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, 2004
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)
100 Motor Parkway, Suite 160, Hauppauge, NY 11788-5138
(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, $0.01 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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
Class of Common Stock Number of Shares Outstanding
as of March 8, 2005
- --------------------------- --------------------------------
$0.01 Par Value 5,923,726
The aggregate market value of the Registrant's common stock held by
nonaffiliates as of June 30, 2004 was approximately $211,855,473.
DOCUMENTS INCORPORATED BY REFERENCE
1) Portions of the Proxy Statement relating to the annual meeting of
stockholders to be held on April 21, 2005 are incorporated herein by
reference into Part III.
1
Part I
Item 1: Description of Business
Smithtown Bancorp, Inc. (the "Registrant" or "Bancorp" )is a New York State
registered bank holding company with one wholly owned subsidiary, Bank of
Smithtown (the "Bank"). The Registrant was organized as a New York business
corporation and was incorporated under the laws of New York State in 1984. At
the direction of the Board of Directors, pursuant to a plan of reorganization,
the former shareholders of the Bank became the shareholders of the Bancorp.
Since commencing business in 1984, the Bancorp has functioned primarily as
holder of all of the Bank's common stock. In October 1999, the Bank and
Seigerman Mulvey Co., Inc. entered into a joint venture, SMTB Financial Group,
LLC, for the purpose of selling insurance products and services and to offer
financial investment services to employees and existing and future customers of
the Bank. In April 2001, the Bank established a new corporation, Bank of
Smithtown Insurance Agency, for the purpose of accepting commission payments
from Essex National Securities and Essex National Insurance Agency. These
commissions were generated through a program called "Investors Marketplace." The
program, which was designed by a large group of community bankers, offers tax
deferred annuities and mutual funds. In August 2004, the Bank purchased all of
the stock of Seigerman Mulvey Co., Inc. (the "Agency"). As a wholly-owned
subsidiary of the Bank, conducting business in East Setauket, NY, the Agency
provides business and personal insurance products as well as financial products
and services. Following the Bank's acquisition of the Agency, SMTB Financial
Group, LLC, ceased operation.
At present, the Registrant does not own or lease any property and has no paid
employees. The Registrant uses the Bank's office space and employees without
separate payment. Corporate headquarters are located at 100 Motor Parkway,
Hauppauge, New York 11788.
The Bank engages in a complete range of commercial and consumer banking services
as well as trust services, including demand, savings and time deposits accepted
from consumers, businesses and municipalities located primarily within Suffolk
and Nassau Counties, Long Island, NY. These deposits, along with funds generated
from operations and other borrowings are invested in 1.) residential and
commercial mortgages, 2.) construction and land loans, 3.) secured and unsecured
commercial loans, 4.) secured and unsecured consumer loans, 4.) U.S. government
agency securities, 5.) obligations of state and political subdivisions and 6.)
FNMA, FHLMC, and FHLB mortgage-backed securities. The Bank also offers merchant
credit and debit card processing, safe deposit boxes, online banking including
bill pay, telephone banking, automated teller machines, and individual
retirement accounts. Through its financial services subsidiary, Bank of
Smithtown Insurance Agency, the Bank offers tax deferred annuities and mutual
funds. Through its insurance subsidiary, Seigerman Mulvey Co., Inc., the Bank
offers a full line of commercial and personal insurance products, as well as
financial services. For the years ended December 31, 2004, 2003 and 2002,
interest income on loans has been the major contributor to income, providing
83.10%, 79.96% and 76.47% of total revenue. As the Bank services a wide range of
customers, there is no dependence upon any single customer, the loss of which
would have a material adverse effect on its business.
The Bank employs a total of 168 full-time equivalent individuals on a full and
part time basis, including the employees of its subsidiaries.
The Bank's market area has been primarily limited to the north shore of Suffolk
County, Long Island, NY. Although some of its customers live within Nassau
County, the majority of its consumer and business deposit customers reside
between Northport and Wading River. All of the 11 current branches of the Bank
are located within this region. As part of its external growth plans to provide
banking services to a wider range of customers, the Bank has leased office space
in Bohemia and Port Washington, with branch openings scheduled for the second
and third quarters of 2005. Within the Bank's primary market area, the majority
of businesses are considered small businesses, and industry tends to be
concentrated within health services, technology companies, insurance companies,
real estate businesses, and small professional services and restaurants. The
Bank's deposit and lending business on Long Island are not subject to any
seasonal fluctuations in the local economy. During the past three years, the
Bank has also provided commercial and residential real estate lending services
within the five boroughs of New York City. Seigerman Mulvey Co., Inc. supplies
insurance services to a wide range of customers, a majority of whom also reside
within the Bank's primary market area, thus adding to the synergy between the
two businesses. Insurance products are also provided nationally by the Agency,
but to a much lesser extent.
All of the business lines engaged in by the Bank and its subsidiaries are of a
highly competitive nature. The Bank faces competitive pressures from community
banks located within its market area, as well as regional and super-regional
banks in the same area. These competitive pressures affect the pricing of Bank
deposit and loan products, as well as the costs of providing Bank services.
Competition results from other commercial banks, savings banks, credit unions
and financial service providers such as investment and insurance companies.
The Registrant, the Bank and its subsidiaries report their income on a
consolidated basis using the accrual method of accounting and are subject to
federal and state income taxes. In general, banks are subject to federal income
tax in the same manner as other
2
corporations. However, gains and losses from the sale of available for sale
securities are treated as ordinary income, rather than capital gains or losses.
Additionally, the Bancorp can exclude 100% of the dividend income it receives
from its subsidiaries as they are all members of the same affiliated group. The
Bank is subject to New York State Franchise Tax on Banking Corporations based on
certain criteria. The taxation of income is similar to federal taxable income
subject to certain modifications.
Regulation and Supervision
The Bank maintains a New York State charter and as such is subject to
supervision, examination and regulation by the New York State Banking
Department. The Bank is also a member of the Federal Reserve System and
therefore is also subject to regulation, examination and supervision by the
Federal Reserve Bank of New York. Smithtown Bancorp, Inc., the holding company
controlling the Bank, is subject to the Bank Company Holding Act of 1956, as
amended ("BHCA"), and as such is subject to the rules and regulations under the
BHCA. The statutory rules and regulations enforced by the Bank's regulatory
agencies relate to deposit insurance, minimum capital requirements, allowable
investments, lending limits, payments of dividends, and various consumer
protection laws. Any change in such laws and regulations, whether by the New
York State Banking Department, the Federal Reserve Bank, the FDIC or through
legislation, could have a material adverse impact on the Bank and the Bancorp
and their operations and shareholders. The Registrant is additionally under the
supervision and regulation of the Securities and Exchange Commission ("SEC").
Access to any materials filed with the Securities and Exchange Commission is
available at the SEC Public Reference Room, 450 Fifth Street, NW, Washington, DC
20549. Information on the operation of the Public Reference Room is available by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site,
http://www.sec.gov, that contains reports, proxy and information statements
filed by the Registrant.
Other Information
The Bank's internet address is www.bankofsmithtown.com. The Annual Report on
Form 10-K, quarterly reports on Form 10-Q and amendments to those reports filed
or furnished pursuant to Section 13 or 15(d) of the Exchange Act are made
available free of charge at the Bank's website as soon as reasonably practicable
after electronic filing has been completed. Requests for these documents may
also be directed to Smithtown Bancorp, Inc., 100 Motor Parkway, Suite 160,
Hauppauge, NY 11788, (631) 360-9300.
The Company has adopted a Code of Ethics, which applies to all directors,
officers and employees. This Code is distributed to and signed by all directors
and staff members annually, and is maintained in the Bank's Human Resource
Department. The Code contains Whistleblower provisions adopted by the Registrant
and its subsidiaries. Security holders may request a copy of the Code of Ethics
by contacting Smithtown Bancorp, Inc., 100 Motor Parkway, Suite 160, Hauppauge
NY 11788 (631) 360-9398, Deborah McElroy, Director of Human Resources.
Item 2: Description of Properties
Corporate headquarters of the Registrant are located at 100 Motor Parkway, Suite
160, Hauppauge, NY 11788. At present, the Registrant itself owns no physical
properties. The Bank owns in fee the following locations:
Smithtown Office Hauppauge Office
1 East Main Street 548 Route 111
Smithtown, New York 11787 Hauppauge, New York 11788
Trust 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 agreements:
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
3
Wading River Office Miller Place Office
6241 Route 25A 347 Route 25A
Wading River, New York 11792 Miller Place, New York 11764
Corporate Headquarters Office and Branch
100 Motor Parkway, Suites 160 and 118
Hauppauge, New York 11788
The Bank has signed leases at 61 Old Shore Road, Port Washington, New York, and
3460 Veterans Highway, Bohemia, New York for branch office space. These branches
are expected to open during the second and third quarter of 2005, respectively.
Item 3: Legal Proceedings
In the opinion of the Registrant and its counsel, there are no material
proceedings pending in which the Registrant, Bank or any of its subsidiaries 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, the Bank and its subsidiaries. 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, 2004 to a vote of
the Registrant's stockholders through the solicitation of proxies or otherwise.
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
May 2004 and April 2003 two-for-one stock splits.
----------Per Share-----------
------------------------------
Cash
Dividend
High Low Declared
---- --- --------
2004
First quarter $ 33.84 $ 20.47 $ 0.050
Second quarter 40.54 30.90 0.050
Third quarter 40.60 24.86 0.050
Fourth quarter 34.75 24.96 0.050
-------
Total cash dividends declared $ 0.200
=======
2003
First quarter $ 15.20 $ 12.61 $ 0.045
Second quarter 14.89 13.91 0.045
Third quarter 17.29 14.24 0.045
Fourth quarter 21.61 17.04 0.045
-------
Total cash dividends declared $ 0.180
=======
At December 31, 2004, the Bancorp had approximately 642 stockholders of record,
not including the number of persons or entities holding stock in nominee or
street name through various banks and brokers and its stock is traded on NASDAQ
under the symbol "SMTB."
4
Item 6: Selected Financial Data
Consolidated Balance Sheets
-------------------As of December 31,---------------
------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands)
Total cash and cash equivalents $ 9,633 $ 14,765 $ 10,692 $ 10,952 $ 8,954
Securities available for sale 51,759 57,285 55,248 62,719 52,359
Securities held to maturity 1,584 1,993 2,962 4,591 5,334
Restricted investment securities 5,555 2,162 2,634 2,174 3,601
Loans, net 565,181 454,870 354,104 278,648 225,819
Cash value of bank-owned life insurance 16,942 16,288 10,891 9,759 9,249
Total assets 677,003 565,085 451,803 380,221 314,581
Total deposits 514,314 481,331 377,920 311,942 257,159
Securities sold under agreements to repurchase -- -- -- 4,000 5,000
Other borrowings 99,500 31,000 38,000 35,750 28,500
Subordinated debt 11,000 11,000 -- -- --
Total stockholders' equity 46,943 39,178 33,944 26,999 22,392
Consolidated Statements of Income
----------------Year ended December 31,-------------
-----------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands)
Total interest income $ 36,530 $ 30,170 $ 27,560 $ 25,224 $ 23,005
Total interest expense 10,347 7,691 7,410 9,389 9,444
-------- -------- -------- -------- --------
Net interest income 26,183 22,479 20,150 15,835 13,561
Provision for loan losses 196 763 1,020 990 540
-------- -------- -------- -------- --------
Net interest income after provision for 25,987 21,716 19,130 14,845 13,021
loan losses
Total other noninterest income 4,520 4,079 4,052 3,629 3,431
Total other operating expenses 14,669 11,435 10,813 9,026 8,710
-------- -------- -------- -------- --------
Income before income taxes 15,838 14,360 12,369 9,448 7,742
Provision for income taxes 5,827 5,261 4,327 3,376 2,792
-------- -------- -------- -------- --------
Net income $ 10,011 $ 9,099 $ 8,042 $ 6,072 $ 4,950
======== ======== ======== ======== ========
5
Supplementary Information
(in thousands, except per share data)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Per share data:
Net income $ 1.69 $ 1.51 $ 1.31 $ 0.98 $ 0.78
Stockholders' equity 7.92 6.59 5.57 4.39 3.58
Dividends declared:
Cash dividends per share 0.20 0.18 0.15 0.13 0.12
Cash dividends declared 1,186 1,083 920 805 766
Year-end data:
Total trust assets 89,724 86,734 74,161 80,709 90,646
Number of shares outstanding 5,924 5,948 6,095 6,157 6,269
Net income to:
Total income 24.39% 26.57% 25.44% 21.05% 18.72%
Average total assets 1.58 1.80 1.89 1.74 1.66
Average stockholders' equity 23.37 24.74 26.31 24.59 23.56
Average stockholders' equity to average 6.75 7.28 7.19 7.07 7.06
assets
Dividend payout ratio 11.86 11.90 11.45 13.26 15.47
Item 7: Management's Discussion and Analysis of Financial Plan and Results of
Operations
Private Securities Litigation Reform Act Safe Harbor Statement
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," "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 and Exchange Commission.
Summary
Smithtown Bancorp, Inc., is a holding company formed in 1984, engaged primarily
in commercial banking through its wholly owned subsidiary, Bank of Smithtown.
The Bank offers a full range of consumer and commercial banking products and
services through its eleven branch system located on the north shore of Suffolk
County, Long Island, NY. The Bank has been in existence since 1910, and has
maintained its mission to operate as an independent community bank for the
purpose of enhancing shareholder value while meeting the financial needs of the
communities it serves, and providing meaningful opportunities for its employees.
The Bancorp's results of operations are significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates; government policies; changes in accounting standards; and actions of
regulatory agencies.
Continuing to provide the products and services that meet the full needs of
customers throughout their business and personal lifecycles has remained the
number one goal for achieving success during 2004. Increasing the Bank's
presence on Long Island through a wider branch network with its own brand of
personal banking, acquiring a successful, respected insurance agency so as to
provide a fuller range of personal and business insurance products and financial
services, and maintaining and acquiring the highest level of professionals to
provide these products and services are a few of the strategies followed during
2004 to ensure continued
6
success. The Bank and its employees' continued commitment to its community have
also helped solidify the Bank's strong banking reputation within its servicing
region.
Success in performance during 2004 produced the following results:
o Increased net interest income with a strong 4.47% net interest
margin
o 24.03% loan growth with outstanding credit quality
o 10.03% growth in net income with 23.37% ROE
o 19.81% asset growth with 1.58% ROA
o Efficiency ratio of 48.89% along with additional branch presence,
new corporate headquarters, and acquisition of Seigerman Mulvey Co.,
Inc. insurance agency
o Fourth two-for-one stock split in the last six years, with market
value growth in the Bancorp's shares of over 46%
Net interest margin during 2004 remained strong at 4.47%, although margin
compression from 4.88% during 2003 was a result of the slightly liability
sensitive position of the Bank within the first year in a slowly rising rate
environment. The Bank's balance sheet exhibits a strong asset sensitive
position, which should react favorably with a continued rising rate environment,
as increasing loan rates outpace increasing deposit costs. Margin compression
during 2004 was also the result of the increased competitive pressures from
other banks attempting to gain market share, some of which were new entrants
into the Long Island region. The sometimes "irrational" rates paid by
competitors, above wholesale market rates, caused the Bank to turn to the
wholesale markets to fund some of its loan growth. As a result, deposit growth
was not as strong as it has been in the past, with only a 6.85% increase for the
year. As much of this "irrational" pricing has already abated during 2005, this
trend of less than usual deposit growth has ended. From December 31, 2004
through January 31, 2005 , the Bank's deposits have grown by 9.84%. As we enter
2005, management expects competitive pressures from other banks to continue,
further compressing net interest margin. It was this expectation of lowered net
interest income in 2005, and therefore the need to increase non-interest
sensitive income, along with the Bank's goal of providing products and services
along all customer lifecycles that were the driving forces behind the Seigerman
Mulvey Co., Inc. acquisition on August 31, 2004. During the last four months of
2004, the Agency provided $405,714 of income before taxes to the Bank.
