Markets

The Little Bank That Made Good

The big guys could learn something from a Long Island institution that reported only one new bad mortgage this year.

By Elizabeth Ody, Associate Editor

From Kiplinger's Personal Finance magazine, July 2009

Brad Rock smiles as he tells the story of his first job at the Bank of Smithtown. Having impressed then chief executive Irving "Buck" Schechter with drive and thoughtfulness beyond his 19 years, Rock was given a summer job that paid $125 a week. "Buck took me into the basement of the main branch," Rock recalls, "and he said, 'All right, clean the basement,' which probably hadn't been cleaned since 1910," when the bank was founded.

Now the chief executive, chairman and president of the bank's parent company, Rock can appreciate -- from his spacious corner office overlooking the expressway that links Long Island to New York City -- how much he learned about the banking business by sifting through old paperwork 38 years ago. "I had to decide what to throw out and what to keep, so I would save interesting records and ask Buck to explain them to me."

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It's a shame that more bank executives don't spend a summer cleaning out the basement. Many of them 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. Not only has the company (symbol SMTB) remained profitable throughout the credit crisis; it reported its 14th consecutive year of record profits in 2008, with earnings up 10%, to $15.7 million, or $1.55 per share. The company's return on equity (a measure of profitability) in 2008 was 17%, compared with an average of 6% for its peers.

Long-term success

Not even stellar results, though, could prop up Smithtown's shares in a market that, until recently, shunned bank stocks the way a hiker sidesteps poison ivy. The stock, which closed at $13 on May 8, has fallen 34% over the past year and now trades for a modest nine times its profits over the past 12 months. Long term, however, Smithtown has been a winner. Over the past ten years through May 8, the stock returned 12% annualized, trouncing Standard & Poor's 500-stock index by an average of 15 percentage points per year.

The bank has done a marvelous job of not making bad loans. Less than one-half of 1% of its loans are not performing (that is, are in or near default). The average among its peers is five times higher, and Citigroup's comparable ratio is nine times higher. In the first quarter, Smithtown added precisely one mortgage to its roster of sour loans. "The Long Island real estate market has held up better than some places," says Mark Fitzgibbon, an analyst at Sandler O'Neill, and that partly explains the good numbers. Nevertheless, he says, "other Long Island banks have seen non-performers rise dramatically." Smithtown was deemed eligible for $38 million in capital from the federal government's Troubled Asset Relief Program, but the bank elected not to participate. Says Rock: "We're in our best of times."

You won't find any smelly subprime mortgages or ticking-time-bomb credit-default swaps on Smithtown's balance sheet. "The banking business, done right, is a very boring business," Rock says. Interest on loans generated 87% of the bank's $101 million in revenues in 2008. A small investment portfolio, account fees, and Smithtown's small trust, investment and insurance business units generated the rest.

Commercial mortgages account for the largest chunk of the bank's loan book, at 45%, followed by 29% in single-family homes and apartment buildings. A typical loan might be a commercial mortgage to a local small business for $1 million to $10 million.

Rock has spent most of his life in Smithtown, which blends the charm of a small New England town with the sprawling malls of a modern suburb. The town's star athlete in high school, Rock attended Boston College on a full football scholarship before transferring to the University of Connecticut, from which he graduated in 1975. He received his law degree from Cornell University in 1978.

One summer while in college he decided it was time to get serious about his career. "I knew I wanted to be either a lawyer or a banker," he says. So his father introduced him to Schechter, who was both: president of the Bank of Smithtown, and head, with his brother, of a local law firm located a stone's throw from the bank's main branch, on Main Street.

From age 19 on, Rock shadowed Schechter whenever he wasn't in school. In turn, Schechter allowed Rock to sit in on high-level meetings and soak up everything he could about banking. By his late twenties, Rock had married his high school sweetheart, Tracy, settled down in Smithtown and made partner at the Schechter law firm, where he mostly represented outside banks doing business on Long Island. In 1990, after several years on the Bank of Smithtown's board, directors asked him to take on the top posts.

Back then, the bank's survival was hardly a sure thing. Schechter's health had steadily deteriorated after he was struck by a car a few years earlier. His decline coincided with the savings-and-loan crisis, which would ultimately claim nearly 750 thrifts. By 1990, the Bank of Smithtown had a festering pile of $16 million in nonperforming loans on its books -- an astounding 20% of total loans. Plus, says Rock, now 57, the bank was exceptionally wasteful. Its efficiency ratio, which measures expenses as a percentage of revenues, was "into the 80s," he recalls. "We were very fat and lazy."

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