Exuberant lending in an uncertain economy appears to have caught up with the Bank of Smithtown, which announced Monday that its parent Smithtown Bancorp posted a loss of $19.8 million for the fourth quarter and entered agreements with federal and state regulators to limit its lending and improve its financial strength.
Bradley E. Rock, the bank's chairman, president and chief executive, said Monday its problems stem from the poor economy affecting the commercial real estate market, the bank's primary lending source. He said he expects the bank to become profitable again this year.
"With the benefit of hindsight, I wish we'd cranked down overall lending sooner," Rock said Monday. "But that's Monday-morning quarterbacking to a certain extent."
Although the agreements with the Federal Deposit Insurance Corp. and the State Banking Department require the bank to improve its loan underwriting within 60 days, Rock said the bank's lending standards were not insufficient.
The bank, with $2.6 billion in assets and 29 branches in Suffolk and Nassau, significantly increased lending last year. In the first nine months of 2009, net loans were $2.1 billion, compared with $1.5 billion in the same period the previous year. Commercial real estate lending grew from $646 million to $974 million in that period.
But bad loans accumulated, too. The bank now reports having $130 million in problem loans, more than double three months ago.
Rock said the commercial real estate market suffered when people lost jobs and started spending less, leading to businesses not being able to pay rent or mortgages.
"That's when it starts to impact Bank of Smithtown, because our primary line of business is commercial real estate lending," Rock said.
Banking experts said agreements with regulatory agencies are often a sign of trouble, but don't necessarily mean that failure is certain. Indeed, regulators prefer to limit what a bank can do in the hopes of avoiding failure, said Carlos Ramirez, a finance professor at George Mason University and a visiting fellow at the FDIC. Ramirez said banks on the brink of failure often "go into this lending frenzy, hoping something will pay off. It's almost always a prescription for failure." That's because bad loans eat into a bank's remaining capital.
The agreements with regulators require the bank to increase its capital, but Rock said the increases are not large and won't be difficult to attain.
Anoop Rai, finance professor at Hofstra University, said the bank is probably strong enough to absorb the losses. He said its apparent intent to deal with the problem quickly is smart.
Rock said the developments are a "nonevent for customers," and shareholders will see the stock's value return.
Stock closing price
$11.54 on Sept. 30, 2009, end of third quarter
$4.60 on Monday
Loan loss provision
(amount bank expects to write off)
3Q 2009: $23.1 million
4Q 2009: $38.5 million
(accounts at least 30 days late)
3Q 2009: $58.3 million
4Q 2009: $130.2 million