United States


Securities and Exchange Commission


Washington, D.C.
20549





Form 10-Q


QUARTERLYREPORT PURSUANT TO SECTION13 or 15(d)OF


THE SECURITIES EXCHANGEACT OF 1934





For the quarterly period endedJune 30,
2010





Commission File Number 0-13314





SMITHTOWN BANCORP, INC.


(Exact name of Registrant as specified
in its charter)





New York
            11-2695037(State or other jurisdiction of
      incorporation or organization)
            (IRS Employer Identification
      No.)100 Motor Parkway, Suite 160,
      Hauppauge, NY
            11788-5138(Address of Principal Executive
      Offices)
            (Zip
  Code)





(631) 360-9300


(Registrant's telephone number,
including area code)





Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  YesxNo ̈





Indicate by check mark
whetherthe Registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (Section 232.405 of this chapter) during the preceding 12
months (or for such shorter
period that the Registrant was required to submit and post such
files).  YesxNo ̈





Indicate by check mark
whether the Registrant is a large accelerated filer, an accelerated filer,  a
non accelerated filer, or a smaller reporting company.  See the
definitions of  “accelerated
filer”and
“smaller
reporting company”in Rule 12b-2 of the
Exchange Act. (Check one):  Large accelerated filer ̈Accelerated
filerxNon-accelerated filer ̈Smaller reporting
company ̈





Indicate by check mark
whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.):   Yes ̈Nox





Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest practicable
date:





Shares of Common Stock ($.01 Par Value)
Outstanding as ofAugust 2,
2010


14,967,508








SMITHTOWN BANCORP, INC.





INDEX





Part I - FINANCIAL
      INFORMATIONItem 1.
                                          Financial
      StatementsConsolidated Balance Sheets
      (Unaudited)June 30, 2010 and December 31,
      2009
                                          
                                          3Consolidated Statements of Income
      (Unaudited)Three and Six Months Ended June
      30, 2010 and 2009
                                          
                                          4Consolidated Statements of Changes
      in Stockholders’Equity (Unaudited)Six Months Ended June 30,
      2010
                                          
                                          5Consolidated Statements of Cash
      Flows (Unaudited)Six Months Ended June 30, 2010 and
      2009
                                          
                                          6Notes to Unaudited Consolidated
      Financial Statements
                                          
                                          7Item 2.
                                          Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                                          
                                          20Item 3.
                                          Quantitative and Qualitative
      Disclosures About Market Risk
                                          
                                          33Item 4.
                                          Controls and
      Procedures
                                          
                                          34Part II - OTHER
      INFORMATIONItem 1.
                                          Legal
      Proceedings
                                          
                                          34Item 1A.
                                          Risk
      Factors
                                          
                                          34Item 2.
                                          Unregistered Sales of Equity
      Securities and Use of Proceeds
                                          
                                          35Item 3.
                                          Defaults Upon Senior
      Securities
                                          
                                          35Item
    4.
                                          Reserved
                                          
                                          35Item 5.  Other
      Information
                                          
                                          35Item 6.Exhibits
                                          
                                          35Signatures





Exhibit
2.01
              Agreement and Plan of Merger,
      dated July 15, 2010, between People’s United Financial, Inc.
      andSmithtown Bancorp, Inc.
      (Incorporated by reference to Exhibit 2.1 of Form 8-K Current Report
      filedJuly 16, 2010,  File No.
      000-13314.)Exhibit
10.1
              Written Agreement by and between
      Smithtown Bancorp, Inc. and Federal Reserve Bank of New York
      datedJune 22,
      2010.  (Incorporated by reference to Exhibit 9.01 of Form 8-K
      Current Report filed June 28, 2010,File No.
      000-13314.)Exhibit 31.1
              Certification of Principal
      Executive Officer pursuant to Rule 13a-14(a)Exhibit
31.2
              Certification of Principal
      Financial Officer pursuant to Rule 13a-14(a)Exhibit 32
              Certification of Chief Executive
      Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18
      U.S.C. Section
1350


2





Item 1.  Financial
Statements


Consolidated Balance Sheets(unaudited)


(Dollar amounts in thousands except
share data)


June30,2010
                
                
                December31,2009ASSETSCash and cash
      equivalents
                
                $
                17,283
                
                
                $
                18,745Interestearning deposits with
      banks
                
                
                19,844
                
                
                
                3,409Total cash and cash
      equivalents
                
                
                37,127
                
                
                
                22,154Term
    placements
                
                
                507
                
                
                
                507Securities available for
      sale
                
                
                209,221
                
                
                
                397,274Securities held to maturity (fair value of $34 and
      $67,
      respectively)
                
                
                33
                
                
                
                66Loans held for
      sale
                
                
                -
                
                
                
                16,450Loans
                
                
                1,978,087
                
                
                
                2,090,896Less: allowance for loan
      losses
                
                
                57,999
                
                
                
                38,483Loans, net
                
                
                1,920,088
                
                
                
                2,052,413Restricted stock, at
      cost
                
                
                18,092
                
                
                
                18,353Real estate owned,
      net
                
                
                1,130
                
                
                
                2,013Premises and equipment,
      net
                
                
                51,421
                
                
                
                47,708Goodwill
                
                
                3,923
                
                
                
                3,923Intangible
      assets
                
                
                494
                
                
                
                616Cash value of company owned life
      insurance
                
                
                25,152
                
                
                
                24,874Accrued interest receivable and
      other assets
                
                
                39,984
                
                
                
                48,579Total
assets
                
                $
                2,307,172
                
                
                $
                2,634,930LIABILITIES AND STOCKHOLDERS'
      EQUITYLiabilities:Demand
    deposits
                
                $
                154,946
                
                
                $
                152,306Saving, NOW and money market
      deposits
                
                
                868,445
                
                
                
                999,066Time deposits of $100,000 or
      more
                
                
                439,383
                
                
                
                508,632Other time
      deposits
                
                
                361,024
                
                
                
                415,024Total
    deposits
                
                
                1,823,798
                
                
                
                2,075,028Other
      borrowings
                
                
                313,480
                
                
                
                352,820Subordinated
      debentures
                
                
                56,514
                
                
                
                56,351Accrued interest payable and other
      liabilities
                
                
                17,735
                
                
                
                14,976Total
      liabilities
                
                
                2,211,527
                
                
                
                2,499,175Commitments and contingent liabilities (Note
      10)
                
                
                -
                
                
                
                -Stockholders'
      equity:Preferred stock, par value $.01
      per share:Authorized: 1,000,000 shares atJune 30, 2010 andDecember 31, 2009,
      respectively; no shares issued or outstanding
                
                
                -
                
                
                
                -Common stock, par value $.01 per
      share:Authorized:35,000,000 shares atJune 30, 2010 andDecember 31, 2009, respectively;
      17,019,372and
      16,907,346shares issued atJune 30, 2010 andDecember 31, 2009,respectively; 14,967,508 and
      14,855,482shares
      outstanding atJune
      30, 2010 andDecember
      31, 2009, respectively
                
                
                170
                
                
                
                169Additional paid-in
      capital
                
                
                82,557
                
                
                
                82,318Retained
      earnings
                
                
                21,837
                
                
                
                64,820Treasury stock, at cost, 2,051,864
      shares
                
                
                (10,062
                )
                
                
                (10,062
                )94,502
                
                
                
                137,245Accumulated other comprehensiveincome (loss)
                
                
                1,143
                
                
                
                (1,490
                )Total stockholders'
      equity
                
                
                95,645
                
                
                
                135,755Total liabilities and
      stockholders' equity
                
                $
                2,307,172
                
                
                $
                2,634,930





See notes to consolidated financial
statements.


3





Consolidated
Statements of Income(unaudited)


(Dollar
amounts in thousands except share data)


Forthethreemonthsended
                  June30,
                
                
                Forthesixmonthsended
                  June30,2010
                
                
                2009
                
                
                2010
                
                
                2009Interest
      income:Loans
                
                $
                26,213
                
                
                $
                28,043
                
                
                $
                54,030
                
                
                $
                53,542Taxable
      securities
                
                
                1,409
                
                
                
                843
                
                
                
                3,426
                
                
                
                1,706Tax exempt
      securities
                
                
                499
                
                
                
                147
                
                
                
                1,001
                
                
                
                195Interestearning deposits with
      banks
                
                
                22
                
                
                
                40
                
                
                
                40
                
                
                
                126Other
                
                
                190
                
                
                
                225
                
                
                
                434
                
                
                
                307Total interest
      income
                
                
                28,333
                
                
                
                29,298
                
                
                
                58,931
                
                
                
                55,876Interestexpense:Savings, NOW and money market
      deposits
                
                
                2,148
                
                
                
                3,520
                
                
                
                4,663
                
                
                
                6,649Time deposits of $100,000 or
      more
                
                
                2,652
                
                
                
                3,282
                
                
                
                5,538
                
                
                
                6,711Other time
      deposits
                
                
                2,468
                
                
                
                3,451
                
                
                
                5,181
                
                
                
                7,268Other
      borrowings
                
                
                2,118
                
                
                
                2,262
                
                
                
                4,250
                
                
                
                4,486Subordinated
      debentures
                
                
                1,018
                
                
                
                477
                
                
                
                2,026
                
                
                
                993Total interest
      expense
                
                
                10,404
                
                
                
                12,992
                
                
                
                21,658
                
                
                
                26,107Net interest
      income
                
                
                17,929
                
                
                
                16,306
                
                
                
                37,273
                
                
                
                29,769Provision for loan
      losses
                
                
                27,500
                
                
                
                1,800
                
                
                
                52,500
                
                
                
                3,000Net interest income(loss)after provision for loan
      losses
                
                
                (9,571
                )
                
                
                14,506
                
                
                
                (15,227
                )
                
                
                26,769Noninterest
      income:Revenues from insurance
      agency
                
                
                877
                
                
                
                953
                
                
                
                1,717
                
                
                
                1,875Service charges on deposit
    accounts
                
                
                638
                
                
                
                551
                
                
                
                1,260
                
                
                
                1,118Net gain on the sale of investment
      securities
                
                
                -
                
                
                
                -
                
                
                
                518
                
                
                
                522Trust  and investment
      services
                
                
                152
                
                
                
                194
                
                
                
                349
                
                
                
                327Increase in cash value of company
      owned life insurance
                
                
                153
                
                
                
                117
                
                
                
                278
                
                
                
                233OTTIloss:Total OTTI
      losses
                
                
                (102
                )
                
                
                (255
                )
                
                
                (597
                )
                
                
                (255
                )Portion of loss recognized in
      other comprehensive income
                
                
                17
                
                
                
                -
                
                
                
                17
                
                
                
                -Netimpairmentlossesrecognized in
      earnings
                
                
                (85
                )
                
                
                (255
                )
                
                
                (580
                )
                
                
                (255
                )Other
                
                
                629
                
                
                
                386
                
                
                
                1,256
                
                
                
                902Total noninterest
      income
                
                
                2,364
                
                
                
                1,946
                
                
                
                4,798
                
                
                
                4,722Noninterest
      expense:Salaries and employee
      benefits
                
                
                5,319
                
                
                
                5,241
                
                
                
                10,560
                
                
                
                10,047Occupancy and
      equipment
                
                
                3,704
                
                
                
                2,780
                
                
                
                7,705
                
                
                
                5,358Federal deposit
    insurance
                
                
                1,603
                
                
                
                1,797
                
                
                
                3,261
                
                
                
                2,347Amortization of intangible
      assets
                
                
                60
                
                
                
                90
                
                
                
                122
                
                
                
                181Other
                
                
                5,156
                
                
                
                1,307
                
                
                
                7,697
                
                
                
                2,670Total noninterest
      expense
                
                
                15,842
                
                
                
                11,215
                
                
                
                29,345
                
                
                
                20,603Income (loss) before income
      taxes
                
                
                (23,049
                )
                
                
                5,237
                
                
                
                (39,774
                )
                
                
                10,888Provisionfor income
      taxes
                
                
                6,165
                
                
                
                1,824
                
                
                
                3,209
                
                
                
                3,859Net income(loss)
                
                $
                (29,214
                )
                
                $
                3,413
                
                
                $
                (42,983
                )
                
                $
                7,029Comprehensive income
      (loss)
                
                $
                (27,172
                )
                
                $
                2,308
                
                
                $
                (40,350
                )
                
                $
                5,368Basic earnings (loss) per
      share
                
                $
                (1.97
                )
                
                $
                0.26
                
                
                $
                (2.90
                )
                
                $
                0.56Diluted earnings (loss)per
      share
                
                $
                (1.97
                )
                
                $
                0.26
                
                
                $
                (2.90
                )
                
                $
                0.56





See notes to consolidated financial
statements.


4





Consolidated Statements of Changes in
Stockholders’Equity (unaudited)


(Dollar amounts in thousands except
share data)


AccumulatedCommon Stock
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                  
                  
                  Total
                  
                  
                  TotalShares
                    Outstanding
                  
                  
                  Amount
                  
                  
                  Paid
                    In Capital
                  
                  
                  Retained
                    Earnings
                  
                  
                  Treasury
                    Stock
                  
                  
                  Comprehensive
                    Loss
                  
                  
                  Stockholders’
                    Equity
                  
                  
                  Comprehensive
                    (Loss)Balance
      at January 1, 2010
                  
                  
                  14,855,482
                  
                  
                  $
                  169
                  
                  
                  $
                  82,318
                  
                  
                  $
                  64,820
                  
                  
                  $
                  (10,062
                  )
                  
                  $
                  (1,490
                  )
                  
                  $
                  135,755Comprehensive
      income:Net
      (loss)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (42,983
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (42,983
                  )
                  
                  $
                  (42,983
                  )Change
      in unrealized gain (loss) on securities available for sale, net of
      reclassification and tax effects
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,778
                  
                  
                  
                  2,778
                  
                  
                  
                  2,778Change
      in unrealized gain (loss) on securities available for sale for which a
      portion of anOTTIhas
      been recognized in earnings, net of reclassification and
      tax
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (25
                  )
                  
                  
                  (25
                  )
                  
                  
                  (25
                  )Changes
      in funded status of retirement plans, net of
    tax
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (120
                  )
                  
                  
                  (120
                  )
                  
                  
                  (120
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (40,350
                  )Issuance
      of shares for employee stock ownership plan
                  
                  
                  50,526
                  
                  
                  
                  1
                  
                  
                  
                  239
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  240Stock
      awards granted
                  
                  
                  61,500Balance
      at June 30, 2010
                  
                  
                  14,967,508
                  
                  
                  $
                  170
                  
                  
                  $
                  82,557
                  
                  
                  $
                  21,837
                  
                  
                  $
                  (10,062
                  )
                  
                  $
                  1,143
                  
                  
                  $
                  95,645





See notes to consolidated financial
statements.