Asset quality remained very high during 2004. For the second consecutive year,
there were no non-performing loans at year end. Management has been able to
achieve these results by employing 1.) conservative loan to value ratios, 2.)
sound underwriting practices, 3.) industry and geographic diversification within
the portfolio, 4.) complete documentation requirements prior to closing, 5.)
multiple sources of repayment, 6.) strong loan review processes and 7.)
outstanding collection efforts when necessary.
For the year ended December 31, 2004, net gains from sales of available for sale
securities totaled $436,846, an increase of 301.7% over 2003, and 468.3% over
2002. These sales were transacted in order to re-channel funds from lower
yielding investment securities into higher yielding loans, as well as to take
advantage of gains within the portfolio. Active balance sheet management by a
committee of executive and senior officers strives to achieve maximum
profitability within acceptable risk limits.
Effective capital management during 2004 resulted in the eighth consecutive year
of ROE above 20%. During the year, the Bank repurchased 24,748 shares of its own
stock, paid quarterly dividends at an 11.57% ratio, and declared a two-for-one
stock split while still maintaining a well capitalized rating by all guidelines.
Although asset growth has outpaced earnings growth during 2004, capital remains
at a level sufficient to support planned growth.
A strong efficiency ratio of 48.89% was achieved during 2004 despite the 19.81%
asset growth, the additional expense associated with branch openings in October
2004 and January 2005, the opening of the new corporate headquarters which
included the move and construction of a new data center, and the acquisition of
the insurance agency with its staff of 23 employees. Although the efficiency
ratio has increased from 2003 to 2004 from 42.97% to 48.89%, management fully
expected a small increase resulting from the continued growth of the Bancorp.
Efficiencies are expected to develop from both the single location of all
support staff of the Bank and further integration of the insurance agency into
the Bank.
Each of the above listed elements is described in an in-depth analysis of our
financial results and the accompanying consolidated financial statements and
footnotes.
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.
7
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, through its Asset Quality Committee, comprised of several
members of executive management as well as the chief collection officer,
evaluates the adequacy of the allowance on a quarterly basis. Adjustments are
made at this time to a level deemed adequate by the Committee, based on its risk
evaluation of the portfolio in its entirety as well as in specific loan details.
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
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 Financial Accounting Standard (SFAS) No.
114, Accounting by Creditors for Impairment of a Loan, an Amendment of SFAS
Statements No. 5 and 15, and SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, an Amendment of SFAS
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. At December 31, 2004, management believes the allowance for loan
losses has been established and maintained at a level adequate to reflect the
probable incurred losses in the Bank's loan portfolio.
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 Bancorp 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,
2004 were limited to $25,146,086, which represents the Bank's 2004 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, and
secondarily for interest payments on the subordinated debt. 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. The goal of asset liability management is the combination
of maintaining adequate liquidity levels without
8
sacrificing earnings. The Bank's objective in asset liability management is to
match the maturity of its assets and liabilities in a way that takes advantage
of the current and anticipated rate environment. Asset liability management is a
primary function of management and is reviewed on an ongoing basis. The Chief
Executive Officer, all Executive Vice Presidents and the Comptroller serve on
the Asset Liability Management Committee. Historically, the Bank has relied on
its deposit base as its principal source of funding. As competitive pricing of
deposits during the fourth quarter of 2004 was often "irrational" and higher
than the rates available through wholesale funding arrangements, management made
the decision to use these wholesale sources to temporarily provide the funding
for new loan originations. Through normal attrition some existing deposits were
allowed to roll off the balance sheet and were replaced temporarily with
wholesale funds. New deposits were not aggressively bid upon, and hence were not
added to the current base. At December 31, 2004, the Bank had the ability to
borrow on aggregate lines of credit of $7,000,000 with unaffiliated
correspondent banks on an unsecured basis. Of this $7,000,000, the Bank had
$5,500,000 remaining for further use. The Bank also has the ability, as a member
of the Federal Home Loan Bank ("FHLB") system, to borrow against unencumbered
residential and commercial mortgages owned by the Bank. As of December 31, 2004,
$35,768,189 of these funds were available yet for borrowing.
The higher than normal use of overnight and long term borrowings during the
fourth quarter resulted in lower interest expense than would have been incurred
if the Bank had responded by paying much higher rates for some deposits. This
decision was closely monitored by the Committee, and was well within the
guidelines of safety. From December 31, 2004 to January 31, 2005, total deposits
have increased 9.84% as a result of certificates of deposit campaigns and
inflows of money market balances. These new deposits are priced at levels that
are more in line with normal competitive pressures. Overnight borrowings have
decreased to $0 at month end January 2005, and excess short term liquidity has
been invested in overnight federal funds.
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, 2004 and 2003. In the following
maturity tables, 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. The last table presented represents management's expectations
regarding the estimated maturity of interest bearing assets and liabilities.
This table has been derived based on internal data and management's assumptions,
and not necessarily the contractual terms for repayment or redemption. The
amounts shown below could also be significantly affected by external factors
such as changes in prepayment assumptions, changes in market interest rates that
are not matched by the Bancorp, early withdrawals of deposits and competition.
Therefore, this information does not reflect the effect of repricing rights or
the impact of repricing on interest income or expense. The following significant
assumptions were used in developing the following tables: a.) time deposits
reflect contractual maturities, b.) money market accounts are rate sensitive and
accordingly, a higher percentage of the accounts have been included as repricing
within the first five years and c.) savings and NOW accounts are not as rate
sensitive to withdrawal as money market accounts so a significant percentage of
these accounts are reflected in the more than 1 to 5 years category. These
assumptions are based on management's historical analysis of market interest
rates and levels of the Bancorp's deposits over the past ten years.
9
------------------------As of December 31, 2004------------------------
-----------------------
Expected Expected Expected
Maturity Between Maturity Between Maturity Between
1/1/05 - 12/31/05 1/1/06 - 12/31/06 1/1/07 - 12/31/07
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
(in thousands) Balance Rate Balance Rate Balance Rate
- -------------- ------- ---- ------- ---- ------- ----
Interest-earning assets
Investments
Available for sale (fair value) $ 2,219 4.52% $ 1,742 3.79% $ 8,811 2.70%
Held to maturity (book value) 457 5.01 691 5.12 146 5.26
Federal funds sold 1,052 2.20 -- -- -- --
Loans:
Fixed rate
Real estate loans, other
Commercial 11 7.50 56 9.50 90 7.00
Residential 19 10.00 425 7.02 23 8.49
Commercial and industrial
loans 334 7.27 359 8.35 1,124 6.80
Loans to individuals for
household, family, and
other personal expenditures 59 12.19 135 11.42 392 11.30
Variable rate
Real estate loans, construction 120,204 6.80 -- -- -- --
Real estate loans, other
Commercial 17,712 7.14 30,869 7.22 34,413 7.28
Residential 24,865 5.46 5,379 6.40 2,248 7.23
Commercial and industrial
loans 35,509 6.52 -- -- -- --
Loans to individuals for
household, family, and
other personal expenditures 941 6.45 -- -- -- --
--------- --------- ---------
Total interest-earning assets $ 203,382 $ 39,656 $ 47,247
========= ========= =========
Interest-bearing liabilities
Deposits
Savings $ 11,051 0.42 $ 11,051 0.42 $ 11,051 0.42
Money market 82,439 1.22 82,439 1.22 -- --
NOW 6,486 0.41 6,487 0.41 6,487 0.41
Time deposits of $100,000 or more 26,459 3.22 15,777 3.13 11,092 4.30
Other time deposits 32,911 3.21 32,983 2.92 17,026 3.85
Other borrowings 37,500 2.45 12,000 2.19 20,000 3.17
Subordinated debt -- -- -- -- -- --
--------- --------- ---------
Total interest-bearing liabilities $ 196,846 $ 160,737 $ 65,656
========= ========= =========
------------------------As of December 31, 2004------------------------
-----------------------
Expected Expected
Maturity Between Maturity Between Expected
1/1/08 - 12/31/08 1/1/09 - 12/31/09 Maturity Thereafter
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
(in thousands) Balance Rate Balance Rate Balance Rate
- -------------- ------- ---- ------- ---- ------- ----
Interest-earning assets
Investments
Available for sale (fair value) $ 1,815 3.15% $ 778 3.85% $ 36,394 4.71%
Held to maturity (book value) 230 6.15 20 3.75 40 3.75
Federal funds sold -- -- -- -- -- --
Loans:
Fixed rate
Real estate loans, other
Commercial -- -- 4,224 7.70 15,186 6.90
Residential -- -- 58 8.39 24,755 6.27
Commercial and industrial
loans 1,550 5.84 691 7.73 1,591 7.45
Loans to individuals for
household, family, and
other personal expenditures 136 9.35 9 9.75 223 17.74
Variable rate
Real estate loans, construction -- -- -- -- -- --
Real estate loans, other
Commercial 92,513 6.58 88,617 6.56 18,590 6.89
Residential 7,739 5.05 32,696 5.80 7,095 6.29
Commercial and industrial
loans -- -- -- -- -- --
Loans to individuals for
household, family, and
other personal expenditures -- -- -- -- -- --
--------- --------- ---------
Total interest-earning assets $ 103,983 $ 127,093 $ 103,874
========= ========= =========
Interest-bearing liabilities
Deposits
Savings $ 11,052 0.42 $ 11,052 0.42 $ -- --
Money market -- -- -- -- -- --
NOW 6,487 0.41 6,487 0.41 -- --
Time deposits of $100,000 or more 4,498 3.84 8,771 4.07 -- --
Other time deposits 6,454 3.83 15,307 4.10 -- --
Other borrowings 10,000 4.07 15,000 4.43 5,000 4.69
Subordinated debt -- -- -- -- 11,000 5.06
--------- --------- ---------
Total interest-bearing liabilities $ 38,491 $ 56,617 $ 16,000
========= ========= =========
10
------------------------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
- -------------- ------- ---- ------- ---- ------- ----
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 -- --
Subordinated debt -- -- -- -- -- --
--------- --------- ---------
Total interest-bearing liabilities $ 181,629 $ 129,480 $ 34,892
========= ========= =========
------------------------As of December 31, 2003------------------------
-----------------------
Expected Expected
Maturity Between Maturity Between Expected
1/1/07 - 12/31/07 1/1/08 - 12/31/08 Maturity Thereafter
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
(in thousands) Balance Rate Balance Rate Balance Rate
- -------------- ------- ---- ------- ---- ------- ----
Interest-earning assets
Investments
Available for sale (fair value) $ 456 3.33% $ 2,241 5.85% $ 28,355 5.70%
Held to maturity (book value) 146 5.26 65 5.27 352 6.03
Federal funds sold -- -- -- -- -- --
Loans:
Fixed rate
Real estate loans, construction -- -- -- -- -- --
Real estate loans, other
Commercial 131 7.00 -- -- 22,220 7.17
Residential 32 8.46 29 8.37 27,287 6.44
Commercial and industrial
loans 1,215 6.89 1,808 5.89 1,556 6.96
Loans to individuals for
household, family, and
other personal expenditures 236 11.23 165 10.15 205 17.58
Variable rate
Real estate loans, construction -- -- -- -- -- --
Real estate loans, other
Commercial 45,742 7.56 103,477 6.61 33,800 7.01
Residential 2,201 7.05 11,297 5.05 3,419 5.46
Commercial and industrial
loans 882 4.92 1,276 6.00 4,448 7.00
Loans to individuals for
household, family, and
other personal expenditures -- -- -- -- 29 8.00
--------- --------- ---------
Total interest-earning assets $ 51,041 $ 120,358 $ 121,671
========= ========= =========
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
Subordinated debt -- -- -- -- 11,000 4.13
--------- --------- ---------
Total interest-bearing liabilities $ 41,794 $ 29,292 $ 21,000
========= ========= =========
11
Over Over Over
Three Six One
(in thousands) Months Months Total Year
Three Through Through Within Through
Months Six One One Five
Revolving Or less Months Year Year Years
--------- ------- ------ ---- ---- -----
Assets:
Investments $ -- $ 2,144 $ 2,129 $ 6,168 $ 10,441 $ 18,421
Federal funds sold 1,052 -- -- -- 1,052 --
Loans:
Installment 1,841 25,380 3,469 2,937 33,627 5,610
Real estate and
commercial 150,110 7,561 2,533 5,182 165,386 305,975
Cash and due from
banks 51 -- -- -- 51 --
Fixed assets -- -- -- -- -- --
Other assets -- -- -- -- -- --
Allowance for loan
losses -- -- -- -- -- --
Unearned discount -- -- -- -- -- --
Deferred loan fees -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
$ 153,054 $ 35,085 $ 8,131 $ 14,287 $ 210,557 $ 330,006
========= ========= ========= ========= ========= =========
Total
Liabilities and Stockholders'
Equity:
Savings $ -- $ 2,763 $ 2,763 $ 5,525 $ 11,051 $ 22,103
Money market -- 20,610 20,610 41,219 82,439 82,439
NOW -- 1,622 1,622 3,243 6,487 12,974
Time deposits of
$100,000 or more -- 15,532 2,668 8,236 26,436 40,161
Other time deposits -- 10,335 5,657 15,998 31,990 72,691
Demand -- -- -- -- -- --
Other borrowings 32,500 -- -- 5,000 37,500 57,000
Subordinated debt -- -- -- -- -- --
Other liabilities -- -- -- -- -- --
Stockholders' equity -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
$ 32,500 $ 50,862 $ 33,320 $ 79,221 $ 195,903 $ 287,368
========= ========= ========= ========= ========= =========
Total
Interest-rate sensitivity gap per
period $ 120,554 $ (15,777) $ (25,189) $ (64,934) $ 14,654 $ 42,638
========= ========= ========= ========= ========= =========
Interest rate sensitivity gap to
total assets (%) 17.81% (2.33)% (3.72)% (9.59)% 2.16% 6.30%
Cumulative interest rate
sensitivity gap $ 120,554 $ 104,777 $ 79,588 $ 14,654 $ 14,654 $ 57,292
========= ========= ========= ========= ========= =========
Cumulative interest rate
sensitivity gap to total
assets (%) 17.81% 15.48% 11.76% 2.16% 2.16% 8.46%
(in thousands)
Over
Five
Years Other Total
----- ----- -----
Assets:
Investments $ 24,480 $ -- $ 53,342
Federal funds sold -- -- 1,052
Loans:
Installment 2,134 -- 41,371
Real estate and
commercial 58,107 -- 529,468
Cash and due from
banks -- 8,531 8,582
Fixed assets -- 15,366 15,366
Other assets -- 33,480 33,480
Allowance for loan
losses -- (4,912) (4,912)
Unearned discount -- (17) (17)
Deferred loan fees -- (729) (729)
--------- --------- ---------
$ 84,721 $ 51,719 $ 677,003
========= ========= =========
Total
Liabilities and Stockholders'
Equity:
Savings $ 22,103 $ -- $ 55,257
Money market -- -- 164,878
NOW 12,973 -- 32,434
Time deposits of
$100,000 or more -- -- 66,597
Other time deposits -- -- 104,681
Demand -- 90,466 90,466
Other borrowings 5,000 -- 99,500
Subordinated debt 11,000 -- 11,000
Other liabilities -- 5,247 5,247
Stockholders' equity -- 46,943 46,943
--------- --------- ---------
$ 51,076 $ 142,656 $ 677,003
========= ========= =========
Total
Interest-rate sensitivity gap per
period $ 33,645 $ (90,937) $ --
========= ========= =========
Interest rate sensitivity gap to
total assets (%) 4.97% --% --%
Cumulative interest rate
sensitivity gap $ 90,937 $ -- $ --
========= ========= =========
Cumulative interest rate
sensitivity gap to total
assets (%) 13.43% --% --%
12
Analysis of Net Interest Income
Net interest income, the primary contributor to earnings, represents the
difference between income on interest earning assets and expense on interest
bearing liabilities. Net interest income depends upon the volume of interest
earning assets and interest bearing liabilities and the interest rates earned or
paid on them.
