Advertisement
Investing

The Little Bank That Could, But Didn’t

Shares of Smithtown Bancorp tanked because the bank’s bad loans soared.

We thought we’d found the perfect bank investment when we told you about the Bank of Smithtown. In 2008 and the first half of 2009, it appeared to have weathered the financial crisis all but unscathed. But as 2009 progressed, New York–area housing and commercial real estate markets soured, and the bank’s book of bum loans began to swell. Loans on which Smithtown wasn’t collecting payments reached 2.8% of its total loans at the end of the third quarter. That’s lower than the average among banks of similar size, but it represents a sixfold increase from the first quarter of 2009. As a result, Smithtown just broke even for the quarter. Since we recommended the stock (symbol SMTB), the shares have plunged 58%, to their recent price of $6, and the company has suspended dividend payments.

Advertisement - Article continues below

How did we get it wrong? We failed to recognize that the bank’s buffer against bad loans was on the thin side, so the increase in nonperforming loans vaporized profits. But the stock’s plunge is out of proportion with the company’s loan problems. Smithtown isn’t a zombie bank with a black-hole balance sheet, and yet the stock currently sells for only six times estimated 2010 earnings of 90 cents per share and for just more than half its book value (even Citigroup is more richly valued). The bank’s deposit base -- its funding for future loans and future profits -- is still growing. And its chief executive is still the hands-on Brad Rock, who has lived through banking crises before.

Advertisement
Advertisement - Article continues below

There will likely be a few more quarters of pain for Smithtown’s profits-and-loan book, but the stock will probably recover sooner. Hold on to your shares.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020

Recommended

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
13 Best Vanguard Funds for the Next Bull Market
mutual funds

13 Best Vanguard Funds for the Next Bull Market

Optimistic that the bounce since March is indeed the start of the next bull market? Here are the 13 best Vanguard funds to help you make the most of i…
July 7, 2020
3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing CEFs, you can sweeten the pot even further.
July 2, 2020