5





Consolidated Statements of Cash
Flows(unaudited)


(Dollar amounts in thousands except
share data)


ForthesixmonthsendedJune30,2010
                                        
                                        
                                        2009Cash
      flows from operating activitiesNet
      income (loss)
                                        
                                        $
                                        (42,983
                                        )
                                        
                                        $
                                        7,029Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      on premises and equipment
                                        
                                        
                                        2,671
                                        
                                        
                                        
                                        1,981Provision
      for loan losses
                                        
                                        
                                        52,500
                                        
                                        
                                        
                                        3,000Deferred
      tax asset valuation
      allowance
                                        
                                        
                                        19,800
                                        
                                        
                                        
                                        -Net
      gain on investment securities
                                        
                                        
                                        (518
                                        )
                                        
                                        
                                        (522
                                        )Loss
      on sale of real estate owned
                                        
                                        
                                        22
                                        
                                        
                                        
                                        -Loss
      on sale of loans held for sale
                                        
                                        
                                        250
                                        
                                        
                                        
                                        -Other
      than temporary net impairment loss on
    securities
                                        
                                        
                                        580
                                        
                                        
                                        
                                        255Net
      increasein
      other liabilities
                                        
                                        
                                        5,364
                                        
                                        
                                        
                                        2,353Net
      increase other assets
                                        
                                        
                                        (9,666
                                        )
                                        
                                        
                                        (2,348
                                        )Net
      increase in deferred taxes
                                        
                                        
                                        (6,055
                                        )
                                        
                                        
                                        (3,127
                                        )Amortization
      of unearned restricted stock awards
                                        
                                        
                                        191
                                        
                                        
                                        
                                        180Amortization
      ofESOP
      awards
                                        
                                        
                                        120
                                        
                                        
                                        
                                        150Increase
      in cash surrender value of company owned life insurance
                                        
                                        
                                        (278
                                        )
                                        
                                        
                                        (233
                                        )Investment
      securities amortization of premium/(accretion) ofdiscount, net
                                        
                                        
                                        543
                                        
                                        
                                        
                                        849Amortization
      of intangible assets
                                        
                                        
                                        122
                                        
                                        
                                        
                                        181Cash
      provided
      by operating activities
                                        
                                        
                                        22,663
                                        
                                        
                                        
                                        9,748Cash
      flows from investingactivitiesProceeds
      from calls, repayments, maturities and salesof
      available forsale
      securities
                                        
                                        
                                        192,084
                                        
                                        
                                        
                                        66,439Proceeds
      from calls, repayments, maturities and salesofheld
      to maturitysecurities
                                        
                                        
                                        33
                                        
                                        
                                        
                                        46Purchases
      of available forsale
      securities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (237,036
                                        )Net
      redemptions (purchases)of
      restricted securities
                                        
                                        
                                        261
                                        
                                        
                                        
                                        (1,252
                                        )Net
      decrease (increase) in loans
                                        
                                        
                                        96,025
                                        
                                        
                                        
                                        (281,827
                                        )Proceeds
      from the sale of real estate owned
                                        
                                        
                                        861
                                        
                                        
                                        
                                        -Purchases
      of premises and equipment
                                        
                                        
                                        (6,384
                                        )
                                        
                                        
                                        (5,788
                                        )Cashprovided
      by (used
      in)investing
      activities
                                        
                                        
                                        282,880
                                        
                                        
                                        
                                        (459,418
                                        )Cash
      flows from financing activitiesNet(decrease)increase
      in demand, money market, NOW and savings
      deposits
                                        
                                        
                                        (127,981
                                        )
                                        
                                        
                                        318,469Net(decrease)increasein
      time deposits
                                        
                                        
                                        (123,249
                                        )
                                        
                                        
                                        97,933Cash
      dividends
      paid
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (946
                                        )Net
      decrease in otherborrowings
                                        
                                        
                                        (39,340
                                        )
                                        
                                        
                                        -Proceeds
      from subordinated debt and warrant issuance
                                        
                                        
                                        -
                                        
                                        
                                        
                                        5,000Net
      proceeds from common stock issuance
                                        
                                        
                                        -
                                        
                                        
                                        
                                        28
      464Cash(used
      in)provided
      by financing activities
                                        
                                        
                                        (290,570
                                        )
                                        
                                        
                                        448,920Net
      increase(decrease)in
      cash and cash equivalents
                                        
                                        
                                        14,973
                                        
                                        
                                        
                                        (750
                                        )Cash
      and cash equivalents, beginning of period
                                        
                                        
                                        22,154
                                        
                                        
                                        
                                        25,969Cash
      and cash equivalents, end of period
                                        
                                        $
                                        37,127
                                        
                                        
                                        $
                                        25,219Supplemental
      Information - Cash Flows:Cash
      paid for:Interest
                                        
                                        $
                                        21,627
                                        
                                        
                                        $
                                        26,010Income
      taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4,541





See notes to consolidated financial
statements.


6





Notes to Consolidated Financial
Statements (unaudited)


(Dollar amounts in thousands except
share data)


Note 1–Financial Statement
Presentation





The consolidated financial statements
include the accounts of Smithtown Bancorp, Inc., (“Company”), a New York State-chartered bank
holding company with its NewYork State-chartered commercial bank
subsidiary, Bank of Smithtown (“Bank”),  and three other
subsidiaries, Smithtown Bancorp Capital Trust I, Smithtown Bancorp Capital Trust
II and Smithtown Bancorp Capital Trust III, all of which were formed for the
purpose of issuing trust preferred
securities.  Bank of Smithtown hassixwholly owned subsidiaries, Bank of
Smithtown Financial Services, Inc., Bank of Smithtown Insurance Agents and
Brokers, Inc., BOS Preferred Funding Corporation, SBRE Realty Corp.,SBRE Realty II, LLC, formed to hold other real estate owned
property, andCarlyle &
Co, a nominee partnership used by the Bank’s trust department to hold permissible
securities.Intercompany transactions and balances
are eliminated in consolidation.





The accompanying unaudited interim consolidated
financial statements have been prepared pursuant to the rules and regulations
for reporting on Form 10-Q.  Accordingly, certain disclosures required
by U.S. generally accepted accounting principles are not included
herein.  These interim statements
should be read in conjunction with the consolidated financial statements and
notes included in the Annual Report on Form 10-K filed by the Company with the
Securities and Exchange Commission (“SEC”).  The December 31, 2009
consolidated financial statements were
derived from the Company’s December 31, 2009 audited financial
statements included in the Annual Report on Form 10-K.





Interim statements are subject to
possible adjustments in connection with the annual audit of the Company for the year ending December 31,
2010.  In the opinion of management, the accompanying unaudited
interim consolidated financial statements contain all adjustments necessary to
present fairly the Company’s financial position and its results of
operations for the periods
presented.  Operating results for the six months ended June 30, 2010
are not necessarily indicative of those that may be expected for the year ending
December 31, 2010.





In preparing the consolidated financial
statements, management is required to make estimates and
assumptions, such as the allowance for loan losses, deferred tax asset valuation
allowance and fair value measurements that affect the reported asset and
liability balances and revenue and expense amounts and the disclosure
ofcontingent assets and
liabilities.  Actual results could differ significantly from those
estimates.





Written Agreement





On June 22, 2010, the Company entered
into a Written Agreement with the Federal Reserve Bank of New York
(“FRB”).  The Written
Agreement is in addition to
theConsent Agreement with
theFederal Deposit
Insurance Corporations (“FDIC”)and a parallel Consent Order with theNew York State Banking
Department (“Banking
Department”), hereinafter collectively
referred to as the
“Consent
Agreement,”that the Bank entered into on January
29, 2010.  The Written Agreement similarly requires that the Company
obtain the approval of the FRB prior to paying a dividend.  Certain
provisions of the Consent Agreement are described in more detail in Note
11.





Proposed Plan of Merger with
People’s United Financial,
Inc.





On July 15, 2010, the Company and
People’s United Financial, Inc. (“People’s United”) of Bridgeport, Connecticut announced a
definitive agreement under which People’s United will acquire the Company in a cash and stock transaction
valued at approximately $60 million, or $4.00 per share.





Under the agreement, People’s United will acquire the Company for
approximately $30 million in cash and 2.14 million shares of People’s United common stock, valued in the aggregate at approximately
$30 million based on the 5-day average closing price of People’s United common stock for the period
ended July 14, 2010.





The definitive agreement has been
unanimously approved by the respective boards of directorsof People’s United and the Company.  The
Company will merge into People’s United, and the Bank, will
simultaneously merge into People’s United Bank, People’s United’s banking subsidiary.  The
value of the consideration a shareholder of the Company will receive for each share of Company common
stock is equivalent in the aggregate to 0.1430 shares of People’s United common stock and $2.00 in
cash.  Shareholders of the Company as of the record date for the
special shareholders meeting to vote on the transaction will be entitled to elect for each
share held whether to receive shares of People’s United common stock or cash, subject
to reallocation if either cash or stock is
oversubscribed.


7


The actual value of the merger
consideration to be paid upon closing toeach shareholder of the Company will
depend on the average People’s United stock price shortly prior to
completion of the merger, and the exact amount of cash payable per common share
of the Company and the exact number of shares to be issued per common
share of the Company will be determined at
that time based on the average People’s United stock price, so that each share
of the Company receives consideration with approximately the same
value.  Receipt of People’s United common stock is expected to be
tax-free to shareholders of the
Company.





The transaction is subject to approval
by bank regulatory authorities and by the shareholders of the
Company.  People’s United shareholder approval is not
required.  The transaction is expected to close in the fourth
quarter
2010.





The merger is the result of an
assessment by the Company and its board of directors of the Company’s strategic alternatives in light of the
financial challenges facing the Company.  The Merger Agreement
satisfies the requirement of the Consent Agreement to sell or merge the
Company and the Bank in the event that the required capital ratios are not
satisfied by June 30, 2010.  If the merger is not consummated, the
Company would be required to find an alternative approach to overcoming its
challenges and satisfying the relevant
regulatory requirements, including meeting the capital ratios required by the
Consent Agreement and the Written Agreement.  At this time, the
Company has no other alternative to raise capital or to enter into another
merger agreement if the merger with
People’s United is not
consummated.  In addition, the terms of the Merger Agreement prohibit
the Company and the Bank from taking certain actions to facilitate the
foregoing.





The unaudited consolidated financial
statementshave been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business for the
foreseeable future. If the People’s United merger is not consummated, the
Company may not be able to
raise any additional capital and, if it could raise any additional capital, such
capital is likely to be extremely dilutive to the Company’s existing shareholders.  In
addition, the Company may not be able to find another merger partner or
acquirer.  In such circumstances,
a failure to raise such capital or to find another merger partner or acquirer
could result in further and more severe regulatory actions against the Company
and the Bank thereby giving rise to substantial doubt as to the Company’s ability to continue as a going
concern.  These financial statements do not include any adjustments
that may result should the Company be unable to continue as a going
concern.





Note 2–Earnings Per Common
Share





The Company has stock compensation
awards with non-forfeitable
dividend rights, which are considered participating securities.  As
such, earnings per share is computed using the two-class method.Basic earnings per common share is
computed by dividing net income allocated to common stock bythe weighted average number of common
shares outstanding during
the periodwhich excludes
the participating securities.  Diluted earnings per common share
includes the dilutive effect of additional potential issuance of common shares
from stock-based compensation plans and warrants to purchase
common shares, but excludes awards considered participating
securities.  Earnings and dividends per share are restated for all
stock splits and stock dividends through the date of issuance of the financial
statements.





Forthethreemonthsended
                  June30,
                
                
                Forthesixmonthsended
                  June30,2010
                
                
                2009
                
                
                2010
                
                
                2009BasicNet (Loss)
                
                $
                (29,214
                )
                
                $
                -
                
                
                $
                (42,983
                )
                
                $
                -Distributed earnings allocated to
      common stock
                
                
                -
                
                
                $
                471
                
                
                
                -
                
                
                $
                941Undistributed earnings allocated
      to common stock
                
                
                -
                
                
                
                2,923
                
                
                
                -
                
                
                
                6,051Net earnings allocated to common
      stock
                
                $
                -
                
                
                $
                3,394
                
                
                $
                -
                
                
                $
                6,992Weighted average common shares
      outstanding,including shares considered participating
securities
                
                
                14,967,508
                
                
                
                13,216,764
                
                
                
                14,943,988
                
                
                
                12,530,304Less:  weighted average
      participating securities
                
                
                (113,170
                )
                
                
                (73,974
                )
                
                
                (100,258
                )
                
                
                (66,812
                )Weighted average
      shares
                
                
                14,854,338
                
                
                
                13,142,790
                
                
                
                14,843,730
                
                
                
                12,463,492Basic earnings (loss) per common
      share
                
                $
                (1.97
                )
                
                $
                0.26 0.31
                
                
                $
                (2.90
                )
                
                $
                0.56 0.31DilutedNet (Loss)
                
                $
                (29,214
                )
                
                $
                -
                
                
                $
                (42,983
                )
                
                $
                -Net earnings allocated to common
      stock
                
                $
                -
                
                
                $
                3,394
                
                
                $
                -
                
                
                $
                6,992Weighted average common shares
      outstanding for basic earnings per common share
                
                
                14,854,338
                
                
                
                13,142,790
                
                
                
                14,843,730
                
                
                
                12,463,492Add:  Dilutive effect of warrants issued to
      purchase common stock
                
                
                -
                
                
                
                268
                
                
                
                -
                
                
                
                134Weighted average shares and
      dilutive potential common shares
                
                
                14,854,338
                
                
                
                13,143,058
                
                
                
                14,843,730
                
                
                
                12,463,626Diluted earnings(loss)per common
      share
                
                $
                (1.97
                )
                
                $
                0.26
                
                
                $
                (2.90
                )
                
                $
                0.56


8





No dividends were paid during the six
months ended June 30, 2010.  Dividends of $5 were paid on unvested shares with
non-forfeitable dividend
rights during the six months ended June 30,2009,none of which wereincluded in net income as compensation
expense as all awardswereexpected to vest.





Participating
securities totaling 113,170, representing shares of restricted common stock, and
475,000 warrants to purchase common stock were not included in the calculation
of diluted earnings per share for the three and six months ended June 30, 2010,
because they were not dilutive.





Note 3–Stock-Based
Compensation





The Board of Directors determines
restricted stock awarded under the 2007 Stock CompensationPlan (“Stock Compensation Plan”).Compensation expense is recognized over
the vesting period of the awards based on the fair value of the stock at issue
date.  The fair value of the stock was determined using the closing
price at the date of issuance.  Restrictedshares vest ratablyover five years.The board of directors elected to issue 61,500 and
38,125shares of non-vested
restricted stock under the Stock Compensation Plan for thesix months ended June 30,2010and 2009, respectively.





A summary of changes in the Company’s nonvested sharesfor the six months ended June 30, 2010follows:





Shares
                
                
                Weighted
                  Average Grant
                  Date Share
                  ValueNonvested at January 1,
      2010
                
                
                51,670
                
                
                $
                17.51Granted
                
                
                61,500
                
                
                
                4.75Non-vested atJune 30, 2010
                
                
                113,170
                
                
                
                10.58





As ofJune 30, 2010, there was $988of total unrecognized compensation cost
related to nonvested shares granted under the Plan.  The cost is
expected to be recognized over a weighted-average period of 4.5years.





Note 4–Investment
Securities





The following table summarizes the
amortized costand fair
value of the available for sale securities and heldtomaturity investment securities portfoliosatJune 30, 2010 andDecember 31, 2009 and the corresponding
amounts of gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss):





Gross
                    
                    
                    GrossAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    ValueJune 30, 2010Available
      for saleU.S.
      government sponsored entities and agencies
                    
                    $
                    5,000
                    
                    
                    $
                    320
                    
                    
                    $
                    -
                    
                    
                    $
                    5,320Obligations
      of state and political subdivisions
                    
                    
                    58,316
                    
                    
                    
                    1,622
                    
                    
                    
                    (5
                    )
                    
                    
                    59,933Mortgage-backed
      securities: residential
                    
                    
                    128,459
                    
                    
                    
                    4,571
                    
                    
                    
                    -
                    
                    
                    
                    133,030Collateralized
      mortgage obligations
                    
                    
                    4,542
                    
                    
                    
                    -
                    
                    
                    
                    (27
                    )
                    
                    
                    4,515Other
                    
                    
                    9,758
                    
                    
                    
                    -
                    
                    
                    
                    (3,335
                    )
                    
                    
                    6,423Total
      available for sale
                    
                    $
                    206,075
                    
                    
                    $
                    6,513
                    
                    
                    $
                    (3,367
                    )
                    
                    $
                    209,221Held
      to maturityObligations
      of state and political subdivisions
                    
                    $
                    33
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    
                    $
                    34December 31, 2009Available
      for saleU.S.
      government sponsored entities and agencies
                    
                    $
                    5,000
                    
                    
                    $
                    -
                    
                    
                    $
                    (34
                    )
                    
                    $
                    4,966Obligations
      of state and political subdivisions
                    
                    
                    59,339
                    
                    
                    
                    761
                    
                    
                    
                    (114
                    )
                    
                    
                    59,986Mortgage-backed
      securities: residential
                    
                    
                    319,543
                    
                    
                    
                    1,447
                    
                    
                    
                    (212
                    )
                    
                    
                    320,778Collateralized
      mortgage obligations
                    
                    
                    4,545
                    
                    
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    4,553Other
                    
                    
                    10,338
                    
                    
                    
                    -
                    
                    
                    
                    (3,347
                    )
                    
                    
                    6,991Total
      available for sale
                    
                    $
                    398,765
                    
                    
                    $
                    2,216
                    
                    
                    $
                    (3,707
                    )
                    
                    $
                    397,274Held
      to maturityObligations
      of state and political subdivisions
                    
                    $
                    66
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    
                    $
                    67


9





The proceeds from sales and calls of
securities and the associated gainsand lossesfor the three and six months ended June
30,are listed
below:





Forthethreemonthsended
                    June30,
                  
                  
                  Forthesixmonthsended
                    June30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Proceeds
                  
                  $
                  965
                  
                  
                  $
                  11,176
                  
                  
                  $
                  162,788
                  
                  
                  $
                  46,904Gross
      gains
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  653
                  
                  
                  
                  522Gross
      losses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  135
                  
                  
                  
                  -





The tax provisionrelated to theserealized gains and losses was $181 and $183 for the six months
ended June 30, 2010 and 2009, respectively.





The amortized cost and fair value of the
investment securities portfolio are shown by expected maturityin the following table.  Expected maturities may
differ from contractual
maturities if borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.





June 30, 2010Amortized
                  
                  
                  FairCost
                  
                  
                  ValueAvailable
      for saleWithin
      one year
                  
                  $
                  453
                  
                  
                  $
                  453One
      to five years
                  
                  
                  10,782
                  
                  
                  
                  11,102Five
      to ten years
                  
                  
                  28,334
                  
                  
                  
                  29,338Beyond
      ten years
                  
                  
                  166,506
                  
                  
                  
                  168,328Total
                  
                  $
                  206,075
                  
                  
                  $
                  209,221Held
      to maturityWithin
      one year
                  
                  $
                  33
                  
                  
                  $
                  34Total
                  
                  $
                  33
                  
                  
                  $
                  34





Securities pledged atJune 30, 2010,had a carrying amount of $132,165andwere pledged to secure public
deposits,treasury tax and loan
depositsand FHLB
borrowings.





