Grim 3Q for Smithtown Bancorp before takeover

Smithtown Bancorp has reported its last quarterly earnings as an independent company before its takeover by Connecticut-based People's United Financial is completed by year- end, and as in the past several quarters, the report is grim.

In the third quarter, the company that owns the century-old Bank of Smithtown reports losing $20.5 million, bringing losses for the year to $63.5 million.

The bleeding was generated mostly by bad loans. The bank reported writing off more than $47 million in loans, two-thirds of which were failed commercial real estate loans. In the most recent quarter, the bank set aside $25 million to cover future potential losses. Bad loans had grown to almost $280 million - 14.6 percent of total loans, or about five times as high as many similar banks. 

Holding its focus
Bank officials declined to comment beyond a statement issued by Brad Rock Sr., the chairman and chief executive: "Our focus remains on serving the long-term valued customers of Bank of Smithtown as we work through the process of merging our company with People's United Financial."

Not too long ago, the bank was one of the most well-regarded in the country. As recently as July 2009, Kiplinger's Personal Finance, the respected financial magazine, held it up as a model of a well-run bank and lavished praise on Rock, then the chairman of the American Bankers Association.

The magazine said other bankers "could learn something from the aplomb and hands-on expertise with which Rock tackles every aspect of his business. And Smithtown Bancorp's performance figures would make even the most stone-faced of executives smile. . . . The bank has done a marvelous job of not making bad loans."

The bank's fall was dizzyingly quick, as large numbers of commercial real estate loans went bad and the stock lost much of its value. According to one shareholder lawsuit that is still pending, many of the poor loans were made by Rock's son, Brad Rock Jr., who worked at the bank as a loan officer. 

Fallout from bad loans
The bad loans constricted the bank's ability to make money and even forced it to stop paying interest on trust-preferred securities, a form of debt that banks are allowed to count as capital.

By March, Kiplinger's was forced to admit it had "failed to recognize that the bank's buffer against bad loans was on the thin side," but it still expressed faith in Rock's ability to save the bank.

State and federal regulators, however, forced the bank to pledge to reduce its bad loans and raise capital levels. It failed to do both, so it shopped itself to potential buyers. People's United agreed to buy the company for $60 million. Officials of that company declined to comment on Smithtown's condition.

Officials at other banks are loath to comment publicly about a competitor, but several are rankled that Rock is eligible for about $10 million in compensation because of the deal.

Earlier this year, a shareholder at the annual meeting of Bridge Bancorp, the company that owns Bridgehampton National Bank, asked company president Kevin O'Connor if their bank should try to buy Smithtown. "I don't know if shareholders want to get involved in that," O'Connor said.