Purchase saves Smithtown bank

If Smithtown Bancorp hadn't agreed to be acquired by a Connecticut banking company, it likely would have gone out of business, the company said in a document filed this week with the federal Securities and Exchange Commission.

The Hauppauge-based company, owner of the troubled Bank of Smithtown, will be taken over by the end of the year by People's United Financial for $60 million, if Smithtown shareholders approve. The decision, announced last month, came after three straight quarters of heavy losses while the company tried and failed to satisfy regulators' demands to strengthen the bank.

In the filing, signed by bank chairman and chief executive Bradley Rock, the company said it couldn't raise enough capital to satisfy regulators. Without the People's United acquisition, the company could face "further and more severe regulatory actions . . . thereby giving rise to substantial doubt as to the company's ability to continue as a going concern."

Rock, who is eligible for up to $10 million as a result of the acquisition, according to an earlier SEC filing, did not respond to requests for comment.

The most recent SEC filing paints a picture of how the once thriving bank led by Rock, the former chairman of the American Bankers Association, tumbled into disarray.

In the most recent quarter alone, it lost $29.2 million.

Despite regulatory orders to raise its ratio of capital to assets, it couldn't do so because bad loans continued to pile up. By June 30, bad loans had almost doubled in the previous six months to $227.5 million, or 11.5 percent of its total loans. At most good-performing banks, fewer than 3 percent of loans are bad.

The bad loans damaged the bank in several ways. They depressed its interest income on loans, its main source of revenue. And they forced the bank to set aside larger amounts to cover potential losses.

They even forced certain expenses to quadruple in the second quarter, as the bank had to spend more on legal fees and other expenses for properties in foreclosure.

And there was no prospect for improvement. "The effects of the economic recession, especially commercial real estate difficulties, took, and will continue to take, a significant toll on our portfolio," the filing said.

In addition to loan losses, the bank had other troubles. It had lost $3.3 million on trust preferred securities, a type of debt once popular with smaller banks because they could be counted as capital. The new financial regulations signed into law last month order them to be phased out.

The bank has assets of $2.3 billion and 30 branches.