At June 30, 2010,there were no holdings of securities of
any one issuer, other than the U.S. Government and itsentities andagencies, in an amount greater than 10%
of shareholders’equity.





The following table summarizes the
investment securities with
unrealized losses atJune
30, 2010 andDecember 31, 2009aggregated by major security type and
length of time in a continuous unrealized loss position:





Less Than 12 Months
                    
                    
                    12 Months or More
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    LossJune 30, 2010Available
      for saleObligations
      of state and political subdivisions
                    
                    $
                    1,439
                    
                    
                    $
                    (5
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,439
                    
                    
                    $
                    (5
                    )Collateralized
      mortgage obligations
                    
                    
                    4,515
                    
                    
                    
                    (27
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,515
                    
                    
                    
                    (27
                    )Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,943
                    
                    
                    
                    (3,335
                    )
                    
                    
                    3,943
                    
                    
                    
                    (3,335
                    )Total
                    
                    $
                    5,954
                    
                    
                    $
                    (32
                    )
                    
                    $
                    3,943
                    
                    
                    $
                    (3,335
                    )
                    
                    $
                    9,897
                    
                    
                    $
                    (3,367
                    )December 31, 2009Available
      for saleU.S.
      Government sponsored entities and agencies
                    
                    $
                    4,966
                    
                    
                    $
                    (34
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,966
                    
                    
                    $
                    (34
                    )Obligations
      of state and political subdivisions
                    
                    
                    13,312
                    
                    
                    
                    (114
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    13,312
                    
                    
                    
                    (114
                    )Mortgage-backed
      securities
                    
                    
                    82,283
                    
                    
                    
                    (
      212
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    82,283
                    
                    
                    
                    (212
                    )Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,511
                    
                    
                    
                    (3,347
                    )
                    
                    
                    4,511
                    
                    
                    
                    (3,347
                    )Total
                    
                    $
                    100,561
                    
                    
                    $
                    (360
                    )
                    
                    $
                    4,511
                    
                    
                    $
                    (3,347
                    )
                    
                    $
                    105,072
                    
                    
                    $
                    (3,707
                    )


10





Other-Than-Temporary-Impairment





In determining OTTI for debt securities,
management considers many factors, including: (1) the length of time and
the extent to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, (3) whether the market decline was
affected by macroeconomic conditions, and (4) whether the Company has the
intent to sell the debt security or more likely than not will be required to
sellthe debt security before its anticipated
recovery.  The assessment of whether anOTTIexists involves a high degree of
subjectivity and judgment and is based on the information available to
management at a point in time.





In order to determine OTTI for
purchased beneficial
interests that, on the purchase date, were rated below AA, the Company compares
the present value of the remaining cash flows as estimated at the preceding
evaluation date to the current expected remaining cash flows.  OTTI is
deemed tohave occurred if there has been an
adverse change in the remaining expected future cash flows.





When OTTI occurs, for either debt
securities or purchased beneficial interests that, on the purchase date, were
rated bellow AA, the amount of the OTTI recognized in earnings depends on whether an
entity intends to sell the security or it is more likely than not it will be
required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss.  If an entity intends to sellor it is more likely than not it will be
required to sell the security before recovery of its amortized cost basis, less
any current-period credit loss, the OTTI shall be recognized in earningsin an amountequal to the entire difference between
the investment’s amortized cost basis and its fair
value at the balance sheet date.  If an entity does not intend to sell
the security and it is not more likely than not that the entity will be required
to sell the security before recovery of its amortized cost basisless any current-period loss, the OTTI
shall be separated into the amount representing the credit loss and the amount
related to all other factors.  The amount of the total OTTI related to
the credit loss is determined based on the present value of cashflows expected to be collected and is
recognized in earnings.  The amount of the total OTTI related to other
factors is recognized in other comprehensive income, net of applicable
taxes.  The previous amortized cost basis less the OTTI recognized in
earnings becomes the new amortized cost basis
of the investment.





At June 30, 2010, the Company’s securities portfolio totaled $209,254,
of which$9,897was in an unrealized loss
position.  The majority of unrealized losses are related to the
Company’s other securities, as discussed
below:





Other
Securities





The Company’s unrealized losses on other securities
relate primarily to its investment in two pooled trust preferred securities and
one single issuer trust preferred security.The decline in fair value is
primarily attributable to
temporary illiquidity and the financial crisis affecting these markets and not
necessarily the expected cash flows of the individual securities.Due to the illiquidity in the market,
it is unlikely that the Company would be able torecover its investment in these
securities if the Company sold the securities at this time.





The following table presents detailed
information for each trust preferred security held by the Company atJune 30, 2010.




Issuer
                        
                        Single
                          Issuer
                          or
                          Pooled
                        
                        Class
                        
                        
                        Book
                          Value
                        
                        
                        Gross
                          Unrealized
                          Loss
                        
                        
                        Estimated
                          Fair Value
                        
                        Credit
                          Rating
                        
                        Number
                          of Paying
                          Banks in
                          Issuance
                        
                        
                        Deferrals
                          and
                          Defaults as
                          % of
                          Collateral
                        
                        
                        Excess
                          Subordination
                          as a Percent of
                          Paying
                          CollateralFairfield
      County Bank Trust Preferred
                        
                        Single
                        
                        -
                        
                        
                        $
                        5,000
                        
                        
                        $
                        (1,801
                        )
                        
                        $
                        3,199
                        
                        NA
                        
                        1
                        
                        
                        None
                        
                        
                        
                        -Trust
      Preferred Funding III LTD Series 144A
                        
                        Pooled
                        
                        B-2
                        
                        
                        
                        1,128
                        
                        
                        
                        (837
                        )
                        
                        
                        291
                        
                        Ca/C
                        
                        23
                        
                        
                        
                        34.64
                        %
                        
                        
                        (35.7
                        )%Trust
      Preferred Funding I
                        
                        Pooled
                        
                        B
                        
                        
                        
                        1,150
                        
                        
                        
                        (697
                        )
                        
                        
                        453
                        
                        Caa3/C
                        
                        12
                        
                        
                        
                        37.36
                        %
                        
                        
                        (29.8
                        )%Total
                        
                        
                        
                        
                        
                        
                        $
                        7,278
                        
                        
                        $
                        (3,335
                        )
                        
                        $
                        3,943





Excess subordination is the amount of
paying collateral above the amount of outstanding collateral underlying each
class of the security.  The Excess Subordination as a Percent of
Paying Collateral, in the table detailing each trust preferred security above, reflects the
difference between the paying collateral and the collateral underlying each
security in the pool divided by the paying collateral.  A negative
number results when the paying collateral is less than the collateral
underlyingeach class of the security.  A
low or negative number decreases the likelihood of full repayment of principal
and interest according to original contractual
terms.


11


Our analysis of two of these investmentsincludes $2,278book value of pooled trust
preferred securities
(CDOs).  The issuers in these securities are primarily
banks.  The Company uses the OTTI evaluation model to compare the
present value of expected cash flows to the previous estimate to ensure there
are no adverse changes in cash flows during the quarter.  The OTTI model
considers the structure and term of the CDO and the financial condition of the
underlying issuers.  Specifically, the model details interest rates,
principal balances of note classes and underlying issuers, the timing and
amount of interest and principal payments
of the underlying issuers, and the allocation of the payments to the note
classes.  The current estimate of expected cash flows is based on the
recent trustee reports and any other relevant market information
including announcements of interest payment
deferrals or defaults of underlying trust preferred
securities.  Assumptions used in the model include expected future
default rates and prepayments.  We assume no recoveries on defaults
and treat all interest payment deferrals as defaults.  Upon completion of theJune 30, 2010 analysis, our model indicated
OTTI on Trust Preferred Funding III LTD Series 144A,which experienced additional defaults or
deferrals during the period.  Thissecurity had OTTI losses recognized
inearnings of
$85 and $580 for the three
and six months ended June 30, 2010, respectively.  The two CDOs remained
classified as available for sale atJune 30, 2010, and together, the two CDOs and
one single issuer trust preferred security accounted for allof the unrealized losses in the
othersecurities category
at June 30,
2010.





The discount rates used to support the
realizable value in trust preferred securities is the actual index and margin on
each security.  The discount rates used for the estimatedfair value of the two
CDOs  and the one single issuer trust preferred security were
14%  and 13%, respectively, atJune 30, 2010.  Management determined these
rates based on discussions with our investment bankers regarding newly issued
bank debt.  Management also reviewed the current internal
risk ratings of the collateral underlying thesecurities.





Future deferrals and defaultson the two CDOsare estimated based on an
analysis of the collateral underlying the security.  Particularattentionis paid toeach bank’s nonperforming assets to total loans,
total risk based capital ratio and Texas ratio(nonperforming assets plus restructured
loans/tangible capital plus the allowance for loan losses).  These three ratios are
weighted to calculate a credit riskrating (“CRR”) for each bank.  The CRR,
based on a scale of 1 being the best and 5 being the worst, is used as the basis
for future default assumptions.  Banks known to have deferred or
defaulted prior, or subsequent, to the reporting date and banks withaCRR of 4 or higher as of the reporting
date are considered to default immediately in our discounted cash flow pricing model
(“model”).  As ofJune 30, 2010other future default rates were
estimated at 50.00% if the CRR was 3.50 to 3.99, 25.00% if the CRRwas 3.00 to 3.49, 12.50% if the CRR was
2.50 to 2.99, 6.25% if the CRR was 2.00 to 2.49 and 3.00% if the CRR was 1.99 or
less.  These weightings generate an overall estimate of future
defaults that are spread over the remaining maturity of the security
inour Model.





Trust Preferred Funding I has
experienced $30,000 in defaults and $21,000 in deferrals, but did not have any
new defaults or deferrals in the first six months of 2010.  Trust
Preferred Funding III LTD Series 144A has experienced $51,750 in defaults and $48,000 in deferrals with
$20,000 of the deferrals announced in the first six months of 2010 and $27,500
of deferrals moving to defaults in the first six months of 2010.  Our
Model as of June 30, 2010, estimated $25,558and $15,794in future defaults in Trust Preferred Funding III LTD
Series 144A and Trust Preferred Funding I, respectively.Principal and interest payments on each
trust
preferred securityhave beenmade on a timely
basis.The last
two interest payments on Trust Preferred FundingI have produced a
shortfall.





Fairfield County Bank Trust Preferred is
performing.  The Company monitors the regulatory filings of Fairfield
County Bank to assess their financial condition.  Based on the
analysis for the first six months of 2010, there isno assumption of a future
default.  Our model, using the contractual coupon of the security with
no defaults, shows no credit related loss.





Information received after the balance
sheet date, but before the issuance of the financial statements is
included in the cash flow
analysis during the reporting period.





The table below presents a roll forward
of the credit losses recognized in earnings fromDecember 31, 2009throughJune 30, 2010:





Beginning balance,December 31, 2009
                  
                  $
                  414Additions/Subtractions:Increases to the amount related to
      the credit loss for whichOTTIwas previously
      recognized
                  
                  
                  580Ending balance, June
      30, 2010
                  
                  $
                  994


12





Note 5–Loans





Loans as of June 30, 2010
and December 31, 2009 consisted of the following:





June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Commercial
      and industrial loans
                  
                  $
                  43,667
                  
                  
                  $
                  48,625Real
      estate:Land
      and construction
                  
                  
                  317,895
                  
                  
                  
                  353,772Commercial
                  
                  
                  937,012
                  
                  
                  
                  997,097Multifamily
                  
                  
                  471,084
                  
                  
                  
                  478,840Residential
                  
                  
                  210,041
                  
                  
                  
                  214,548Consumer
                  
                  
                  1,670
                  
                  
                  
                  2,082Less:
      Net deferred loan fees
                  
                  
                  3,282
                  
                  
                  
                  4,068Total
      loans
                  
                  
                  1,978,087
                  
                  
                  
                  2,090,896Allowance
      for loan losses
                  
                  
                  57,999
                  
                  
                  
                  38,483Net
      loans
                  
                  $
                  1,920,088
                  
                  
                  $
                  2,052,413





Individually
impaired loans were as follows:


June 30,
                  
                  
                  December 31,2010
                  
                  
                  2009Loans
      with no allocated allowance for loan losses
                  
                  $
                  102,153
                  
                  
                  $
                  133,155Loans
      with allocated allowance for loan losses
                  
                  
                  196,081
                  
                  
                  
                  79,385Total
                  
                  $
                  298,234
                  
                  
                  $
                  212,540Amount
      of the allowance for loan losses allocated
                  
                  $
                  30,555
                  
                  
                  $
                  21,630Average
      of individually impaired loans during the year
                  
                  
                  233,436
                  
                  
                  
                  44,685Interest
      income recognized during impairment
                  
                  
                  788
                  
                  
                  
                  495





Included
in impaired loans above are troubled debt restructurings of $53,124 and $42,633
at June 30, 2010 and December 31, 2009, respectively.  The amount of
the allowance for loan losses allocated to trouble debt restructurings was
$6,079 and $2,571 at June 30, 2010 and December 31, 2009,
respectively.





At June
30, 2010 and December 31, 2009, $318 and $51, respectively, was committed to
customers whose loans are classified as a troubled debt
restructuring.





Recognition
of interest income on impaired loans, as for all other loans, is discontinued
when reasonable doubt exists as to the full collectability of principal or
interest.  Any payments received on impaired loans are applied to the
recorded investment in the loan.  No interest was earned for the six
months ended June 30, 2010 and for 2009 on the cash basis for impaired
loans.





Nonaccrual loans, loans past due 90 daysand still accruingandtroubled debt restructurings not
included in nonaccrual
loansand loans past due 90 daysand still accruingwere as follows:





June 30,
                
                
                December 31,2010
                
                
                2009Nonaccrual
      loans
                
                $
                227,502
                
                
                $
                130,172Loans past due 90 daysand still
      accruing
                
                
                -
                
                
                
                -Troubled debt restructurings not
      included innonaccrual loansand loans past due 90 daysand still
      accruing
                
                
                24,292
                
                
                
                26,937





Nonaccrual
loans and loans past due 90 days or more and still accruing include both smaller
balance homogeneous loans that are collectively evaluated for impairment and
individually classified impaired loans.





Note
6 - Fair Value





Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date.  There are three levels of inputs that may be
used to measure fair values:





Level 1–Quoted prices (unadjusted) for
identical assets or liabilities in active markets that the entity has the
ability to access as of the measurement date.


Level 2–Significant other observable inputs
other than Level1 prices
such as quoted prices for similar assets or liabilities; quoted prices in
markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.


13





Level 3–Significant unobservable inputs that
reflecta
company’s own assumptions about the assumptions
that market participants would use in pricing an asset or
liability.





The Company used the following methods
and significant assumptions to estimate the fair value of the following assets
and liabilities:





Investment
Securities:  The
fair values for investment securities are determined by quoted market prices, if
available (Level 1).  For securities where quoted prices are not
available, fair values are calculated based on market prices of similar
securities(Level 2).For securities where quoted prices or
market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators (Level
3).Discounted cash flows are calculated
using spread to swap and
LIBOR curves that are updated to incorporate loss severities, volatility, credit
spread and optionality.  During times when trading is more liquid,
broker quotes are used (if available) to validate the model.  Rating
agency and industry research reports as well as defaults and deferrals on
individual securities are reviewed and incorporated into the
calculations.





Impaired
Loans:  The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent real estate appraisals.  These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income
approach.  Adjustments are routinely made in the appraisal process by
the appraisers to adjust for differences between the comparable sales
and income data available.  Such adjustments are usually significant
and typically result in a Level 3 classification of the inputs for determining
fair value.





Other Real Estate
Owned:  Nonrecurring adjustments to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
are measured at the lower of carrying amount or fair value, less costs to
sell.  Fair values are generally based on third party appraisals of
the property, resulting in a Level 3 classification.  In cases where
the carrying amount exceeds the fair value, less costs to sell, an impairment
loss is recognized.





Loans Held For
Sale:  Loans held for sale are carried at the lower of cost or
fair value, as determined by outstanding commitments, from third party
investors.





