $15,835,324 in 2001 to $20,150,351 in 2002 and to
$22,479,265 in 2003, resulting from a larger increase in average
interest-earning assets than average interest-bearing liabilities. The result of
these changes in balance sheet composition and interest rates was an interest
margin of 4.90% in 2003 as compared to 5.22% in 2002.
6
Average Balance Sheet and Yield Analysis
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.
--------------2003------------ --------------2002------------
---- ----
(in thousands) Average Average Average Average Average Average
Tax Equivalent Basis Balance Interest Rate Balance Interest Rate
- -------------------- ------- -------- ---- ------- -------- ----
ASSETS
Interest-earning assets:
Investment securities:
Taxable $ 39,168 $ 1,697 4.33% $ 38,311 $ 2,085 5.44%
Nontaxable 20,455 1,306 6.39 23,937 1,614 6.74
-------- -------- ---- -------- -------- ----
Total investment securities 59,623 3,003 5.04 62,248 3,699 5.94
Restricted securities 2,328 67 2.88 2,533 120 4.74
Balances due from banks 132 1 0.76 46 2 4.35
Total loans 396,946 27,386 6.90 324,247 24,175 7.46
Federal funds sold 9,021 91 1.01 7,321 114 1.56
-------- -------- ---- -------- -------- ----
Total interest-earning assets 468,050 30,548 6.53 396,395 28,110 7.09
Non-interest-earning assets 36,849 28,786
-------- --------
Total assets $504,899 $425,181
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities:
Savings deposits (including NOW) $ 78,802 $ 297 0.38% $ 64,905 $ 310 0.48%
Money market accounts 145,191 1,680 1.16 116,773 1,796 1.54
Certificates of deposit 114,634 4,210 3.67 92,457 3,550 3.84
-------- -------- ---- -------- -------- ----
Total interest-bearing
deposits 338,627 6,187 1.83 274,135 5,656 2.06
Securities sold under agreements
to repurchase -- -- -- 3,156 78 2.47
Other borrowings 40,992 1,504 3.67 45,673 1,676 3.67
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities 379,619 7,691 2.03 322,964 7,410 2.29
-------- --------
Non-interest bearing liabilities:
Demand deposits 85,770 70,342
Other liabilities 2,728 1,309
-------- --------
Total liabilities 468,117 394,615
Stockholders' equity 36,782 30,566
-------- --------
Total liabilities and stockholders'
equity $504,899 $425,181
======== ========
Net interest income/interest rate spread $ 22,857 4.50% $ 20,700 4.80%
======== ==== ======== ====
Net earning assets/net yield on average
interest earning assets $ 89,198 4.88% $ 73,431 5.22%
======== ==== ======== ====
--------------2001-----------
----
(in thousands) Average Average Average
Tax Equivalent Basis Balance Interest Rate
- -------------------- ------- -------- ----
ASSETS
Interest-earning assets:
Investment securities:
Taxable $ 39,783 $ 2,786 7.00%
Nontaxable 19,431 1,345 6.92
-------- -------- ----
Total investment securities 59,214 4,131 6.98
Restricted securities -- -- --
Balances due from banks 75 3 4.00
Total loans 255,254 21,213 8.31
Federal funds sold 7,312 294 4.02
-------- -------- ----
Total interest-earning assets 321,855 25,641 7.97
Non-interest-earning assets 27,229
--------
Total assets $349,084
========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities:
Savings deposits (including NOW) $ 54,974 $ 425 0.77%
Money market accounts 90,394 2,677 2.96
Certificates of deposit 85,564 4,464 5.22
-------- -------- ----
Total interest-bearing
deposits 230,932 7,566 3.28
Securities sold under agreements
to repurchase 2,840 161 5.67
Other borrowings 30,172 1,662 5.51
-------- -------- ----
Total interest-bearing liabilities 263,944 9,389 3.56
--------
Non-interest bearing liabilities:
Demand deposits 59,247
Other liabilities 1,308
--------
Total liabilities 324,499
Stockholders' equity 24,585
--------
Total liabilities and stockholders'
equity $349,084
========
Net interest income/interest rate spread $ 16,252 4.41%
======== ====
Net earning assets/net yield on average
interest earning assets $ 57,911 5.05%
======== ====
7
Rate Volume Relationships of Interest Margin on Earning Assets
-------------2003/2002------------ -------------2002/2001------------
--------- ---------
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 $ 46 $ (434) $ (388) $ (105) $ 404 $ 299
Nontaxable (226) (82) (308) 312 (36) 276
-------- -------- -------- -------- -------- --------
Total investment securities (180) (516) (696) 207 368 575
Restricted securities (9) (44) (53) 4,164 (11,447) (7,283)
Total loans 5,117 (1,906) 3,211 5,734 (2,460) 3,274
Federal funds sold 23 (46) (23) -- (180) (180)
Balances due from banks 2 (3) (1) (1) -- (1)
-------- -------- -------- -------- -------- --------
Total interest-earning assets 4,953 (2,515) 2,438 10,104 (13,719) (3,615)
Interest expense:
Savings deposits 59 (72) (13) 772 (1,656) (884)
Money market accounts 383 (499) (116) 781 (1,286) (505)
Certificates of deposit 820 (160) 660 360 (1,179) (819)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 1,262 (731) 531 1,913 (4,121) (2,208)
Securities sold under agreements
to repurchase (78) -- (78) 18 (91) (73)
Other borrowings (172) -- (172) 854 (555) 299
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 1,012 (731) 281 2,785 (4,767) (1,982)
-------- -------- -------- -------- -------- --------
Changes in interest margin $ 3,941 $ (1,784) $ 2,157 $ 7,319 $ (8,952) $ (1,633)
======== ======== ======== ======== ======== ========
Other Operating Income
Other operating income increased by .69% and 11.64% over 2002 and 2001. Service
charges on deposit accounts are the single largest contributor to other non
interest income. These service charges decreased from $1,922,029 to $1,783,028,
or 7.23%, from 2002 to 2003. This decrease is the result of an increasing number
of free checking accounts opened during 2003. Income from trust services
increased by 27.13% from the 2002 level due to the large number of estates that
closed in 2003 as well as the effect of increased market value of managed
assets. Other income declined slightly from $1,549,408 during 2002 to $1,539,530
in 2003. During 2003, the Bank realized a gain on the sale of investment
securities held in the available-for-sale portfolio of $108,745. Net income from
the Bank's equity ownership in SMTB Financial Group, LLC., a joint venture with
Siegerman Mulvey Co., was $66,101 as compared to $45,415 in 2002.
8
Other Operating Expenses
Other operating expenses represent various categories of noninterest expense.
These expenses increased by 5.76% over 2002 levels and 19.80% over 2001 levels.
Salary and benefit expense increased by 5.90% during 2003 due to additions to
staff resulting from two branch openings as well as the increasing costs of
health insurance. Net occupancy expense increased from $1,190,168 during 2002 to
$1,497,003 during 2003, a 25.78% increase. This resulted from increased lease
payments on branch properties and depreciation expenses attributed to
construction costs of new branches as well as leasehold and building
improvements. A lesser increase of 20.40% in occupancy expense occurred from the
year 2001 to 2002, also related to the increased costs of maintaining the Bank's
buildings. Furniture and equipment expense rose by 8.01% and 13.89% over 2002
and 2001. This was primarily due to the purchase and resultant depreciation of a
new imaging system as well as expenses related to the completion of new
branches. Other expenses decreased by 3.84% in 2003 and increased by 22.58% in
2002, reflective of changes in overhead and operating expenses for an increased
asset and deposit base.
Investment Securities
Investment securities at December 31, 2003 totaled $59,277,948 as compared to
$58,209,577 at year-end 2002, an increase of 1.84%. As the interest rates
decreased during 2003, principal payment reductions on mortgage-backed
securities increased. Proceeds from maturities of investment securities were
primarily re-channeled into new loan originations. The majority of investment
securities are held in the available-for-sale portfolio, which represents 96.64%
of the total portfolio. This provides maximum liquidity for the Bank, as these
securities may be sold, if necessary. The composition of the portfolio has
changed during 2003. Obligations of U.S. government agencies was 42.33% of the
portfolio at December 31, 2003 vs. 19.29% at December 31, 2002. Obligations of
state and political subdivisions represented 32.80% of the portfolio at December
31, 2003 vs. 39.98% at December 31, 2002. Mortgage-backed securities represented
14.19% of the portfolio at December 31, 2003 and 28.32% at December 31, 2002.
Other securities is comprised of corporate bonds. This change in the overall
weighted average maturity of the investment portfolio is attributable to the
reduction of longer term mortgage-backed securities. The Weighted Average Yield
Table and the Average Balance Sheet and Yield Analysis both indicate the
decreased yield on the investment portfolio. During 2003, the yield decreased
from 5.94% to 5.15%.
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, 2003, 2002,
and 2001.
2003 2002 2001
----------- ----------- -----------
Investment securities available for sale
Obligations of U.S. government agencies $25,094,497 $11,226,328 $12,258,139
Mortgage-backed securities 8,120,100 15,905,791 26,053,874
Obligations of state and political subdivisions 17,745,735 20,893,082 20,399,572
Other securities 6,324,238 7,222,864 4,007,500
----------- ----------- -----------
Total investment securities available for sale $57,284,570 $55,248,065 $62,719,085
=========== =========== ===========
Investment securities held to maturity
Mortgage-backed securities $ 293,055 $ 579,622 $ 922,879
Obligations of state and political subdivisions 1,700,323 2,381,890 3,667,584
----------- ----------- -----------
Total investment securities held to maturity $ 1,993,378 $ 2,961,512 $ 4,590,463
=========== =========== ===========
9
The tables below set forth the investment securities by portfolio, weighted
average maturity, and weighted average yield as of December 31, 2003.