The following table sets forth certain information relating to the Bancorp's
average consolidated statements of financial condition and its consolidated
statements of income for the years indicated and reflects the average yield on
assets and average cost of liabilities for the years indicated. Such yields and
costs are derived by dividing income or expense by the average balance of assets
or liabilities, respectively, for the years shown. Average balances are derived
from daily average balances and include non-performing loans, if any. The yields
and costs include fees, which are considered adjustments to yields.
---------------2004-------------- ---------------2003--------------
--------------------------------- ---------------------------------
(in thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
--------- --------- --------- --------- --------- ---------
ASSETS
Interest-earning assets:
Investment securities:
Taxable $ 37,910 $ 1,504 3.97% $ 39,168 $ 1,697 4.33%
Nontaxable 18,030 1,040 5.77 20,455 1,306 6.39
--------- --------- --------- ---------
Total investment securities 55,940 2,544 4.55 59,623 3,003 5.04
Total loans 521,642 34,113 6.54 396,946 27,386 6.90
Federal funds sold 13,054 140 1.07 9,021 91 1.01
Other interest-earning assets 3,223 86 2.67 2,460 68 2.72
--------- --------- --------- ---------
Total interest-earning assets 593,859 36,883 6.21 468,050 30,548 6.53
Noninterest-earning assets 40,952 36,849
--------- ---------
Total assets $ 634,811 $ 504,899
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities:
Savings deposits (including NOW) $ 88,784 $ 367 0.41% $ 78,802 $ 297 0.38%
Money market accounts 179,498 2,230 1.24 145,191 1,680 1.16
Time deposits 167,086 5,677 3.40 114,634 4,210 3.67
--------- --------- --------- ---------
Total interest-bearing deposits 435,368 8,274 1.90 338,627 6,187 1.83
Securities sold under agreements
to repurchase -- -- -- -- -- --
Other borrowings 49,794 1,587 3.19 38,039 1,367 3.59
Subordinated debt 11,000 485 4.41 2,953 137 4.64
--------- --------- --------- ---------
Total interest-bearing liabilities 496,162 10,346 2.08 379,619 7,691 2.03
--------- ---------
Noninterest-bearing liabilities:
Demand deposits 92,724 85,770
Other liabilities 3,085 2,728
--------- ---------
Total liabilities 591,971 468,117
Stockholders' equity 42,840 36,782
--------- ---------
Total liabilities and stockholders'
equity $ 634,811 $ 504,899
========= =========
Net interest income/interest rate spread $ 26,537 4.13% $ 22,857 4.50%
========= ======== ========= ========
Net earning assets/net yield on average
interest-earning assets $ 97,697 4.47% $ 88,431 4.88%
========= ======== ========= =========
--------------2002-------------
-------------------------------
(in thousands) Average Average
Balance Interest Rate
------- -------- ----
ASSETS
Interest-earning assets:
Investment securities:
Taxable $ 38,311 $ 2,085 5.44%
Nontaxable 23,937 1,614 6.74
--------- ---------
Total investment securities 62,248 3,699 5.94
Total loans 324,247 24,175 7.46
Federal funds sold 7,321 114 1.56
Other interest-earning assets 2,579 122 4.73
--------- ---------
Total interest-earning assets 396,395 28,110 7.09
Noninterest-earning assets 28,786
---------
Total assets $ 425,181
=========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing liabilities:
Savings deposits (including NOW) $ 64,905 $ 310 0.48%
Money market accounts 116,773 1,796 1.54
Time deposits 92,457 3,550 3.84
--------- --------- ---------
Total interest-bearing deposits 274,135 5,656 2.06
Securities sold under agreements
to repurchase 3,156 78 2.47
Other borrowings 45,673 1,676 3.67
Subordinated debt -- -- --
--------- ---------
Total interest-bearing liabilities 322,964 7,410 2.29
---------
Noninterest-bearing liabilities:
Demand deposits 70,342
Other liabilities 1,309
---------
Total liabilities 394,615
Stockholders' equity 30,566
---------
Total liabilities and stockholders'
equity $ 425,181
=========
Net interest income/interest rate spread $ 20,700 4.80%
========= =========
Net earning assets/net yield on average
interest-earning assets $ 73,431 5.22%
========= =========
13
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changes in rates
and volumes. The following table illustrates the extent to which changes in
interest rates and in volume of average interest earning assets and interest
bearing liabilities have affected the Bank's interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to 1.) changes attributable to changes in volume (changes in volume
multiplied by prior rate); 2.) changes attributable to changes in rate (changes
in rates multiplied by prior volume); and 3.) the net changes. For purposes of
this table, changes, which are not due solely to volume or rate changes, have
been allocated to these categories based on the respective percentage changes in
average volume and rate. Due to the numerous simultaneous volume and rate
changes during the period analyzed, it is not possible to precisely allocate
changes between volume and rates. In addition, average earning assets include
non-accrual loans (if any).
Rate Volume Relationships of Interest Margin on Earning Assets
-----------2004/2003------------- -----------2003/2002-------------
--------- ---------
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 $ (62) $ (132) $ (194) $ 46 $ (434) $ (388)
Nontaxable (147) (119) (266) (226) (82) (308)
-------- -------- -------- -------- -------- --------
Total investment securities (209) (251) (460) (180) (516) (696)
Total loans 8,379 (1,652) 6,727 5,117 (1,906) 3,211
Federal funds sold 42 7 49 23 (46) (23)
Other interest-earning assets 20 (1) 19 (7) (47) (54)
-------- -------- -------- -------- -------- --------
Total interest-earning assets 8,232 (1,897) 6,335 4,953 (2,515) 2,438
Interest expense:
Savings deposits (including NOW) 39 31 70 59 (72) (13)
Money market accounts 411 139 550 383 (499) (116)
Time deposits 1,854 (387) 1,467 820 (160) 660
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 2,304 (217) 2,087 1,262 (731) 531
Securities sold under agreements to repurchase -- -- -- (78) -- (78)
Other borrowings 355 (7) 348 (172) -- (172)
Subordinated debt 385 (165) 220 -- -- --
Total interest-bearing liabilities 3,044 (389) 2,655 1,012 (731) 281
-------- -------- -------- -------- -------- --------
Changes in interest margin $ 5,188 $ (1,508) $ 3,680 $ 3,941 $ (1,784) $ 2,157
======== ======== ======== ======== ======== ========
Financial Condition
Total assets of the Bancorp at December 31, 2004 were $677,002,881 as compared
to $565,085,400 at December 31, 2003, representing an increase of 19.81%. This
increase was primarily the result of an increased loan volume of $110,462,757,
representing a 24.03% increase. The second largest growth on the balance sheet
was in bank premises and equipment which grew by 49.36% , a result of the
investment in two new branch offices and new corporate headquarters.
14
Loans
The Bank's loan portfolio consists primarily of real estate loans secured by
residential and commercial properties located within the Bank's market area as
well as within the five boroughs of New York City. Total loan growth during 2004
was $110,462,757 or 24.03%. The largest areas of growth were in construction,
commercial and residential mortgage loans, which together grew by $109,034,435.
Real estate loans comprise 92.46% of the Bank's loan portfolio, but this
concentration has been mitigated by industry and geographical diversification.
Loan stratification analysis is performed annually to ensure this
diversification. Sound underwriting standards, in addition to lending on many
owner occupied properties, also reduce the overall risk of this portfolio.
The following table sets forth the major classifications of loans:
--------2004---------- ---------2003--------- ---------2002--------
---- ---- ----
Real estate loans,
construction $120,204,220 21.06% $ 74,753,266 16.26% $ 63,773,877 17.81%
Real estate loans, other:
Commercial 302,280,777 52.95 259,126,430 56.37 179,090,184 50.00
Residential 105,301,610 18.45 84,872,476 18.46 85,000,952 23.73
Commercial and industrial
loans 40,968,206 7.18 39,227,832 8.53 26,830,222 7.49
Loans to individuals for
household family and
other personal expenditures 1,893,893 0.33 1,382,712 0.30 2,975,945 0.83
All other loans (including
overdrafts) 190,165 0.03 314,837 0.08 500,297 0.14
------------ ------ ------------ ------ ------------ ------
Total loans $570,838,871 100.0% $459,677,553 100.00% $358,171,477 100.00%
============ ====== ============ ====== ============ ======
---------2001--------- ---------2000---------
---- ----
Real estate loans,
construction $ 35,187,562 12.47% $ 23,736,992 10.36%
Real estate loans, other:
Commercial 145,255,133 51.49 114,200,418 49.85
Residential 73,902,211 26.20 55,362,167 24.17
Commercial and industrial
loans 24,650,724 8.74 31,605,659 13.80
Loans to individuals for
household family and
other personal expenditures 2,821,630 1.00 3,954,201 1.73
All other loans (including
overdrafts) 272,863 0.10 203,223 0.09
------------ ------ ------------ ------
Total loans $282,090,123 100.0% $229,062,660 100.00%
============ ====== ============ ======
At year end December 31, 2004, non-performing loans remain unchanged from year
end 2003 at $0. Loans past due 30-89 days amounted to $61,166 at year end 2004.
Internally classified loans at December 31, 2004 aggregate to $8,054,655, all
centered in Substandard assets. No loans were classified as doubtful or loss.
While this reflects a $7,089,385 increase in classified assets since year end
2003, the majority of this increase is concentrated in one loan. Collateral on
this $7,399,307 loan consists of a leasehold mortgage on two six story office
buildings located on Madison Avenue, New York City appraised at $11,800,000 as
of November 2003. While this loan did not fall into the 30-89 day delinquency
status as of year end, the borrower remains in technical default under his
lease. Long term prospects for recouping all funds due to the Bank are good, but
in the short term there could be substantial out of pocket expenses required of
the Bank, should the borrower not complete the work required to cure the
technical defaults, or discontinue making payments. The Bank holds enough funds
in escrow to clear the technical defaults. The same borrower is also a principal
in two additional New York City properties for which the Bank holds mortgages.
Both of these properties are under contracts of sale due to close during the
second quarter of 2005. If these sales close, they will provide the Bank with a
significant level of funds, net of mortgage payments, to cure any technical
defaults that may still exist under the initial loan and leasehold agreement.
These two additional loans have been internally classified on the Bank's "watch
list." Special mention loans have also increased as of December 31, 2004 through
the addition of one real estate loan in the amount of $2,895,713. This loan is
for a property located on Long Island owned by a corporation owned by a director
of the Bancorp. The loan was internally classified as Special Mention due to
insufficient cash flows and operating losses that fell below the annual debt
servicing requirements. The mortgage is current and has evidenced a satisfactory
repayment history from its inception in July 2002. The guarantor maintains
sufficient liquid assets to service the debt throughout 2005, if required. The
increase in internally classified substandard and special mention loans is of
concern to management but satisfactory resolution of both loans is expected.
15
The fourth quarter of 2004 marked the first time in the Bank's history that loan
balances exceeded deposit balances. Although the growth in deposits was replaced
by a lower cost form of loan funding, the Bank's focus for 2005 will be the
acquisition of core deposits. This focus has already resulted in the elimination
of overnight borrowings as of January 31, 2005. Loan growth for 2005 is expected
to remain strong. Demand on Long Island for mortgages has remained very strong,
as the scarcity of available land to build new homes has increased. The prices
of homes on Long Island have also increased as a result of this scarcity of
available land for development. Although the prime rate and federal funds rate
increased during 2004, longer term mortgage rates increased only nominally. If
this trend continues in 2005, demand will remain strong. Indications of a
strengthening economy in 2004 and 2005, continued rising rates, and three new
branch locations in new target areas of Long Island should provide opportunities
for the Bank to attract new funds, both short and long term. These new deposits
will provide the funding for new loans.
The following table shows the maturities of loans (excluding real estate
mortgages and installment loans) outstanding as of December 31, 2004:
After One
Within Year but After
One Within Five Five
Fixed rate loans Year Years Years Total
---- ----- ----- -----
Commercial (and all other loans including overdrafts) $ 406,409 $ 3,844,473 $ 1,591,002 $ 5,841,884
Variable rate loans
Commercial (and all other loans including overdrafts) $ 20,480,750 $ 10,948,659 $ 3,887,077 $ 35,316,486
Real estate-construction 79,534,333 40,669,887 -- 120,204,220
------------ ------------ ------------ ------------
100,015,083 51,618,546 3,887,077 155,520,706
Total $100,421,492 $ 55,463,019 $ 5,478,079 $161,362,590
============ ============ ============ ============
Analysis of the Allowance for Loan Losses
The allowance for loan loss account at year-end 2004 was $4,912,394 compared to
$4,760,805 at year-end 2003. The change in the allowance account is the result
of net recoveries of $19,089 and a provision for loan losses of $196,297 and a
reclassification to the reserve for contingent liabilities of $63,797. Based on
specific reserves for internally classified loans and multiple factors including
historical loss experience and current economic conditions, management feels the
level of the allowance for loan losses provides adequate coverage.
Currently, the Bank's reserve ratio (the allowance for loan losses as a
percentage of end of period loans) is 0.86%, a decrease from 1.04% at year end
2003. During 2004, management made the decision to lower its overall level of
reserves due to the quality of the portfolio, its low risk composition due to a
high percentage of secured lending and lending to owner occupied properties, its
lack of delinquency, and its low historical loss and charge-off experience. The
Bank's reserve coverage ratio is within the range of peer group bank reserve
ratios.
The allowance for loan losses is an amount that management currently believes
will be adequate to absorb probable incurred 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.