Assets and liabilities measured at fair
value on a recurring basis, including financial assets and liabilities for which
the Company has elected the fair value option, are summarized
below:





Fair Value Measurements atJune 30, 2010 UsingQuoted Prices
                  in Active
                  Markets for
                  Identical Assets
                
                
                Significant Other
                  Observable
                  Inputs
                
                
                Significant Other
                  Unobservable
                  InputsCarrying Value
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Assets:Available
      for sale securitiesU.S.
      government sponsored entities and agencies
                
                $
                5,320
                
                
                $
                -
                
                
                $
                5,320
                
                
                $
                -Obligations
      of  state and political subdivisions
                
                
                59,933
                
                
                
                -
                
                
                
                59,933
                
                
                
                -Mortgage-backed
      securities: residential
                
                
                133,030
                
                
                
                -
                
                
                
                133,030
                
                
                
                -Collateralized
      mortgage obligations
                
                
                4,515
                
                
                
                -
                
                
                
                4,515
                
                
                
                -Other
                
                
                6,423
                
                
                
                -
                
                
                
                2,480
                
                
                
                3,943





Fair Value Measurements atDecember 31, 2009 UsingQuoted
      Prices
                  in
      Active
                  Markets
      for
                  Identical
      Assets
                
                
                Significant
      Other
                  Observable
                  Inputs
                
                
                Significant
      Other
                  Unobservable
                  InputsCarrying Value
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Assets:Available
      for sale securitiesU.S.
      government sponsored entities and agencies
                
                $
                4,966
                
                
                $
                -
                
                
                $
                4,966
                
                
                $
                -Obligations
      of  state and political subdivisions
                
                
                59,986
                
                
                
                -
                
                
                
                59,986
                
                
                
                -Mortgage-backed
      securities: residential
                
                
                320,778
                
                
                
                -
                
                
                
                320,778
                
                
                
                -Collateralized
      mortgage obligations
                
                
                4,553
                
                
                
                -
                
                
                
                4,553
                
                
                
                -Other
                
                
                6,991
                
                
                
                -
                
                
                
                2,480
                
                
                
                4,511


14





The table below presents a
reconciliation of all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the period endedJune 30, 2010 and the year ended December
31, 2009:





Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)Available for Sale SecuritiesBalance of recurring Level 3
      assets at January 1, 2010
                  
                  $
                  4,511Total gains or losses
      (realized/unrealized):Included in earnings–realizedIncluded in earnings–unrealized
                  
                  
                  (580
                  )Included
      in other comprehensive income
                  
                  
                  12Purchases, sales, issuances and
      settlements, netTransfers in and/or out of Level
      3
                  
                  
                  -Balance of recurring Level 3 assets at June
      30, 2010
                  
                  $
                  3,943





Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)Available for Sale SecuritiesBalance of recurring Level 3
      assets at January 1, 2009
                  
                  $
                  8,743Total gains or losses
      (realized/unrealized):Included in earnings–realized
                  
                  
                  (77
                  )Included in earnings–unrealized
                  
                  
                  (414
                  )Included
      in other comprehensive income
                  
                  
                  (1,882
                  )Purchases, sales, issuances and
      settlements, net
                  
                  
                  (1,859
                  )Transfers in and/or out of Level
      3
                  
                  
                  -Balance of recurring Level 3
      assets at December 31, 2009
                  
                  $
                  4,511





Assets measured at fair value on a
non-recurring basis are summarized below:





Fair Value Measurements at
                  June 30, 2010 UsingQuoted Pricesin Active
                
                
                Significant Other
                
                
                Significant OtherMarkets for
                
                
                Observable
                
                
                UnobservableIdentical Assets
                
                
                Inputs
                
                
                InputsCarrying Value
                
                
                (Level 1)
                
                
                ( Level 2)
                
                
                ( Level 3)Assets:Impaired
      loans
                
                $
                196,081
                
                
                $
                -
                
                
                $
                -
                
                
                $
                165,526Other
      real estate owned, net
                
                
                1,130
                
                
                
                -
                
                
                
                -
                
                
                
                1,130





Fair Value Measurements at
                  December 31, 2009 UsingQuoted Pricesin Active
                
                
                Significant Other
                
                
                Significant OtherMarkets for
                
                
                Observable
                
                
                UnobservableIdentical Assets
                
                
                Inputs
                
                
                InputsCarrying Value
                
                
                (Level 1)
                
                
                ( Level 2)
                
                
                ( Level 3)Assets:Impaired
      loans
                
                $
                79,385
                
                
                $
                -
                
                
                $
                -
                
                
                $
                57,755Other
      real estate owned, net
                
                
                2,013
                
                
                
                -
                
                
                
                -
                
                
                
                2,013Loans
      held for sale
                
                
                16,450
                
                
                
                -
                
                
                
                16,450
                
                
                
                -





Impaired loans, which are measured for impairment
using the fair value of the collateral forcollateral dependent loans,hada carrying amount of $196,081,with a valuation allowance of
$30,555atJune 30, 2010, resulting in an additional provisionfor loan losses of $8,925for thesix month ended June 30, 2010.At December 31,
2009,impaired loans had a carrying
amount of $79,385, with a
valuation allowance of $21,630, resulting in an additional provision
for loan losses of $21,305for the year ending December 31,
2009.


15





Other
real estate owned, which is measured at the lower of carrying or fair value less
costs to sell, had a net carrying amount of $1,130, which is made up of the
outstanding balance of $8,102, net of a valuation allowance of $6,972 at June
30, 2010.  Proceeds from
salesof
other real estate ownedwere $861
forthesixmonths endedJune 30, 2010.  Gross
lossesof
$22 wererealized on sales during the firstsixmonths of
2010.At December
31, 2009, other real estate ownedhad a net carrying amount of $2,013,
which was made up of the outstanding balance of $8,985, net of a valuation
allowance of $6,972.  A write-down of $6,872 was recorded for the year
ending December 31, 2009.  There were no sales of other real estate
owned during 2009.





There
were no loans held for sale, which are carried at the lower of cost or fair
value, at June 30, 2010.  Charge offs of $1,864 were recognized during
the first six months of 2010 on the loans held for sale before they were
classified as held for sale.  Proceeds from salesof loans
held for sale were $19,400for thesixmonths endedJune
30,
2010.  Losses on
sales totaled $250 during the first six months of 2010.Loans
held for sale at December 31, 2009 totaled $16,450.  Charge offs of
$9,883 were recognized in 2009 on the loans held for sale at December 31, 2009
before they were classified as held for sale.  There were no sales of
loans held for sale in 2009.





The carrying amounts and estimated fairvalues of financial
instrumentsatJune 30, 2010 andDecember 31, 2009wereas follows:





June 30, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  ValueFinancial
      assets:Cash
      and due from banks
                  
                  $
                  17,283
                  
                  
                  $
                  17,283
                  
                  
                  $
                  18,745
                  
                  
                  $
                  18,745Interest
      earning deposits with banks
                  
                  
                  19,844
                  
                  
                  
                  19,844
                  
                  
                  
                  3,409
                  
                  
                  
                  3,409Term
      placements
                  
                  
                  507
                  
                  
                  
                  507
                  
                  
                  
                  507
                  
                  
                  
                  507Securities
      available for sale
                  
                  
                  209,221
                  
                  
                  
                  209,221
                  
                  
                  
                  397,274
                  
                  
                  
                  397,274Securities
      held to maturity
                  
                  
                  33
                  
                  
                  
                  33
                  
                  
                  
                  66
                  
                  
                  
                  67Restricted
      stock
                  
                  
                  18,092
                  
                  
                  NA
                  
                  
                  
                  18,353
                  
                  
                  NALoans
      held for sale
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  16,450
                  
                  
                  
                  16,450Loans,
      net
                  
                  
                  1,920,088
                  
                  
                  
                  1,712,051
                  
                  
                  
                  2,090,896
                  
                  
                  
                  1,975,640Other
      real estate owned
                  
                  
                  1,130
                  
                  
                  
                  1,130
                  
                  
                  
                  2,013
                  
                  
                  
                  2,013Accrued
      interest receivable
                  
                  
                  8,440
                  
                  
                  
                  8,440
                  
                  
                  
                  10,152
                  
                  
                  
                  10,152Financial
      liabilities:Deposits
                  
                  
                  1,823,798
                  
                  
                  
                  1,833,218
                  
                  
                  
                  2,075,028
                  
                  
                  
                  2,086,245FHLB
      advances and otherBorrowings
                  
                  
                  313,480
                  
                  
                  
                  331,745
                  
                  
                  
                  352,820
                  
                  
                  
                  303,354Subordinated
      debt
                  
                  
                  56,433
                  
                  
                  
                  20,965
                  
                  
                  
                  56,351
                  
                  
                  
                  28,480Accrued
      interest payable
                  
                  
                  4,628
                  
                  
                  
                  4,628
                  
                  
                  
                  4,597
                  
                  
                  
                  4,597





The methods and assumptions, not
previously presented, used to estimate fair value are described as
follows:





Carrying amount is the estimated fair
value for cash and cash equivalents, interest bearing deposits, accrued interest
receivable and payable, demand deposits, short term debt, and variable rate
loans or deposits that
re-price frequently and fully.  The methods for determining the fair
values for securities were described previously.  For fixed rate loans
or deposits and for variable rate loans or deposits with infrequent re-pricing
or re-pricing limits, fair valueis based on discounted cash flows using
current market rates applied to the estimated life and credit
risk.  Fair value of debt is based on current rates for similar
financing.  It was not practicable to determine the fair value of FHLB
stock due to restrictions placed on its
transferability.  The fair value of off balance sheet items is not
consideredmaterial.





Note
7 – Other Borrowings and Subordinated Debentures





Advances from the FHLB were as follows:





June
      30, 2010:Overnightline of credit at 0.34%
                  
                  $
                  2,000Maturitiesfrom January 2011through September 2018,
      fixedrate at rates
      from2.18% to 3.15%,
      averaging2.68%
                  
                  
                  310,000December
      31, 2009:Overnightline of credit at
      0.34%
                  
                  $
                  36,340MaturitiesfromJanuary 2010 through September
      2018, fixed rate at
      rates from 2.18% to 3.61%, averaging 2.70%
                  
                  
                  315,000




16





Each term advance is payable at its
maturity date with a prepayment penalty if paid before the maturity
date.All advances are periodically callable.  The advances were collateralized by $701,626and $884,328 of first mortgage loans at
June 30, 2010 and December 31, 2009, respectively.  The collateral at
June 30, 2010 has been delivered to the FHLB and at December 31, 2009 was under
a blanket lien arrangement.  Based on thiscollateral and the Company’s holdings of FHLB stock, the Company is
eligible to borrow up to anadditional $120,625 atJune 30, 2010.





In 2003,
a trust formed by the Company issued $11,000 of floating rate trust preferred
securities as part of a pooled offering of such securities due October 8,
2033.  The securities bear interest at 3 month London Interbank
Offered Rate (“LIBOR”) plus 2.99% with a rate of 3.29% as of June 30,
2010.  The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering.  The debentures and related
debt issuance costs represent the sole assets of the trust.  The
Company may redeem the subordinated debentures, in whole or in part, on any
interest payment date.





In 2006,
an additional trust formed by the Company issued $7,000 of floating rate trust
preferred securities as part of a pooled offering of such securities due
September 30, 2036.  These securities bear interest at 6.53% for the
initial five-year term and thereafter at 3 month LIBOR plus
1.43%.  The Company issued subordinated debentures to the trust in
exchange for the proceeds of the offering.  The debentures and related
debt issuance costs represent the sole assets of the trust.  The
Company may not redeem any part of the subordinated debentures prior to the
initial call date of September 30, 2011.





In 2008,
a third trust formed by the Company issued $20,000 of floating rate trust
preferred securities due September 1, 2038. The securities bear interest at 3
month LIBOR plus 3.75% with a rate of 4.29% as of June 30, 2010.  The
Company issued subordinated debentures to the trust in exchange for the proceeds
of the offering.  The debentures and related debt issuance costs
represent the sole assets of the trust.  The Company may redeem the
subordinated debentures, in whole or in part, at a premium declining ratably to
par on September 1, 2013.





The
Company is not considered the primary beneficiary of these trusts, which are
variable interest entities; therefore the trusts are not consolidated in the
Company’s financial statements, but rather the subordinated debentures are shown
as a liability.  The Company has the option to defer interest payments
on the subordinated debentures from time to time for a period not to exceed five
consecutive years.  The
subordinated debentures may be included in Tier 1 capital (with certain
limitations applicable) under current regulatory guidelines and
interpretations.On May 3, 2010, the Company
announced that it has decided to defer interest on these subordinated debentures.  During the
interest deferral period, the Company continues to accrue interest
expense.





On July
27, 2009 and June 29, 2009, the Bank issued $14,000 and $5,000, respectively, of
fixed rate subordinated notes due July 1, 2019; the notes bear interest at
11%.  The Bank, subject to obtaining prior approval of the FDIC and the Banking Department,
may redeem the subordinated notes, in whole or in part, on any interest payment
date beginning on July 1, 2014.  The subordinated debentures may be
included in Tier 2 capital
(with certain limitations applicable) under current regulatory guidelines and
interpretations.





Note
8 – Post Retirement Benefits





The Company sponsors a postretirement
medical and life insurance plan for a closed group of prior employees.  Pre-Medicare eligible
retirees pay an amount similar to active employees.  Post-Medicare
eligible retirees pay the entire amount over the Bank’s obligation, which is frozen at $864
per year per covered person.Since the plans hold no assets,
the Bank did not contribute to the plans in 2009 and does not expect to
contribute to the plans during 2010, other than to fund the payments for the
benefits.





A
nontax-qualified executive and director incentive retirement plan covers certain
directors and executive officers.  Under the plan, the Company can
award up to 10% of the executive officer’s salary for the prior fiscal year and
up to 25% of a director’s fees for the prior fiscal year.  The Company
pays each participant the amount awarded plus interest either over 15 years or
in a lump sum at normal retirement age.  The Bank’s expense for these
plans was $58 and $115 for the three and six months ended June 30, 2010,
respectively.  The Bank’s expense for these plans was $94 and $190 for
the three and six months ended June 30, 2009, respectively.





A
nontax-qualified deferred compensation plan covers all directors and executive
officers.  Under the plan, directors may elect to defer a portion of
their fees and executive officers may elect to defer a portion of their
compensation.  Upon retirement or termination of service, the Company
pays each participant the amount of their deferrals plus interest over 5 years,
10 years or in a lump sum payment.  A liability is accrued for the
obligation under this plan.  The Bank’s expense for these plans was $8
and $16 for the three and six months ended June 30, 2010,
respectively.  The Bank’s expense for these plans was $7 and $15 for
the three and six months ended June 30, 2009, respectively.


17





Certain
members of management are covered by group term replacement life
insurance.  The benefit provides postretirement life insurance up to a
maximum of two and one half times final annual base salary.  The
Bank’s expense for these plans was $35 and $46 for the three and six months
ended June 30, 2010, respectively.  The Bank’s expense for these plans
was $10 and $21 for the three and six months ended June 30, 2009,
respectively.





The Chief
Executive Officer (“CEO”) has a Supplemental Executive Retirement Agreement
(“SERA”).  Under the plan, the CEO receives a lifetime benefit at
retirement, with a guaranteed 15 years, based on seventy percent of his final
three-year average base salary reduced by various offsets including employer
contributions under the 401(k) Plan, the Executive Incentive Retirement Plan, as
well as 50% of his Social Security benefit.  The Bank’s expense for
this plan was $351 and $703 for the three and six months ended June 30, 2010,
respectively.  The Bank’s expense for this plan was $193 and $355 for
the three and six months ended June 30, 2009, respectively.





The
following table sets forth the components of net periodic benefit cost and other
amounts recognized in Other Comprehensive Income:





Three months ended June 30,
                
                SERA Benefits
                
                
                Postretirement Medical and Life
                  Benefits2010
                
                
                2009
                
                
                2010
                
                
                2009Service
      cost
                
                $
                179
                
                
                $
                133
                
                
                $
                -
                
                
                $
                -Interest
      cost
                
                
                61
                
                
                
                37
                
                
                
                4
                
                
                
                3Amortization
      of net (gain)/loss
                
                
                111
                
                
                
                15
                
                
                
                (1
                )
                
                
                (3
                )Amortization
      of unrecognized transition obligation
                
                
                -
                
                
                
                -
                
                
                
                8
                
                
                
                8Net
      periodic benefit cost
                
                $
                351
                
                
                $
                185
                
                
                $
                11
                
                
                $
                8





Six months ended June 30,
                
                SERA Benefits
                
                
                Postretirement Medical and Life
                  Benefits2010
                
                
                2009
                
                
                2010
                
                
                2009Service
      cost
                
                $
                358
                
                
                $
                265
                
                
                $
                -
                
                
                $
                -Interest
      cost
                
                
                122
                
                
                
                75
                
                
                
                8
                
                
                
                6Amortization
      of net (gain)/loss
                
                
                223
                
                
                
                31
                
                
                
                (2
                )
                
                
                (6
                )Amortization
      of unrecognized transition obligation
                
                
                -
                
                
                
                -
                
                
                
                16
                
                
                
                16Net
      periodic benefit cost
                
                $
                703
                
                
                $
                371
                
                
                $
                22
                
                
                $
                16





Note
9 – Income Taxes





The
Company had income tax expense for the three months ended June 30, 2010 of
$6,165.  Due to an operating loss before taxes for the quarter of
$23,049, there was a gross income tax benefit of $9,535 offset by a valuation
allowance on the Company’s deferred tax asset of $15,700.  For the six
months ended June 30, 2010, the Company had income tax expense of
$3,209.  Due to an operating loss before taxes of $39,774, there was a
gross income tax benefit was $16,591 offset by a valuation allowance on the
Company’s deferred tax asset of $19,800.  An assessment of the
Company’s deferred tax asset before valuation allowance at June 30, 2010 of
$27,970, led to the decision to record the additional valuation
allowance.  Based on the Company’s operating losses over the past
three quarters, the ability to realize the full benefits of the deferred tax
asset has become further impaired.  In determining the need for and
the amount of a valuation allowance Management considered the Company’s ability
to realize carry back benefits of the current losses as well as the ability to
realize future tax benefits based on tax planning strategies that are feasible
and could be implemented.  The Company evaluates the need for a
valuation allowance for its deferred tax asset on a quarterly
basis.





