Dear Valued Shareholders
and
Customers of Simsbury Bank:
Dear Valued Customers and Shareholders:
Simsbury Bank was formed with two core commitments to the market: provide excellent, respectful
service to all customers all the time and provide businesses and consumers with a locally managed loan
source to help them achieve their goals. By fulfilling these commitments, the Bank would provide its
shareholders with a competitive return and the communities we serve with a trusted and involved partner.
These commitments continue to guide Simsbury Bank and its holding company, SBT Bancorp.
The subprime mortgage crisis began in August 2007. Early in 2008, we anticipated that the continued
unraveling of the subprime mortgage crisis would impact the national economy for much of 2008 and
banks like ours. We did not, however, anticipate the depth and breadth of the financial market crisis that
unfolded subsequent to the Treasury Department’s nationalization of Fannie Mae and Freddie Mac in
early September 2008 and its impact on the economy. We now navigate through a period of economic
uncertainty unlike any in the post-World War II period. The financial market crisis and economic
recession have disrupted many large national and regional banks that serve our market. We are mindful
now more than ever that our commitment to the importance of a locally managed bank able to meet its
market’s loan demand in good economic times and bad is critical to the wellbeing of our region.
We are very pleased to report that Simsbury Bank’s strong balance sheet and dedicated staff position it
extremely well to fulfill our enduring commitments to the market during this most difficult economic
period. We have a relatively low risk loan portfolio comprised of loans secured by conventionally
underwritten residential mortgages and home equities (70%), commercial loans (28%) and consumer
loans (2%). We have only modest exposure to one of the typically riskiest loan categories, non-owner
occupied commercial real estate secured loans, which comprise less than 8.5% of our total loans, well
below many peer banks. Our deposit mix remains low cost and diversified with almost 32% checking
deposits, 29% money market and savings deposits, and 39% certificates of deposit. Finally, our capital
levels remain comfortably above levels qualifying the Bank as “well capitalized” from a regulatory
perspective. However, as you know, we have chosen to participate in the Treasury Department’s Capital
Purchase Program in order to ensure that we have adequate capital to support loan demand and protect us
from unexpected adverse consequences of the uncertain economic conditions. This capital will permit us
to continue to enjoy the loan and deposit growth of the past year as more and more businesses and
consumers choose us as their banking and investment services partner.
2008 was a year of mixed results for Simsbury Bank. We enjoyed the best loan and deposit growth in
years. However, we reported a loss for the year due principally to a number of one time events related to
the financial market crisis, weakening economy and our decision to align our Albany Turnpike market
presence with demonstrated customer demand.
Earnings
In 2008, Simsbury Bank’s total revenue, net interest income plus other income (excluding security write
downs and losses), increased 2% from 2007. While the Bank enjoyed strong deposit growth of 18% and
robust loan growth of 9%, our loan to deposit ratio decreased from 89% at year end 2007 to 82% at year
end 2008. As deposits grew more quickly than loans, we increased our investment activity. The almost
33% increase in our investment portfolio, whose components are generally lower yielding than loans,
resulted in a decline in our net interest margin from 4.16% in 2007 to 3.95% in 2008. As a result, our net
interest income and dividend increased only 2% in 2008. Meanwhile, Banking and Investment Services
Fees & Commissions declined 1% due principally to a 60% decline in investment services commissions
offset by a strong 12% increase in banking fees. Banking fee increases were due principally to customer
growth and more careful management of fee waivers. Investment services commissions declined due
principally to lower capacity as we had only one financial advisor for more than half the year, the
attention required for our transition to LPL Financial for brokerage services, and the difficult fourth
quarter investment markets due to the financial market crisis.
Click here to see a larger graph.
Our revenue growth, however, did not translate into net income growth. The principal reasons that we
reported a net loss for the year were the almost total loss in value of our Fannie Mae and Freddie Mac
preferred stock holdings and the resulting mark-to-market write-down, the repositioning of our Canton
location in serving the Albany Turnpike marketplace and resulting expenses, and the otherwise modest
increase in other operating expenses, offset somewhat by the proceeds from a bank owned life insurance
policy.
- As you know, when the Treasury Department nationalized Fannie Mae and Freddie Mac in early
September 2008, they chose to treat preferred stockholders of these government sponsored enterprises
in the same manner as common shareholders, while fully guaranteeing the enterprises’ debt
obligations. This resulted in a $1,755,600 Other Than Temporary Impairment charge to mark our
investments to market. While we joined with hundreds of community banks and trade associations
across the country to seek a change in this treatment, community banks were ultimately able to
achieve only, though very importantly, more appropriate tax treatment of the write-down.
- In the first half of 2008, we took a close look at how our customers use our full service branches. We
found that four of the branches experienced full utilization of all of the services we offer while one,
Canton, was used primarily for convenience transactions such as check cashing. Based on our
customers’ preferences, we decided to reposition the Canton location to continue to meet the
convenience transaction service demand with an ATM and night deposit drop, and to redeploy the
branch space for mortgage, commercial and investment services business development activities.
This decision resulted in the need to accelerate recognition of $485,000 in costs associated with the
former full service activities. These expenses were recognized in the second half of the year.
- By far the largest component of our noninterest expenses, accounting for slightly less than half, are
salaries and employee benefits. In 2008, these expenses increased only 2.8%. Occupancy and
equipment expense increased 32.7%. However, excluding the accelerated expenses related to the
repositioning of the Canton location, occupancy and equipment expenses increased only 0.4% for the
3
year. Our remaining noninterest expenses, comprising approximately 29% of the total, increased
14.4% due in part to higher volume related costs (correspondent charges, postage, forms and
supplies), as well as higher marketing expenditures and professional fees.