16
The following tables describe the activity in the allowance for loan losses
account for the following years ended:
(in thousands) 2004 2003 2002 2001 2000
-------------- ---- ---- ---- ---- ----
Allowance for loan losses at beginning of period $ 4,761 $ 3,946 $ 3,092 $ 2,501 $ 2,252
Loans charged off:
Commercial 159 77 200 455 375
Real estate 22 -- -- -- --
Consumer -- 2 18 28 21
--------- -------- --------- --------- ---------
Total loans charged off 181 79 218 483 396
Recoveries on amounts previously charged off:
Commercial 186 109 19 30 62
Real estate 4 14 26 27 10
Consumer 10 8 7 27 33
--------- -------- --------- --------- ---------
Total recoveries 200 131 52 84 105
--------- -------- --------- --------- ---------
Net (charge-offs) recoveries 19 52 (166) (399) (291)
Reclassification to allowance for contingent liabilities (64) -- -- -- --
Current year's provision for loan losses 196 763 1,020 990 540
--------- -------- --------- --------- ---------
Allowance for loan losses at end of period $ 4,912 $ 4,761 $ 3,946 $ 3,092 $ 2,501
========= ======== ========= ========= =========
Total loans:
Average loans, net $ 516,715 $392,638 $ 320,727 $ 252,312 $ 202,679
End of period (net of unearned discount) 570,093 459,630 358,050 281,739 228,320
Ratios: 2004 2003 2002 2001 2000
- ------- ---- ---- ---- ---- ----
Net (charge-offs) recoveries to:
Average loans 0.004% 0.01% (0.05)% (0.16)% (0.14)%
Loans at end of period 0.003 0.01 (0.05) (0.14) (0.13)
Allowance for loan losses 0.39 1.09 (4.21) (12.91) (11.64)
Provision for loan losses 9.69 6.82 (16.27) (40.32) (53.89)
Last year's charge-off to this year's recovery 39.50 165.65 928.85 471.43 351.43
Allowance for loan losses at year end to:
Average loans (net of unearned discount) 0.94 1.21 1.22 1.21 1.22
End of period loans (net of unearned discount) 0.86 1.04 1.10 1.10 1.10
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.
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
% % % % %
Loans Loans Loans Loans Loans
To To To To To
(in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
- -------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial $ 474 7.2% $ 924 8.5% $ 749 7.5% $ 556 8.7% $ 624 13.8%
Real Estate 3,812 92.4 3,354 91.1 2,692 91.5 1,997 90.2 1,306 84.4
Consumer and other 6 0.4 25 .4 20 1.0 31 1.1 53 1.8
Unallocated 620 -- 458 -- 485 -- 508 -- 518 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $4,912 100.0% $4,761 100.0% $3,946 100.0% $3,092 100.0% $2,501 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
17
The following table shows the Bank's nonaccrual and contractually past due
loans:
-----------------As of December 31,-----------------
------------------
(in thousands) 2004 2003 2002 2001 2000
- -------------- ---- ---- ---- ---- ----
Accruing loans past due 90 days or more
$ -- $ -- $ 187 $ -- $ 446
Nonaccrual loans -- -- 1,712 631 918
-------- -------- -------- -------- --------
Total
$ -- $ -- $ 1,899 $ 631 $ 1,364
======== ======== ======== ======== ========
For 2004 and 2003, the difference between interest income on nonaccrual loans
and income that would have been recognized at original contractual rates and
terms was $0.
Securities
Total securities decreased by $5,935,490 from year end 2003 to year end 2004.
During the 2004 year, called securities of principal totaling $19,000,000 and
sales of available for sale securities of principal totaling $13,092,753 were
transacted. The funds from these called and sold securities were primarily
re-channeled into higher paying loans. Various investments were made during the
year into U.S. Government Agency securities, municipal securities and $1,000,000
into the Community Reinvestment Fund as part of the Bank's Community
Reinvestment Act requirement.
The following schedule presents the estimated fair value for securities
available for sale and the amortized cost for investment securities held to
maturity as detailed in the Bancorp's balance sheets as of December 31, 2004,
2003, and 2002.
2004 2003 2002
---- ---- ----
Securities available for sale
Obligations of U.S. government agencies $30,192,467 $25,094,497 $11,226,328
Mortgage-backed securities 4,975,557 8,120,100 15,905,791
Obligations of state and political subdivisions 13,585,584 17,745,735 20,893,082
Other securities 3,005,000 6,324,238 7,222,864
----------- ----------- -----------
Total securities available for sale $51,758,608 $57,284,570 $55,248,065
=========== =========== ===========
Securities held to maturity
Mortgage-backed securities $ 165,388 $ 293,055 $ 579,622
Obligations of state and political subdivisions 1,418,462 1,700,323 2,381,890
----------- ----------- -----------
Total securities held to maturity $ 1,583,850 $ 1,993,378 $ 2,961,512
=========== =========== ===========
18
The following table presents the amortized costs and estimated fair values of
debt securities by contractual maturity at December 31, 2004:
Weighted Weighted
Estimated Average Average
Amortized Cost Fair Value Yield Maturity
-------------- ---------- ----- --------
Investment securities available for sale
Obligations of U.S. government agencies:
After 1 year, but within 5 years $ 8,945,445 $ 8,924,062 2.68%
After 5 years, but within 10 years 19,960,552 19,765,891 4.62
After 10 years 1,503,784 1,502,514 5.17
----------- -----------
Total obligations of U.S. government agencies 30,409,781 30,192,467 4.07 6.29
Mortgage-backed securities:
After 10 years 4,830,827 4,975,557 4.51
----------- -----------
Total mortgage-backed securities 4,830,827 4,975,557 4.51 25.13
Obligations of state and political subdivisions:
Within 1 year 2,210,188 2,218,861 4.70
After 1 year, but within 5 years 4,201,123 4,221,774 3.51
After 5 years, but within 10 years 2,613,652 2,649,269 4.17
After 10 years 4,414,172 4,495,680 4.95
----------- -----------
Total obligations of state and political subdivisions 13,439,135 13,585,584 4.30 8.00
Other securities:
After 10 years 3,000,000 3,005,000 5.89
----------- -----------
Total other securities 3,000,000 3,005,000 5.89 37.84
Total investment securities available for sale $51,679,743 $51,758,608 4.25% 9.79
=========== =========== ====
Investment securities held to maturity
Mortgage-backed securities:
After 1 year, but within 5 years $ 165,388 $ 174,799 6.50%
----------- -----------
Total mortgage-backed securities 165,388 174,799 6.50 3.42
Obligations of state and political subdivisions:
Within 1 year 456,712 462,485 5.01
After 1 year, but within 5 years 921,750 953,803 5.13
After 5 years, but within 10 years 40,000 39,912 3.75
----------- -----------
Total obligations of state and political subdivisions 1,418,462 1,456,200 5.05 1.43
----------- -----------
Total investment securities held to maturity $ 1,583,850 $ 1,630,999 5.20% 1.63
=========== =========== ====
Obligations of U.S. government agencies, mortgage-backed securities, and
obligations of state and political subdivisions having an amortized cost of
$42,171,633 and an estimated fair value of $42,297,843 were pledged to secure
public deposits, treasury tax and loan deposits and advances. No municipality
maintains deposits exceeding ten percent of stockholders' equity.
Deposits & Other Borrowings
Total deposits as of December 31, 2004 were $514,314,262 as compared to
$481,331,022 at December 31, 2003, representing an increase of $32,983,240. The
largest area of growth within the portfolio was in time deposits which increased
by $18,844,239 or 12.36%. Demand deposits grew by $4,861,932 or 5.68%. Money
market accounts increased by 9.49%, primarily a result of increased municipal
and commercial deposits. The average cost of interest-bearing deposits during
2004 and 2003 was 1.90% and 1.83%, respectively. The reasons for the increased
cost were the higher interest rate environment combined with the higher
percentage of time and money market accounts in 2004. Total deposits grew by
6.85% from year end 2003 to 2004, as compared to 27.36% from year end 2002 to
year end 2003. During the first six months of 2004, deposit growth was more
rapid. During the fourth quarter wholesale funding became available at rates
that were lower in cost than retail deposits. Management made the decision to
use these wholesale sources to fund new loan growth. As a result, maturing time
deposits were allowed to roll off the balance sheet and were replaced with
Federal Home Loan Bank borrowings. Also responsible for the slower than normal
growth in deposits was the delayed opening of two of the Bank's new branch
offices. Due to construction constraints and increased time frames for obtaining
required permits, the Miller Place branch and the Motor Parkway branch opened
months later than had been projected. As deposit collection at new branches can
be significant, these delayed openings reduced overall deposit inflows. Two new
branch openings are planned for this year during the second and third quarters.
These new offices in conjunction with the two offices that opened during the
fourth quarter of 2004 and during the first week of 2005 will provide
significant sources of deposit inflows for 2005. Management fully expects
deposit collection to be in line with prior years during 2005, and this
expectation has already been validated by the 9.84% increase in total deposits
during the first month of the new year. The Bank has also planned for the
introduction of a new deposit product during the early part of the first quarter
of 2005 which should further solidify further
19
deposit relationships.
At December 31, 2004, the remaining maturities of the Bank's time deposits in
amounts of $100,000 or greater were as follows:
3 months or less $ 15,556,319
Over 3 through 6 months 2,667,880
Over 6 through 12 months 8,235,247
Over 12 months 40,137,601
------------
Total $ 66,597,047
============
Total borrowings increased from $31,000,000 to $99,500,000, which includes
$1,500,000 drawn on an overnight line with J.P. Morgan Chase. Federal Home Loan
Bank borrowings increased from $31,000,000 to $98,000,000, a 216.13% increase.
A description of the advances is detailed below:
Description Rate Type Maturity Amount
- ----------- ---- ---- -------- ------
Overnight Line of Credit 2.88% Fixed 01/03/2005 $ 31,000,000
Advance 2.04 Fixed 09/06/2005 4,000,000
Advance 3.67 Fixed 09/16/2005 1,000,000
Advance 4.08 Fixed 01/17/2006 10,000,000
Advance 2.69 Fixed 09/18/2006 2,000,000
Advance 3.63 Fixed 01/09/2007 10,000,000
Advance 2.95 Fixed 09/17/2007 5,000,000
Advance 4.29 Fixed 12/10/2007 5,000,000
Advance 4.06 Fixed 12/01/2008 5,000,000
Advance 4.69 Fixed 12/30/2008 5,000,000
Advance 2.88 Fixed 01/15/2009 5,000,000
Advance 4.94 Fixed 11/30/2009 5,000,000
Advance 4.05 Fixed 12/09/2009 5,000,000
Advance 2.95 Fixed 01/15/2011 5,000,000
------------
Total $ 98,000,000
============
The weighted average interest rate for the advances was 3.50% during 2004 as
compared to 3.09% in 2003. The average maturity for these borrowings was 3
years. The underlying collateral for Federal Home Loan Bank borrowings is
comprised of U.S. government agency securities, mortgage-backed securities and
residential and commercial real estate loans. At December 31, 2004, available
collateral at Federal Home Loan Bank was $35,768,189. The Bank also has
unsecured lines of credit with its correspondent banks. These unused lines of
credit totaled $5,500,000 at year end 2004.
The following table details the Bank's borrowed funds at December 31.
(in thousands) 2004 2003 2002
---- ---- ----
Advances from FHLBNY
Maximum month-end balance during the year $98,000 $44,300 $49,000
Average balance during the year 48,720 38,169 45,614
Weighted average interest rate during the year 3.11% 3.49% 3.65%
Weighted average interest rate at year end 3.50 3.84 3.13
Federal Funds Purchased
Maximum month-end balance during the year $ 7,200 $ -- $ --
Average balance during the year 28 22 57
Weighted average interest rate during the year 2.50% --% --%
Weighted average interest rate at year end 2.50 -- --
Securities sold under agreements to repurchase
Maximum month-end balance during the year -- -- $ 4,000
Average balance during the year -- -- 3,156
Weighted average interest rate during the year -- -- 2.47%
Weighted average interest rate at year end -- -- --
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.
20
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 19.82% from year end 2003 to year end 2004.
This was primarily the result of net income of $10,011,002, dividends declared
of $1,186,473, a reduction in comprehensive income of $375,164, and shares
repurchased by the Bancorp totaling $684,952. During 2004, the Bancorp declared
a two-for-one stock split; the fourth split in six years. The book value of the
Bancorp's shares at December 31, 2004 and 2003 was $7.92 and $6.59,
respectively. Earnings per share for the same two years was $1.69 and $1.51,
respectively.
The Bancorp exceeds the risk-based capital adequacy ratio levels required by the
regulatory agencies (See Note P to the Consolidated Financial Statements).
Management believes that the current capital levels along with future retained
earnings will allow the Bank to maintain a position exceeding required levels
and be more than adequate to meet the growth plans of the Bancorp. The Bancorp
has the ability to issue additional common stock and/or trust preferred
securities should the need arise.
The Bancorp had returns on average equity of 23.37%, 24.74%, and 26.31%, and
returns on average assets of 1.58%, 1.80%, and 1.89% for the years ended
December 31, 2004, 2003, and 2002, respectively.
Off-Balance Sheet Items and Contractual Obligations
The following tables disclose contractual obligations and commercial commitments
of the Bancorp as of December 31, 2004:
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
----- ------ ----------- ----------- -------
FHLB advances $ 98,000,000 $ 36,000,000 $ 32,000,000 $25,000,000 $ 5,000,000
Subordinated debt 11,000,000 -- -- -- 11,000,000
Lease obligations 14,965,631 1,194,442 2,424,057 2,521,112 8,826,020
------------ ------------ ------------ ----------- -----------
Total contractual cash obligations $123,965,631 $ 37,194,442 $ 34,424,057 $27,521,112 $24,826,020
============ ============ ============ =========== ===========
Letters of credit $ 8,502,509 $ 8,502,509 $ -- $ -- $ --
Other loan commitments 120,863,866 120,863,866 -- -- --
------------ ------------ ------------ ----------- -----------
Total commercial commitments $129,366,375 $129,366,375 $ -- $ -- $ --
============ ============ ============ =========== ===========
The Bancorp had the ability to borrow on unsecured lines of credit up to
$7,000,000 at December 31, 2004. Outstanding balances at year end totaled
$1,500,000.
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 Bancorp 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 Bancorp, 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
For discussion regarding the impact of new accounting standards, refer to Note A
of Notes to Consolidated Financial Statements.
Comparison of Operating Results For the Years Ended December 31, 2004 and 2003
General
Net income for 2004 totaled $10,011,002 as compared to $9,098,626, representing
an increase of 10.03%. Earnings per share for the two years was $1.69 and $1.51,
respectively. The primary reasons for the increased net income during 2004 were
1.) increased net interest income of $3,704,221 or 16.48%, 2.) reduced provision
for loan loss expense of $566,816 or 74.28% and 3.) increased net gain on the
sale of investment securities of $328,101 or 301.72%.
21
Interest Income
Total interest income increased from 2003 to 2004 by $6,359,352 or 21.08%. This
was the result of a 24.56 % increase in loan income. The yield on loans during
2004 was 6.54% as compared to 6.90% during 2003. The average balance on the loan
portfolio during 2004 and 2003 was $521,641,742 and $396,946,409, respectively.
The decline in yield on the portfolio was the result of matured loans and a high
level of refinanced loans that carried higher interest rates being replaced at
lower yields. Interest income on federal funds sold increased by $48,926 or
53.48% as a result of a slightly higher yield for 2004 of 1.07% as compared to
1.01% for 2003. The average balance of federal funds sold during 2004 and 2003
was $13,053,753 as compared to $9,021,062. A high level of federal funds sold
was carried throughout the first three quarters of 2004. This level decreased
significantly during the fourth quarter as loan volume increased. Interest
income on investment securities decreased by $435,287 from 2003 to 2004. The
yield on the securities portfolio, adjusted for tax-exempt income on municipal
securities, was 4.56% during 2004 as compared to 5.04% during 2003. The
decreased volume of these investment securities was re-channeled into loans.