Note
10 - Loan Commitments and Other Related Activities





Some financial instruments, such
asloan commitments, credit
lines, letters of credit and overdraft protection, are issued to meet customer
financing needs.  These are agreements to provide credit or to support
the credit of others, as long as conditions established in the contract are
met,and usually have expiration
dates.  Commitments may expire without being used.  Off
balance sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated.  The same
credit policies are used to make such commitments as are used for
loans, including obtaining collateral at exercise of the
commitment.


18





The contractual amounts of financial
instruments with off balance sheet riskwere as follows:





June 30, 2010
                  
                  
                  December 31, 2009Fixed
                  
                  
                  Variable
                  
                  
                  Fixed
                  
                  
                  VariableRate
                  
                  
                  Rate
                  
                  
                  Rate
                  
                  
                  RateCommitments to make
      loans
                  
                  $
                  100
                  
                  
                  $
                  4,550
                  
                  
                  $
                  2,742
                  
                  
                  $
                  16,971Unused lines of
      credit
                  
                  
                  1,108
                  
                  
                  
                  74,901
                  
                  
                  
                  1,108
                  
                  
                  
                  107,456Standby letters of
      credit
                  
                  
                  -
                  
                  
                  
                  19,295
                  
                  
                  
                  -
                  
                  
                  
                  18,281





Note
11 – Regulatory Capital Matters





We are subject to various regulatory
capital requirements administered by the federal banking
agencies.  Failure to meet minimal capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that,if undertaken, could
have a direct material effect on our financial statements.  Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, we must meet specific capitalguidelines that involve
quantitative measures of
ourassets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices.  Our capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weighting and
other factors.





Quantitative measures established by
regulations to ensure capital adequacy require us to maintain minimum amounts
and ratios (set forth below in the table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier 1
capital (as defined in the regulations) to average assets (as defined in the
regulations).  Pursuant totheConsent Agreement,the Bank must maintain Tier 1 Capital
at least equal to 7% of total assets, Tier 1 Risk-Based Capital at least equal to 9% of
Total Risk-Weighted Assets and Total Risk-Based Capital at least equal to 11% of
Total Risk-Weighted Assets no later than June 30, 2010.





The Company’s and the Bank’s actual capital amounts and ratios as
ofJune 30, 2010 andDecember 31, 2009 are in the following
table.The Bank is categorized asadequately capitalizedfor regulatory capital
purposes.




Actual
                                          
                                          
                                          Required For Capital
                                            Adequacy Purposes
                                          
                                          
                                          To Be Well
                                            Capitalized Under
                                            Prompt Corrective
                                            Action ProvisionsAmount
                                          
                                          
                                          Ratio
                                          
                                          
                                          Amount
                                          
                                          
                                          Ratio
                                          
                                          
                                          Amount
                                          
                                          
                                          RatioJune
      30,
      2010Total
      capital to risk weighted assets:Consolidated
                                          
                                          $
                                          169,584
                                          
                                          
                                          
                                          9.40
                                          %
                                          
                                          $
                                          144,308
                                          
                                          
                                          
                                          8.00
                                          %
                                          
                                          $
                                          NA
                                          
                                          
                                          
                                          NA
                                          %Bank
                                          
                                          
                                          167,803
                                          
                                          
                                          
                                          9.31
                                          
                                          
                                          
                                          144,165
                                          
                                          
                                          
                                          8.00
                                          
                                          
                                          
                                          180,206
                                          
                                          
                                          
                                          10.00Tier
      1 capital to risk weighted assets:Consolidated
                                          
                                          
                                          120,112
                                          
                                          
                                          
                                          6.66
                                          
                                          
                                          
                                          72,154
                                          
                                          
                                          
                                          4.00
                                          
                                          
                                          NA
                                          
                                          
                                          NABank
                                          
                                          
                                          117,768
                                          
                                          
                                          
                                          6.54
                                          
                                          
                                          
                                          72,083
                                          
                                          
                                          
                                          4.00
                                          
                                          
                                          
                                          108,124
                                          
                                          
                                          
                                          6.00Tier
      1 capital to average assets:Consolidated
                                          
                                          
                                          120,112
                                          
                                          
                                          
                                          5.06
                                          
                                          
                                          
                                          94,861
                                          
                                          
                                          
                                          4.00
                                          
                                          
                                          NA
                                          
                                          
                                          NABank
                                          
                                          
                                          117,768
                                          
                                          
                                          
                                          4.97
                                          
                                          
                                          
                                          94,794
                                          
                                          
                                          
                                          4.00
                                          
                                          
                                          
                                          118,493
                                          
                                          
                                          
                                          5.00





Actual
                    
                    
                    Required For Capital
                      Adequacy Purposes
                    
                    
                    To Be Well
                      Capitalized Under
                      Prompt Corrective
                      Action ProvisionsAmount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    Ratio
                    
                    
                    Amount
                    
                    
                    RatioDecember 31,
      2009Total capital to risk weighted
      assets:Consolidated
                    
                    $
                    214,555
                    
                    
                    
                    10.52
                    %
                    
                    $
                    163,188
                    
                    
                    
                    8.00
                    %
                    
                    $
                    NA
                    
                    
                    NA
                    %Bank
                    
                    
                    211,718
                    
                    
                    
                    10.37
                    
                    
                    
                    162,977
                    
                    
                    
                    8.00
                    
                    
                    
                    203,721
                    
                    
                    
                    10.00Tier 1 capital to risk weighted
      assets:Consolidated
                    
                    
                    171,540
                    
                    
                    
                    8.41
                    
                    
                    
                    81,594
                    
                    
                    
                    4.00
                    
                    
                    NA
                    
                    
                    NABank
                    
                    
                    168,196
                    
                    
                    
                    8.26
                    
                    
                    
                    81,488
                    
                    
                    
                    4.00
                    
                    
                    
                    122,233
                    
                    
                    
                    6.00Tier 1 capital to average
      assets:Consolidated
                    
                    
                    171,540
                    
                    
                    
                    6.39
                    
                    
                    
                    107,347
                    
                    
                    
                    4.00
                    
                    
                    NA
                    
                    
                    NABank
                    
                    
                    168,196
                    
                    
                    
                    6.28
                    
                    
                    
                    107,086
                    
                    
                    
                    4.00
                    
                    
                    
                    133,857
                    
                    
                    
                    5.00





Based on the Bank’s  June 30,
2010 total risk weighted assets of $1,802,063 and total month end assets used
for leverage of $2,300,993, the Bank would have needed total capital of $198,227
and Tier 1 capital $162,186 to meet the capital requirements of the Consent
Agreement.





Attempts to meet the capital
requirements of the Consent
Agreementso far this yearinclude:


19





·
            Shrinking the balance
      sheet


·
            Shifting assets from higher to
      lower risk weighting
categories


·
            Selling one or more packages of
      nonperforming loans


·
            Selling one or more packages of
      performing loans


·
            Raising
    capital


·
            A combination of the foregoing
      strategies


·
            A sale or merger of the
      Bank





Since the Bank was unable to meet the
required capital ratios at June 30, 2010, the Consent Agreement requires
immediate notification to the FDIC and Banking Department and provides a 60 day period to
either meet the ratios or tosubmit a written plan describing the
primary means and timing by which the Bank shall meet or exceed the minimum
requirements, as well as a contingency plan for the sale or merger of
theBank in the event the
primary sources of capital are not available.  The Bank has notified
the FDIC and Banking Department of the Merger Agreement.





Banking regulators solely determine the
Bank’s progress toward compliance with
provisions of the Consent Agreement.  Accordingly, it is
possible banking regulators in the future could impose further and more
stringent conditions or take other actions whose impact could be
material.





Item
2. -  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


(Dollar
amounts in thousands except share data)





About
Forward-Looking Statements





This
report may contain statements relating to the future results of the Company
(including certain projections and business trends) that are considered
“forward-looking statements” as defined in the Private Securities Litigation
Reform Act of 1995 (the “PSLRA”).  In addition, certain statements may
be contained in the Company’s future filings with the SEC, in press releases,
and in oral and written statements made by or with the approval of the Company
that are not statements of historical fact and constitute forward-looking
statements within the meaning of the PSLRA.  Such forward-looking
statements, in addition to historical information, which involve risk and
uncertainties, are based on the beliefs, assumptions and expectations of
management of the Company.  Words such as “expects,” “believes,”
“should,” “plans,” “anticipates,” “will,” “potential,” “could,” “intend,” “may,”
“outlook,” “predict,” “project,” “would,” “estimates,” “assumes,” “likely,” and
variations of such similar expressions are intended to identify such
forward-looking statements.  Examples of forward-looking statements
include, but are not limited to, possible or assumed estimates with respect to
the financial condition, expected or anticipated revenue, and results of
operations and business of the Company, including earnings growth; revenue
growth in retail banking, lending and other areas; origination volume in the
Company’s consumer, commercial and other lending businesses; current and future
capital management programs; future loan loss provision; noninterest income
levels, including fees from banking services as well as product sales; tangible
capital generation; market share; expense levels; and other business operations
and strategies. For this presentation, the Company claims the protection of the
safe harbor for forward-looking statements contained in the PSLRA.





Factors
that could cause future results to vary from current management expectations
include, but are not limited to: changes in economic conditions including an
economic recession that could affect the value of real estate collateral and the
ability for borrowers to repay their loans; the ability of the Company to
successfully execute its plans and strategies; legislative and regulatory
changes, including increases in Federal Deposit Insurance Corporation (“FDIC”)
insurance rates; monetary and fiscal policies of the federal government; changes
in tax policies, rates and regulations of federal, state and local tax
authorities; changes in interest rates; deposit flows; the cost of funds; demand
for loan products and other financial services; competition; changes in the
quality and composition of the Bank’s loan and investment portfolios; changes in
estimates of future reserve requirements based upon the periodic review thereof
under relevant regulatory and accounting requirements; changes in management’s
business strategies; acquisitions and integration of acquired businesses;
changes in accounting principles, policies or guidelines; changes in real estate
values; changes in the level of nonperforming assets and charge offs and other
factors discussed elsewhere in this report, factors set forth in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009 under “Item 1A.,
Risk Factors,” factors set forth in this report under “Item 1A., Risk Factors”
and in other reports filed by the Company with the SEC. The forward-looking
statements are made as of the date of this report, and the Company assumes no
obligation to update the forward-looking statements or to update the reasons why
actual results could differ from those projected in the forward-looking
statements.





This discussion and analysis should be
read in conjunction with
the Company’s consolidated financial statements,
notes thereto and other financial information appearing elsewhere in this
report.Dollaramounts in thousandsexcept sharedata.


20


Proposed
Plan of Merger with People’s United Financial, Inc.
 
 On July
15, 2010, the Company and People’s United Financial, Inc. (“People’s United”) of
Bridgeport, Connecticut announced a definitive agreement under which People’s
United will acquire the Company in a cash and stock transaction valued at
approximately $60 million, or $4.00 per share.
 
 Under the
agreement, People’s United will acquire the Company for approximately $30
million in cash and 2.14 million shares of People’s United common stock, valued
in the aggregate at approximately $30 million based on the 5-day average closing
price of People’s United common stock for the period ended July 14,
2010.
 
 The
definitive agreement has been unanimously approved by the respective boards of
directors of People’s United and the Company.  The Company will merge into
People’s United, and the Bank, will simultaneously merge into People’s United
Bank, People’s United’s banking subsidiary.  The value of the consideration
a shareholder of the Company will receive for each share of Company common stock
is equivalent in the aggregate to 0.1430 shares of People’s United common stock
and $2.00 in cash.  Shareholders of the Company as of the record date for
the special shareholders meeting to vote on the transaction will be
entitled to elect for each share held whether to receive shares of People’s
United common stock or cash, subject to reallocation if either cash or stock is
oversubscribed.
 
 The
actual value of the merger consideration to be paid upon closing to each
shareholder of the Company will depend on the average People’s United stock
price shortly prior to completion of the merger, and the exact amount of cash
payable per common share of the Company and the exact number of shares to be
issued per common share of the Company will be determined at that time based on
the average People’s United stock price, so that each share of the Company
receives consideration with approximately the same value.  Receipt of
People’s United common stock is expected to be tax-free to shareholders of the
Company.
 
 The
transaction is subject to approval by bank regulatory authorities and by the
shareholders of the Company.  People’s United shareholder approval is not
required.  The transaction is expected to close in the fourth quarter
2010.
 
 The
merger is the result of an assessment by the Company and its board of directors
of the Company’s strategic alternatives in light of the financial challenges
facing the Company.  The Merger Agreement satisfies the requirement of the
Consent Agreement to sell or merge the Company and the Bank in the event that
the required capital ratios are not satisfied by June 30, 2010.  If the
merger is not consummated, the Company would be required to find an alternative
approach to overcoming its challenges and satisfying the relevant regulatory
requirements, including meeting the capital ratios required by the Consent
Agreement and the Written Agreement.  At this time, the Company has no
other alternative to raise capital or to enter into another merger agreement if
the merger with People’s is not consummated.  In addition, the terms of the
Merger Agreement prohibit the Company and the Bank from taking certain actions
to facilitate the foregoing.
 
 If the
People’s merger is not consummated, the Company may not be able to raise any
additional capital and, if it could raise any additional capital, such capital
is likely to be extremely dilutive to the Company’s existing shareholders. 
In addition, the Company may not be able to find another merger partner or
acquirer.  In such circumstances, a failure to raise such capital or to
find another merger partner or acquirer could result in further and more severe
regulatory actions against the Company and the Bank thereby giving rise to
substantial doubt as to the Company’s ability to
continue as a going concern.
 
 Overview
 
 The
Company recorded a net loss for the second quarter of 2010 of $29,214, or $1.97
per fully diluted share.  The net loss for the first six months of 2010 was
$42,983, or $2.90 per fully diluted share.  Net charge offs and additional
specific allocations added to the allowance for loan losses on impaired loans,
especially in the Bank’s land and construction portfolio, led to a provisions
for loan losses of $27,500 and $52,500 for the three and six month periods ended
June 30, 2010.  After net charge offs of $20,722 and $32,975 during the
quarter and six months ended June 30, 2010, the allowance for loan losses at
June 30, 2010 totaled $57,999, or 2.93%, of total loans.  Nonperforming
loans at June 30, 2010 were $227,502, or 11.50% of total loans.  At
December 31, 2009, nonperforming loans were $130,172, or 6.23%, of total
loans.
 
 One new
branch was opened during the second quarter and three new branch projects remain
under development with expected completion dates between the end of 2010 and the
first quarter of 2011.  These locations have FDIC and Banking Department
approval to establish a branch and the Bank is obligated under lease
agreements.  The board of directors and management believe the expanding
branch network continues to add to the franchise value of the
Company.
  21
  On June
22, 2010, the Company entered into a Written Agreement with the FRB.  The
Written Agreement is in addition to the Consent Agreement and similarly requires
that the Company obtain the approval of the FRB prior to paying a
dividend.
 
 During
the first six months of 2010, the Bank made the following progress in complying
with the Consent Agreement provisions:
 
 i.
              The
      Bank submitted to the FDIC and Banking Department a revised lending
      policy to provide additional guidance and control over the lending
      functions.
 
 ii.
              The
      Bank submitted to the FDIC and Banking Department a revised independent
      loan review policy and program to ensure that it is consistent with the
      Bank’s loan review policy and that is sufficiently comprehensive to assess
      risks in the Bank’s lending and minimize credit
  losses.
 
 iii.
              The
      Bank has eliminated from its books all assets or portions of assets
      classified as “Loss.”
 
 iv.
              The
      Bank completed and submitted to the FDIC and Banking Department a plan for
      systematically reducing and monitoring its CRE loan concentration of
      credit to an amount, which is commensurate with the Bank’s business
      strategy, management expertise, size and
  location.
 
 v.
              The
      Bank completed and submitted to the FDIC and Banking Department a plan to
      reduce assets classified “Doubtful” and
  “Substandard.”
 
 vi.
              The
      Bank completed and submitted to the FDIC and Banking Department a profit
      plan and comprehensive budget for all categories of income and expense for
      the calendar year 2010.
 
 vii.
              The
      Bank provided updated plans and forecasts based on the known information
      at the time to the FDIC and Banking Department regarding our capital
      requirements.
 
 The Bank
was not successful meeting the capital ratios in the Consent Agreement of Tier 1
Capital at least equal to 7% of total assets, Tier 1 Risk-Based Capital at least
equal to 9% of Total Risk-Weighted Assets and Total Risk-Based Capital at least
equal to 11% of Total Risk-Weighted Assets by June 30, 2010.  Since the
Bank was unable to meet the required capital ratios, the Consent Agreement
requires immediate notification to the FDIC and Banking Department and provides
a 60 day period to either meet the ratios or to submit a written plan describing
the primary means and timing by which the Bank shall meet or exceed the minimum
requirements, as well as a contingency plan for the sale or merger of the Bank
in the event the primary sources of capital are not available.  The Bank
has notified the FDIC and Banking Department of the Merger
Agreement.
 