Weighted Weighted
Estimated Average Average
Amortized Cost Fair Value Yield Maturity
-------------- ---------- ----- --------
Investment securities available for sale
Obligations of U.S. government agencies:
After 5 years, but within 10 years $10,193,524 $10,087,498 4.75%
After 10 years 15,023,017 15,006,999 4.04
----------- -----------
Total obligations of U.S. government agencies 25,216,541 25,094,497 4.33 11.2 yrs
Mortgage-backed securities:
After 1 year, but within 5 years 54,302 56,229 8.00
After 10 years 7,868,803 8,063,871 5.36
----------- -----------
Total mortgage-backed securities 7,923,105 8,120,100 5.38 25.9 yrs
Obligation of state and political subdivisions
Within 1 year 1,773,448 1,789,739 4.49
After 1 year, but within 5 years 4,663,636 4,774,953 4.36
After 5 years, but within 10 years 3,192,348 3,378,847 4.20
After 10 years 7,746,350 7,802,196 2.80
----------- -----------
Total obligations of state and political subdivisions 17,375,782 17,745,735 3.65 10.3 yrs
Other securities
No stated maturity 1,000,000 1,001,000 3.78
After 1 year, but within 5 years 1,000,000 1,122,638 7.50
After 5 years, but within 10 years 2,044,833 2,050,600 8.09
After 10 years 2,000,000 2,150,000 8.03
----------- -----------
Total other securities 6,044,833 6,324,238 7.28 15.1 yrs
----------- -----------
Total investment securities available for sale $56,560,261 $57,284,570 4.18% 13.2 yrs
=========== =========== ====
Investment securities held to maturity
Mortgage-backed securities:
After 5 years, but within 10 years $ 293,055 $ 311,345 6.50% 4.3 yrs
Obligations of state and political subdivisions:
Within 1 year 281,810 283,806 4.70
After 1 year, but within 5 years 1,293,263 1,367,856 5.09
After 5 years, but within 10 years 125,250 128,325 4.54
----------- -----------
Total obligations of state and political subdivisions 1,700,323 1,779,987 4.98 2.1 yrs
----------- -----------
Total investment securities held to maturity $ 1,993,378 $ 2,091,332 5.21% 2.4 yrs
=========== =========== ====
10
Loans
The classification of the loan portfolio is as follows:
---------2003---------- ---------2002---------- ---------2001----------
---- ---- ----
Real estate loans,
construction $ 74,753,266 16.26% $ 63,773,877 17.81% $ 35,187,562 12.47%
Real estate loans, other:
Commercial 259,126,430 56.37 179,090,184 50.00 145,255,133 51.49
Residential 84,872,476 18.46 85,000,952 23.73 73,902,211 26.20
Commercial and industrial
loans 39,227,832 8.53 26,830,222 7.49 24,650,724 8.74
Loans to individuals for
household, family and
other personal expenditures 1,382,712 0.30 2,975,945 0.83 2,821,630 1.00
All other loans (including
overdrafts) 314,837 0.08 500,297 0.14 272,863 0.10
------------ ------ ------------ ------ ------------ ------
Total loans $459,677,553 100.00% $358,171,477 100.00% $282,090,123 100.0%
============ ====== ============ ====== ============ =====
---------2000---------- ---------1999----------
---- ----
Real estate loans,
construction $ 23,736,992 10.36% $ 22,563,456 12.76%
Real estate loans, other:
Commercial 114,200,418 49.85 81,336,842 46.00
Residential 55,362,167 24.17 37,459,938 21.19
Commercial and industrial
loans 31,605,659 13.80 31,997,026 18.10
Loans to individuals for
household, family and
other personal expenditures 3,954,201 1.73 3,350,208 1.89
All other loans (including
overdrafts) 203,223 0.09 112,275 0.06
------------ ------ ------------ ------
Total loans $229,062,660 100.00% $176,819,745 100.00%
============ ====== ============ ======
11
The area of largest growth in the portfolio was in commercial real estate. The
volume of growth was $80,036,246, or 44.69%, during 2003. Commercial and
industrial loans also grew by $12,397,610, or 46.21%. Average yield on the loan
portfolio during 2003 was 6.90% as compared to 7.46% during 2002. Credit quality
remains high on the loan portfolio with no impaired loans at December 31, 2003.
The allowance for loan loss account represents 1.04% of total loans and is
considered adequate by management.
The following table shows the maturities of loans (excluding real estate
mortgages and installment loans) outstanding as of December 31, 2003:
After One
Within Year but After
One Within Five Five
Year Years Years Total
----------- ----------- ---------- ------------
Commercial (and all other loans including
overdrafts) $24,161,701 $9,061,009 $6,005,122 $ 39,227,832
Real estate - construction 74,753,266 -- -- 74,753,266
----------- ---------- ---------- ------------
Total $98,914,967 $9,061,009 $6,005,122 $113,981,098
=========== ========== ========== ============
Analysis of the Allowance for Loan Losses
The allowance for loan loss account at year-end 2003 was $4,760,805 compared to
$3,945,593 at year-end 2002. The change in the allowance account is the result
of net recoveries of $52,099 and a provision for loan losses of $763,113. Based
on the high quality of the loan portfolio and the low level of non-performing
assets, management feels the allowance for loan losses provides adequate
coverage.
The allowance for loan losses is an amount that management currently believes
will be adequate to absorb estimated probable losses inherent in the Bank's loan
portfolio. In determining the allowance for loan losses, there is not an exact
amount but rather a range for what constitutes an appropriate allowance. As more
fully discussed in the "Application of Critical Accounting Policies" section of
this discussion and analysis of financial condition and results of operations,
the process for estimating credit losses and determining the allowance for loan
losses as of any balance sheet date is subjective in nature and requires
material estimates. Actual results could differ significantly from these
estimates.
The following tables describe the activity in the allowance for loan losses
account for the following years ended.
(in thousands) 2003 2002 2001 2000 1999
- -------------- --------- -------- -------- -------- --------
Allowance for loan losses at beginning of period $ 3,946 $ 3,092 $ 2,501 $ 2,252 $ 2,120
Loans charged off:
Commercial 77 200 455 375 255
Real estate -- -- -- -- 9
Consumer 2 18 28 21 105
--------- -------- -------- -------- --------
Total loans charged off 79 218 483 396 369
Recoveries on amounts previously charged off:
Commercial 109 19 30 62 20
Real estate 14 26 27 10 15
Consumer 8 7 27 33 16
--------- -------- -------- -------- --------
Total recoveries 131 52 84 105 51
--------- -------- -------- -------- --------
Net charge-offs (recoveries) (52) 166 399 291 318
Current year's provision for loan losses 763 1,020 990 540 450
--------- -------- -------- -------- --------
Allowance for loan losses at end of period $ 4,761 $ 3,946 $ 3,092 $ 2,501 $ 2,252
========= ======== ======== ======== ========
Total loans:
Average loans, net $ 392,638 $320,727 $252,312 $202,679 $142,216
End of period (net of unearned discount) 459,631 358,050 281,739 228,320 176,280
12
Ratios: 2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Net loan charge-offs (recoveries) to:
Average loans (.01)% 0.05% .16% .14% .22%
Loans at end of period (.01) 0.05 .14 .13 .18
Allowance for loan losses (1.09) 4.21 12.91 11.64 14.12
Provision for loan losses (6.82) 16.27 40.32 53.89 70.67
Last year's charge-off to this year's recovery 165.65 928.85 471.43 351.43 262.75
Allowance for loan losses at year end to:
Average loans (net of unearned discount) 1.21 1.22 1.21 1.22 1.56
End of period loans (net of unearned discount) 1.04 1.10 1.10 1.10 1.28
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of our allowance for loan losses
by loan category and the percent of loans in each category to total loans
receivable, net, at the dates indicated. The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses which may occur within the loan category since the total loan loss
allowance is a valuation allocation applicable to the entire loan portfolio.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
% % % % %
Loans Loans Loans Loans Loans
To To To To To
(in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
- -------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial $ 924 8.5% $ 749 7.5% $ 556 8.7% $ 624 13.8% $ 650 18.1%
Real Estate 3,354 91.1 2,692 91.5 1,997 90.2 1,306 84.4 1,050 79.9
Consumer and other 25 .4 20 1.0 31 1.1 53 1.8 40 2.0
Unallocated 458 -- 485 -- 508 -- 518 -- 512 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $4,761 100.0% $3,946 100.0% $3,092 100.0% $2,501 100.0% $2,252 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
The following table shows the Bank's nonaccrual and contractually past due
loans:
--------------As of December 31,---------------
------------------
(in thousands) 2003 2002 2001 2000 1999
- -------------- ----- ------ ---- ------ ------
Accruing loans past due 90 days or more $ -- $ 187 $ -- $ 446 $ --
Nonaccrual loans -- 1,712 631 918 1,388
----- ------ ---- ------ ------
Total $ -- $1,899 $631 $1,364 $1,388
===== ====== ==== ====== ======
For 2003 and 2002, the difference between interest income on nonaccrual loans
and income that would have been recognized at original contractual rates and
terms was $0 and $133,018.
Deposits
Average deposits for 2003 increased by 22.15% over 2002. Year-end deposits
increased by 27.36% over the same period in 2002. The largest areas of growth in
average deposits for 2003 were time deposits and money market deposit accounts.
The average increase resulting from these two deposit categories was 23.81% of
the total. Due to the downward trend in rates during 2003, the Bank experienced
only a 9.40% increase in interest expense on this increased deposit base. The
average cost of deposits during 2003 and 2002 was 1.83% and 2.06%.
At December 31, 2003, the remaining maturities of the Bank's certificates of
deposit in amounts of $100,000 or greater were as follows:
3 months or less $ 8,400,250
Over 3 through 6 months 3,713,552
Over 6 through 12 months 13,511,508
Over 12 months 29,551,715
-----------
Total $55,177,025
===========
13
Other Borrowings
During 2003, borrowings decreased from $38,000,000 to $31,000,000. These
borrowings are in the form of seven advances from the Federal Home Loan Bank of
New York. A description of the advances is detailed below:
Description Rate Type Maturity Amount
----------- ---- ---- -------- ------
Advance 1.100% Adjustable 1/7/2004 $ 9,000,000
Advance 4.935 Fixed 1/15/2009 5,000,000
Advance 4.690 Fixed 3/14/2011 5,000,000
Advance 2.480 Fixed 9/16/2004 2,000,000
Advance 2.880 Fixed 9/6/2005 4,000,000
Advance 2.950 Fixed 9/16/2005 1,000,000
Advance 3.670 Fixed 9/17/2007 5,000,000
-----------
Total $31,000,000
===========
The weighted average interest rate for these borrowings is 3.09%. 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 approximately 20 years. The
average interest rate is approximately 6.55%. Total estimated fair value of
these residential mortgages at December 31, 2003, was approximately $68,110,000.
A trust formed by the Bancorp issued $11,000,000 of floating rate trust
preferred securities in 2003 as part of a pooled offering of such securities due
October 8, 2033. The securities bear interest at 3-month LIBOR plus 2.99%. The
Bancorp issued subordinated debentures to the trust in exchange for the proceeds
of the offering; the debentures and related debt issuance costs represent the
sole assets of the trust. The Bancorp may redeem the subordinated debentures, in
whole or in part, at a premium declining ratably to par on October 8, 2008.
Stockholders' Equity
Stockholders' equity increased by 15.42% from year-end 2002 to year-end 2003,
primarily the result of net income of $9,098,626, dividends declared of
$1,083,175, and purchase of treasury stock of $2,467,700. Effective May 4, 2001,
the Board of Directors approved a two-for-one 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 to $1.25 per share. Again in 2003, the Board of
Directors approved a two-for-one stock split effective April 4, 2003, which
increased only issued shares. These splits have been given retroactive effect
for all financial statements presented and have been reflected in earnings per
share calculations. Average weighted shares outstanding at December 31, 2003 was
3,013,720 and earnings per share was $3.02.
Capital ratios are regarded as one of the most important indicators of a banking
institution's strength. Leverage capital is defined as the ratio of capital to
assets and at year-end 2003 and 2002 was 9.08 and 7.98. Minimum leverage ratio
is 4.00%. Risk-based capital is a measurement of the amount of capital the Bank
carries in relation to the credit risk of its assets. Total risk-based capital
at year-end 2003 and 2002 was 11.87% and 10.64%. The minimum regulatory ratio
for a well capitalized bank is 10.00%. Bank of Smithtown is considered well
capitalized by all guidelines.
Application of Critical Accounting Policies
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported asset and liability
balances and revenue and expense amounts. Our determination of the allowance for
loan losses is a critical accounting estimate because it is based on our
subjective evaluation of a variety of factors at a specific point in time and
involves difficult and complex judgments about matters that are inherently
uncertain. In the event that management's estimate needs to be adjusted based
on, among other things, additional information that comes to light after the
estimate is made or changes in circumstances, such adjustment could result in
the need for a significantly different allowance for loan losses and thereby
materially impact, either positively or negatively, the Bank's results of
operations.
The allowance for loan losses is established and maintained through a provision
for loan losses based on probable incurred losses inherent in the Bank's loan
portfolio. Management evaluates the adequacy of the allowance on a quarterly
basis. The allowance is comprised of both individual valuation allowances and
loan pool valuation allowances.
The Bank monitors its entire loan portfolio on a regular basis, with
consideration given to detailed analysis of classified loans, repayment
patterns, probable incurred losses, past loss experience, current economic
conditions, and various types of concentrations of credit. Additions to the
allowance are charged to expense and realized losses, net of recoveries, are
14
charged to the allowance.