Interest Expense
Total interest expense increased from $7,691,230 during 2003 to $10,346,361
during 2004, representing an increase in cost of 34.52%. This was the result of
an increased cost of interest-bearing funds from 2.03% during 2003 to 2.08%
during 2004. The average balance of total deposits and borrowings also increased
by 26.54%, due to the large inflow of deposits early in 2004, the increased
balance of borrowings originated during the fourth quarter, and the outstanding
subordinated debt carried for the entire year of 2004.
Net Interest Income
Net interest income increased from 2003 to 2004 by 16.48%, primarily as a result
of the significantly increased loan income. Net interest margin for 2004 was
4.47 % compared to 4.88% during 2003. Margin compression resulted from the
increased costs of deposit and borrowing expense in conjunction with the reduced
level of yield on loans and investment securities. Cash flows from older
investment securities and matured and refinanced loans were reinvested in lower
yielding loans. Thus the reduction in yields on interest bearing assets declined
in conjunction with the increasing costs of interest on deposits and borrowings.
Yield on interest earning assets for 2004 and 2003 was 6.21% and 6.53%,
respectively. The cost of interest-bearing funds during 2004 and 2003 was 2.08%
and 2.03%, respectively.
Other Non-Interest Income
Other non-interest income increased by 10.82% over 2003 levels. Primarily
responsible for this increase was the net gain on sales of available for sale
securities. Securities were sold during the year in order to provide funds to
meet strong loan demand. Other components of non-interest income include fees
earned from trust department services. This reduced income was the result of the
settlement of several trusts during 2003. This business was not replaced and
therefore the fee income generated from these trusts was not earned during 2004.
Service charge income on deposit accounts also declined during 2004 as a result
of an increased number of "free checking" accounts opened. This trend is
expected to continue into 2005 as most new demand accounts are free accounts,
although fees generated from a new Overdraft Honor program to be introduced in
2005 is expected to compensate for this reduction in service charge income. Also
included in this category of income is the revenue generated from Seigerman
Mulvey Co., Inc. Net income from operations during the four months of the
Bancorp's ownership of the agency was $317,451.
Other Operating Expenses
Total other operating expenses increased by 28.29% from 2003 to 2004. The
physical and human resource expansion that took place in the Bancorp throughout
2004 is reflected in these increased operating expenses. Staffing for two
additional branches with associated benefit costs, the addition of several
banking professionals within the Retail, Lending and Finance departments, and
increased salary and incentive compensation costs for existing staff were
responsible for the 46.94% and 24.36% increases in salary and benefit expenses,
respectively. Net occupancy and furniture and equipment costs increased by
12.77% and 13.69%, respectively. Once again, the addition of two new branches
and the move of all back office support departments from three different
locations into one new corporate headquarters increased occupancy and equipment
expenses. The consolidation of the three areas is expected to result in improved
efficiencies, which is of significant importance for a growing company.
Noteworthy within the category of other operating expenses were the greatly
increased costs incurred by the Bancorp for auditing and accounting services.
Compliance with the Sarbanes-Oxley Act of 2002, Section 404, required a very
large use of resources within the Bank as well as the assistance of an internal
audit firm to set up and test the internal control framework of the Bank. The
additional work then required to audit and test the internal controls resulted
in additional expense for the Bancorp. These costs were in excess of $100,000,
and were expenses that were new for 2004. These fees are expected to be greatly
reduced in 2005, as the control framework has now been developed and will be
updated and monitored on a regular basis by current staff. Another component of
other operating expenses is the provision for loan losses. The amount of
provision expense for 2004 was significantly lower than that of 2003. Based on
the quality of the loan portfolio, the net recoveries of prior charged off
loans, and the coverage ratio of the allowance for loan loss account, management
determined the amount of provision expense required to maintain an adequate
level of reserves.
22
Comparison of Operating Results For the Years Ended December 31, 2003 and 2002
Net income for the year ended December 31, 2003 was $9,098,626 as compared to
$8,041,747 for the same period in 2002. This represents a 13.14% growth rate.
The primary reasons for the growth in net income were: 1.) increased loan
interest and fee income resulting from the $101,506,076 growth in the loan
portfolio, 2.) growth in deposit accounts of $103,411,348 with a minimal
increase in interest expense resulting from the low interest rate environment
and 3.) the 25.19% decreased provision for loan losses.
Interest Income
Interest income for the two years ended December 31, 2003 and 2002 was
$30,170,495 and $27,560,123. The largest contributor to interest income was
interest on loans, and it represents 90.77% and 87.72% of this total,
respectively. The increased loan income during 2003 was the result of the 28.34%
increase in loan volume. Loans at year end 2003 represent 81.35% of total
assets. The yield on the loan portfolio decreased fromn 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 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 sold 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 years ended December 2003 and 2002 was $7,691,230 and
$7,409,772, an increase of $281,458 or 3.80% over the period. Interest cost for
the Bancorp is comprised of interest expense on deposit accounts totaling
$6,187,497 and $5,655,773 and to a lesser degree the interest expense on other
borrowings. This cost for 2003 and 2002 was $1,503,733 and $1,753,999. Other
borrowings include long term advances and overnight lines of credit from the
Federal Home Loan Bank as well as the interest cost associated with the
subordinated debt issued by the Bancorp during 2003. The cost for interest
bearing deposits during 2003 was 1.83% as compared to 2.06% during 2002. The
cost of other borrowings for the same years was 3.67%. The Bank's overall cost
of funds for 2003 and 2002 was 2.03% and 2.29%.
Net Interest Income
Net interest income is the largest contributor to net income and comprises
65.63% and 63.74% of total income for 2003 and 2002. Net interest income
increased from $15,835,324 in 2001 to $20,150,351 in 2002 and $22,479,265 in
2003, resulting from a larger increase in average interest-earning assets than
interest-bearing liabilities. The result of these changes in balance sheet
composition and interest rates was an interest margin of 4.88% in 2003 as
compared to 5.22% in 2002.
Other Non-Interest Income
Other non-interest 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 to 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 during 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 2003.
Other Operating Expenses
Other operating expenses increased by 5.76% over 2002 levels and 19.80% over
2001 levels. Other operating expenses represent various categories of
noninterest expense. 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.
23
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Significant increases in the level of market interest rates may adversely affect
the fair value of securities and other interest earning assets. At December 31,
2004, $37,403,950 or 70.1% of the Bancorp's securities had fixed interest rates.
Loans with fixed interest rates comprised 9.03% of the loan portfolio.
Generally, the value of fixed rate instruments fluctuates inversely with the
changes in interest rates. As a result, increases in interest rates could result
in decreases in the market value of interest earning assets.
This decrease in market value could adversely affect the Bancorp's results of
operations if the loans or securities were sold or, in the case of interest
earning assets classified as available for sale, could reduce the Bancorp's
stockholders' equity if they were to be retained.
The Bancorp utilizes the results of a dynamic simulation model to quantify the
estimated exposure to net interest income fluctuations resulting from sustained
interest rate changes. Management monitors simulated net interest income
sensitivity over a rolling two year horizon. This simulation model captures the
impact of changing interest rates on the interest income received and interest
expense paid on all interest sensitive assets and liabilities reflected on the
Bancorp's balance sheet. This sensitivity analysis is compared to policy limits
internally set by the Asset Liability Committee that specify a maximum tolerance
level for net interest income exposure over a one year horizon given both an
upward and downward shift in interest rates. Due to the historically low rate
environment, the simulation was modeled on a 100 basis point downward shift and
a 200 basis point upward shift in rates. A parallel and pro rata shift in rates
over a twelve month period is assumed. The following reflects the Bancorp's
income sensitivity analysis as of October 31, 2004 and November 30, 2003.
(in thousands)
Change In Interest As of October 31, 2004 As of November 30, 2003
Rates In Basis Points Potential Change In Potential Change In
(Rate Shock) Net Interest Income Net Interest Income
- -------------------------------------------------------------------------------------------
---------------------------------------------------------
$ Change % Change $ Change % Change
-------- -------- -------- --------
---------------------------------------------------------
Up 300 Basis Points 2,056 6.43% 223 0.85%
Static -- -- -- --
Down 100 Basis Points (1,209) (3.78)% (445) (1.73)%
24
Item 8: Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Smithtown Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Smithtown
Bancorp, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. The consolidated
statements of income, comprehensive income, changes in stockholders' equity and
cash flows for the year ended December 31, 2002 were audited by other auditors
whose report dated January 17, 2003 expressed an unqualified opinion on these
statements.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Smithtown Bancorp at December 31, 2004 and 2003, and the results of its
operations and its cash flows for the years then ended in conformity with U.S
generally accepted accounting principles.
Crowe Chizek and Company LLC
Livingston, New Jersey
February 18, 2005
25
Consolidated Balance Sheets
------As of December 31,------
------------------
2004 2003
---- ----
ASSETS
Cash and due from banks $ 8,581,562 $ 9,383,247
Federal funds sold 1,051,678 5,382,026
------------ ------------
Total cash and cash equivalents 9,633,240 14,765,273
Investment securities:
Available for sale:
Obligations of U.S. government agencies 30,192,467 25,094,497
Mortgage-backed securities 4,975,557 8,120,100
Obligations of state and political subdivisions 13,585,584 17,745,735
Other securities 3,005,000 6,324,238
------------ ------------
Total securities available for sale 51,758,608 57,284,570
Held to maturity:
Mortgage-backed securities 165,388 293,055
Obligations of state and political subdivisions 1,418,462 1,700,323
------------ ------------
Total investment securities held to maturity (estimated fair
value $1,631,000 in 2004 and $2,091,332 in 2003) 1,583,850 1,993,378
------------ ------------
Total investment securities 53,342,458 59,277,948
Restricted securities 5,554,620 2,162,096
Loans 570,093,127 459,630,370
Less: allowance for loan losses 4,912,394 4,760,805
------------ ------------
Loans, net 565,180,733 454,869,565
Bank premises and equipment 15,365,598 10,287,727
Other assets
Cash value of bank-owned life insurance 16,942,104 16,288,124
Goodwill 388,291 --
Intangible assets 464,820 --
Other 10,131,017 7,434,667
------------ ------------
Total other assets 27,926,232 23,722,791
------------ ------------
Total assets $677,002,881 $565,085,400
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand (non-interest bearing) $ 90,466,100 $ 85,604,168
Money market 164,878,232 150,583,706
NOW 32,434,201 41,816,900
Savings 55,257,418 50,892,176
Time 171,278,311 152,434,072
------------ ------------
Total deposits 514,314,262 481,331,022
Dividends payable 296,190 267,681
Other borrowings 99,500,000 31,000,000
Subordinated debt 11,000,000 11,000,000
Other liabilities 4,949,545 2,308,226
------------ ------------
Total liabilities 630,059,997 525,906,929
Stockholders' equity
Common stock $.01 par value (15,000,000 shares authorized;
7,167,280 shares issued: 5,923,726 and 5,948,474 shares
outstanding at December 31, 2004 and 2003) 71,673 4,479,550
Retained earnings 52,480,787 43,656,258
Additional paid in capital 4,407,877 --
Accumulated other comprehensive income 44,910 420,074
------------ ------------
57,005,247 48,555,882
Less: treasury stock (1,243,554 and 1,218,806 shares at cost at
December 31, 2004 and 2003, respectively) 10,062,363 9,377,411
------------ ------------
Total stockholders' equity 46,942,884 39,178,471
------------ ------------
Total liabilities and stockholders' equity $677,002,881 $565,085,400
============ ============
See notes to consolidated financial statements.
26
Consolidated Statements of Income
------------Year ended December 31,----------
-----------------------
2004 2003 2002
---- ---- ----
Interest income
Interest and fees on loans $34,112,816 $27,385,991 $24,174,525
Interest on federal funds sold 140,403 91,477 113,914
Interest and dividends on investment securities:
Taxable:
Obligations of U.S. government agencies 972,485 659,605 526,784
Mortgage-backed securities 285,915 578,360 1,198,596
Other securities 245,378 525,899 359,649
----------- ----------- -----------
Subtotal 1,503,778 1,763,864 2,085,029
Exempt from federal income taxes:
Obligations of state and political subdivisions 686,513 861,714 1,064,763
Other interest income 86,337 67,449 121,892
----------- ----------- -----------
Total interest income 36,529,847 30,170,495 27,560,123
Interest expense
Money market accounts (including savings) 2,596,577 1,976,246 2,105,547
Time deposits of $100,000 or more 2,187,058 1,508,018 1,313,528
Other time deposits 3,490,419 2,703,233 2,236,698
Securities sold under agreements to repurchase -- -- 78,228
Other borrowings 2,072,307 1,503,733 1,675,771
----------- ----------- -----------
Total interest expense 10,346,361 7,691,230 7,409,772
----------- ----------- -----------
Net interest income 26,183,486 22,479,265 20,150,351
Provision for loan losses 196,297 763,113 1,020,000
----------- ----------- -----------
Net interest income after provision for loan losses 25,987,189 21,716,152 19,130,351
Other noninterest income
Trust department income 439,295 581,467 457,393
Service charges on deposit accounts 1,707,268 1,783,028 1,922,029
Other income 1,222,996 1,055,828 1,012,972
Net gain on sales of investment securities 436,846 108,745 76,865
Gain in cash value of bank owned life insurance 653,980 483,702 536,436
Net income from equity investment 59,756 66,101 45,415
----------- ----------- -----------
Total other noninterest income 4,520,141 4,078,871 4,051,110
Other operating expenses
Salaries 7,128,627 4,851,400 4,728,761
Pensions and other employee benefits 1,626,443 1,307,863 1,087,387
Net occupancy expense of bank premises 1,688,125 1,497,003 1,190,168
Furniture and equipment expense 1,227,845 1,079,961 999,911
Other expense 2,998,591 2,698,815 2,806,539
----------- ----------- -----------
Total other operating expenses 14,669,631 11,435,042 10,812,766
----------- ----------- -----------
Income before income taxes 15,837,699 14,359,981 12,368,695
Provision for income taxes 5,826,697 5,261,355 4,326,948
----------- ----------- -----------
Net income $10,011,002 $ 9,098,626 $ 8,041,747
=========== =========== ===========
Earnings per share
Net income $ 1.69 $ 1.51 $ 1.31
Weighted average shares outstanding 5,935,210 6,027,440 6,138,440
See notes to consolidated financial statements.
27
Consolidated Statements of Comprehensive Income
-------------Year ended December 31,-----------
-----------------------
2004 2003 2002
------------ ----------- ----------
Net income $ 10,011,002 $ 9,098,626 $8,041,747
Other comprehensive income (loss), before tax:
Unrealized holding gain (loss) arising during the year (209,988) (431,843) 1,176,856
Less: reclassification adjustment for gains included in net income 436,846 108,745 76,865
------------ ----------- ----------
(646,834) (540,588) 1,099,991
Tax effect 271,670 227,022 461,996
------------ ----------- ----------
Other comprehensive income (loss), net of tax (375,164) (313,566) 637,995
------------ ----------- ----------
Total comprehensive income $ 9,635,838 $ 8,785,060 $8,679,742
============ =========== ==========
See notes to consolidated financial statements.