 Cash
dividends will remain suspended and the Company will continue to defer interest
payments on its trust preferred securities.  Dividends cannot be paid to
common shareholders until all deferred interest payments on the trust preferred
securities are brought current.
 
 The
Merger Agreement with People’s, described above, imposes significant
restrictions on the Company’s operations until the consummation of the
merger.
 
 On April
13, 2010, the FDIC approved an interim rule (finalized in June 2010) extending
the Transaction Account Guarantee Program (“TAG Program”), which offers deposit
insurance on the entire amount of all noninterest bearing checking accounts
through December 31, 2010.  The Bank has decided to continue its
participation in the TAG Program through this latest extension
period.
 
 Net
Income (Loss)
 
 The net
loss for the quarter ended June 30, 2010 totaled $29,214, or $1.97 per diluted
share, while net income for the quarter ending June 30, 2009 totaled $3,413, or
$0.26 per diluted share.  Significant trends for the second quarter of 2010
include: (i) a $25,700, or 1,427.77%, increase in the provision for loan losses;
(ii) a $1,623, or 9.95%, increase in net interest income; (iii) a $418, or
21.48%, increase in total noninterest income; (iv) a $4,627, or 41.26%, increase
in total noninterest expense and (v) a $4,341, or 237.99%, increase in the
provision for income taxes.
 
 The net
loss for the six months ended June 30, 2010 totaled $42,983, or $2.90 per
diluted share, while net income for the same period in 2009 totaled $7,029, or
$0.56 per diluted share.  Significant trends for the first six months of
2010 include: (i) a $49,500, or 1,650.00%, increase in the provision for loan
losses; (ii) a $7,504, or 25.21%, increase in net interest income; (iii) a $76,
or 1.61%, increase in total noninterest income; (iv) a $8,742, or 42.43%,
increase in total noninterest expense and (v) a $650, or 16.84%, decrease in the
provision for income taxes.
  22
  Net
Interest Income
 
 Net
interest income, the primary contributor to earnings, represents the difference
between income on interest earning assets and expense on interest bearing
liabilities. Net interest income depends upon the volume of interest earning
assets and interest bearing liabilities and the interest rates earned or paid on
them.
 
 The
following table sets forth certain information relating to the Company's average
consolidated statements of financial condition and its consolidated statements
of income for the periods indicated and reflects the average yield on assets and
average cost of liabilities for the periods indicated.  Interest income on
investment securities is shown on a tax equivalent (“TE”) basis.  Interest
income on nontaxable investment securities depicted below have been grossed up
by .54 to estimate the TE yield.  Yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities, respectively,
for the periods shown.  Average balances are derived from daily average
balances and include nonaccrual loans, if any.  The yields and costs
include fees, which are considered adjustments to yields.
 
 For the three months ended
                              June 30, 2010
                            
                            
                            For the three months ended
                              June 30, 2009Average
                            
                            
                            
                            
                            
                            Average
                            
                            
                            Average
                            
                            
                            
                            
                            
                            AverageBalance
                            
                            
                            Interest
                            
                            
                            Rate
                            
                            
                            Balance
                            
                            
                            Interest
                            
                            
                            RateASSETSInterest
      earning assets:Investment
      securities:Taxable
                            
                            $
                            149,781
                            
                            
                            $
                            1,409
                            
                            
                            
                            3.76
                            %
                            
                            $
                            123,207
                            
                            
                            $
                            843
                            
                            
                            
                            2.74
                            %Nontaxable
                            
                            
                            60,051
                            
                            
                            
                            769
                            
                            
                            
                            5.12
                            
                            
                            
                            16,598
                            
                            
                            
                            226
                            
                            
                            
                            5.45Total
      investment securities
                            
                            
                            209,832
                            
                            
                            
                            2,178
                            
                            
                            
                            4.15
                            
                            
                            
                            139,805
                            
                            
                            
                            1,069
                            
                            
                            
                            3.06Loans
                            
                            
                            2,020,825
                            
                            
                            
                            26,213
                            
                            
                            
                            5.19
                            
                            
                            
                            1,902,130
                            
                            
                            
                            28,043
                            
                            
                            
                            5.90Interest
      earning deposits with banks
                            
                            
                            28,498
                            
                            
                            
                            22
                            
                            
                            
                            0.31
                            
                            
                            
                            64,002
                            
                            
                            
                            40
                            
                            
                            
                            0.25Other
      interest earning assets
                            
                            
                            18,386
                            
                            
                            
                            190
                            
                            
                            
                            4.13
                            
                            
                            
                            32,468
                            
                            
                            
                            226
                            
                            
                            
                            2.78Total
      interest earning assets
                            
                            
                            2,277,541
                            
                            
                            
                            28,603
                            
                            
                            
                            5.02
                            
                            
                            
                            2,138,405
                            
                            
                            
                            29,378
                            
                            
                            
                            5.50Noninterest
      earning assets:Cash
      and cash equivalents
                            
                            
                            20,479
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            21,509Other
      assets
                            
                            
                            77,371
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            78,341Total
      assets
                            
                            $
                            2,375,391
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            2,238,255LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesInterest
      bearing liabilities:Savings,
      NOW and money market deposits
                            
                            $
                            893,302
                            
                            
                            $
                            2,148
                            
                            
                            
                            0.96
                            %
                            
                            $
                            794,931
                            
                            
                            $
                            3,520
                            
                            
                            
                            1.78
                            %Time
      deposits of $100,000 or more
                            
                            
                            428,043
                            
                            
                            
                            2,652
                            
                            
                            
                            2.49
                            
                            
                            
                            405,834
                            
                            
                            
                            3,612
                            
                            
                            
                            3.57Other
      time deposits
                            
                            
                            386,238
                            
                            
                            
                            2,468
                            
                            
                            
                            2.56
                            
                            
                            
                            397,073
                            
                            
                            
                            3,121
                            
                            
                            
                            3.15Other
      borrowings
                            
                            
                            320,375
                            
                            
                            
                            2,118
                            
                            
                            
                            2.64
                            
                            
                            
                            327,222
                            
                            
                            
                            2,262
                            
                            
                            
                            2.77Subordinated
      debt
                            
                            
                            56,476
                            
                            
                            
                            1,018
                            
                            
                            
                            7.21
                            
                            
                            
                            38,939
                            
                            
                            
                            477
                            
                            
                            
                            4.90Total
      interest bearing liabilities
                            
                            
                            2,084,434
                            
                            
                            
                            10,404
                            
                            
                            
                            2.00
                            
                            
                            
                            1,963,999
                            
                            
                            
                            12,992
                            
                            
                            
                            2.65Noninterest
      bearing liabilities:Demand
      deposits
                            
                            
                            148,820
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            121,449Other
      liabilities
                            
                            
                            16,630
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            13,325Total
      liabilities
                            
                            
                            2,249,884
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            2,098,773Stockholders'
      equity
                            
                            
                            125,507
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            139,482Total
      liabilities and stockholders'equity
                            
                            $
                            2,375,391
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            2,238,255Net
      interest income (TE)/interest rate spread
                            
                            
                            
                            
                            
                            $
                            18,199
                            
                            
                            
                            3.02
                            %
                            
                            
                            
                            
                            
                            $
                            16,386
                            
                            
                            
                            2.85
                            %Net
      interest earning assets/net interest margin
                            
                            $
                            193,107
                            
                            
                            
                            
                            
                            
                            
                            3.19
                            %
                            
                            $
                            174,406
                            
                            
                            
                            
                            
                            
                            
                            3.06
                            %Less: 
      tax equivalent adjustment
                            
                            
                            
                            
                            
                            
                            270
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            80Net
      interest income
                            
                            
                            
                            
                            
                            $
                            17,929
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            16,306
  23
 
 For the six months ended
                        June 30, 2010
                      
                      
                      For the six months ended
                        June 30, 2009Average
                      
                      
                      
                      
                      
                      Average
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageBalance
                      
                      
                      Interest
                      
                      
                      Rate
                      
                      
                      Balance
                      
                      
                      Interest
                      
                      
                      RateASSETSInterest
      earning assets:Investment
      securities:Taxable
                      
                      $
                      175,377
                      
                      
                      $
                      3,426
                      
                      
                      
                      3.91
                      %
                      
                      $
                      96,895
                      
                      
                      $
                      1,706
                      
                      
                      
                      3.52
                      %Nontaxable
                      
                      
                      60,231
                      
                      
                      
                      1,542
                      
                      
                      
                      5.12
                      
                      
                      
                      10,662
                      
                      
                      
                      300
                      
                      
                      
                      5.63Total
      investment securities
                      
                      
                      235,608
                      
                      
                      
                      4,968
                      
                      
                      
                      4.22
                      
                      
                      
                      107,557
                      
                      
                      
                      2,006
                      
                      
                      
                      3.73Loans
                      
                      
                      2,058,095
                      
                      
                      
                      54,030
                      
                      
                      
                      5.25
                      
                      
                      
                      1,820,570
                      
                      
                      
                      53,542
                      
                      
                      
                      5.89Interest
      earning deposits with banks
                      
                      
                      31,269
                      
                      
                      
                      40
                      
                      
                      
                      0.26
                      
                      
                      
                      89,036
                      
                      
                      
                      127
                      
                      
                      
                      0.29Other
      interest earning assets
                      
                      
                      18,247
                      
                      
                      
                      434
                      
                      
                      
                      4.76
                      
                      
                      
                      24,278
                      
                      
                      
                      307
                      
                      
                      
                      2.53Total
      interest earning assets
                      
                      
                      2,343,219
                      
                      
                      
                      59,472
                      
                      
                      
                      5.08
                      
                      
                      
                      2,041,441
                      
                      
                      
                      55,982
                      
                      
                      
                      5.49Noninterest
      earning assets:Cash
      and cash equivalents
                      
                      
                      20,962
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      20,582Other
      assets
                      
                      
                      76,572
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      76,581Total
      assets
                      
                      $
                      2,440,753
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      2,138,604LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesInterest
      bearing liabilities:Savings,
      NOW and money market deposits
                      
                      $
                      928,810
                      
                      
                      $
                      4,663
                      
                      
                      
                      1.01
                      %
                      
                      $
                      708,502
                      
                      
                      $
                      6,649
                      
                      
                      
                      1.89
                      %Time
      deposits of $100,000 or more
                      
                      
                      452,029
                      
                      
                      
                      5,538
                      
                      
                      
                      2.47
                      
                      
                      
                      399,069
                      
                      
                      
                      6,711
                      
                      
                      
                      3.39Other
      time deposits
                      
                      
                      375,202
                      
                      
                      
                      5,181
                      
                      
                      
                      2.78
                      
                      
                      
                      406,008
                      
                      
                      
                      7,268
                      
                      
                      
                      3.61Other
      borrowings
                      
                      
                      333,775
                      
                      
                      
                      4,250
                      
                      
                      
                      2.55
                      
                      
                      
                      326,853
                      
                      
                      
                      4,486
                      
                      
                      
                      2.77Subordinated
      debt
                      
                      
                      56,435
                      
                      
                      
                      2,026
                      
                      
                      
                      7.18
                      
                      
                      
                      38,888
                      
                      
                      
                      993
                      
                      
                      
                      5.11Total
      interest bearing liabilities
                      
                      
                      2,146,251
                      
                      
                      
                      21,658
                      
                      
                      
                      2.03
                      
                      
                      
                      1,879,320
                      
                      
                      
                      26,107
                      
                      
                      
                      2.80Noninterest
      bearing liabilities:Demand
      deposits
                      
                      
                      149,368
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      115,567Other
      liabilities
                      
                      
                      11,553
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,304Total
      liabilities
                      
                      
                      2,307,172
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,008,191Stockholders'
      equity
                      
                      
                      133,581
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      130,413Total
      liabilities and stockholders'equity
                      
                      $
                      2,440,753
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      2,138,604Net
      interest income (TE)/interest rate spread
                      
                      
                      
                      
                      
                      $
                      37,814
                      
                      
                      
                      3.05
                      %
                      
                      
                      
                      
                      
                      $
                      29,875
                      
                      
                      
                      2.69
                      %Net
      interest earning assets/net interest margin
                      
                      $
                      196,968
                      
                      
                      
                      
                      
                      
                      
                      3.22
                      %
                      
                      $
                      162,121
                      
                      
                      
                      
                      
                      
                      
                      2.92
                      %Less: 
      tax equivalent adjustment
                      
                      
                      
                      
                      
                      
                      541
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      106Net
      interest income
                      
                      
                      
                      
                      
                      $
                      37,273
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      29,769
 
 The
Bank’s net interest margin increased 13 basis points during the quarter ended
June 30, 2010 compared to the same period last year.  Loan yields decreased
71 basis points, primarily the result of nonperforming loans, causing a decrease
in the average yield on total interest earning assets of 48 basis points, or
8.73%.  The lower yields on interest earning assets were more than offset
by lower interest expense on interest bearing liabilities.  The average
rate on interest bearing liabilities decreased 65 basis points in the first
quarter of 2010 from the first quarter of 2009, a 24.53% drop.  Net
interest income increased $1,813, or 11.06%, to 17,929 in the second quarter of
2010 compared to $16,306 in second quarter of 2009.
 
 The
Bank’s net interest margin increased 30 basis points during the six months ended
June 30, 2010 compared to the same period last year.  Asset yields were
lower by 41 basis points resulting largely from loans yields being down 64 basis
due to the continued high level of nonperforming loans.  All deposit
categories benefited from a lower cost of funds due to the continued low rate
environment.  The average rate on interest bearing liabilities decreased 77
basis points in the first six months of 2010 from the first six months of 2009,
a 27.50% drop.  Net interest income increased $7,504, or 25.21%, in the
six-month period of 2010 compared to the same period of 2009.
 
 Asset
Quality
 
 The table
below sets forth the amounts and categories of our nonperforming assets,
including troubled debt restructurings (See Note 5), at the dates
indicated.
 
 At June 30,
                        
                        
                        At December 31,2010
                        
                        
                        2009Nonaccrual
      loans:Real
      estate loans:Land
      and construction
                        
                        $
                        101,755
                        
                        
                        $
                        52,590Commercial
                        
                        
                        80,717
                        
                        
                        
                        57,026Multifamily
                        
                        
                        29,192
                        
                        
                        
                        7,870Residential
                        
                        
                        13,370
                        
                        
                        
                        9,575Commercial
      and industrial loans
                        
                        
                        2,460
                        
                        
                        
                        3,097All
      other loans (including overdrafts)
                        
                        
                        8
                        
                        
                        
                        14Total
      nonaccrual loans
                        
                        $
                        227,502
                        
                        
                        $
                        130,172Loans
      past due 90 days and still accruing
                        
                        
                        -
                        
                        
                        
                        -Total
      nonperforming loans
                        
                        $
                        227,502
                        
                        
                        $
                        130,172Other
      nonperforming assets:Other
      real estate owned
                        
                        $
                        1,130
                        
                        
                        $
                        2,013Total
      nonperforming assets
                        
                        $
                        228,632
                        
                        
                        $
                        132,185Total
      nonperforming loans to total loans
                        
                        
                        11.50
                        %
                        
                        
                        6.23
                        %Total
      nonperforming assets to total assets
                        
                        
                        9.91
                        %
                        
                        
                        5.02
                        %Allowance
      for loan losses to total nonperforming loans
                        
                        
                        25.49
                        %
                        
                        
                        29.56
                        %
  24
  The
following table sets forth certain types of loans which management believes to
be considered higher risk loans because of the lack of principal amortization, a
collateral position subordinate to another creditor, or increased defaults due
to slowdowns in the construction and real estate sales sector during the
economic recession.  The table quantifies their respective percentage of
the Company’s total loans, the total allowance for loan losses balance
specifically allocated to these loans and the level of nonperforming loans
within these categories.
 
