LI bank posts 2nd consecutive quarterly loss

Smithtown Bancorp Inc.'s recovery plan is working - but not quickly enough, said the company's chairman as the bank holding company reported Monday its second straight quarter with a multimillion-dollar loss.

The Hauppauge-based company, which owns Bank of Smithtown, has been struggling to deal with the effects of bad commercial real estate loans. The company lost $13.8 million in the first quarter.

"We've seen a huge number of store closings and office vacancies," bank chairman and chief executive Brad Rock Sr. said. "That's what has hurt us this quarter."

The bank resolved $45.1 million of bad loans in the first quarter, losing $6 million in the process, but bad loans soared by 56.4 percent in the same period to $203.6 million. That represents 10.1 percent of the bank's total loans, more than double the national average, which is itself elevated because of the recession.

"We've had a large number of new loans go bad," Rock said. The bank, which has $2.4 billion in assets and 29 branches, set aside another $25 million to cover potential losses, bringing the total to $51.2 million at the end of the quarter.

Because the bank is under a consent decree with federal and state regulators, it must also raise capital as it gets rid of bad loans. The bank faces a June 30 deadline to meet regulators' targets or to come up with a plan for how it will do so.

To meet the deadline, Rock said the bank will be more aggressive about selling off packages of bad loans, possibly including current loans to attract buyers. That will get the bad loans off the bank's books more quickly, but the bank will lose more on the sales, Rock said.

A less attractive option to raise capital includes issuing more stock for sale. Regulators want to see a plan to sell the bank itself if it misses the June 30 deadline, but Rock said that would be a last resort.

Smithtown's stock closed Monday down 73 cents, or 15.7 percent, to $3.92 a share. The stock has lost almost 70 percent of its value in the past year, sparking several shareholder lawsuits.

Rock declined to discuss the lawsuits, but he addressed another potential issue that is plaguing smaller banks across the country: trust-preferred securities.

Since the mid-1990s, many banks have issued these securities to investors because rules permitted banks to count the money they raised as capital while deducting the interest payments on the securities from taxes. The securities are backed by cash flow. But with the recession and bank failures, the market for trust-preferred securities dried up. As a result, banks that hold them are having trouble raising capital.

Smithtown Bancorp issued a total of $38 million in trust-preferred securities, Rock said. The company has decided to defer interest payments on its securities, as it is allowed to do, he said.