28
Consolidated Statements of Changes in Stockholders' Equity
-----------Common Stock----------
------------
Shares Additional Retained Treasury
Outstanding Amount Paid In Capital Earnings Stock
----------- ------ --------------- -------- -----
Balance at January 1, 2002 1,539,257 $ 2,239,775 $ 1,993,574 $ 28,765,704 $ (6,095,915)
Comprehensive income:
Net income -- -- -- 8,041,747 --
Other comprehensive
income, net of tax -- -- -- -- --
Total comprehensive
income
Cash dividends declared -- -- -- (920,443) --
Treasury stock purchases (15,508) -- -- -- (813,796)
---------- ----------- ----------- ------------ ------------
Balance at December 31,
2002 1,523,749 2,239,775 1,993,574 35,887,008 (6,909,711)
Comprehensive income:
Net income -- -- -- 9,098,626 --
Other comprehensive
loss, net of tax -- -- -- -- --
Total comprehensive
income
2-for-1 stock split 1,523,749 2,239,775 (1,993,574) (246,201) --
Cash dividends declared -- -- -- (1,083,175) --
Treasury stock purchases (73,261) -- -- -- (2,467,700)
---------- ----------- ----------- ------------ ------------
Balance at December 31,
2003 2,974,237 4,479,550 -- 43,656,258 (9,377,411)
Comprehensive income:
Net income 10,011,002
Other comprehensive
loss, net of tax
Total comprehensive
income
2-for-1 stock split 2,974,237 35,836 (35,836) --
Change in par value(1) (4,443,713) 4,443,713
Cash dividends declared (1,186,473)
Treasury stock purchases (24,748) (684,952)
---------- ----------- ----------- ------------ ------------
Balance at December 31,
2004 5,923,726 $ 71,673 $ 4,407,877 $ 52,480,787 $(10,062,363)
========== =========== =========== ============ ============
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) Equity
----------- ------------
Balance at January 1, 2002 $ 95,645 $ 26,998,783
Comprehensive income:
Net income -- 8,041,747
Other comprehensive
income, net of tax 637,995 637,995
------------
Total comprehensive
income 8,679,742
Cash dividends declared -- (920,443)
Treasury stock purchases -- (813,796)
----------- ------------
Balance at December 31,
2002 733,640 33,944,286
Comprehensive income:
Net income -- 9,098,626
Other comprehensive
loss, net of tax (313,566) (313,566)
------------
Total comprehensive
income 8,785,060
2-for-1 stock split -- --
Cash dividends declared -- (1,083,175)
Treasury stock purchases -- (2,467,700)
----------- ------------
Balance at December 31,
2003 420,074 39,178,471
Comprehensive income:
Net income 10,011,002
Other comprehensive
loss, net of tax (375,164) (375,164)
------------
Total comprehensive
income 9,635,838
2-for-1 stock split -- --
Change in par value(1)
Cash dividends declared (1,186,473)
Treasury stock purchases (684,952)
----------- ------------
Balance at December 31,
2004 $ 44,910 $ 46,942,884
=========== ============
Cash dividends declared per share were $.20 in 2004, $.18 in 2003, and $.15 in
2002.
(1) As a result of the May 7, 2004 two-for-one stock split and the April 20,
2004 reduction in par value from $1.25 to $0.01 per share, a transfer of
$4,443,713 was made from the common stock account into additional paid in
capital.
See notes to consolidated financial statements.
29
Consolidated Statements of Cash Flows
-------------Year ended December 31,------------
2004 2003 2002
---- ---- ----
Cash flows from operating activities
Net income $ 10,011,002 $ 9,098,626 $ 8,041,747
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation on premises and equipment 1,100,262 772,030 639,794
Provision for loan losses 196,297 763,113 1,020,000
Net increase in other liabilities 1,468,893 585,499 434,819
Net increase in other assets (2,395,368) (33,368) (1,608,453)
Net gain on sale of investment securities (436,846) (108,745) (76,865)
Decrease (increase) in deferred taxes 322,738 (263,671) (289,678)
Distribution from SMTB Financial Group, LLC -- 66,000 78,000
Increase in cash surrender value of officers' life insurance policies (653,980) (483,702) (886,436)
Amortization of investment security premiums and accretion of
discounts, net (71,290) (40,660) (198,032)
------------- ------------- ------------
Cash provided by operating activities 9,541,708 10,355,122 7,154,896
Cash flows from investing activities
Mortgage-backed securities
Proceeds from calls, repayments, maturities and sales of available
for sale 3,093,262 7,388,309 10,275,313
Proceeds from calls, repayments and maturities of held to maturity 127,667 286,568 343,257
Other securities:
Proceeds from calls, repayments, maturities and sales ofavailable
for sale 33,564,889 33,997,942 15,989,472
Proceeds from calls, repayments and maturities of
held to maturity 281,750 691,861 1,444,695
Purchase of other investment securities:
Held to maturity -- (200,000) (140,000)
Available for sale (31,706,267) (43,624,261) (17,437,878)
Purchase of officers' life insurance policies -- (4,913,600) (245,000)
Purchase of Federal Home Loan Bank stock (3,350,000) -- --
Acquisition of Seigerman Mulvey Co., Inc. (1,053,249) -- --
Loans made to customers, net (110,311,168) (101,528,249) (76,476,777)
Proceeds from sale of other real estate owned -- -- 758,476
Purchase of premises and equipment (6,178,133) (2,279,575) (4,418,569)
------------- ------------- ------------
Cash used in investing activities (115,531,249) (110,181,005) (69,907,011)
Cash flows from financing activities
Net increase in demand deposits, money market, NOW
and savings 15,356,185 58,403,501 42,926,215
Net increase in time deposits 18,844,239 45,007,848 23,051,416
Cash dividends paid (1,157,964) (1,044,744) (921,558)
Securities sold under agreements to repurchase and
other borrowings 68,500,000 (7,000,000) (1,750,000)
Proceeds from subordinated debt issuance -- 11,000,000 --
Purchase of treasury stock (684,952) (2,467,700) (813,796)
------------- ------------- ------------
Cash provided by financing activities 100,857,508 103,898,905 62,492,277
------------- ------------- ------------
Net decrease increase in cash and cash equivalents (5,132,033) 4,073,022 (259,838)
Cash and cash equivalents, beginning of period 14,765,273 10,692,251 10,952,089
------------- ------------- ------------
Cash and cash equivalents, end of period $ 9,633,240 $ 14,765,273 $ 10,692,251
============= ============= ============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 10,172,461 $ 7,455,049 $ 7,356,970
Income taxes 6,156,445 5,319,117 2,542,450
See notes to consolidated financial statements.
30
Notes to Consolidated Financial Statements
Note A. Summary of Significant Accounting Policies
The accounting and reporting policies of Smithtown Bancorp, Inc. ("the Bancorp")
and its subsidiary, Bank of Smithtown ("the Bank"), reflect banking industry
practices and conform to U.S. generally accepted accounting principles. A
summary of the significant accounting policies followed by the Bancorp in the
preparation of the accompanying consolidated financial statements is set forth
below.
Nature of Operations and Principles of Consolidation
The accompanying consolidated financial statements are prepared on the accrual
basis of accounting and include the accounts of Smithtown Bancorp, its wholly
owned subsidiary, Bank of Smithtown, and Bank of Smithtown's wholly owned
subsidiaries, Bank of Smithtown Insurance Agency, Inc. and Seigerman Mulvey Co.,
Inc. All material inter-company transactions and balances have been eliminated.
During May 2004 and April 2003, the Bancorp 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 splits.
Smithtown Bancorp operates under a state bank charter and provides full banking
services, including trust, investment management and insurance 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 shore of Suffolk County, New York, and services are provided at
eleven branch offices.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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. The allowance for loan losses, fair values of financial instruments,
deferred taxes and post retirement benefit obligations are particularly subject
to change.
Cash Flows
For the purposes of the statements of cash flows, the Bancorp considers cash and
due from banks including deposits with other financial institutions under 90
days and federal funds sold as cash and cash equivalents. Net cash flows are
reported for loan and deposit transactions, interest bearing deposits in other
financial institutions, federal funds purchased, other borrowings and repurchase
agreements.
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 Bancorp's investments in
securities are classified in two categories and accounted for as follows:
o Securities Held to Maturity: Bonds, notes and debentures for which
the Bancorp 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.
Restricted securities, as reported on the balance sheet, including Federal Home
Loan Bank stock and Federal Reserve Bank stock, are carried at cost. 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. Premiums
and discounts on securities are amortized on the level-yield method without
anticipating prepayments. Gains and losses on sales are based on the amortized
cost of the security sold and are recorded on settlement date.
Declines in the fair value of securities below their cost that are other than
temporary are reflected as realized losses. In estimating other-than-temporary
losses, management considers: 1) the length of time and extent that fair value
has been less than cost, 2) the financial condition and near term prospects of
the issuer, and 3) the Bancorp's ability and intent to hold the security for a
period sufficient to allow for any anticipated recovery in fair value.
31
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at the principal balance
outstanding, net of unearned interest, deferred loan fees and costs, and
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. Loan origination fees, net of certain direct origination
costs, are deferred and recognized in interest income using the level-yield
method without anticipating prepayments.
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. Generally, interest received on impaired loans continues either to be
applied by the Bank against principal or to be realized as interest income,
according to management's judgment as to the collectibility of principal. Loans
are returned to accrual status when all principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
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 considered impaired when, based on current information and events, it
is probable that the Bancorp will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent. Large groups of smaller
balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Bancorp does not separately identify individual consumer and
residential loans for impairment disclosures.
Bank Premises and Equipment
Land is carried at cost. Leasehold improvements are amortized over the lives of
the respective leases or the service lives of the improvements, whichever is
shorter. 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
Other real estate owned ("OREO"), acquired principally through foreclosure or a
similar conveyance of title is carried at the lower of cost or fair value less
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. At December 31, 2004 and 2003, the Bancorp carried no
other real estate owned.
32
Company-Owned Life Insurance
The Bancorp has purchased life insurance policies on certain key executives and
certain eligible directors. Company-owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
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 tax assets and liabilities are the
expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax
rates. 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 Common Share
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. ESOP ("Employee Stock
Ownership Plan") 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.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses, net of tax, on
securities available for sale, which is also recognized as a separate component
of equity.
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
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.
Employee Stock Ownership Plan
The cost of shares issued to the ESOP, but not yet allocated to participants, is
recognized as pension expense and is based on the market price of the shares at
the time the Bancorp purchases such shares.
33
Restrictions on Cash
Cash on hand or on deposit with the Federal Reserve Bank of $765,000 was
required to meet regulatory reserve and clearing balance requirements at
December 31, 2004 and 2003. These balances do not earn interest. The average
amount of these reserve balances for the years ended December 31, 2004 and 2003
were $835,564 and $846,624, respectively.
Collateralized Securities Transactions
Transactions involving purchases of securities under agreements to resell
("reverse repurchase agreements") or sales of securities under agreements to
repurchase ("repurchase agreements") are treated as collateralized financing
transactions and are recorded at their contracted resale or repurchase amounts
plus accrued interest. The Bank is required to provide securities to
counterparties in order to collateralize repurchase agreements. The Bank's
agreements with counterparties generally contain contractual provisions allowing
for additional collateral to be obtained or excess collateral returned when
necessary. It is the Bank's policy to value collateral periodically and to
obtain additional collateral or to retrieve excess collateral from
counterparties, when deemed appropriate. At December 31, 2004 and 2003, the Bank
carried no collateralized securities transactions.
Recently Issued Accounting Pronouncements
SFAS 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
29", modifies an exception from fair value measurement of nonmonetary exchanges.
Exchanges that are not expected to result in significant changes in cash flows
of the reporting entity are not measured at fair value. This supersedes the
prior exemption from fair value measurement for exchanges of similar productive
assets, and applies for fiscal years beginning after June 15, 2005.
Statement of Position ("SOP") 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer" requires that a valuation allowance for loans
acquired in a transfer, including in a business combination, reflect only losses
incurred after acquisition and should not be recorded at acquisition. It applies
to any loan acquired in a transfer that showed evidence of credit quality
deterioration since it was made. This guidance is effective for all applicable
transactions entered into December 15, 2004 or later.
The effect of these other new standards on the Company's financial position and
results of operations is no expected to be material upon and after adoption.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the
dividends paid by the Bank to the holding company or by the holding company to
stockholders. These restrictions pose no practical limit on the ability of the
Bank or holding company to pay dividends at historical levels.
Segment Reporting
While management monitors the revenue streams of the various products and
services, the identifiable segments are not material and operations are managed
and financial performance is evaluated on a Bancorp-wide basis. Accordingly, all
of the financial service operations are considered by management to be
aggregated in one reportable operating segment.
Goodwill and Other Intangible Assets
Goodwill results from business acquisitions and represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities
and identifiable intangible assets. Goodwill is assessed at least annually for
impairment and such impairment will be recognized in the period identified.
Other intangible assets consist of customer relationships, and covenants not to
compete, each of which relate to the acquisition of Seigerman Mulvey Co., Inc.
They are initially measured at fair value and then are amortized over their
estimated useful lives.
Reclassifications
Certain reclassifications related to direct loan origination fees and costs have
been made to the prior 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.
34
Note B. Securities
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
December 31, 2004
Obligations of U.S. government agencies $30,192,467 $ 1,633 $ (218,947)
Mortgage-backed securities 4,975,557 146,293 (1,600)
Obligations of state and political subdivisions 13,585,584 198,869 (52,418)
Other securities 3,005,000 5,000 --
----------- ----------- -----------
Total $51,758,608 $ 351,795 $ (272,965)
=========== =========== ===========
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)
=========== =========== ===========
The carrying amount, unrealized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
------ ----- ------ -----
December 31, 2004
Mortgage-backed securities $ 165,388 $ 9,411 $ -- $ 174,799
Obligations of state and political subdivisions 1,418,462 37,853 (114) 1,456,201
------------ ------------ ------------ ------------
Total $ 1,583,850 $ 47,264 $ (114) $ 1,631,000
============ ============ ============ ============
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
============ ============ ============ ============
35
The following table presents the amortized costs of and estimated fair values of
debt securities by contractual maturity at December 31, 2004:
Available
--for Sale-- -------Held to Maturity------
Carrying
Fair Value Amount Fair Value
---------- ------ ----------
Type and Maturity Grouping
Obligations of U.S. government agencies
After 1 year, but within 5 years $ 8,924,062 $ -- $ --
After 5 years, but within 10 years 19,765,891 -- --
After 10 years 1,502,514 -- --
----------- ----------- -----------
Total obligations of U.S. government agencies $30,192,467 $ -- $ --
=========== =========== ===========
Mortgage-backed securities
After 1 year, but within 5 years $ -- $ 165,388 $ 174,799
After 10 years 4,975,557 -- --
----------- ----------- -----------
Total mortgage-backed securities $ 4,975,557 $ 165,388 $ 174,799
=========== =========== ===========
Obligations of state and political subdivisions
Within 1 year $ 2,218,861 $ 456,712 $ 462,485
After 1 year, but within 5 years 4,221,774 921,750 953,804
After 5 years, but within 10 years 2,649,269 40,000 39,912
After 10 years 4,495,680 -- --
----------- ----------- -----------
Total obligations of state and political subdivisions $13,585,584 $ 1,418,462 $ 1,456,201
=========== =========== ===========
Other securities
After 10 years $ 3,005,000 $ -- $ --
----------- ----------- -----------
Total other securities $ 3,005,000 $ -- $ --
=========== =========== ===========
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 U.S. government agencies, mortgage-backed securities, and
obligations of state and political subdivisions having an amortized cost of
$42,171,633 and an estimated fair value of $42,297,843 were pledged to secure
public deposits, treasury tax and loan deposits and advances. No municipality
maintains deposits exceeding ten percent of stockholders' equity.