Individual valuation allowances are established in connection with specific loan
reviews and the asset classification process including the procedures for
impairment testing under Statement of Accounting Standard ("SFAS") No. 114,
"Accounting by Creditors for Impairment of a Loan, an Amendment of FASB
Statements No. 5 and 15," and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, an Amendment of FASB
Statement No. 114." Such valuation, which includes a review of loans for which
full collectibility in accordance with contractual terms is not reasonably
assured, considers the estimated fair value of the underlying collateral less
the costs to sell, if any, or the present value of expected future cash flows,
or the loan's observable market value. Any shortfall that exists from this
analysis results in a specific allowance for the loan. Pursuant to our policy,
loan losses must be charged-off in the period the loans, or portions thereof,
are deemed uncollectible. Assumptions and judgments by management, in
conjunction with outside sources, are used to determine whether full
collectibility of a loan is not reasonably assured. Assumptions and judgments
also are used to determine the estimates of the fair value of the underlying
collateral or the present value of expected future cash flows or the loan's
observable market value. Individual valuation allowances could differ materially
as a result of changes in these assumptions and judgments. Individual loan
analyses are periodically performed on specific loans considered impaired. The
results of the individual valuation allowances are aggregated and included in
the overall allowance for loan losses.
In addition to estimating losses for loans individually deemed to be impaired,
management also estimates collective impairment losses for pools of loans that
are not specifically reviewed. Statistical information regarding the Bank's
historical loss experience over a period of time believed to be relevant is
weighted very heavily in management's estimate of such losses. However, future
losses could vary significantly from those experienced in the past. In addition,
management also considers a variety of general qualitative factors and then
subjectively determines the amount of weight to assign to each in estimating
losses. The factors include, among others, national and local economic
conditions, environmental risks, trends in volume and terms of loans,
concentrations of credit, changes in lending policies and procedures, and
experience, ability, and depth of the Bank's lending staff. Because of the
nature of the factors and the difficulty in assessing their impact, management's
resulting estimate of losses may not accurately reflect actual losses in the
portfolio.
Although the allowance for loan losses has two separate components, one for
impairment losses on individual loans and one for collective impairment losses
on pools of loans, the entire allowance for loan losses is available to absorb
realized losses as they occur whether they relate to individual loans or pools
of loans.
Liquidity
The objective of liquidity management is to ensure the sufficiency of funds
available to respond to the needs of depositors and borrowers, and to access
unanticipated earnings enhancement opportunities for Company growth. Liquidity
management addresses the ability to meet deposit withdrawals either on demand or
contractual maturity, to repay other borrowings as they mature and to make new
loans and investments as opportunities arise.
The Bancorp's principal source of liquidity is dividends from the Bank. Due to
regulatory restrictions, dividends from the Bank to the Bancorp at December 31,
2003 were limited to $21,486,814, which represents the Bank's 2003 retained net
income and the net undivided profits from the previous two years. The dividends
received from the Bank are used primarily for dividends to the shareholders. In
the event that the Bancorp subsequently expands its current operations, in
addition to dividends from the Bank, it will need to rely on its own earnings,
additional capital raised and other borrowings to meet liquidity needs.
The Bank's most liquid assets are cash and cash equivalents, securities
available for sale and securities held to maturity due within one year. The
levels of these assets are dependent upon the Bank's operating, financing,
lending and investing activities during any given period. Other sources of
liquidity include loan and security principal repayments and maturities, lines
of credit with other financial institutions including the Federal Home Loan
Bank, and growth in core deposits. While scheduled loan amortization, maturing
securities and short-term investments are a relatively predictable source of
funds, deposit flows and loan and mortgage-backed securities prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Bank adjusts its liquidity levels as appropriate to meet
funding needs such as seasonal deposit outflows, loans, and asset and liability
management objectives. Historically, the Bank has relied on its deposit base as
its principal source of funding. The Bank seeks to retain existing deposits and
loans and maintain customer relationships by offering quality service and
competitive interest rates to its customers, while managing the overall cost of
funds needed to finance its strategies. At December 31, 2003, the Bank had the
ability to borrow on aggregate lines of credit of $6,500,000 with unaffiliated
correspondent banks on an unsecured basis. The Bank also has the ability, as a
member of the Federal Home Loan Bank ("FHLB") system, to borrow against
unencumbered residential mortgages owned by the Bank.
15
Management believes the Company has sufficient liquidity to meet its operating
requirements.
Off-Balance Sheet Items and Contractual Obligations
The following tables disclose contractual obligations and commercial commitments
of the Company as of December 31, 2003:
Less Than After
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
----------- ----------- ----------- ----------- -----------
FHLB advances $31,000,000 $11,000,000 $5,000,000 $5,000,000 $10,000,000
Subordinated debt 11,000,000 -- -- -- 11,000,000
Lease obligations 2,714,920 351,602 566,232 467,604 1,329,482
----------- ----------- ---------- ---------- -----------
Total contractual
cash obligations $44,714,920 $11,351,602 $5,566,232 $5,467,604 $22,329,482
=========== =========== ========== ========== ===========
Letters of credit $ 9,213,430 $ 9,213,430 $ -- $ -- $ --
Other loan
commitments 10,428,781 10,428,781 -- -- --
----------- ----------- ---------- ---------- -----------
Total commercial
commitments $19,642,211 $19,642,211 $ -- $ -- $ --
=========== =========== ========== ========== ===========
The Bancorp had the ability to borrow on unsecured lines of credit up to
$6,500,000 at December 31, 2003. No balances were outstanding on these lines of
credit.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with accounting principles generally accepted in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary effect of inflation on the operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, changes in interest rates have a more significant effect on the
performance of a financial institution than do the effects of changes in the
general rate of inflation and changes in prices. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services. Interest rates are highly sensitive to many factors, which
are beyond the control of the Company, including the influence of domestic and
foreign economic conditions and the monetary and fiscal policies of the United
States government and federal agencies, particularly the Federal Reserve Bank.
Recent Accounting Pronouncements
Refer to financial statements for a discussion of recent accounting
pronouncements.
Item 7A: 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 factor affecting these sources of liquidity is
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 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. Semiannually, the Bank collects the necessary information to perform
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 2003
and 2002 reflected minimal sensitivity to
16
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 on 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 tables set forth the amounts of estimated cash flows for the
various interest earning assets and interest bearing liabilities that are
sensitive to interest rates at December 31, 2003 and December 31,2002.
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 accounts are assumed to decline over a five-year period.
17
-----------------------As of December 31, 2003----------------------
-----------------------
Expected Expected Expected
Maturity Between Maturity Between Maturity Between
1/1/04 - 12/31/04 1/1/05 - 12/31/05 1/1/06 - 12/31/06
--------------------- ------------------- --------------------
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) $ 14,492 3.59% $ 6,215 3.99% $ 5,526 3.38%
Held to maturity (book value) 202 4.82 537 4.90 691 5.12
Federal funds sold 5,382 0.75 -- -- -- --
Loans:
Fixed rate
Real estate loans, construction 175 9.50 -- -- -- --
Real estate loans, other
Commercial 48 8.15 31 7.50 48 7.31
Residential 3 7.50 134 8.68 91 7.90
Commercial and industrial
loans 5,931 6.58 458 9.78 936 8.36
Loans to individuals for
household, family, and
other personal expenditures 231 8.58 151 11.88 253 11.38
Variable rate
Real estate loans, construction 74,578 5.64 -- -- -- --
Real estate loans, other
Commercial 15,098 7.27 12,020 8.50 43,406 7.21
Residential 22,393 4.10 342 8.09 336 7.80
Commercial and industrial
loans 18,231 5.47 1,733 5.04 753 5.28
Loans to individuals for
household, family, and
other personal expenditures 120 6.00 -- -- -- --
-------- -------- -------
Total interest-earning
assets $156,884 $ 21,621 $52,040
======== ======== =======
Interest-bearing liabilities
Deposits
Savings $ 10,178 0.48 $ 10,178 0.48 $10,178 0.48
Money market 75,292 1.09 75,292 1.09 -- --
NOW 8,363 0.05 8,363 0.05 8,363 0.05
Time deposits of 100,000 or more 22,950 2.54 8,057 5.89 5,244 3.35
Other time deposits 53,846 2.66 22,590 4.36 11,107 3.33
Other borrowings 11,000 1.35 5,000 2.89 -- --
-------- -------- -------
Total interest-bearing liabilities $181,629 $129,480 $34,892
======== ======== =======
----------------------As of December 31, 2003---------------------------------
-----------------------
Expected Expected Expected
Maturity Between Maturity Between Maturity
1/1/07 - 12/31/07 1/1/08 - 12/31/08 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) $ 456 3.33% $ 2,241 5.85% $ 28,355 5.70% $ 57,285
Held to maturity (book value) 146 5.26 65 5.27 352 6.03 2,091
Federal funds sold -- -- -- -- -- -- 5,382
Loans:
Fixed rate
Real estate loans, construction -- -- -- -- -- -- 175
Real estate loans, other
Commercial 131 7.00 -- -- 22,220 7.17 23,330
Residential 32 8.46 29 8.37 27,287 6.44 28,122
Commercial and industrial
loans 1,215 6.89 1,808 5.89 1,556 6.96 11,974
Loans to individuals for
household, family, and
other personal expenditures 236 11.23 165 10.15 205 17.58 1,241
Variable rate
Real estate loans, construction -- -- -- -- -- -- 74,578
Real estate loans, other
Commercial 45,742 7.56 103,477 6.61 33,800 7.01 255,998
Residential 2,201 7.05 11,297 5.05 3,419 5.46 39,988
Commercial and industrial