- Finally, our earnings benefited from a $328,358 bank owned life insurance death benefit related to a
policy insuring our director and former President & CEO Barry Loucks. Barry’s premature death
triggered payment of the death benefit on a policy purchased to provide a source of income for Bank
employee and executive benefits.
Click here to see a larger graph.
Loans and Deposits
2008 was an excellent year for loan and deposit growth. The Bank enjoyed an 8.7% increase in net loans
and an 18.2% increase in deposits. Commercial purpose loans increased by 11.9% and residential
property secured mortgages and home equities increased by 10.9%. Consumer loans declined by 45%
due to the runoff of a purchased loan portfolio. At year end, 70% of the Bank’s loans were residential
property secured mortgages and home equities, 28% were commercial loans and the balance consumer.
Deposit growth was led by time deposits which increased by 33.5% as consumers and businesses sought
the safety of FDIC insured, guaranteed return certificates in the face of the unfolding financial market
crisis. Savings and NOW deposits also increased for the same reason by 17.8%. Demand deposits
declined slightly by 4.7%. The Bank’s deposit mix remains favorable and relationship-based with 32% in
checking deposits, 30% in savings and money market, and 38% in time deposits. The Bank also
experienced an increase in the average deposit balance to over $10,800 from $9,200 at year end 2007.
Click here to see a larger graph.
Asset Quality
The Bank’s asset quality remains strong both absolutely and compared to our competitors. Although
nonaccruals and loan charge offs increased in 2008, they remained at low levels. Nonaccruals increased
to $560,917 (0.31% of gross loans and leases) from $5,328 in 2007, while charge-offs net of recoveries
increased to $357,407 (0.21% of average loans and leases) from $23,777 in 2007. The Bank’s provision
for loan losses in 2008 totaled $450,000 compared to $250,000 in 2007. The loan loss reserve increased
almost 5% to $2,017,145 equaling 1.12% of total loans and leases.
With the likelihood of a difficult economy through 2009 high, we feel that our relatively low exposure to
commercial real estate secured loans is one of our strengths. With only approximately 18% of our loans
financing commercial real estate, we are among banks with the lowest exposure to commercial real estate
in our market area. Construction and development loans total approximately 5% of total loans and nonowner
occupied commercial real estate secured loans total approximately 8.5% of our total loans.
Capital
Due to the Company’s net loss, shareholders’ equity and book value per share both declined in 2008 but
were above 2006 year end levels.
Click here to see a larger graph.
The Bank’s capital position was adversely impacted by our net loss in 2008; however, we remain
comfortably “well capitalized” compared to the FDIC’s capital adequacy standards. Nevertheless, we
believe that the current difficult economic environment combined with steady business and consumer
loan demand suggest that we add to capital to ensure that your company continues to have the capital
necessary to weather these uncertain times and have the capacity to meet loan demand as more businesses
and households turn to locally managed banks to meet their needs. The management and board of
directors determined that the Treasury’s Capital Purchase Program offered the most advantageous source
of capital at this time. As such, on March 27, 2009, SBT Bancorp issued 4200 shares of preferred stock
to the Treasury in return for $4 million of capital. This capital qualifies for treatment as “Tier 1” capital
from a regulatory perspective.
Click here to see a larger graph.
Financial Markets, Economic Conditions and SBT Bancorp The financial market crisis began in August 2007 and then accelerated in September 2008 with the
Treasury’s decision to nationalize Fannie Mae and Freddie Mac. We have all learned a great deal about
the causes of this crisis and it is likely that more will be learned. We continue to witness unprecedented
intervention in the financial markets and economy by the federal government and anticipate significant
changes to the regulatory framework within which financial companies, including ours, operate. At the
same time, we are all dealing with the consequences of the crisis in our households, businesses, and local,
state and federal governments. There is still great uncertainty as to the ultimate severity and duration of
the economic recession. Inevitably, there will be a recovery of the economy. However, it is unclear to
what degree the recovery will resemble those of the past or instead reflect fundamental changes in
household and business consumption, saving, borrowing and investing behavior.
Banks are a reflection of the economy. Simsbury Bank’s success is tied to the success of the businesses
and households in Central Connecticut. Simsbury Bank manages its assets and liabilities conservatively
and with the knowledge that economic cycles will test any unhealthy loan or deposit concentrations.
Most of our loans are to businesses, families and individuals in our primary market area. We try to
mitigate this geographic concentration risk through careful underwriting and by having a diverse loan
portfolio by loan type and borrower. Our deposits are adequate to fund most of our loan and investment
activities and reflect the strong relationship orientation of our focus with a healthy mix of checking,
savings and time deposits. We do not rely on wholesale funding such as brokered CDs. We occasionally
borrow from the Federal Home Loan Bank when it offers rates, terms and flexibility better than we can
obtain through local deposits.
Looking Forward, Not Pulling Back
We look forward with confidence rooted in the strength of our people, our performance culture, our
commitment to customer service excellence and the resilience of our market area. The current financial
market and economic crisis creates an opportunity for us. We are open for business and seeking to
provide the capital and financial strength that our market demands. We will manage risk well and create
value for our shareholders, customers and the communities we serve.
We appreciate your support and look forward to continuing to help our customers achieve their life goals
by being their banking and investment partner of choice.
Sincerely,
Martin J. Geitz
President & Chief Executive Officer
860-651-2088
mgeitz@simsburybank.com
Click here to read President Geitz’s Letter to Shareholders and Customers in Adobe Portable Document Format (PDF)
Equal Housing Lender