As a member of the Federal Reserve Bank of New York, the Bank owns Federal
Reserve Bank stock with a book value of $397,400. The stock has no maturity and
has paid dividends at the rate of 6.00% for 2004 and 2003. The Bank is a member
of the Federal Home Loan Bank of New York and now holds $4,900,000 of its stock.
This stock also has no maturity and has paid average dividends of approximately
1.80% and 2.97% for 2004 and 2003. Stock of both the Federal Reserve Bank and
the Federal Home Loan Bank is restricted.
The following table presents the sales of available for sale securities:
2004 2003 2002
---- ---- ----
Proceeds $12,561,556 $33,341,262 $14,912,361
Gross gains 436,846 108,745 76,865
Gross losses -- -- --
The Bank invested $100,000 in the Nassau-Suffolk Business Development Fund. This
consortium of banks provides loans to low-income homeowners.
36
Securities with unrealized losses at year-end 2004 and 2003, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, are as follows:
As of December 31, 2004 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 $23,010,045 $ 151,759 $ 4,932,813 $ 67,188 $27,942,858 $ 218,947
Mortgage-backed securities 157,019 1,600 -- -- 157,019 1,600
Obligations of state and
political subdivisions 5,734,777 52,031 943,705 387 6,678,482 52,418
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily
impaired $28,901,841 $ 205,390 $ 5,876,518 $ 67,575 $34,778,359 $ 272,965
=========== =========== =========== =========== =========== ===========
As of December 31, 2003 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
=========== =========== =========== =========== =========== ===========
Unrealized losses on securities held to maturity were $114 and $0 at December
31, 2004 and 2003, respectively. The unrealized losses on all securities have
not been recognized into income because the bonds are of high credit quality,
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 securities approach their maturity date
and/or market rates decline.
Note C. Loans
Loans as of December 31 consisted of the following:
2004 2003
---- ----
Real estate loans, construction $120,204,220 $ 74,753,266
Real estate loans, other
Commercial 302,280,777 259,126,430
Residential 105,301,610 84,872,476
Commercial and industrial loans 40,968,206 39,227,832
Loans to individuals for household, family and other personal expenditures 1,893,893 1,382,712
All other loans (including overdrafts) 190,165 314,837
------------ ------------
Total loans, gross 570,838,871 459,677,553
Less: unearned discount 16,972 47,183
deferred fees 728,772 --
allowance for loan losses 4,912,394 4,760,805
------------ ------------
Loans, net $565,180,733 $454,869,565
============ ============
37
Activity in the allowance for loan losses was as follows:
2004 2003 2002
---- ---- ----
Beginning balance $4,760,805 $3,945,593 $3,091,585
Add:
Recoveries 200,431 131,364 51,864
Provision charged to current expense 196,297 763,113 1,020,000
---------- ---------- ----------
Total 5,157,533 4,840,070 4,163,449
Less: charge-offs 181,342 79,265 217,856
Reclassification to reserve for contingent liabilities 63,797 -- --
---------- ---------- ----------
Balance, December 31 $4,912,394 $4,760,805 $3,945,593
========== ========== ==========
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, 2004 and 2003, there
were no loans that are considered impaired under SFAS 114. The average recorded
investment in impaired loans during the twelve months ended December 31, 2004
and 2003 was $66,312 and $15,093, respectively. The allowance on impaired loans
at December 31, 2004 and 2003 was zero and at December 31, 2002 was $209,964.
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. The Bancorp recognized no interest revenue in 2004, 2003,
and 2002, 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, 2004 and 2003, there were no loans with unpaid principal
balances on which the Bank is no longer accruing interest income, included in
the total loans listed above. At December 31, 2004 and 2003, there were no loans
past due ninety days or more and still accruing interest.
A summary of information concerning interest income on nonaccrual loans at
December 31 follows:
(in thousands) 2004 2003 2002
- -------------- ---- ---- ----
Gross interest income which would have been recorded
during the year under original contract terms $ 2 $ 1 $ 133
Gross interest income recorded during the year -- -- --
Note D. Bank Premises and Equipment
Bank premises and equipment as of December 31, 2004 and 2003 were as follows:
2004 2003
---- ----
Land $ 301,404 $ 301,404
Bank premises 8,010,876 5,986,070
Leasehold improvements 7,082,423 4,199,028
Furniture and equipment 6,296,416 5,543,057
----------- -----------
Subtotal 21,691,119 16,029,559
Less: accumulated depreciation and amortization 6,325,521 5,741,832
----------- -----------
Total bank premises and equipment $15,365,598 $10,287,727
=========== ===========
As of December 31, 2004, the minimum rental commitments under non-cancelable
operating leases for premises and equipment with initial terms in excess of one
year are as follows:
2005 $ 1,194,020
2006 1,182,737
2007 1,233,704
2008 1,231,984
2009 1,261,640
Years after 2009 7,549,603
------------
Total $ 13,653,688
============
A number of leases include escalation provisions relating to real estate taxes
and expenses. Individual office rental expenses range from $1,500 to $55,300 per
month with escalation provisions tied to the consumer price index or in some
offices with a straight line annual increase averaging 2%.
38
Rental expenses for all leases on premises and equipment amounted to $717,225 in
2004, $624,971 in 2003, and $473,752 in 2002. The above table includes rental
commitments for two new branch locations. The branches will be opened in 2005.
Note E. Employee Stock Ownership Plan And Other Postretirement Plan
The Bancorp has established an Employee Stock Ownership Plan for substantially
all of its employees. The ESOP serves as the Bank's pension plan. Eligibility
requirements for the ESOP remain the same as for the Defined Contribution Plan
and include one year of continuous service, 1,000 hours and attaining an age of
21. Eligible compensation is defined as gross wages less contributions to any
qualified plans to the extent that these contributions are not includable in the
gross income of the participant. Contributions to the ESOP are in the form of
cash and are made at the discretion of the Board of Directors. The ESOP uses
this contribution to purchase shares of Smithtown Bancorp stock, which are then
allocated to eligible participants. ESOP benefits 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 $180,000,
$160,000 and $135,000 related to the ESOP for the years ended December 31, 2004,
2003, and 2002. During 2004, 2003, and 2002, the ESOP used the Bank's
contribution to purchase 7,200, 5,828 and 4,512 shares of common stock at an
average cost of $25.00, $27.00 and $20.00 per share. The 2004 contribution
represents 3.0% of eligible compensation. As of December 31, 2004 and 2003, the
ESOP held 272,120 and 258,256 allocated shares. There were no unallocated shares
in the ESOP effective December 31, 2004 and 2003. ESOP shares are included in
weighted average shares outstanding in the calculations of earnings per share.
The Bank sponsors a post-retirement medical and life insurance plan for a closed
group of prior employees. The following tables provide a reconciliation of the
changes in the plan's benefit obligations and fair value of assets over the
two-year period ending December 31, 2004 and a statement of the funded status as
of December 31 of both years:
Projected Benefit Obligation
Retiree Health Benefits
2004 2003
---- ----
Reconciliation of benefit obligation
Obligation at January 1 $ 359,696 $ 394,693
Interest cost 20,351 24,293
Actuarial gain (21,562) (16,282)
Benefit payments (38,038) (43,008)
--------- ---------
Obligation at December 31 $ 320,447 $ 359,696
========= =========
Reconciliation of fair value of plan assets
Employer contributions $ 38,038 $ 43,008
Benefit payments (38,038) (43,008)
--------- ---------
Fair value of plan assets at December 31 $ -- $ --
========= =========
Funded status
Funded status at December 31 $(320,447) $(359,696)
Unrecognized transition obligation 253,600 285,400
Unrecognized gain (133,125) (116,526)
--------- ---------
Net amount recognized $(199,972) $(190,822)
========= =========
The following table provides the components of net periodic benefit cost for the
plans for the years 2004, 2003 and 2002:
Retiree Health Benefits
2004 2003 2002
---- ---- ----
Interest cost $ 20,351 $ 24,293 $ 27,796
Amortization of unrecognized transition obligation 31,800 31,800 31,800
Amortization of net gain (4,963) (3,886) (2,276)
-------- -------- --------
Net periodic benefit cost $ 47,188 $ 52,207 $ 57,320
======== ======== ========
39
The assumptions used in the measurement of the Bank's benefit obligation are
shown in the following table:
Retiree Health Benefits
2004 2003 2002
---- ---- ----
Weighted average assumptions as of December 31
Discount 6.00% 6.00% 6.50%
Initial rate for health care costs 8.50% 9.00% 9.50%
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 $ 90 $ (86)
Effect on health care component of the accumulated postretirement
benefit obligation 1,248 (1,209)
Contributions
Since the plan holds no assets, the Bank does not expect to contribute to its
plan in 2005 other than to fund the payments for the benefits described 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
--------
2005 $ 38,726
2006 37,869
2007 33,720
2008 32,745
2009 29,773
Years 2010-2014 127,085
Note F. Other Benefit Plans
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 their compensation up
to a maximum of $14,000 per year. 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 2004, 2003, and 2002 amounted
to $154,628, $100,900 and $85,925.
The Bank has adopted a nontax qualified Executive and Director Incentive
Retirement Plan. While this plan is to be funded from the general assets of the
Bank, life insurance policies were acquired for the purpose of serving as the
primary funding source. Benefits under the Incentive Retirement Plan are based
solely on the amount contributed by the Bank to the plan, which for executive
officers is 10% of the officer's salary for the prior fiscal year and for
directors, is 25% of the director's fees for the prior fiscal year. The award
will be deferred into an account and 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 this plan for the years 2004 and 2003 were $113,328 and $104,213.
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, 2004 and 2003, the combined value of these insurance
policies was $13,307,985 and $12,810,416.
The Bank has established a non-qualified Deferred Compensation Plan in 2004. All
directors and executive officers of the Bancorp are
40
eligible to participate in this plan. Under this plan, directors may elect to
defer a portion of their fees and executive officers may elect to defer a
portion of their compensation. A liability is accrued for the obligation under
this plan.
During 2004 the Bank adopted a non-qualified Supplemental Executive Retirement
Plan ("SERP") for the Chief Executive Officer. The benefit provided to him by
the SERP is calculated at seventy percent of his final three year average
compensation reduced by various employer offsets including contributions under
the 401K Plan, the Deferred Compensation Plan and the Executive Incentive
Retirement Plan as well as by a percentage of his Social Security benefit. The
SERP is partially funded by a life insurance policy with a cash value at year
end 2004 of $3,635,252. The Bank's expense for the SERP for 2004 was $42,852.
Note G. Income Taxes
Income tax expense for the years ended December 31 was as follows:
2004 2003 2002
---- ---- ----
Federal:
Current $4,186,170 $ 4,210,737 $3,063,980
Deferred 264,691 (184,856) 230,921
---------- ----------- ----------
Total federal 4,450,861 4,025,881 3,294,901
New York State:
Current 1,317,789 1,314,289 977,261
Deferred 58,047 (78,815) 54,786
---------- ----------- ----------
Total New York State 1,375,836 1,235,474 1,032,047
---------- ----------- ----------
Total provision for income taxes $5,826,697 $ 5,261,355 $4,326,948
========== =========== ==========
A reconciliation of the federal statutory tax rate to the required tax rate
based on income before income taxes is as follows:
-----------2004------------- -----------2003------------ -----------2002------------
% of % of % of
Tax Pretax Tax Pretax Tax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Federal statutory rate $ 5,384,818 34.00% $ 4,882,394 34.00% $ 4,205,356 34.00%
Increase (reduction) of taxes
resulting from:
Effect of additional tax
brackets 83,508 0.53 43,599 0.30 23,687 0.19
Tax exempt interest (214,303) (1.35) (271,993) (1.89) (333,662) (2.70)
State income taxes net of
federal income tax benefit 908,052 5.73 815,413 5.68 681,151 5.51
Other (335,378) (2.12) (208,058) (1.45) (249,584) (2.02)
----------- ----------- ----------- ----------- ----------- -----------
Total provision for
income taxes $ 5,826,697 36.79% $ 5,261,355 36.64% $ 4,326,948 34.98%
=========== =========== =========== =========== =========== ===========
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 $1,555,143 and $1,607,570 as of the end
of 2004 and 2003.
41
Note H. Deposits
At December 31, 2004 and 2003, time deposits in principal amounts of $100,000 or
more were $66,597,047 and $55,177,025. Interest expense on such deposits for the
years ended December 31, 2004, 2003, and 2002 was $2,187,058, $1,508,018 and
$1,313,528.
The following table sets forth the remaining maturities of the Bank's time
deposits at December 31, 2004.
2005 $ 58,808,895
2006 49,322,658
2007 28,118,163
2008 10,951,500
2009 24,077,095
Thereafter --
-------------
Total $ 171,278,311
=============
Note I. Related Party Transactions
Loans to principal officers, directors and their affiliates in 2004 were as
follows:
Beginning balance $ 5,652,314
New loans 379,500
Effect of changes in related parties --
Repayments (434,085)
-----------
Ending balance $ 5,597,729
Deposits from principal officers, directors and their affiliates at year end
2004 and 2003 were $8,974,866 and $5,251,833.
Note J. Smithtown Bancorp (parent company only)
Smithtown Bancorp has one wholly owned subsidiary, Bank of Smithtown.
Balance Sheets
As of December 31,
------------------
ASSETS 2004 2003
- ------ ---- ----
Cash and cash equivalents $ 981,903 $ 787,723
Due from subsidiary 10,440 --
Prepaid expense 335,400 6,100
Investment in subsidiary 57,042,750 49,846,175
----------- -----------
Total assets $58,370,493 $50,639,998
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Cash dividends payable $ 296,190 $ 267,681
Due to subsidiary -- 57,234
Interest payable 131,419 136,612
Subordinated debt 11,000,000 11,000,000
----------- -----------
Total liabilities 11,427,609 11,461,527
Stockholders' equity 46,942,884 39,178,471
----------- -----------
Total liabilities and stockholders' equity $58,370,493 $50,639,998
=========== ===========
Statements of Income
-------- Year ended December 31,--------
-----------------------
2004 2003 2002
---- ---- ----
Income
Dividends from subsidiary $ 2,710,000 $2,383,175 $1,380,443
Expenses 611,879 195,973 51,507
----------- ---------- ----------
Net income before equity in undistributed earnings of
subsidiary 2,098,121 2,187,202 1,328,936
Equity in undistributed earnings of subsidiary 7,912,881 6,911,424 6,712,811
----------- ---------- ----------
Net income $10,011,002 $9,098,626 $8,041,747
=========== ========== ==========
42
Statements of Cash Flows Year ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Cash flows from operating activities
Net income $ 10,011,002 $ 9,098,626 $ 8,041,747
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net earnings of subsidiary (7,912,881) (6,911,424) (6,712,811)
Increase in other assets (339,740) (286,249) (43,350)
Increase in other liabilities 278,715 140,565 34,006
------------ ------------ -----------
Net cash provided by operating activities 2,037,096 2,041,518 1,319,592
Cash flows from financing activities
Proceeds from subordinated debt issuance -- 11,000,000 --
Cash dividends paid (1,157,964) (1,044,745) (891,296)
Purchases of treasury stock (684,952) (2,467,700) (813,795)
------------ ------------ -----------
Net cash (used in) provided by financing activities (1,842,916) 7,487,555 (1,705,091)
Cash flows from investing activities
Capital contribution to subsidiary -- (9,006,400) --
------------ ------------ -----------
Net cash used in investing activities -- (9,006,400) --
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents 194,180 522,673 (385,499)
Cash and cash equivalents, beginning of period 787,723 265,050 650,549
------------ ------------ -----------
Cash and cash equivalents, end of period $ 981,903 $ 787,723 $ 265,050
============ ============ ===========
Note K. Estimated Fair Value of Financial Instruments
Fair value estimates are made at a specific point in time and are based on
existing on and off balance sheet financial instruments. Such estimates are
generally subjective in nature and dependent upon a number of significant
assumptions associated with each financial instrument or group of financial
instruments, including estimates of discount rates, risks associated with
specific financial instruments, estimates of future cash flows and relevant
available market information. Changes in assumptions could significantly affect
the estimates. In addition, fair value estimates do not reflect the value of
anticipated future business, premiums or discounts that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument, or the tax consequences of realizing gains or losses on
the sale of financial instruments.