loans 882 4.92 1,276 6.00 4,448 7.00 27,323
Loans to individuals for
household, family, and
other personal expenditures -- -- -- -- 29 8.00 149
------- -------- -------- --------
Total interest-earning
assets $51,041 $120,358 $121,671 $527,636
======= ======== ======== ========
Interest-bearing liabilities
Deposits
Savings $10,179 0.48 $ 10,179 0.48 $ -- -- $ --
Money market -- -- -- -- -- -- --
NOW 8,364 0.05 8,364 0.05 -- -- --
Time deposits of 100,000 or more 7,854 4.66 2,883 3.72 -- -- --
Other time deposits 10,397 4.46 7,866 3.84 -- -- --
Other borrowings 5,000 3.67 -- -- 10,000 4.81 --
------- -------- -------- --------
Total interest-bearing liabilities $41,794 $ 29,292 $ 10,000 $ --
======= ======== ======== ========
18
-----------------------As of December 31, 2002---------------------
-----------------------
Expected Expected Expected
Maturity Between Maturity Between Maturity Between
1/1/03 - 12/31/03 1/1/04 - 12/31/04 1/1/05 - 12/31/05
--------------------- ------------------- --------------------
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) $ 8,196 4.99% $ 2,042 4.85% $ 3,147 4.81%
Held to maturity (book value) 871 4.89 252 5.10 427 5.09
Federal funds sold 2,523 1.00 -- -- -- --
Loans:
Fixed rate
Real estate loans, construction -- -- 175 9.50 -- --
Real estate loans, other
Commercial 38 11.02 117 8.75 2,740 7.99
Residential 17 11.54 227 8.54 266 8.74
Commercial and industrial
loans 2,469 7.30 430 8.82 -- --
Loans to individuals for
household, family, and
other personal expenditures 1,491 6.32 379 11.09 930 9.99
Variable rate
Real estate loans, construction 63,599 5.93 -- -- 303 11.94
Real estate loans, other
Commercial 13,499 7.50 21,488 7.62 16,116 8.22
Residential 19,751 4.45 2,262 7.77 1,824 8.36
Commercial and industrial
loans 17,863 5.67 1,066 6.48 -- --
Loans to individuals for
household, family, and
other personal expenditures -- -- 33 5.25 739 5.78
-------- -------- -------
Total interest-earning
assets $130,317 $ 28,471 $26,492
======== ======== =======
Interest-bearing liabilities
Deposits
Savings $ 9,170 0.58 $ 9,170 0.58 $ 9,170 0.58
Money market 63,354 1.26 63,354 1.26 -- --
NOW 5,103 0.15 5,103 0.15 5,103 0.15
Time deposits of 100,000 or more 12,660 1.75 8,694 4.03 5,888 6.59
Other time deposits 21,346 2.32 26,055 3.66 10,992 6.34
Other borrowings 7,000 6.40 21,000 3.26 5,000 2.89
-------- -------- -------
Total interest-bearing liabilities $118,633 $133,376 $36,153
======== ======== =======
----------------------------As of December 31, 2002----------------------------
-----------------------
Expected Expected Expected
Maturity Between Maturity Between Maturity
1/1/06 - 12/31/06 1/1/07 - 12/31/07 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) $ 579 4.33% $ -- --% $ 41,284 5.88% $ 55,248
Held to maturity (book value) 661 5.19 126 5.50 625 6.46 3,119
Federal funds sold -- -- -- -- -- -- 2,523
Loans:
Fixed rate
Real estate loans, construction -- -- -- -- -- -- 175
Real estate loans, other
Commercial 58 9.50 168 7.00 20,769 7.50 24,333
Residential 234 7.76 67 8.08 36,219 7.18 37,762
Commercial and industrial
loans - - 1,163 6.93 894 8.37 6,817
Loans to individuals for
household, family, and
other personal expenditures 884 9.10 293 11.35 198 17.46 2,923
Variable rate
Real estate loans, construction 247 11.30 -- -- -- -- 63,599
Real estate loans, other
Commercial 36,361 8.09 59,883 7.59 13,346 9.06 162,599
Residential 2,629 7.76 10,798 7.26 5,206 6.58 42,730
Commercial and industrial
loans -- -- -- -- 92 6.25 20,044
Loans to individuals for
household, family, and
other personal expenditures 300 6.06 -- -- 39 8.25 72
------- -------- -------- --------
Total interest-earning
assets $41,953 $ 72,498 $118,672 $421,944
======= ======== ======== ========
Interest-bearing liabilities
Deposits
Savings $ 9,171 0.58 $ 9,171 0.58 $ -- -- $ 45,852
Money market -- -- -- -- -- -- 126,708
NOW 5,103 0.15 5,104 0.15 -- -- 25,516
Time deposits of 100,000 or more 1,009 4.96 7,322 4.64 -- -- 35,573
Other time deposits 2,335 4.95 11,120 4.47 5 4.72 71,853
Other borrowings -- -- 5,000 3.67 -- -- 38,000
------- -------- -------- --------
Total interest-bearing liabilities $17,618 $ 37,717 $ 5 $343,502
======= ======== ======== ========
19
Repricing Date
--------------------------------------------------------------------
Over
Three
Months Over Six
Three Through Months Total
Months Six Through Within
Revolving Or Less Months One Year One Year
--------- ------- ------ -------- --------
(in thousands)
Assets:
Investments $ -- $ 8,266 $ 1,990 $ 4,517 $ 14,773
Federal funds sold 5,382 -- -- -- 5,382
Loans:
Installment 1,949 23,021 2,049 1,562 28,581
Real estate and commercial 90,612 12,661 7,144 9,395 119,812
Cash and due from banks 671 -- -- -- 671
Investment in SMTB -- -- -- -- --
Fixed assets -- -- -- -- --
Other assets -- -- -- -- --
Allowance for loan losses -- -- -- -- --
Unearned discount -- -- -- -- --
------- -------- -------- --------- ---------
Total $98,614 $ 43,948 $ 11,183 $ 15,474 $ 169,219
======= ======== ======== ========= =========
Liabilities and Stockholders' Equity:
Savings $ -- $ 2,545 $ 2,545 $ 45,803 $ 50,893
Money markets -- 18,823 18,823 112,937 150,583
NOW -- 2,091 2,091 37,636 41,818
Time deposits of $100,000+ -- 8,400 3,713 13,512 25,625
Other time deposits -- 7,334 15,843 27,622 50,799
Demand -- 2,140 2,140 4,280 8,560
Other borrowed money -- 9,000 -- 2,000 11,000
Trust preferred -- -- -- -- --
Other liabilities -- -- -- -- --
Stockholders' equity -- -- -- -- --
------- -------- -------- --------- ---------
Total $ -- $ 50,333 $ 45,155 $ 243,790 $ 339,278
======= ======== ======== ========= =========
Interest-rate sensitivity gap per period $98,614 $ (6,385) $(33,972) $(228,316) $(170,059)
======= ======== ======== ========= =========
Interest sensitivity gap to total assets (%) 17.45% (1.13)% (6.01)% (40.40)% (30.09)%
======= ======== ======== ========= =========
Cumulative interest sensitivity gap $98,614 $ 92,229 $ 58,257 $(170,059) $(170,059)
======= ======== ======== ========= =========
Cumulative interest rate gap to total assets (%) 17.45% 16.32% 10.31% (30.09)% (30.09)%
======= ======== ======== ========= =========
Repricing Date
------------------------------------------------------
One Year
Through Over
Five Five
Years Years Other Total
----- ----- ----- -----
(in thousands)
Assets:
Investments $ 16,089 $ 28,415 $ -- $ 59,277
Federal funds sold -- -- -- 5,382
Loans:
Installment 6,452 3,681 -- 38,714
Real estate and commercial 233,026 68,126 -- 420,964
Cash and due from banks -- -- 8,712 9,383
Investment in SMTB -- -- 3 3
Fixed assets -- -- 10,288 10,288
Other assets -- -- 25,882 25,882
Allowance for loan losses -- -- (4,761) (4,761)
Unearned discount -- -- (47) (47)
--------- -------- -------- ---------
Total $ 255,567 $100,222 $ 40,077 $ 565,085
========= ======== ======== =========
Liabilities and Stockholders' Equity:
Savings $ -- $ -- $ -- $ 50,893
Money markets -- -- -- 150,583
NOW -- -- -- 41,818
Time deposits of $100,000+ 29,552 -- -- 55,177
Other time deposits 46,457 -- -- 97,256
Demand 34,242 -- 42,802 85,604
Other borrowed money 10,000 10,000 -- 31,000
Trust preferred -- 11,000 -- 11,000
Other liabilities -- -- 2,576 2,576
Stockholders' equity -- -- 39,178 39,178
--------- -------- -------- ---------
Total $ 120,251 $ 21,000 $ 84,556 $ 565,085
========= ======== ======== =========
Interest-rate sensitivity gap per period $ 135,316 $ 79,222 $(44,479) $ --
========= ======== ======== =========
Interest sensitivity gap to total assets (%) (23.95)% 14.02% -- --
========= ======== ======== =========
Cumulative interest sensitivity gap $ (34,743) $ 44,479 $ -- $ --
========= ======== ======== =========
Cumulative interest rate gap to total assets (%) (6.15)% 7.87% -- --
========= ======== ======== =========
20
Item 8: Financial Statements
Independent Auditors' Report
To the Board of Directors and Stockholders of Smithtown Bancorp,
We have audited the accompanying consolidated balance sheet of Smithtown Bancorp
as of December 31, 2003, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows for the
year then ended. 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 audit. The consolidated financial
statements of Smithtown Bancorp as of December 31, 2002 and 2001 were audited by
other auditors whose report dated January 17, 2003 expressed an unqualified
opinion on these statements.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Smithtown Bancorp at December 31, 2003, and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Morristown, New Jersey
February 13, 2004
21
Consolidated Balance Sheets
Smithtown Bancorp
------As of December 31,-----
------------------
2003 2002
------------ ------------
ASSETS
Cash and due from banks $ 9,383,247 $ 8,169,673
Federal funds sold 5,382,026 2,522,578
------------ ------------
Total cash and cash equivalents 14,765,273 10,692,251
Investment securities:
Investment securities available for sale:
Obligations of U.S. government agencies 25,094,497 11,226,328
Mortgage-backed securities 8,120,100 15,905,791
Obligations of state and political subdivisions 17,745,735 20,893,082
Other securities 6,324,238 7,222,864
------------ ------------
Total investment securities available for sale (at estimated fair value) 57,284,570 55,248,065
Investment securities held to maturity:
Mortgage-backed securities 293,055 579,622
Obligations of state and political subdivisions 1,700,323 2,381,890
------------ ------------
Total investment securities held to maturity (estimated
fair value $2,091,332 in 2003 and $3,118,644 in 2002) 1,993,378 2,961,512
------------ ------------
Total investment securities 59,277,948 58,209,577
Restricted securities 2,162,096 2,634,420
Loans 459,677,553 358,171,477
Less: unearned discount 47,183 121,456
allowance for loan losses 4,760,805 3,945,593
------------ ------------
Loans, net 454,869,565 354,104,428
Equity investment in SMTB Financial Group, LLC. 2,724 2,623
Bank premises and equipment 10,287,727 8,780,182
Other assets
Cash value of bank-owned life insurance 16,288,124 10,890,822
Other 7,431,943 6,488,934
------------ ------------
Total other assets 23,720,067 17,379,756
------------ ------------
Total assets $565,085,400 $451,803,237
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand (non-interest bearing) $ 85,604,168 $ 72,417,182
Money market 150,583,706 126,707,767
NOW 41,816,900 25,516,385
Savings 50,892,176 45,852,116
Time 152,434,072 107,426,224
------------ ------------
Total deposits 481,331,022 377,919,674
Dividend payable 267,681 229,251
Other borrowings 31,000,000 38,000,000
Subordinated debt 11,000,000 --
Other liabilities 2,308,226 1,710,026
------------ ------------
Total liabilities 525,906,929 417,858,951
Stockholders' equity
Common stock $1.25 par value (7,000,000 shares authorized;
3,583,640 shares issued) 4,479,550 2,239,775
Retained earnings 43,656,258 35,887,008
Additional paid in capital -- 1,993,574
Accumulated other comprehensive income 420,074 733,640
------------ ------------
48,555,882 40,853,997
Less: treasury stock (609,403 and 536,142 shares at cost at
December 31, 2003 and 2002, respectively) 9,377,411 6,909,711
------------ ------------
Total stockholders' equity 39,178,471 33,944,286
------------ ------------
Total liabilities and stockholders' equity $565,085,400 $451,803,237
============ ============
See notes to consolidated financial statements.