 June 30, 2010
                  
                  Amount
                  
                  
                  Percentage of
                    Loan
                    Portfolio
                  
                  
                  Total Specific
                    Allocation
                  
                  
                  Nonperforming
                    LoansInterest
      only land and construction loans
                  
                  $
                  331,565
                  
                  
                  
                  16.76
                  %
                  
                  $
                  11,345
                  
                  
                  $
                  97,786Interest
      only commercial mortgages
                  
                  
                  38,065
                  
                  
                  
                  1.93
                  
                  
                  
                  1,463
                  
                  
                  
                  4,230Interest
      only residential mortgages and home equity lines
                  
                  
                  28,672
                  
                  
                  
                  1.45
                  
                  
                  
                  -
                  
                  
                  
                  1,145Interest
      only commercial loans
                  
                  
                  27,773
                  
                  
                  
                  1.40
                  
                  
                  
                  -
                  
                  
                  
                  2,046Interest
      only consumer loans
                  
                  
                  551
                  
                  
                  
                  0.03
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  426,626
                  
                  
                  
                  21.57
                  %
                  
                  $
                  12,808
                  
                  
                  $
                  105,207
 
 The
following table describes the activity in the allowance for loan losses account
followed by a key loan ratio for the periods ended:
 
 For the six months
                      ended
                      June 30, 2010
                    
                    
                    For the six months
                      ended
                      June 30, 2009Allowance
      for loan losses at beginning of period
                    
                    $
                    38,483
                    
                    
                    $
                    11,303Charge
      offs:Commercial
                    
                    
                    2,086
                    
                    
                    
                    240Real
      estate:Land
      and construction
                    
                    
                    20,361
                    
                    
                    
                    -Commercial
                    
                    
                    8,118
                    
                    
                    
                    -Multifamily
                    
                    
                    2,484
                    
                    
                    
                    -Consumer
                    
                    
                    56
                    
                    
                    
                    92Total
                    
                    
                    33,105
                    
                    
                    
                    332Recoveries:Commercial
                    
                    
                    2
                    
                    
                    
                    121Real
      estate:Land
      and construction
                    
                    
                    5
                    
                    
                    
                    -Commercial
                    
                    
                    36
                    
                    
                    
                    -Multifamily
                    
                    
                    52
                    
                    
                    
                    -Consumer
                    
                    
                    26
                    
                    
                    
                    17Total
                    
                    
                    121
                    
                    
                    
                    138Net
      charge offs
                    
                    
                    (32,984
                    )
                    
                    
                    (194
                    )Provision
      for loan losses
                    
                    
                    52,500
                    
                    
                    
                    3,000Allowance
      for loan losses at end of period
                    
                    $
                    57,999
                    
                    
                    $
                    14,109Ratio
      of net charge offs during period to average loans outstanding
      (annualized)
                    
                    
                    3.20
                    %
                    
                    
                    0.02
                    %
 
 Allocation
of Allowance for Loan Losses
 
 The
following table sets forth the allocation of the Company’s allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the date indicated.  The portion of the loan loss allowance
allocated to each loan category does not represent the total available for
future losses, which may occur within the loan category since the total loan
loss allowance is a valuation allocation applicable to the entire loan
portfolio.
  25
 
 June 30, 2010
                          
                          
                          December 31, 2009Amount
                          
                          
                          Percentage of
                            Loans to
                            TotalLoans
                          
                          
                          Amount
                          
                          
                          Percentage of
                            Loans to
                            TotalLoansCommercial
                          
                          $
                          1,429
                          
                          
                          
                          2.2
                          %
                          
                          $
                          1,883
                          
                          
                          
                          3.1
                          %Real
      estate
                          
                          
                          52,006
                          
                          
                          
                          97.7
                          
                          
                          
                          35,802
                          
                          
                          
                          96.8Consumer
      and other
                          
                          
                          142
                          
                          
                          
                          0.1
                          
                          
                          
                          138
                          
                          
                          
                          0.1Unallocated
                          
                          
                          4,422
                          
                          
                          
                          0.0
                          
                          
                          
                          660
                          
                          
                          
                          -Total
                          
                          $
                          57,999
                          
                          
                          
                          100.0
                          %
                          
                          $
                          38,483
                          
                          
                          
                          100.0
                          %
 
 The
Company made a $52,500 provision for loan losses for the six-month period ended
June 30, 2010.  The Company received a number of updated appraisals on
impaired loans during the first six month of 2010 that demonstrated a continued
trend of declining values from the original appraisals.  These new
appraisals were largely responsible for the increase in specific allocations on
impaired loans of $8,924.  Net loan charge offs totaled $32,984 during the
first six months of 2010, a significant increase from $194 during the same
period last year.  The general allocation portion of the allowance for loan
losses has been adjusted to account for the higher historical charge offs. 
For example, the general allocation for commercial mortgages has increased to
102 basis points at June 30, 2010 from 52 basis points at December 31, 2009 and
the general allocation on multifamily mortgages has increased to 105 basis
points from 40 basis points over the same period.  The general allocation
on the loan and construction portfolio increased to 432 basis points at June 30,
2010 from 350 basis points at December 31, 2009.
 
 Nonperforming
loans totaled $227,502, or 11.50%, of total loans as of June 30, 2010, as
compared to $130,172, or 6.23%, as of December 31, 2009.  Nonperforming
loans include $28,832 of restructured loans that are in nonaccrual status. 
In addition, delinquent loans increased as loans 30-89 days past due totaled
$48,042, or 2.43%, of total loans at June 30, 2010 compared to $20,756, or .99%,
of total loans at December 31, 2009.
 
 The ratio
of the allowance for loan losses to total nonperforming loans as of June 30,
2010 and December 31, 2009 was 25.49% and 29.56%, respectively.  The ratio
of the allowance for loan losses to total loans increased to 2.93% at June 30,
2010 from 1.84% at December 31, 2009.  Annualized net charge offs for the
first six months of 2010 totaled 3.20% of average total loans.  Net charge
offs for 2009 were 1.22% of average total loans.
  Noninterest
Income
  Noninterest
income increased $418, or 21.48%, and $76, or 1.61%, for the three and six
months ended June 30, 2010, respectively, over the comparable periods in
2009.  Total noninterest income was reduced $85 due to the net loss on OTTI
recognized in earnings during the quarter and $580 for the first six months of
2010.  Gross revenues from the Company’s insurance subsidiary decreased
$76, or 7.97%, and $158, or 8.43%, for first three and six months of 2010,
respectively, as premiums and corresponding commissions are down as a result of
the soft insurance market.  Service charge income increased 15.79% for the
quarter and 12.70% for the first six months of 2010, due to an increased volume
of transaction accounts resulting from branch expansion efforts during
2009.  Income from trust and investment management services decreased $42,
or 21.65%, for the quarter to date and increased $22, or 6.73% for the year to
date, due to efforts to move deposit relationships off the balance sheet and
into alternative investment products to meet the requirements of the Consent
Agreement, offset by efforts to reduce assets under management as the Bank moves
toward offering limited trust services.  Other noninterest income increased
$243, or 62.95%, and $354, or 39.25%, for the three and six month periods ended
June 30, 2010, respectively, mainly the result of ATM and debit card transaction
fees and loan fees generated from renewals.
  Noninterest
Expense
  Noninterest
expense increased $4,627, or 41.26%, and $8,742, or 42.43%, for the three and
six months ended June 30, 2010, respectively, as compared to the same periods in
2009.  The Company’s Federal deposit insurance decreased $194, or 10.80%,
during the second quarter of 2010, as the higher risk based insurance premiums
the Bank paid in the second quarter of 2010 were less than the regular premiums
and special assessment expensed in the second quarter of 2009.  Year to
date, FDIC insurance premiums have increased $914, or 38.94%.  Occupancy
and equipment expense increased $924, or 33.24%, and $2,347, or 43.80%, for the
quarter and year to date, consistent with the 50% increase in branch locations
during 2009.  Salary and employee benefits increased $78, or 1.49%, and
$513, or 5.11%, for the three and six months ended June 30, 2010, respectively,
mainly the result of the new branch locations offset by no accruals for
incentive compensation due to net losses.  Other noninterest expenses
increased $3,848, or 294.41%, and $5,027, or 188.28%, due to costs attributed to
the impaired loan portfolio such as legal fees, collection expenses, real estate
taxes and insurance for properties in foreclosure.  Other added costs in
other noninterest expenses include expenses attributed to meeting the terms of
the Consent Agreement and legal fees associated with defending various
lawsuits.
  26
 
 Income
Tax Expense/Benefit
 
 The
Company had income tax expense for the three months ended June 30, 2010 of
$6,165.  Due to an operating loss before taxes for the quarter of $23,049,
there was a gross income tax benefit of $9,535 offset by a valuation allowance
on the Company’s deferred tax asset of $15,700.  For the six months ended
June 30, 2010, the Company had income tax expense of $3,209.  Due to an
operating loss before taxes of $39,774, there was a gross income tax benefit was
$16,591 offset by a valuation allowance on the Company’s deferred tax asset of
$19,800.  An assessment of the Company’s deferred tax asset before
valuation allowance at June 30, 2010 of $27,970, led to the decision to record
the additional valuation allowance.  Based on the Company’s operating
losses over the past three quarters, the ability to realize the full benefits of
the deferred tax asset has become further impaired.  In determining the
need for and the amount of a valuation allowance Management considered the
Company’s ability to realize carry back benefits of the current losses as well
as the ability to realize future tax benefits based on tax planning strategies
that are feasible and could be implemented.  The Company evaluates the need
for a valuation allowance for its deferred tax asset on a quarterly
basis.
 
 Financial
Condition
 
 Total
assets were $2,307,172 at June 30, 2010, a decrease of $327,758, or 12.44%, from
the previous year-end.  This decrease in assets was driven predominantly by
a decrease in loans, including loans held for sale, of $129,259, or 6.13%, and
investments of $188,086, or 47.34%.  The shrinking of the balance sheet was
in reaction to the no growth provision and capital requirements of the Consent
Agreement.  Deposits have decreased by $251,230, or 12.11%, mainly through
pricing to retain multiple service customers and let go single service CD
customers.
 
 The
decrease in loans during the first six months of 2010 included the sale, or pay
off, of $81,803 of problem real estate loans.  In the course of these
resolutions, the Bank recovered $63,999 of principal and charged off $17,804,
representing a loss rate of approximately 21.76%.  These resolutions,
however, were offset by the movement of some loans previously identified at
December 31, 2009 as impaired loans into the nonperforming loan category,
as well as some new impaired loans in 2010.
 
 Loans
 
 The
Company’s loan portfolio consists mainly of real estate loans secured by
commercial and residential properties located primarily within the Bank’s market
area of Long Island, the five boroughs of New York City and the greater
metropolitan area.  Most classifications of loans had decreases from the
prior year-end.  Land and construction loans decreased by $35,877, or
11.29%, as the Bank continued to look to reduce its exposure in this loan
category.  Commercial real estate loans declined by $60,085, or 6.03%, and
combined with the decrease on land and construction loans represents the bulk of
the Company’s progress in reducing its CRE loan exposure as per the terms of the
Consent Agreement.
 
 With
97.71% of the Bank’s loan portfolio secured by real estate, the portfolio is
subject to additional risk of significant additional losses due to the downturn
in the real estate market.  The effects of the economic recession,
especially commercial real estate difficulties, took, and will continue to take,
a significant toll on our portfolio.  The land and construction portfolio,
in particular speculative construction, was impacted to the greatest degree
resulting in charge offs well above historical rates.
 
 The
following table sets forth the major classifications of loans:
 
 June 30,
                          2010
                        
                        
                        December 31,
                          2009Real
      estate:Land
      and construction
                        
                        $
                        317,895
                        
                        
                        $
                        353,772Commercial
                        
                        
                        937,012
                        
                        
                        
                        997,097Multifamily
                        
                        
                        471,084
                        
                        
                        
                        478,840Residential
                        
                        
                        210,041
                        
                        
                        
                        214,548Agricultural
                        
                        
                        -
                        
                        
                        
                        -Commercial
      and industrial loans
                        
                        
                        43,667
                        
                        
                        
                        48,625Loans
      to individuals for household, family and other personal
      expenditures
                        
                        
                        1,252
                        
                        
                        
                        1,740All
      other loans (including overdrafts)
                        
                        
                        418
                        
                        
                        
                        342Less: 
      Net deferred loan fees
                        
                        
                        3,282
                        
                        
                        
                        4,068Total
      loans
                        
                        $
                        1,978,087
                        
                        
                        $
                        2,090,896
  27
 
 Nonaccrual,
Past Due and Restructured Loans
 
 The
following table sets forth the Bank's nonaccrual, contractually past due and
restructured loans:
 
 June 30,
                      2010
                    
                    
                    December 31,
                      2009Nonaccrual
      loans
                    
                    $
                    227,502
                    
                    
                    $
                    130,172Trouble
      Debt Restructured loans
                    
                    
                    53,124
                    
                    
                    
                    47,633
 
 The
amount of gross interest income that would have been recorded in 2010 on
nonaccrual and restructured loans if the loans had been current in accordance
with their original terms was $8,730.  The amount of interest income that
was recorded in 2010 on nonaccrual and restructured loans was
$2,595.
 
 A loan is
moved to nonaccrual status at 90 days past due unless the loan is both well
secured and in the process of collection.  All interest accrued but not
received for loans placed on nonaccrual is reversed against interest
income.  Interest received on such loans is accounted for on a cash basis,
until qualifying for return to accrual status.  Loans are returned to
accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
 
 Impaired
loans of $298,234 less nonaccrual loans of 227,502, represents $70,732 of
impaired loans that are still performing, which management believes it is
probable the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement.  In addition to loans identified
as impaired that are still performing, there is a total of $103,864 of loans
that are not considered impaired, where management has serious doubts as to the
ability of the borrowers to comply with the present loan repayment terms. 
Potential problem loans are the sum of the $70,732 and $103,864 above, or
$174,596.
 
 Securities
 
 Securities
totaled $209,254 at June 30, 2010, down 47.34% from $397,340 at December 31,
2009.  Sales and principal payments of government sponsored entity and
agency mortgage-backed securities used to offset the decrease in deposits caused
the reduction.
 
 The
following schedule presents the estimated fair value for securities available
for sale and the amortized cost for securities held to maturity as detailed in
the Company's balance sheets as of June 30, 2010 and December 31,
2009.
  June 30,
                              2010
                            
                            
                            December 31,
                              2009Available
      for saleU.S.
      government sponsored entities and agencies
                            
                            $
                            5,320
                            
                            
                            $
                            4,966Obligations
      of state and political subdivisions
                            
                            
                            59,933
                            
                            
                            
                            59,986Mortgage-backed
      securities: residential
                            
                            
                            133,030
                            
                            
                            
                            320,778Collateralized
      mortgage obligations
                            
                            
                            4,515
                            
                            
                            
                            4,553Other
      securities
                            
                            
                            6,423
                            
                            
                            
                            6,991Total
      available for sale
                            
                            $
                            209,221
                            
                            
                            $
                            397,274Held
      to maturityObligations
      of state and political subdivisions
                            
                            $
                            33
                            
                            
                            $
                            66
  28
 
 The
following table presents the amortized costs and estimated fair values of
securities by contractual maturity at June 30, 2010:
 
 Within One Year
                            
                            
                            After One But
                              Within Five Years
                            
                            
                            After Five But
                              Within Ten Years
                            
                            
                            After Ten Years
                            
                            
                            TotalAmortized
                              Cost
                            
                            
                            Estimated
                              Fair Value
                            
                            
                            Yield
                            
                            
                            Amortized
                              Cost
                            
                            
                            Estimated
                              Fair Value
                            
                            
                            Yield
                            
                            
                            Amortized
                              Cost
                            
                            
                            Estimated
                              Fair Value
                            
                            
                            Yield
                            
                            
                            Amortized
                              Cost
                            
                            
                            Estimated
                              Fair Value
                            
                            
                            Yield
                            
                            
                            Amortized
                              Cost
                            
                            
                            Estimated
                              Fair ValueAvailable
      for saleU.S.
      government sponsored entities and agencies
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            5,000
                            
                            
                            $
                            5,320
                            
                            
                            
                            4.00
                            %
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            5,000
                            
                            
                            $
                            5,320Obligations
      of state and political subdivisions
                            
                            
                            453
                            
                            
                            
                            452
                            
                            
                            
                            3.60
                            
                            
                            
                            10,782
                            
                            
                            
                            11,102
                            
                            
                            
                            3.45
                            
                            
                            
                            21,855
                            
                            
                            
                            22,538
                            
                            
                            
                            3.46
                            
                            
                            
                            25,226
                            
                            
                            
                            25,841
                            
                            
                            
                            4.00
                            
                            
                            
                            58,316
                            
                            
                            
                            59,933Mortgage-backed
      securities
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            128,459
                            
                            
                            
                            133,030
                            
                            
                            
                            5.23
                            
                            
                            
                            128,459
                            
                            
                            
                            133,030Collateralized
      mortgage obligations
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            4,542
                            
                            
                            
                            4,515
                            
                            
                            
                            4.80
                            
                            
                            
                            4,542
                            
                            
                            
                            4,515Other
      securities
                            
                            
                            7,278
                            
                            
                            
                            3,943
                            
                            
                            
                            4.44
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,480
                            
                            
                            
                            1,480
                            
                            
                            
                            3.24
                            
                            
                            
                            1,000
                            
                            
                            
                            1,000
                            
                            
                            
                            3.73
                            
                            
                            
                            9,758
                            
                            
                            
                            6,423Total
      available for sale
                            
                            $
                            7,731
                            
                            
                            $
                            4,395
                            
                            
                            
                            3.73
                            %
                            
                            $
                            10782
                            
                            
                            $
                            11,102
                            
                            
                            
                            3.45
                            %
                            
                            $
                            28,335
                            
                            
                            $
                            29,338
                            
                            
                            
                            3.55
                            %
                            
                            $
                            159,227
                            
                            
                            $
                            164,386
                            
                            
                            
                            5.17
                            %
                            
                            $
                            206,075
                            
                            
                            $
                            209,221Held
      to maturityObligations of state
      and political subdivisions
                            
                            $
                            33
                            
                            
                            $
                            34
                            
                            
                            
                            4.34
                            %
                            
                            $
                            00
                            
                            
                            $
                            00
                            
                            
                            
                            0.00
                            %
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            33
                            
                            
                            $
                            34
  29
  Deposits
& Other Borrowings
 
 Total
deposits decreased $251,230, or 12.11%, for the period ended June 30, 2010 from
December 31, 2009.  The largest segment of the portfolio was savings, NOW
and money market deposits, which decreased $130,621, or 13.07%, in the first six
months of 2010.  Time deposits decreased $123,249, or 13.34%. 
Strategies implemented to attempt to meet the terms of the Consent Agreement led
to the shrinkage in total deposits.
 