The Bancorp used the following methods and assumptions in estimating the fair
value of its financial instruments:
Cash and due from banks and federal funds sold: Carrying amounts approximate
fair value, since these instruments are either payable on demand or have
short-term maturities.
Securities available for sale and held to maturity: The estimated fair values
are based on independent dealer quotations and quoted market prices.
Loans: The estimated fair values of real estate mortgage loans and other loans
receivable are based on discounted cash flow calculations that apply available
market benchmarks when establishing discount factors for the types of loans. All
nonaccrual loans are carried at their current fair value.
Deposits: The estimated fair value of time deposits are based on discounted cash
flow calculations that apply interest rates currently being offered by the Bank
for deposits with similar remaining maturities to a schedule of aggregated
expected monthly maturities. Stated value is fair value for all other deposits.
Borrowings: The estimated fair value of borrowed funds is based on the
discounted value of contractual cash flows using interest rates currently in
effect for borrowings with similar maturities and collateral requirements.
Accrued interest receivable and payable: For these short-term instruments, the
carrying amount is a reasonable estimate of the fair value.
The estimated fair values and recorded carrying values of the Bank's financial
instruments are as follows:
43
At December 31, ---------2004--------- --------2003----------
(in thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Financial assets
Cash and due from banks $ 8,582 $ 8,582 $ 9,383 $ 9,383
Federal funds sold 1,052 1,052 5,382 5,382
Securities available for sale 51,759 51,759 57,285 57,285
Securities held to maturity 1,584 1,631 1,993 2,091
Restricted securities 5,555 5,555 2,162 2,162
Loans 565,181 569,012 454,870 458,118
Accrued interest receivable 3,267 3,267 2,679 2,679
Financial liabilities
Demand and other deposits 514,314 514,416 481,331 486,467
Borrowings 99,500 99,606 31,000 31,000
Subordinated debentures 11,000 11,000 11,000 11,000
Accrued interest payable 996 996 996 996
Note L. 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 FHLBNY is calculated at 25%
of the Bank's total average assets and is subject to specific collateral
requirements.
Each advance is payable at its maturity date, with the exception of two $5
million advances with coupon rates of 4.69% and 4.935% maturing in 2011 and
2009, respectively, which are callable in 2005. The remaining advances are not
callable. Each of the advances carries a prepayment penalty.
Scheduled repayments and maturities of advances from FHLBNY are as follows:
2004 2003
Weighted Weighted
Average Rate 2004 Average Rate 2003
------------ ---- ------------ ----
Maturing in 2004 --% $ -- 1.35% $11,000,000
Maturing in 2005 2.38 36,000,000 2.89 5,000,000
Maturing in 2006 3.85 12,000,000 -- --
Maturing in 2007 3.63 20,000,000 3.67 5,000,000
Maturing in 2008 4.38 10,000,000 -- --
Maturing in 2009 3.96 15,000,000 4.94 5,000,000
Maturing in 2011 2.95 5,000,000 4.69 5,000,000
----------- -----------
3.28% $98,000,000 3.09% $31,000,000
=========== ===========
These borrowings are collateralized by residential and commercial mortgages
under a specific lien arrangement at December 31, 2004 and 2003. Other
collateral includes securities issued by the Federal Home Loan Bank, Federal
Home Loan Mortgage Corporation ("FHLMC") and the Government National Mortgage
Association ("GNMA"). Based on this collateral and the Bancorp's holdings of
FHLB stock, the Bancorp is eligible to borrow up to $133,768,189. Unused
borrowing capacity at FHLBNY at December 31, 2004 was $35,768,189.
J.P. Morgan Chase
At December 31, 2004 , the Bank borrowed $1,500,000 against its $2,000,000
unsecured overnight line of credit. There was no need for such funding at
December 31,2003.
44
M&T Bank
At December 31, 2004 and 2003, the amount borrowed against the Bank's $5,000,000
unsecured overnight line of credit from M&T Bank was zero. $629,505
Note M. Subordinated Debentures
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.
Note N. Loan Commitments And Contingent Liabilities
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. Material losses are not anticipated. Such
financial instruments are recorded on the balance sheet 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.
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,
2004, the Bank's total commitments to extend credit were $4,893,925 at fixed
rates and $115,969,941 at variable rates. Fixed rate commitments have rates
ranging from 5.875% to 18%. 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 40 performance standby letters of credit
totaling $8,502,509 as of December 31, 2004. There were 44 of such 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.
The Bank has retained recourse on certain sold loans. The contract amount and
carrying value of these sold loans for the years ended December 31, 2004 and
2003 were $83,076 and $1,801,004.
The Bank has agreements (the "Agreements") with Bradley E. Rock, Anita M.
Florek, Robert J. Anrig, John A. Romano, Thomas J. Stevens and certain other
employees (collectively, the "Excecutives") which would become effective in the
event of a change in control of the Bancorp's stock. The Agreements provide that
if the Executives' employment were terminated by the Bank subsequent to a change
in control of the Bancorp for any reason other than cause, disability or death,
or if the Executive elects to terminate his or her employment following a change
in control of the Bancorp because of a diminution of the Executive's
compensation or responsibilities or following a breach by the Bank of the
Agreement, the Executive would be entitled (a) to receive an amount equal to
three times the sum of the Executive's highest salary and incentive compensation
paid in the three most recent years preceding the change in control, and (b) to
receive an amount equal to the contributions and benefits that the Executive
would have received for a three year period based on the benefits and
contributions paid on the Executive's behalf in the year preceding the
Executive's termination, and (c) to continue to participate in the health
benefit plans of the Bank for a period of three years following the termination.
The Agreement between the Bank and Mr. Rock also provides that if at any time
within one year after a change in control of the Bancorp Mr. Rock elects to
terminate his employment with the Bank for any reason, he will receive the
amounts and the benefits referred to in the previous sentence.
Note O. Capital Requirements and Restrictions on Retained Earnings
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities and certain off-balance-sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, under capitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At year end 2004 and
2003, the most recent regulatory notifications categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the institution's category.
45
Actual and required capital amounts and ratios are presented below as
of December 31, 2004:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2004
- ----------------
Total capital to risk-
weighted assets
Consolidated $62,515 11.39% $43,895 8.00% $54,869 10.00%
Bank 61,617 11.24 43,873 8.00 54,842 10.00
Tier 1 (core) capital to risk-
weighted assets
Consolidated 57,129 10.41 21,948 4.00 32,921 6.00
Bank 56,229 10.25 21,937 4.00 32,905 6.00
Tier 1 (core) capital to
average assets
Consolidated 57,129 9.00 25,362 4.00 31,702 5.00
Bank 56,229 8.41 25,274 4.00 31,592 5.00
December 31, 2003
- -----------------
Total capital to risk-
weighted assets
Consolidated $54,814 11.87% $36,939 8.00% $46,174 10.00%
Bank 53,823 11.66 36,928 8.00 46,160 10.00
Tier 1 (core) capital to risk-
weighted assets
Consolidated 49,646 10.75 18,469 4.00 27,704 6.00
Bank 48,655 10.54 18,464 4.00 27,696 6.00
Tier 1 (core) capital to
average assets
Consolidated 49,646 9.09 21,858 4.00 27,322 5.00
Bank 48,655 8.86 21,962 4.00 27,452 5.00
The Banking Law of the State of New York and the Federal Reserve Board regulates
the amount of cash dividends that may be paid without prior approval. Retained
earnings available for cash dividends were $25,146,086 and $21,486,814 at
December 31, 2004 and 2003.
During 2004, the Board of Directors re-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 24,748, 146,522 and
62,032 shares during 2004, 2003 and 2002 at a cost of $684,951, $2,467,700 and
$813,795.
Note P. Business Combination
On August 31, 2004, Bank of Smithtown acquired 100% of the outstanding shares of
Seigerman Mulvey Co., Inc. Operating results of Seigerman Mulvey Co., Inc. are
included in the consolidated financial statements since the date of acquisition.
As a result of this acquisition, the Bank expects to further solidify its market
share in the insurance and financial services business, expand its customer base
to enhance fee income and provide an opportunity to market additional products
and services to new customers.
The purchase price paid by the Bank is comprised of two components. At closing,
$1,000,000 was paid to the shareholders of Seigerman Mulvey Co., Inc. On each of
the next three anniversary dates of the acquisition, the prior stockholders will
be paid an amount equal to one hundred twenty percent of the income before taxes
generated by the acquired company. These amounts will be recorded as an increase
to the purchase price when paid. The company also incurred $53,249 in costs
associated with the acquisition.
The following table presents the allocation of the acquisition cost for
Seigermann Mulvey Co., Inc. to assets acquired and liabilities assumed, based on
their fair values:
46
Cash and cash equivalents $ 629,505
Accounts receivable 1,969,704
Fixed assets 54,538
Goodwill 388,291
Intangible assets 489,000
Other assets 8,366
----------
Total assets 3,539,404
Accounts payable 1,782,180
Other liabilities 703,975
----------
Total liabilities 2,486,155
----------
Net assets acquired $1,053,249
==========
Goodwill is not deductible for tax purposes. Intangible assets consist primarily
of customer relationships and covenants not to compete. Customer relationships
are being amortized on a straight-line basis over seven years and covenants not
to compete are being amortized on a straight-line basis over five years. The
intangible assets are net of accumulated amortization of $24,180 at December 31,
2004. Estimated intangible amortization for each of the next five years is as
follows:
2005 $72,540
2006 72,540
2007 72,540
2008 72,540
2009 72,540
Note Q. Quarterly Results of Operations (Unaudited)
----------Year Ended December 31, 2004----------
----------------------------
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
- ------------------------------------- --------- --------- --------- ---------
Interest income $ 8,334 $ 8,877 $ 9,311 $ 10,008
Interest expense 2,479 2,449 2,658 2,761
--------- --------- --------- ---------
Net interest income 5,855 6,428 6,653 7,247
Provision for loan losses -- -- 60 136
--------- --------- --------- ---------
Net interest income after provision for loan losses 5,855 6,428 6,593 7,111
Other non-interest income 1,018 1,119 1,216 1,167
Other operating expenses 3,530 3,495 3,678 3,966
--------- --------- --------- ---------
Income before income taxes 3,343 4,052 4,131 4,312
Provision for income taxes 1,213 1,474 1,489 1,651
--------- --------- --------- ---------
Net income $ 2,130 $ 2,578 $ 2,642 $ 2,661
========= ========= ========= =========
Earnings per share $ 0.36 $ 0.43 $ 0.45 $ 0.45
----------Year Ended December 31, 2003----------
----------------------------
First Second Third Fourth
(In 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 $ 0.33 $ 0.37 $ 0.40 $ 0.41
* Certain reclassifications have been made as discussed in Note A resulting
in increases in interest income of $47,000, decreases in other
non-interest income of $845,000 and decreases in other operating expenses
of $798,000 for the first, second and third quarters.
47
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. Management's annual report on internal control over
financial reporting and the related report of the Bancorp's auditors on the
effectiveness of internal control over financial reporting are not included in
this report.
Part III
Item 10: Directors and Executive Officers
Pages 2 through 3, and page 6 and page 14 of the Registrant's Proxy Statement
dated March 17, 2005 are incorporated herein by reference.
Item 11: Executive Compensation
Page 15 and page 17 of the Registrant's Proxy Statement dated March 17, 2005 are
incorporated herein by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Pages 12 through 13 of the Registrant's Proxy Statement dated March 17, 2005 are
incorporated herein by reference.
Item 13: Certain Relationships and Related Transactions
Page 16 of the Registrant's Proxy Statement dated March 17, 2005 is incorporated
herein by reference.
Page 35 of the Registrant's Annual Report to Stockholders for the year ended
December 31, 2004.
Item 14: Principal Accounting Fees and Services
Pages 7 through 8 of the Registrant's Proxy Statement dated March 17, 2005 are
incorporated herein by reference.
Part IV
Item 15: Exhibits, Financial Statements Schedules and Reports on Form 8-K
48
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 Stockholders for the year ended December 31,
2004
18 No change in accounting principles
19 Reference to Page 1 in 10-K
21 Bank of Smithtown
Hauppauge, New York 11788
24 None
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.
49
(1) Current report on Form 8-K (item 9) filed on October 21, 2004.
(ii) Current report on Form 8-K (item 8) filed on November 12, 2004.
(iii) Current report on Form 8-K (item 8) filed on November 19, 2004.
(iv) Current report on Form 8-K (item 8) filed on November 29, 2004.
(v) Current report on Form 8-K (item 9) filed on January 27, 2005.
50
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: 3/11/05 /s/ BRADLEY E. ROCK
-----------------------------------------
Bradley E. Rock, Chairman, President
and Chief Executive Officer
Date: 3/11/05 /s/ ANITA M. FLOREK
-----------------------------------------
Anita M. Florek, Executive Vice President
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 3/11/05
-----------------------------------------------
Bradley E. Rock, Chairman, President and
Chief Executive Officer
/s/ AUGUSTA KEMPER Date 3/11/05
-----------------------------------------------
Augusta Kemper, Director
/s/ PATRICK A. GIVEN Date 3/11/05
-----------------------------------------------
Patrick A. Given, Director
/S/ MANNY SCHWARTZ Date 3/11/05
-----------------------------------------------
Manny Schwartz, Director
/s/ BARRY M. SEIGERMAN Date 3/11/05
-----------------------------------------------
Barry M. Seigerman, Director
/s/ ROBERT W. SCHERDEL Date 3/11/05
-----------------------------------------------
Robert W. Scherdel, Director
/s/ PATRICIA C. DELANEY Date 3/11/05
-----------------------------------------------
Patricia C. Delaney, Director
/s/ SANFORD C. SCHEMAN Date 3/11/05
-----------------------------------------------
Sanford C. Scheman, Director
/s/ HYUKMUN KWON Date 3/11/05
-----------------------------------------------
Hyukmun Kwon, Director
51