22
Consolidated Statements of Income
Smithtown Bancorp
----------Year ended December 31,-----------
-----------------------
2003 2002 2001
----------- ----------- ------------
Interest income
Interest and fees on loans $27,385,991 $24,174,525 $ 21,253,783
Interest on balances due from banks 915 1,597 3,271
Interest on federal funds sold 91,477 113,914 293,713
Interest and dividends on investment securities:
Taxable:
Obligations of U.S. government agencies 659,605 526,784 658,926
Mortgage-backed securities 578,360 1,198,596 1,770,809
Other securities 525,899 359,649 140,768
----------- ----------- ------------
Subtotal 1,763,864 2,085,029 2,570,503
Exempt from federal income taxes:
Obligations of state and political subdivisions 861,714 1,064,763 887,555
Other interest income 66,534 120,295 215,461
----------- ----------- ------------
Total interest income 30,170,495 27,560,123 25,224,286
Interest expense
Money market accounts (including savings) 1,976,246 2,105,547 3,101,553
Certificates of deposit of $100,000 and over 1,508,018 1,313,528 1,767,403
Other time deposits 2,703,233 2,236,698 2,696,114
Securities sold under agreements to repurchase -- 78,228 161,417
Other borrowings 1,503,733 1,675,771 1,662,475
----------- ----------- ------------
Total interest expense 7,691,230 7,409,772 9,388,962
----------- ----------- ------------
Net interest income 22,479,265 20,150,351 15,835,324
Provision for loan losses 763,113 1,020,000 990,000
----------- ----------- ------------
Net interest income after provision for loan losses 21,716,152 19,130,351 14,845,324
Other noninterest income
Trust department income 581,467 457,393 491,376
Service charges on deposit accounts 1,783,028 1,922,029 1,769,932
Other income 1,539,530 1,549,408 1,339,201
Net gain (loss) on sales of investment securities 108,745 76,865 (4,636)
Net income from equity investment 66,101 45,415 32,707
----------- ----------- ------------
Total other noninterest income 4,078,871 4,051,110 3,628,580
Other operating expenses
Salaries 4,851,400 4,728,761 3,980,624
Pensions and other employee benefits 1,307,863 1,087,387 889,289
Net occupancy expense of bank premises 1,497,003 1,190,168 988,549
Furniture and equipment expense 1,079,961 999,911 877,952
Other expense 2,698,815 2,806,539 2,289,596
----------- ----------- ------------
Total other operating expenses 11,435,042 10,812,766 9,026,010
----------- ----------- ------------
Income before income taxes 14,359,981 12,368,695 9,447,894
Provision for income taxes 5,261,355 4,326,948 3,375,631
----------- ----------- ------------
Net income $ 9,098,626 $ 8,041,747 $ 6,072,263
=========== =========== ============
Earnings per share
Net income $ 3.02 $ 2.62 $ 1.96
Weighted average shares outstanding 3,013,720 3,069,220 3,101,532
See notes to consolidated financial statements
23
Consolidated Statements of Comprehensive Income
Smithtown Bancorp
----------Year ended December 31,----------
-----------------------
2003 2002 2001
----------- ---------- -----------
Net income $ 9,098,626 $8,041,747 $ 6,072,263
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) arising during the year (431,843) 1,176,856 498,402
Less: reclassification adjustment for gains (losses) included in net
income 108,745 76,865 (4,636)
----------- ---------- -----------
(540,588) 1,099,991 503,038
Income tax related to other comprehensive income 227,022 461,996 211,276
----------- ---------- -----------
Other comprehensive income (loss), net of tax (313,566) 637,995 291,762
----------- ---------- -----------
Total comprehensive income $ 8,785,060 $8,679,742 $ 6,364,025
=========== ========== ===========
See notes to consolidated financial statements.
24
Consolidated Statements of Changes in Stockholders' Equity
------------------------------------------Smithtown Bancorp---------------------------------------------
-----------------
------Common Stock------- Accumulated
------------ Other Total
Shares Additional Retained Treasury Comprehensive Stockholders'
Outstanding Amount Paid In Capital Earnings Stock Income (Loss) Equity
----------- ------ --------------- -------- ----- ------------- ------
Balance at January 1,
2001 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
Comprehensive income:
Net income -- -- -- 8,041,747 -- -- 8,041,747
Other comprehensive
income, net of tax -- -- -- -- -- 637,995 637,995
------------
Total comprehensive
income 8,679,742
Cash dividends declared -- -- -- (920,443) -- -- (920,443)
Treasury stock purchases (15,508) -- -- -- (813,796) -- (813,796)
---------- ---------- ----------- ------------ ----------- --------- ------------
Balance at December 31,
2002 1,523,749 2,239,775 1,993,574 35,887,008 (6,909,711) 733,640 33,944,286
Comprehensive income:
Net income -- -- -- 9,098,626 -- -- 9,098,626
Other comprehensive
income, net of tax -- -- -- -- -- (313,566) (313,566)
------------
Total comprehensive
income 8,785,060
2-for-1 stock split 1,523,749 2,239,775 (1,993,574) (246,201) -- -- --
Cash dividends declared -- -- -- (1,083,175) -- -- (1,083,175)
Treasury stock purchases (73,261) -- -- -- (2,467,700) -- (2,467,700)
---------- ---------- ----------- ------------ ----------- --------- ------------
Balance at December 31,
2003 2,974,237 $4,479,550 $ -- $ 43,656,258 $(9,377,411) $ 420,074 $ 39,178,471
========== ========== =========== ============ =========== ========= ============
Cash dividends declared per share were $.36 in 2003, $.30 in 2002, and $.26 in
2001.
See notes to consolidated financial statements.
25
Consolidated Statements of Cash Flows
Smithtown Bancorp
--------------Year ended December 31,------------
2003 2002 2001
------------- ------------ ------------
Cash flows from operating activities
Net income $ 9,098,626 $ 8,041,747 $ 6,072,263
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation on premises and equipment 772,030 639,794 536,129
Provision for loan losses 763,113 1,020,000 990,000
Net (gain) loss on sale of investment securities (108,743) (76,865) 4,636
Amortization of transition obligation 21,599 (28,124) 22,146
Gain on sale of other real estate owned -- 66,228 --
Increase in cash surrender value of officers' life
insurance policies (483,702) (886,436) (510,786)
Increase (decrease) in interest payable 99,566 52,802 (99,873)
Increase in miscellaneous payables and
accrued expenses 548,780 434,888 136,210
(Increase) decrease in fees and commissions receivable 73,316 (29,605) (80,226)
(Increase) decrease in interest receivable (348,640) (393,813) 44,683
(Increase) decrease in prepaid expenses 90,844 (320,267) (324,020)
(Increase) decrease in miscellaneous receivables 67,090 (614,968) 1,194,921
(Increase) decrease in income taxes receivable 84,020 (249,800) 21,993
Increase in deferred taxes (263,671) (289,678) (364,053)
Decrease in accumulated post retirement benefit obligation (18,345) (45,560) (32,972)
Amortization of investment security premiums and
accretion of discounts (40,660) (198,032) (445,359)
Net gain on investment in SMTB Financial Group, LLC. (66,101) (45,415) (32,707)
------------- ------------ ------------
Cash provided by operating activities 10,289,122 7,076,896 7,132,985
Cash flows from investing activities
Mortgage-backed securities:
Proceeds from calls, repayments, maturities, and
sales of available for sale 7,388,309 10,275,313 11,019,951
Proceeds from calls, repayments, and maturities of
held to maturity 286,568 343,257 357,146
Investment securities:
Proceeds from calls, repayments, maturities, and
sales of available for sale 33,997,942 15,989,472 24,667,387
Proceeds from calls, repayments, and maturities of
held to maturity 691,861 1,444,695 424,002
Purchase of mortgage-backed securities:
Available for sale -- -- (14,212,104)
Purchase of other investment securities:
Held to maturity (200,000) (140,000) (44,000)
Available for sale (43,624,261) (17,437,878) (30,849,796)
Purchase of officers' life insurance policies (4,913,600) (245,000) --
Loans made to customers, net (101,528,249) (76,476,777) (53,818,841)
Proceeds from sale of other real estate owned -- 758,476 --
Distribution from SMTB Financial Group, LLC. 66,000 78,000 --
Purchase of premises and equipment, net of disposals (2,279,575) (4,418,569) (1,966,182)
------------- ------------ ------------
Cash used in investing activities (110,115,005) (69,829,011) (64,422,437)
26
Consolidated Statements of Cash Flows (Continued)
Smithtown Bancorp
--------------Year ended December 31,------------
2003 2002 2001
------------- ------------ ------------
Cash flows from financing activities
Net increase in demand deposits, NOW and savings
accounts $ 58,403,501 $ 42,926,215 $ 47,907,727
Net increase in time accounts 45,007,848 23,051,416 6,874,993
Cash dividends paid (1,044,744) (921,558) (793,898)
Securities sold under agreements to repurchase and
other borrowings, net (7,000,000) (1,750,000) 6,250,000
Proceeds from subordinated debt 11,000,000 -- --
Purchase of treasury stock (2,467,700) (813,796) (951,042)
------------- ------------ ------------
Cash provided by financing activities 103,898,905 62,492,277 59,287,780
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 4,073,022 (259,838) 1,998,328
Cash and cash equivalents, beginning of year 10,692,251 10,952,089 8,953,761
------------- ------------ ------------
Cash and cash equivalents, end of year $ 14,765,273 $ 10,692,251 $ 10,952,089
============= ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 7,455,049 $ 7,356,970 $ 9,488,834
Income taxes 5,319,117 2,542,450 3,701,272
See notes to consolidated financial statements
27
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 accounting principles generally accepted in the United
States of America. 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,
its wholly owned subsidiary, Bank of Smithtown, and its wholly owned subsidiary,
Bank of Smithtown Insurance Agency, Inc. All material inter-company transactions
have been eliminated.
During April 2003 and May 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 earnings per share and share data have been
retroactively adjusted to reflect the two-for-one stock split.
Nature of Operations
Smithtown Bancorp operates under a state bank charter and provides full banking
services, including trust and investment management services. As a state bank,
the Bank is subject to regulation by the State of New York Banking Department
and the Federal Reserve Board. The area served by Smithtown Bancorp is the north
central region of Suffolk County, New York, and services are provided at ten
branch offices.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions based on available information 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
loan losses and the valuation reserve for other real estate owned (OREO) could
differ from actual results.
Securities
The Bank evaluates its security 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:
o Securities to be Held to Maturity: Bonds, notes and debentures for
which the Bank has the positive intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premiums
and accretion of discounts, which are recognized in interest income
using the interest method over the period to maturity.
o Securities Available for Sale: Bonds, notes, debentures, and certain
equity securities are carried at estimated fair value.
Unrealized holding gains and losses, net of tax, arising on securities available
for sale are reported as a component of accumulated other comprehensive income.
Comprehensive income generally represents all changes in stockholders' equity
except those resulting from investments by and distributions to stockholders.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
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 loan losses be determined based on the present value of
28
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.
Loans are generally recorded at the principal amount outstanding net of unearned
discount and the allowance for loan losses. Unearned discounts are generally
amortized over the term of the loan using the interest method. Interest income
is reported on the interest method and includes amortization of net deferred
loan fees and costs over the loan term. Interest income on mortgage and
commercial loans is discontinued at the time the loan is 90 days delinquent
unless the loan is well secured and in process of collection. Consumer and
credit card loans are typically charged off no later than 180 days past due. In
all cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful. Management may
continue to accrue interest when it determines that a loan and related interest
are adequately secured and in the process of collection. 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.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
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 to 30 years
Leasehold improvements 5 to 40 years
Furniture and equipment 3 to 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
loan losses. Revenues and expenses associated with holding such assets are
recorded through operations when realized.
The valuation reserve account is established through a loss on other real estate
owned charged to expense. Properties held in 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.
Company-Owned Life Insurance
The Bancorp has purchased life insurance policies on certain key executives.
Company-owned life insurance is recorded at its cash surrender value, or the
amount that can be realized.
29
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance-sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet
customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay.
Such financial instruments are recorded when they are funded. Instruments, such
as standby letters of credit that are considered financial guarantees in
accordance with FASB Interpretation No. 45, are recorded at fair value.
Income Taxes
The tax provision as shown in the consolidated statements of income relates to
items of income and expense reflected in the statements after appropriate
deduction of tax-free income, principally, nontaxable interest from obligations
of state and political subdivisions. Deferred taxes are provided for timing
differences related to depreciation, loan loss provisions, postretirement
benefits, and investment securities, which are recognized for financial
accounting purposes in one period and for tax purposes in another period.
Trust Assets
Assets belonging to trust customers that are held in fiduciary or agency
capacity by the Bank are not included in the financial statements since they are
not assets of the Bank. Deposits held in fiduciary or agency capacity in the
normal course of business are reported in the applicable deposit categories of
the consolidated balance sheets.
Earnings Per Share
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Diluted earnings
per common share includes the dilutive effect of additional potential common
shares issuable under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the date of issue of the
financial statements. The Bancorp did not have any potentially dilutive shares
for any periods presented.