 At June
30, 2010, the remaining maturities of the Bank's time deposits in amounts of
$100,000 or more were as follows:
  3
      months or less
                    
                    $
                    162,379Over
      3 through 6 months
                    
                    
                    177,154Over
      6 through 12 months
                    
                    
                    80,642Over
      12 months
                    
                    
                    19,208Total
                    
                    $
                    439,383
 
 Other
borrowings decreased to $313,480 at June 30, 2010 from $352,820 at December 31,
2009.  Included in other borrowings are $1,480 of secured borrowings that
are a financial arrangement with the Senior Housing Crime Prevention
program  that are secured by U.S. government agency bonds.  At
maturity, the Company has the option to repay the secured borrowings
simultaneous with the release of the collateral or to renew the
borrowings.
 
 The
following table sets forth the Bank's borrowed funds:,
 
 June 30, 2010
                    
                    
                    December 31, 2009FHLBNY
      OLOC:Maximum
      month end balance during the period
                    
                    $
                    14,800
                    
                    
                    $
                    36,340Average
      balance during the period
                    
                    
                    5,048
                    
                    
                    
                    1,801Weighted
      average interest rate during the period
                    
                    
                    0.46
                    %
                    
                    
                    0.38
                    %Weighted
      average interest rate at period end
                    
                    
                    0.34
                    
                    
                    
                    0.34Term
      advances from FHLBNY:Maximum
      month end balance during the period
                    
                    $
                    310,000
                    
                    
                    $
                    325,000Average
      balance during the period
                    
                    
                    313,846
                    
                    
                    
                    324,247Weighted
      average interest rate during the period
                    
                    
                    2.68
                    %
                    
                    
                    2.77
                    %Weighted
      average interest rate at period end
                    
                    
                    2.68
                    
                    
                    
                    2.70Senior
      Housing Crime Prevention:Maximum
      month end balance during the period
                    
                    $
                    1,480
                    
                    
                    $
                    1,480Average
      balance during the period
                    
                    
                    1,480
                    
                    
                    
                    1,480Weighted
      average interest rate during the period
                    
                    
                    1.79
                    %
                    
                    
                    1.79
                    %Weighted
      average interest rate at period end
                    
                    
                    1.79
                    
                    
                    
                    1.79
 
 Liquidity
 
 Liquidity
provides the source of funds for anticipated deposit outflow and loan
growth.  The Bank’s primary sources of liquidity include deposits,
repayments of loan principal, maturities and sales of investment securities,
principal reductions on mortgage-backed securities, “unpledged” securities,
deposits with banks, and borrowing potential from correspondent banks.  The
primary factors affecting these sources of liquidity are their immediate
availability if necessary and current market rates of interest, which can cause
fluctuations in levels of deposits and prepayments on loans and
securities.  Management believes that the Bank’s liquidity level is
sufficient to meet funding needs while under the terms of the Consent
Agreement.
 
 The Bank
has the ability, as a member of the FHLB system, to borrow against residential
and commercial mortgages owned by the Bank and pledged to FHLB.  As a
result of entering into the Consent Agreement, the FHLB has required the Bank to
physically deliver the pledged loan collateral during 2010.  At December
31, 2009, the collateral pledged to the FHLB was under a blanket lien
arrangement and delivered electronically.  At June 30, 2010, the unused
available credit totaled $120,625, which represents a decrease of $364,604 from
the December 31, 2009 amount of $485,229. The Bank has the
ability to deliver additional collateral should the need arise.  As of June
30, 2010, the Bank had $2,000 of collateralized overnight borrowings, which was
down from $36,340 at December 31, 2009.  The Bank had $310,000 and $315,000
in collateralized term advances outstanding with the FHLB as of June 30, 2010
and December 31, 2009, respectively.  At June 30, 2010, the Company has
$37,127 in cash and cash equivalents, a 67.59% increase from the December level
of $22,154, as additional interest earning deposits are being maintained by the
Bank at the Federal Reserve Bank of New York for increased liquidity while under
the Consent Agreement.
  30
 
 The
Company’s principal source of liquidity is dividends from the Bank.  Cash
available to service Company trust preferred debt obligations, to pay expenses
and for distribution of dividends to shareholders is primarily derived from
dividends paid by the Bank to the Company.  Under the Consent Agreement,
the Bank’s payment of dividends requires prior approval of the FDIC and Banking
Department.  Under the Written Agreement, the Bank’s payment of dividends
requires prior approval of the FRB.  Such prior approval of  the FDIC
and Banking Department and FRB is unlikely to be received. As of June 30, 2010,
the Company had $634 in cash and cash equivalents.  The Company presently
plans to use the cash and cash equivalents to pay its expenses.  Interest
payments on trust preferred securities were made during the first quarter of
2010, but the Company deferred interest payments on its trust preferred
securities during the second quarter of 2010 to preserve cash for operating
expenses due to the dividend restrictions.  In the event the Company
subsequently needs additional funds and the FRB, FDIC and Banking Department are
unwilling to approve a dividend from the Bank, the Company will need to raise
additional capital or borrow funds to meet liquidity needs.
 
 Capital
Resources
 
 Total
stockholders’ equity was $95,645 at June 30, 2010, a decrease of $40,110, or
29.55%, from December 31, 2009, primarily due the net loss of
$42,983.
 
 Initial
efforts to meet the capital requirements of the Consent Agreement focused upon
shrinking the balance sheet, selling one or more packages of nonperforming
loans, selling one or more packages of performing loans, raising capital, or
some ‘hybrid’ combination of the foregoing strategies.  The success in
shrinking the balance sheet and selling loans to meet the capital requirements
has been more than offset by the loss for the first six months resulting largely
from the $52,500 provision for loan losses and a valuation allowance of $19,800
against the Company’s deferred tax asset.  As a result, efforts were
focused on assessing the Company’s strategic initiatives, which resulted in the
Company entering into the Merger Agreement with People’s United Financial, Inc.
on July 15, 2010.
 
 The
Company had returns on average equity of (64.36%) and 10.78%, and returns on
average assets of (3.52%) and 0.66% for the six months ended June 30, 2010 and
2009, respectively.  The equity to assets ratio was 4.15% and 5.15% at June
30, 2010 and December 31, 2009, respectively.  No dividends were paid for
the six months ended June 30, 2010.  The Company paid dividends of $946 for
the six months ended June 30, 2009.
 
 Recent
Regulatory and Accounting Developments
 
 Adoption
of New Accounting Guidance
 
 In
January 2010, the Financial Accounting Standards Board (“FASB”) amended existing
guidance to improve disclosure requirements related to fair value measurements.
New disclosures are required for significant transfers in and out of Level 1 and
Level 2 fair value measurements and the reasons for the transfers. In addition,
the FASB clarified guidance related to disclosures for each class of assets and
liabilities as well as disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3. The impact of adoption on
January 1, 2010 was not material as it required only disclosures, which are
included in the Fair Value footnote.
 
 In June
2009, the FASB amended existing guidance to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This amended guidance addresses (1) practices
that are not consistent with the intent and key requirements of the original
guidance and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors. The impact
of adoption on January 1, 2010 was not material.
 
 In June
2009, the FASB amended guidance for consolidation of variable interest entities
by replacing the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity. The new approach focuses on identifying which
enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. Additional disclosures about an enterprise’s involvement in
variable interest entities are also required. The impact of adoption on January
1, 2010 was not material.
  31
 
 In
December 2007, the FASB enhanced existing guidance for the use of the
acquisition method of accounting (formerly the purchase method) for all business
combinations, for an acquirer to be identified for each business combination and
for intangible assets to be identified and recognized separately from
goodwill.  An entity in a business combination is required to recognize the
assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions.  Additionally, there were changes in requirements
for recognizing assets acquired and liabilities assumed arising from
contingencies and recognizing and measuring contingent consideration. 
Disclosure requirements for business combinations were also enhanced.  The
impact of adoption on January 1, 2009 was not material.
 
 In April
2009, the FASB issued amended clarifying guidance to address application issues
raised by preparers, auditors and members of the legal profession on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The impact of adoption on January 1, 2009 was not
material.
 
 In
January 2010, the FASB issued amended clarifying guidance addressing
implementation issues related to the changes in ownership provisions. The impact
of adoption on January 1, 2010 was not material.
 
 Newly
Issued But Not Yet Effective Accounting Guidance
 
 In
January 2010, the FASB amended existing guidance related to fair value
measurements requiring new disclosures for activity in Level 3 fair value
measurements.  In the reconciliation for fair value measurements using
significant unobservable  inputs (Level  3), a reporting entity should
present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). 
These disclosures are effective for fiscal years beginning after December 15,
2010, and for interim periods within those fiscal years.  The impact of
adoption is expected to be immaterial.
 
 Recent
Legislative Developments
 
 On July
21, 2010, President Obama signed into law the sweeping financial regulatory
reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection
Act” that implements far-reaching changes to the regulation of the financial
services industry, including provisions that, among other things
will:
 
 ·
              Centralize
      responsibility for consumer financial protection by creating a new agency
      responsible for implementing, examining and enforcing compliance with
      federal consumer financial laws.
 ·
              Apply
      the same leverage and risk-based capital requirements that apply to
      insured depository institutions to bank holding
  companies.
 ·
              Require
      the FDIC to seek to make its capital requirements for banks such as the
      Bank of Smithtown countercyclical so that the amount of capital required
      to be maintained increases in times of economic expansion and decreases in
      times of economic contraction.
 ·
              Change
      the assessment base for federal deposit insurance from the amount of
      insured deposits to consolidated assets less tangible
    capital.
 ·
              Implement
      corporate governance revisions, including with regard to executive
      compensation and proxy access by shareholders, that apply to all public
      companies, not just financial
institutions.
 ·
              Make
      permanent the $250 thousand limit for federal deposit insurance and
      increase the cash limit of Securities Investor Protection Corporation
      protection from $100 thousand to $250 thousand, and provide unlimited
      federal deposit insurance until January 1, 2013, for non-interest bearing
      demand transaction accounts at all insured depository
      institutions.
 ·
              Repeal
      the federal prohibitions on the payment of interest on demand deposits,
      thereby permitting depository institutions to pay interest on business
      transaction and other accounts.
 ·
              Increase
      the authority of the Federal Reserve to examine the Company and its
      non-bank subsidiaries.
 
 Many
aspects of the act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on the
Company, its customers or the financial industry more generally. 
Provisions in the legislation that affect deposit insurance assessments and
payment of interest on demand deposits could increase the costs associated with
deposits as well as place limitations on certain revenues those deposits may
generate.
  32
 
 Item
3.  Quantitative and Qualitative Disclosures about Market Risk
 
 Management
considers interest rate risk to be the most significant market risk for the
Company.  Market risk is the risk of loss from adverse changes in market
prices and rates.  Interest rate risk is the exposure to adverse changes in
the net income of the Company as a result of changes in interest rates. 
The Company’s primary earnings source is net interest income, which is affected
by changes in the level of interest rates, the relationship between rates, the
impact of interest rate fluctuations on asset prepayments, the level and
composition of deposits and liabilities, and the credit quality of earning
assets.  The Company’s objectives in its asset and liability management are
to maintain a strong, stable net interest margin, to utilize its capital
effectively without taking undue risks, to maintain adequate liquidity, and to
reduce vulnerability of its operations to changes in interest
rates.
 
 The
Company’s Asset and Liability Committee evaluates at least quarterly the impact
of changes in market interest rates on assets and liabilities, net interest
margin, capital and liquidity.  Risk assessments are governed by policies
and limits established by senior management, which are reviewed and approved by
the board of directors at least annually.  The economic environment
continually presents uncertainties as to future interest rate trends.  The
Asset and Liability Committee regularly utilizes a model that projects net
interest income based on increasing or decreasing interest rates in order to be
better able to respond to changes in interest rates.
 
 Changes
in interest rates affect the value of the Company’s interest earning assets and
in particular its securities portfolio.  Generally, the value of securities
fluctuates inversely with changes in interest rates.  Increases in interest
rates could result in decreases in the market value of interest earning assets,
which could adversely affect the Company’s stockholders’ equity and its results
of operations if sold.  The Company is also subject to reinvestment risk
associated with changes in interest rates.  Changes in market interest
rates also could affect the type (fixed rate or adjustable rate) and amount of
loans originated by the Company and the average life of loans and securities,
which can impact the yields earned on the Company’s loans and securities. 
Changes in interest rates may affect the average life of loans and mortgage
related securities.  In periods of decreasing interest rates, the average
life of loans and securities held by the Company may be shortened to the extent
increased prepayment activity occurs during such periods which, in turn, may
result in the reinvestment of funds from such prepayments into lower yielding
assets.  Under these circumstances, the Company is subject to reinvestment
risk to the extent that it is unable to reinvest the cash received from such
prepayments at rates that are comparable to the rates on existing loans and
securities.  Additionally, increases in interest rates may result in
decreasing loan prepayments with respect to fixed rate loans (and therefore an
increase in the average life of such loans), may result in a decrease in loan
demand, and make it more difficult for borrowers to repay adjustable rate
loans.
 
 The
Company utilizes the results of a detailed and dynamic simulation model to
quantify the estimated exposure to net interest income to sustained interest
rate changes.  Management routinely monitors simulated net interest income
sensitivity over a rolling two-year horizon.  The simulation model captures
the seasonality of the Company’s deposit flows and the impact of changing
interest rates on the interest income received and the interest expense paid on
all assets and liabilities reflected on the Company’s balance sheet.  This
sensitivity analysis is compared to the asset and liability policy limits that
specify a maximum tolerance level for net interest income exposure over a
one-year horizon.  A 100, 200 and 300 basis point upward and downward shift
in interest rates over a one-year time horizon was considered at June 30, 2010
and December 31, 2009.  A parallel and pro rata shift in rates over a
twelve-month period is assumed.
 
 The
following table reflects the Bank’s income sensitivity analysis as of June 30,
2010 and December 31, 2009:
 
 Change In Interest
                        Rates In Basis Points
                      
                      As of June 30,
                        2010
                        Potential Change In
                      
                      
                      As of December 31,
                        2009
                        Potential Change In(Rate Shock)
                      
                      Net Interest Income
                      
                      
                      Net Interest Income$ Change
                      
                      
                      % Change
                      
                      
                      $ Change
                      
                      
                      % ChangeUp
      300 basis points
                      
                      
                      2,632
                      
                      
                      
                      3.81
                      
                      
                      
                      1,048
                      
                      
                      
                      1.18Up
      200 basis points
                      
                      
                      1,702
                      
                      
                      
                      2.46
                      
                      
                      
                      880
                      
                      
                      
                      0.99Up
      100 basis points
                      
                      
                      869
                      
                      
                      
                      1.26
                      
                      
                      
                      542
                      
                      
                      
                      0.61Static
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Down
      100 basis points
                      
                      
                      (851
                      )
                      
                      
                      (1.23
                      )
                      
                      
                      (667
                      )
                      
                      
                      (0.75
                      )Down
      200 basis points
                      
                      
                      (564
                      )
                      
                      
                      (0.82
                      )
                      
                      
                      (1,541
                      )
                      
                      
                      (1.74
                      )Down
      300 basis points
                      
                      
                      391
                      
                      
                      
                      0.57
                      
                      
                      
                      (2,603
                      )
                      
                      
                      (2.94
                      )
 
 The
preceding sensitivity analysis does not represent a Company forecast and should
not be relied upon as being indicative of expected operating results. 
These hypothetical estimates are based upon numerous assumptions including, but
not limited to, the nature and timing of interest rate levels and yield curve
shapes, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, and reinvestment and replacement of asset and
liability cash flows.  While assumptions are developed based upon perceived
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences may change.
  33
 
 Also, as
market conditions vary from those assumed in the sensitivity analysis, actual
results will also differ due to prepayment and refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals,
prepayment penalties and product preference changes and other internal and
external variables.  Furthermore, the sensitivity analysis does not reflect
actions that management might take in responding to, or anticipating changes in,
interest rates and market conditions.
 
 Item
4. Controls and Procedures
 
 An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 131-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
June 30, 2010.  Based on that evaluation, the Company’s management,
including the Principal Executive Officer and Principal Financial Officer,
concluded that the Company’s disclosure controls and procedures were effective.
There has been no change in the Company’s internal controls over financial
reporting during the quarter that has materially affected, or is reasonably
likely to affect, the Company’s internal control over financial
reporting.
 
 Part
II - Other Information
 
 Item
1.    Legal Proceedings
 
 On
February 25, 2010 and March 29, 2010, the Company and several of its officers
and its directors were named in two lawsuits commenced in United States District
Court, