Bank that rejected TARP faces sharp reversal

A year after rejecting money from the Troubled Asset Relief Program because of its "onerous restrictions,'' Smithtown Bancorp Inc. has found itself with mounting losses and a different form of government intervention.

The company, which is based in Hauppauge, N.Y., and operates Bank of Smithtown, lost $19.8 million in the fourth quarter, leaving it with a deficit of $11.8 million for all of 2009.

It said in its earnings announcement that it also had entered into a consent agreement with the Federal Deposit Insurance Corp. and a parallel consent order with the New York State Banking Department.

The company made headlines in January 2009 when Bradley Rock, chairman and chief executive, announced that it would not participate in TARP, even though the Treasury Department had approved $37.8 million in capital.

At the time he cited "onerous restrictions on banks" that accompanied the government investment, claiming that it made no sense "for a healthy and profitable bank to take the money."

Smithtown had earnings of $15.7 million for 2008. Its loss for 2009 was mainly the result of a $38.1 million provision for loan losses in the fourth quarter, and a $7 million write down on real estate it owned. 

The bank ended the year with $130.2 million in nonperforming loans, up from just $5.26 million at the end of 2008. It has roughly $2.6 billion in total assets.

News of the big fourth-quarter loss and the closer governmental supervision comes on the heels of the December decision by Smithtown's board of directors to bypass a cash dividend for the fourth quarter.

Rock noted at the time that the Company had previously halted cash dividends in the early 1990s when an economic slowdown and a real estate downturn made it prudent to do so.

Rock defended the December withholding, saying, "We believe that this is a time to conserve capital."

His demeanor and message were far different when he announced the company's decision to forego TARP.  At that time, he claimed the bank's capital was not an issue and that he objected to TARP's restrictions on dividend payments to stockholders.

"We have had record earnings, the best year in the history of the bank,'' he said in an interview with Newsday.  "Why would we not pay dividends?"

Ironically, one of the strictures of both the consent agreements is that the payment of dividends will now require the approval of both federal and state regulators.

Other stipulations of the pacts include improvements in credit administration and tighter controls on the loan underwriting and review process. The bank also is required to reduce its holdings of certain assets and shrink its concentration in commercial real estate loans, all in the hopes of increasing profitability.