Statements of Cash Flows
For the purposes of the statements of cash flows, the Bank considers cash and
due from banks including deposits with other financial institutions under 90
days as cash and cash equivalents. Net cash flows are reported for loan and
deposit transactions.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is
probable and an amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a material effect on
the financial statements.
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 postretirement benefits other than pensions
be accrued over the period earned rather than expensed as incurred.
In addition, the Bank adopted the provisions of SFAS No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits, ("SFAS 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. The Bank adopted SFAS 132 as amended in 2003 for additional disclosures
about the assets, obligations, cash flows of defined benefit pension and
postretirement plans, as well as the expense recorded for such plans.
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
30
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.
Subordinated Debentures and Trust Preferred Securities
A trust formed by the Bancorp issued $11,000,000 of floating rate trust
preferred securities in 2003 as part of a pooled offering of such securities due
October 8, 2033. The securities bear interest at 3-month LIBOR plus 2.99%. The
Bancorp issued subordinated debentures to the trust in exchange for the proceeds
of the offering; the debentures and related debt issuance costs represent the
sole assets of the trust. The Bancorp may redeem the subordinated debentures, in
whole or in part, at a premium declining ratably to par on October 8, 2008.
Under new accounting guidance, FASB Interpretation No. 46, as revised in
December 2003, the trust is not consolidated with the Bancorp. Accordingly, the
Bancorp does not report the securities issued by the trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Bancorp
and held by the trust, as these are no longer eliminated in consolidation.
Recently Issued Accounting Pronouncements
During 2003, the Bancorp adopted FASB Statement 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities; FASB Statement 150, Accounting
for Certain Financial Instruments With Characteristics of Both Liabilities and
Equities; FASB Statement 132 (revised 2003), Employers' Disclosures About
Pensions and Other Postretirement Benefits; FASB Interpretation 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees; and FASB Interpretation
46, Consolidation of Variable Interest Entities. Adoption of the new standards
did not materially affect the Bancorp's operating results or financial
condition.
Reclassifications
Certain reclassifications related to direct loan origination fees and costs have
been made to the prior and current year's financial statements to conform to the
current period presentation. These reclassifications had no effect on previously
reported results of operations or retained earnings.
Note B. Securities
The carrying amounts of securities as shown in the consolidated balance sheets
and their fair values at December 31 were as follows:
--------Securities Available for Sale------
Estimated Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
December 31, 2003
Obligations of U.S. government agencies $25,094,497 $ 39,129 $(161,173)
Mortgage-backed securities 8,120,100 204,436 (7,441)
Obligations of state and political subdivisions 17,745,735 444,419 (74,466)
Other securities 6,324,238 279,405 --
----------- ---------- ---------
Total $57,284,570 $ 967,389 $(243,080)
=========== ========== =========
December 31, 2002
Obligations of U.S. government agencies $11,226,328 $ 49,815 $ --
Mortgage-backed securities 15,905,791 539,518 --
Obligations of state and political subdivisions 20,893,082 541,238 (41,865)
Other securities 7,222,864 177,259 (1,068)
----------- ---------- ---------
Total $55,248,065 $1,307,830 $ (42,933)
=========== ========== =========
31
--------------Securities Held to Maturity-------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
December 31, 2003
Mortgage-backed securities $ 293,055 $ 18,290 $ -- $ 311,345
Obligations of state and political subdivisions 1,700,323 79,664 -- 1,779,987
---------- -------- -------- ----------
Total $1,993,378 $ 97,954 $ -- $2,091,332
========== ======== ======== ==========
December 31, 2002
Mortgage-backed securities $ 579,622 $ 36,211 $ -- $ 615,833
Obligations of state and political subdivisions 2,381,890 120,921 -- 2,502,811
---------- -------- -------- ----------
Total $2,961,512 $157,132 $ -- $3,118,644
========== ======== ======== ==========
The following table presents the amortized costs of and estimated fair values of
debt securities by scheduled maturity at December 31, 2003:
Securities
Available Securities
--for Sale-- -----Held to Maturity-----
Estimated Amortized Estimated
Fair Value Costs Fair Value
---------- ----- ----------
Type and Maturity Grouping
Obligations of U.S. government agencies
After 5 years, but within 10 years $12,589,067 $ -- $ --
After 10 years 12,505,430 -- --
----------- ---------- ----------
Total obligations of U.S. government agencies $25,094,497 $ -- $ --
=========== ========== ==========
Mortgage-backed securities
After 1 year, but within 5 years $ 56,229 $ 293,055 $ 311,345
After 10 years 8,063,871 -- --
----------- ---------- ----------
Total mortgage-backed securities $ 8,120,100 $ 293,055 $ 311,345
=========== ========== ==========
Obligations of state and political subdivisions
Within 1 year $ 1,789,739 $ 281,810 $ 283,807
After 1 year, but within 5 years 5,893,036 1,358,513 1,435,098
After 5 years, but within 10 years 3,001,735 60,000 61,082
After 10 years 7,061,225 -- --
----------- ---------- ----------
Total obligations of state and political subdivisions $17,745,735 $1,700,323 $1,779,987
=========== ========== ==========
Other securities
After 1 years, but within 5 years $ 2,123,638 $ -- $ --
After 5 years, but within 10 years 2,050,600 -- --
After 10 years 2,150,000 -- --
----------- ---------- ----------
Total other securities $ 6,324,238 $ -- $ --
=========== ========== ==========
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.
Obligations of the U.S. government agencies, mortgage-backed securities, and
obligations of state and political subdivisions having an amortized cost of
$52,296,806 and an estimated fair value of $52,836,103 were pledged to secure
public deposits, treasury tax and loan deposits, repurchase agreements, and
advances. No municipality maintains deposits exceeding ten percent of
stockholders' equity.
32
The following table presents the sales of available for sale securities:
2003 2002 2001
----------- ----------- ------------
Proceeds $33,341,262 $14,912,361 $ 25,804,096
Gross gains 108,745 76,865 50,005
Gross losses -- -- (54,641)
As a member of the Federal Reserve Bank of New York, the Bank owns Federal
Reserve Bank stock with a book value of $404,876. The stock has no maturity and
has paid dividends at the rate of 6.00% for 2003 and 2002. The Bank is a member
of the Federal Home Loan Bank of New York and now holds $1,550,000 of its stock.
This stock also has no maturity and has paid average dividends of approximately
2.97% and 4.81% for 2003 and 2002. Stock of both the Federal Reserve Bank and
the Federal Home Loan Bank is restricted.
The Bank invested $50,000 in the Nassau-Suffolk Business Development Fund. This
consortium of banks provides loans to low-income homeowners.
Securities with unrealized losses at year-end 2003 are presented below by length
of time the securities have been in an unrealized loss position:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----- ---- ----- ---- ----- ----
Securities available for sale:
Obligations of U.S.
government agencies $14,351,669 $161,173 $ -- $ -- $14,351,669 $161,173
Mortgage-backed securities 2,026,798 7,441 -- -- 2,026,798 7,441
Obligations of state and
political subdivisions 4,457,123 58,814 931,750 15,652 5,388,873 74,466
----------- -------- -------- ------- ----------- --------
Total temporarily
impaired $20,835,590 $227,428 $931,750 $15,652 $21,767,340 $243,080
=========== ======== ======== ======= =========== ========
There were no unrealized losses on securities held to maturity at December 31,
2003. Unrealized losses on securities have not been recognized into income
because the bonds are of high credit quality (rated AA or higher), management
has the intent and ability to hold for the foreseeable future, and the decline
in fair value is largely due to increases in market interest rates. The fair
value is expected to recover as the bond(s) approach their maturity date and/or
market rates decline.
Note C. Loans
Loans as of December 31, consisted of the following:
2003 2002
------------ ------------
Real estate loans, construction $ 74,753,266 $ 63,773,877
Real estate loans, other
Commercial 259,126,430 179,090,184
Residential 84,872,476 85,000,952
Commercial and industrial loans 39,227,832 26,830,222
Loans to individuals for household, family and other personal expenditures 1,382,712 2,975,945
All other loans (including overdrafts) 314,837 500,297
------------ ------------
Total loans, gross 459,677,553 358,171,477
Less: unearned discount on loans 47,183 121,456
------------ ------------
Total loans (net of unearned discount) $459,630,370 $358,050,021
============ ============
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, 2003 and 2002 totaled approximately $462,878,000
and $360,864,000.
33
All loans considered impaired under SFAS 114 are included in the Bank's 90-day
or more past-due or nonaccrual categories. At December 31, 2003 and 2002, the
recorded investment in loans that are considered impaired under SFAS 114 was $0
and $1,898,569. The average recorded investment in impaired loans during the
twelve months ended December 31, 2003 and 2002 was $15,093 and $1,837,427. The
allowance on impaired loans at December 31, 2003, 2002 and 2001 totaled $0,
$209,964, and $137,447.
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 $0, $0, and $705 in interest
revenue in 2003, 2002, and 2001, on these impaired loans. Any cash receipts
would first be applied to accrued interest on impaired loans and then to the
principal balance outstanding.
At December 31, 2003 and 2002, loans with unpaid principal balances of $0 and
$1,711,860, on which the Bank is no longer accruing interest income, are
included in the total loans listed above. 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 $0 in 2003 and $133,018 in 2002. At
December 31, 2003 and 2002, $0 and $186,709, respectively, in loans were past
due ninety days or more and still accruing interest.
A summary of information concerning interest income on nonaccrual loans at
December 31 follows:
-----Nonaccrual-----
(in thousands) 2003 2002 2001
- -------------- ---- ---- ----
Gross interest income which would have been recorded
during the year under original contract terms $ 1 $133 $ 58
Gross interest income recorded during the year -- -- --
The Bank has granted loans to officers, directors, and principal stockholders of
the Bancorp and to their associates. Related party loans are made in the
ordinary course of business. The aggregate dollar amount of these loans was
$5,652,314 and $4,788,384 at December 31, 2003 and 2002. During 2003, $2,250,222
of new loans were made; repayments totaled $1,386,292.
Note D. Allowance for Loan Losses
Transactions in the allowance for the years ended December 31, 2003, 2002, and
2001 were as follows:
2003 2002 2001
---------- ---------- ----------
Balance, January 1 $3,945,593 $3,091,585 $2,500,724
Add:
Recoveries 131,364 51,864 84,279
Provision charged to current expense 763,113 1,020,000 990,000
---------- ---------- ----------
Total 4,840,070 4,163,449 3,575,003
Less: charge-offs 79,265 217,856 483,418
---------- ---------- ----------
Balance, December 31 $4,760,805 $3,945,593 $3,091,585
========== ========== ==========
34
Note E. Bank Premises and Equipment
Bank premises and equipment at cost as of December 31, 2003, and 2002 is as
follows:
2003 2002
----------- -----------
Land $ 301,404 $ 321,044
Bank premises 5,986,070 6,056,091
Leasehold improvements 4,199,028 3,272,691
Furniture and equipment 5,543,057 5,672,552
----------- -----------
Subtotal 16,029,559 15,322,378
Less: accumulated depreciation and amortization 5,741,832 6,542,196
----------- -----------
Total bank premises and equipment $10,287,727 $ 8,780,182
=========== ===========
Note F. Employee Benefits
The Bank established a 401(k) Defined Contribution Plan ("the Plan"). 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) contribution for 2003, 2002, and 2001 amounted to $100,900, $85,925, and
$78,862.
The Bank has established an Employee Stock Ownership Plan ("ESOP") for
substantially all of its employees. 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 $160,000, $135,000, and $130,000
related to the ESOP for the years ended December 31, 2003, 2002, and 2001.
During 2003, 2002, and 2001, the ESOP used the Bank's contribution to purchase
5,828, 4,512, and 8,160 shares of common stock at an average cost of $27.00,
$20.00, and $15.93 per share. The 2003 contribution represents 3% of eligible
compensation. As of December 31, 2003 and 2002, the ESOP held 129,128 and
135,258 allocated shares. There were no unallocated shares in the ESOP effective
December 31, 2003 and 2002. 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 ending December 31, 2003 and a statement of
the funded status as of December 31 of both years:
Retiree Health Benefits
2003 2002
--------- ---------
Reconciliation of benefit obligation
Obligation at January 1 $ 394,693 $ 434,499
Interest cost 24,293 27,796
Actuarial gain (16,282) (23,877)
Benefit payments (43,008) (43,725)
--------- ---------
Obligation at December 31 $ 359,696 $ 394,693
========= =========
Reconciliation of fair value of plan assets
Employer contributions $ 43,008 $ 43,725
Benefit payments (43,008) (43,725)
--------- ---------
Fair value of plan assets at December 31 $ -- $ --
========= =========
35
2003 2002
--------- ---------
Funded status
Funded status at December 31 $(359,696) $(394,693)
Unrecognized transition obligation 285,400 317,200
Unrecognized (gain) (116,526) (104,130)
--------- ---------
Net amount recognized, before additional minimum liability $(190,822) $(181,623)
========= =========
Projected Benefit Obligation
The following table provides the components of net periodic benefit cost for the
plans for years 2003 and 2002:
Retiree Health Benefits
2003 2002 2001
-------- -------- -------
Interest cost $ 24,293 $ 27,796 $33,794
Amortization of unrecognized transition obligation 31,800 31,800 31,800
Amortization of net (gain) (3,886) (2,276) --
-------- -------- -------
Net periodic benefit cost $ 52,207 $ 57,320 $65,594
======== ======== =======
The assumption used in the measurement of the Bancorp's benefit obligation are
shown in the following table:
Retiree Health Benefits
2003 2002 2001
---- ---- ----
Weighted average assumptions as of December 31
Discount 6.00% 6.50% 6.75%
Initial rate for health care costs 9.00% 9.50% 10.00%
Ultimate rate for health care costs 6.00% 6.00% 6.00%
Ultimate year of health care increase 2010 2010 2010
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% 1%
Increase Decrease
-------- --------
Effect on total of service and interest cost components net of periodic
postretirement health care benefit cost $ 105 $ (101)
Effect on health care component of the accumulated postretirement
benefit obligation 1,494 (1,440)
Contributions
Since the plan holds no assets, the Bank of Smithtown expects to contribute $0
to its plan in 2004. However, the plan is expected to pay for benefits as
detailed in the table below.
Expected Future Benefit Payments
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Benefits
--------
2004 $ 41,036
2005 40,168
2006 39,077
2007 35,587
2008 34,370
Years 2009-2013 144,028
36
Note G. Income Taxes
Federal and state income taxes payable as of December 31, 2003 and 2002 included
in other assets are as follows:
2003 2002
---------- ----------
Current $ 234,606 $ 318,626
Deferred 1,607,570 1,116,852
---------- ----------
Total income taxes $1,842,176 $1,435,478
========== ==========
Provisions for current income taxes for the years ended December 31, 2003, 2002,
and 2001 are as follows:
2003 2002 2001
----------- ---------- ----------
Federal:
Current $ 4,210,737 $3,063,980 $2,173,602
Deferred (184,856) 230,921 294,763
----------- ---------- ----------
Total federal 4,025,881 3,294,901 2,468,365
New York state:
Current 1,314,289 977,261 837,975
Deferred (78,815) 54,786 69,291
----------- ---------- ----------
Total New York state 1,235,474 1,032,047 907,266
----------- ---------- ----------
Total provision for income taxes $ 5,261,355 $4,326,948 $3,375,631
=========== ========== ==========
A reconciliation of the federal statutory tax rate to the required tax rate
based on income before income taxes is as follows:
---------2003--------- ---------2002--------- ---------2001---------
Tax Pretax Tax Pretax Tax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Federal statutory rate $ 4,882,394 34.00% $ 4,205,356 34.00% $ 3,212,284 34.00%
Increase (reduction) of taxes
resulting from:
Tax exempt interest (271,993) (1.89) (333,662) (2.70) (266,211) (2.82)
State income taxes net of
federal income tax benefit 815,413 5.61 681,151 5.51 598,796 6.34
Other (164,459) (1.08) (225,897) (1.83) (169,238) (1.79)
----------- ----- ----------- ----- ----------- -----
Total provision for
income taxes $ 5,261,355 36.64% $ 4,326,948 34.98% $ 3,375,631 35.73%
=========== ===== =========== ===== =========== =====
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 $1,607,570 and $1,116,852 as of the end
of 2003 and 2002.
The components of deferred tax assets and liabilities are as follows:
Deferred
Loan Loss SFAS SFAS Incentive
Provision Depreciation No. 106 No. 115 Plan Total
--------- ------------ ------- ------- ---- -----
December 31, 2003:
Federal deferred tax asset (liability) $1,482,721 $(212,666) $59,312 $(246,265) $155,510 $1,238,612
New York state deferred
tax asset (liability) 357,936 18,651 13,503 (57,944) 36,812 368,958
---------- --------- ------- --------- -------- ----------
Net deferred tax asset (liability) $1,840,657 $(194,015) $72,815 $(304,209) $192,322 $1,607,570
========== ========= ======= ========= ======== ==========
December 31, 2002:
Federal deferred tax asset (liability) $1,169,205 $ (33,377) $58,252 $(430,065) $105,941 $ 869,956
New York state deferred
tax asset (liability) 274,947 34,995 13,222 (101,191) 24,923 246,896
---------- --------- ------- --------- -------- ----------
Net deferred tax asset (liability) $1,444,152 $ 1,618 $71,474 $(531,256) $130,864 $1,116,852
========== ========= ======= ========= ======== ==========
37
Note H. Deposits
At December 31, 2003 and 2002, time deposits in principal amounts of $100,000 or
more were $55,177,025 and $38,053,598. Interest expense on such deposits for the
years ended December 31, 2003, 2002, and 2001 was $1,508,018, $1,313,528, and
$1,767,403.
The following table sets forth the remaining maturities of the Bank's time
deposits at December 31, 2003.
2004 $ 76,410,868
2005 30,658,847
2006 16,352,170
2007 18,262,531
2008 10,749,656
------------
Total $152,434,072
============
Deposits due to major stockholders, officers, directors, and their affiliates
aggregated $5,251,833 and $5,068,182 at December 31, 2003 and 2002 respectively.
Fair values of deposits were approximately $486,467,000 and $381,995,000 at
December 31, 2003 and 2002.
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 $21,486,814 and $17,492,456 at
December 31, 2003 and 2002.
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 73,261, 31,016 and 55,914
shares during 2003, 2002, and 2001 at a cost of $2,467,700, $813,795, and
$951,039.
Note J. Smithtown Bancorp (parent company only)
Smithtown Bancorp has one wholly owned subsidiary, Bank of Smithtown.
Balance Sheets
----As of December 31,----
------------------
2003 2002
----------- -----------
ASSETS
Cash and cash equivalents $ 787,723 $ 265,050
Prepaid expense 6,100 60,851
Investment in Bank of Smithtown 49,846,175 33,899,144
----------- -----------
Total assets $50,639,998 $34,225,045
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Cash dividends payable $ 267,681 $ 229,251
Due to Bank of Smithtown 57,234 51,508
Interest payable 136,612 --
Subordinated debt 11,000,000 --
----------- -----------
Total liabilities 11,461,527 280,759
Stockholders' equity 39,178,471 33,944,286
----------- -----------
Total liabilities and stockholders' equity $50,639,998 $34,225,045
=========== ===========
38
Statements of Income
-----------Year ended December 31,----------
-----------------------
2003 2002 2001
------------ ----------- -----------
Income
Dividends from Bank of Smithtown $ 2,383,175 $ 1,380,443 $ 1,955,480
Expenses 195,973 51,507 50,995
------------ ----------- -----------
Net income before equity in undistributed earnings of subsidiary 2,187,202 1,328,936 1,904,485
Equity in undistributed earnings of subsidiary 6,911,424 6,712,811 4,167,778
------------ ----------- -----------
Net income $ 9,098,626 $ 8,041,747 $ 6,072,263
============ =========== ===========
Statements of Cash Flows
-----------Year ended December 31,----------
-----------------------
2003 2002 2001
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 9,098,626 $ 8,041,747 $ 6,072,263
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net earnings of subsidiary (6,911,424) (6,712,811) (4,167,778)
Change in other assets (286,249) (43,350) --
Change in other liabilities 140,565 34,007 --
------------ ----------- -----------
Net cash provided by operating activities 2,041,518 1,319,592 1,904,485
Cash flows from financing activities:
Proceeds from issuance of long-term debt 11,000,000 -- --
Dividends paid (1,044,745) (891,296) (793,902)
Purchases of treasury stock (2,467,700) (813,795) (951,039)
------------ ----------- -----------
Net cash provided by (used in) financing activities 7,487,555 (1,705,091) (1,744,941)
Cash flows from investing activities:
Capital contribution to Bank subsidiary (9,006,400) -- --
------------ ----------- -----------
Net cash used in investing activities (9,006,400) -- --
Net increase (decrease) in cash and cash equivalents 522,673 (385,499) 159,544
Cash and cash equivalents, beginning of year 265,050 650,549 491,005
------------ ----------- -----------
Cash and cash equivalents, end of year $ 787,723 $ 265,050 $ 650,549
============ =========== ===========
Note K. Commitments and Contingent Liabilities
As of December 31, 2003, the minimum rental commitments under non-cancelable
operating leases for premises and equipment with initial terms in excess of one
year are as follows:
2004 $ 351,602
2005 302,371
2006 263,861
2007 245,234
2008 222,370
Subsequent to 2008 1,329,482
-----------
Total $ 2,714,920
===========
A number of leases include escalation provisions relating to real estate taxes
and expenses. Individual office rental expenses range from $1,000 to $7,000 per
month with escalation provisions tied to the consumer price index or in some
offices with a straight line annual increase ranging from 3% to 6%.
Rental expenses for all leases on premises and equipment amounted to $624,971 in
2003, $473,752 in 2002, and $394,463 in 2001.
39
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, 2003 was $846,624.
The Bank has agreements with certain executives which would become effective in
the event of a change in control of the Bank's stock. The agreement provides, in
essence, that the executive would continue to be employed for a period of five
years from the date of the change in control in a position with duties and
authority commensurate with the duties being performed and the authority being
exercised by the executives immediately prior to the change in control. It
provides that their compensation and benefits would be commensurate with those
of other executives in similar positions at the Bank or in similar positions
with the organization that has acquired control of the Bank. In any event, the
executives' compensation and benefits would not be less than they were
immediately prior to the change in control.
The agreement further provides that if the executives' employment were
terminated by the Bank subsequent to a change in control, for any reason other
than cause, disability, or death, the executives would continue to receive the
same compensation and benefits they would have received had they remained
employed for a period of five years. The agreement between the Bank and the
Chief Executive Officer also provides that at any time within one year after the
change in control, if the Chief Executive Officer elects to terminate his
employment with the Bank for any reason, he will receive a lump sum severance
allowance equivalent to three years compensation and benefits at the rate as
payable to him immediately prior to the change in control.
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.
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.
Securities
For securities held to maturity and available for sale, fair values are
estimated based on quoted market prices or dealer quotes.
Loans
The fair value of fixed-rate loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings. For variable rate loans, the carrying amount is a
reasonable estimate of fair value. The fair value of mortgage loans held for
sale approximates cost based on current estimated disposition values.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable at the reporting date. The fair values of fixed
maturity certificates of deposit are estimated using the rates currently offered
for deposits of similar remaining maturities.
Other Borrowings
The fair values of other borrowings are estimated based on quoted market prices
or dealer quotes.
40
Note N. Other Borrowings
Federal Home Loan Bank of New York
The Bank has available to it various lines of credit from the Federal Home Loan
Bank of New York ("FHLBNY"). The borrowing limit at the FHLBNY is calculated on
25% of the Bank's total average assets and is subject to specific collateral
requirements.
The Bank has multiple advances with the Federal Home Loan Bank (FHLB) with
maturities through 2009 and rates ranging from 1.10% to 4.935% at December 31,
2003. Two $5 million advances with coupon rates of 4.69% and 4.935% maturing in
2011 and 2009 are callable in 2004. The remaining $21 million of FHLB advances
are non-callable. Scheduled repayments and maturities of advances from the
Federal Home Loan Bank are as follows:
Weighted
Average Rate
2003 2003 2002
---- ---- ----
Maturing in 2003 --% $ -- $ 7,000,000
Maturing in 2004 1.35 11,000,000 21,000,000
Maturing in 2005 2.89 5,000,000 5,000,000
Maturing in 2007 3.67 5,000,000 5,000,000
Maturing in 2009 4.94 5,000,000 --
Maturing in 2011 4.69 5,000,000 --
----------- -----------
3.09 $31,000,000 $38,000,000
=========== ===========
The borrowings are secured by securities issued by the Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation ("FHLMC") and the Government National
Mortgage Association ("GNMA"). The maturity dates of these securities range from
April 2005 to August 2031, with coupon interest rates paying between 8.50% and
3.13%. Total estimated fair value of the securities at December 31, 2003 was
$22,275,576. 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 approximately 20 years. The average interest rate is approximately
6.55%. Total estimated fair value of these residential mortgages at December 31,
2003 was approximately $68,110,000.
The average balance of other borrowings for 2003 was $40,992,000, and the
maximum outstanding amount at any month end was $44,300,000.
The average balance of other borrowings for 2002 was $45,614,246, and the
maximum outstanding amount at any month end was $49,000,000.
At December 31, 2003 and 2002, the estimated fair value of other borrowings
approximated cost.
J.P. Morgan Chase
At December 31, 2003 and 2002, the amount borrowed against the Bank's $1,500,000
unsecured overnight line of credit from J.P. Morgan Chase was zero.
M&T Bank
At December 31, 2003 and 2002, the amount borrowed against the Bank's $5,000,000
and $4,000,000 unsecured overnight line of credit from M&T Bank was zero.
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.
Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit. The face amount for
these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when
they are funded. Instruments, such as standby letters of credit, that are
considered financial guarantees in accordance with FASB Interpretation No. 45
are recorded at fair value. The Bank uses the same credit policies in making
these commitments as it does for on-balance sheet instruments.
41
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,
2003, the Bank's total commitments to extend credit were $10,428,781 at fixed
rates and $91,122,000 at variable rates. Fixed rate commitments have rates
ranging from 5.375% to 18.00%. 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 44 performance standby letters of credit
totaling $9,213,430 as of December 31, 2003. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained by
the Bank upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but generally includes residential and
income-producing properties.
Note P. Regulatory Matters
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 Bancorp's
capital remains extremely strong by all regulatory guidelines. The Bancorp's
only activity is ownership of the Bank and, therefore, its capital, capital
ratios, and minimum required levels of capital are materially the same as the
Bank's. The following is a listing of the Bancorp's required and actual capital
ratios.
As of December 31, 2003, the most recent notification from the corresponding
regulatory agency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Banks must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the Bank's
categories.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2003
Total capital to risk-
weighted assets
Consolidated $54,814 11.87% $36,939 8.0% $46,174 10.0%
Bank 53,823 11.66 36,928 8.0 46,160 10.0
Tier 1 (core) capital to risk-
weighted assets
Consolidated 49,646 10.75 18,469 4.0 27,704 6.0
Bank 48,655 10.54 18,464 4.0 27,696 6.0
Tier 1 (core) capital to
average assets
Consolidated 49,646 9.09 21,858 4.0 27,322 5.0
Bank 48,655 8.86 21,962 4.0 27,452 5.0
December 31, 2002
Total capital to risk-
weighted assets
Consolidated 37,346 10.64 28,071 8.0 35,089 10.0
Bank 37,076 10.56 28,077 8.0 35,096 10.0
Tier 1 (core) capital to risk-
weighted assets
Consolidated 33,100 9.43 14,036 4.0 21,054 6.0
Bank 32,830 9.35 14,038 4.0 21,058 6.0
Tier 1 (core) capital to
average assets
Consolidated 33,100 7.35 18,024 4.0 22,530 5.0
Bank 32,830 7.19 18,273 4.0 22,842 5.0
Note Q. Deferred Incentive Plan for Executive Officers and Directors
The Bank has adopted a nontax qualified retirement plan for certain executives
and directors. While the Plan is to be funded from the general assets of the
Bancorp, 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
42
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 years 2003 and 2002 were $104,213 and $97,111. 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. At December
31, 2003 and 2002, the combined value of these insurance policies was
$16,288,124 and $10,890,822.
Note R. Quarterly Results of Operations (Unaudited)
--------Year Ended December 31, 2003-------
----------------------------
First Second Third Fourth
Thousands, Except Per Share Data) Quarter* Quarter* Quarter Quarter
--------------------------------- -------- -------- ------- -------
Interest income $6,917 $7,443 $7,612 $8,198
Interest expense 1,846 1,888 1,835 2,122
------ ------ ------ ------
Net interest income 5,071 5,555 5,777 6,076
Provision for loan losses 80 270 250 163
------ ------ ------ ------
Net interest income after provision for loan losses 4,991 5,285 5,527 5,913
Other non-interest income 948 1,083 1,066 981
Other operating expenses 2,828 2,831 2,809 2,966
------ ------ ------ ------
Income before income taxes 3,111 3,537 3,784 3,928
Provision for income taxes 1,122 1,304 1,374 1,462
------ ------ ------ ------
Net income $1,989 $2,233 $2,410 $2,466
====== ====== ====== ======
Earnings per share $ 0.66 $ 0.74 $ 0.80 $ 0.82
* Certain reclassifications have been made as discussed in Note A resulting in
a decrease in interest income of $83,000 for the first quarter and an increase
in interest income of $130,000 for the second quarter. Other non-interest
income decreased by $291,000 and $554,000 for the first and second quarters,
and other operating expenses decreased by $374,000 and $424,000 for the first
and second quarters.
--------Year Ended December 31, 2002-------
----------------------------
First Second Third Fourth
Thousands, Except Per Share Data) Quarter* Quarter* Quarter Quarter
--------------------------------- -------- -------- ------- -------
Interest income $6,478 $6,761 $7,105 $7,215
Interest expense 1,751 1,780 1,915 1,964
------ ------ ------ ------
Net interest income 4,727 4,981 5,190 5,251
Provision for loan losses 210 250 330 230
------ ------ ------ ------
Net interest income after provision for loan losses 4,517 4,731 4,860 5,021
Other non-interest income 962 1,102 1,014 972
Other operating expenses 2,522 2,660 2,929 2,699
------ ------ ------ ------
Income before income taxes 2,957 3,173 2,945 3,294
Provision for income taxes 1,059 1,109 1,005 1,154
------ ------ ------ ------
Net income $1,898 $2,064 $1,940 $2,140
====== ====== ====== ======
Earnings per share $ 0.62 $ 0.67 $ 0.63 $ 0.70
* Certain reclassifications have been made as discussed in Note A resulting in
increases in interest income of $88,000, decreases in other non-interest
income of $354,000 and decreases in other operating expenses of $266,000 for
the first, second and third quarters.
43
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
See Form 8-K filed on September 3, 2003.
Item 9a: Controls and Procedures
The Bancorp has established a system of controls and other procedures designed
to ensure that information required to be disclosed in its periodic reports
filed under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. These disclosure controls
and procedures have been evaluated under the direction of the Bancorp's Chief
Executive Officer and Chief Financial Officer within the last 90 days. Based on
such evaluations, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures are effective. There have
been no significant changes in the Bancorp's system of internal control over
financial reporting during the quarter that has materially affected, or is
reasonably likely to materially affect, the Bancorp's internal control over
financial reporting.
Part III
Item 10: Directors and Executive Officers
Pages 2 through 4, inclusive, and pages 10 through 14 of the Registrant's Proxy
Statement dated March 16, 2004 are incorporated herein by reference.
Code of Ethics. During 2003, the Bancorp approved a written code of ethics based
upon the standards set forth under Item 406 of Regulation S-K of the Securities
Exchange Act. The code of ethics applies to all of the Bancorp's directors,
officers, and employees. A copy of the Bancorp's code of ethics is being filed
with the SEC as Exhibit 14 to this Annual Report on Form 10-K.
Item 11: Executive Compensation
Page 13 of the Registrant's Proxy Statement dated March 16, 2004 are
incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Pages 10 through 11, inclusive, of the Registrant's Proxy Statement dated March
16, 2004 are incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Page 14 of the Registrant's Proxy Statement dated March 16, 2004 is incorporated
herein by reference.
Page 35 of the Registrant's Annual Report to Stockholders for the year ended
December 31, 2003.
Item 14: Principal Accounting Fees and Services
Pages 7 through 8 inclusive, of the Registrant's Proxy Statement dated March 16,
2004 are incorporated herein by reference.
44
Part IV
Item 15: Exhibits, Financial Statements Schedules, and Reports on Form 8-K
INDEX OF EXHIBITS
Exhibit No. Description
----------- -----------
3a Articles of Incorporation*
3b By-Laws*
4 By-Laws Page Nos. 2, 11, 12, 13, 14
Articles of Incorporation Page No. 2*
9 No voting trust agreements*
10 No material contracts
13 Annual Report to Shareholders for the year ended December 31,
2003
14 Code of ethics
16 Reference to Item 8 in 10-K
18 No change in accounting principles
19 Reference to Page 1 in 10-K
21 Bank of Smithtown
Smithtown, New York 11787
24 None
31 Certifications required under section 302 of the
Sarbanes-Oxley Act of 2002
32 Certifications required under section 906 of the
Sarbanes-Oxley Act of 2002
99 Independent Auditor's Report filed on Form 10-K for the year
ended December 31, 2002
* 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.
Reports on Form 8-K.
(i) Current Report on Form 8-K (Items 12 and 7), filed on November 5,
2003.
(ii) Current Report on Form 8-K (Item 12), filed on December 12, 2003.
45
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.
SMITHTOWN BANCORP, INC.
----------------------------------------
Registrant
Date: 3/5/04 /s/ BRADLEY E. ROCK
----------------------------------------
Bradley E. Rock, Chairman, President
and Chief Executive Officer
Date: 3/5/04 /s/ ANITA M. FLOREK
----------------------------------------
Anita M. Florek, Treasurer and 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 Date 3/5/04
---------------------------------
Bradley E. Rock, Chairman,
President and Chief Executive
Officer
/s/ AUGUSTA KEMPER Date 3/5/04
---------------------------------
Augusta Kemper, Director
/s/ PATRICK A. GIVEN Date 3/5/04
---------------------------------
Patrick A. Given, Director
/S/ MANNY SCHWARTZ Date 3/5/04
---------------------------------
Manny Schwartz, Director
/s/ EDITH HODGKINSON Date 3/5/04
---------------------------------
Edith Hodgkinson, Director
/s/ BARRY M. SEIGERMAN Date 3/5/04
---------------------------------
Barry M. Seigerman, Director
/s/ ROBERT W. SCHERDEL Date 3/5/04
---------------------------------
Robert W. Scherdel, Director
/s/ PATRICIA C. DELANEY Date 3/5/04
---------------------------------
Patricia C. Delaney, Director
/s/ SANFORD C. SCHEMAN Date 3/5/04
---------------------------------
Sanford C. Scheman, Director
46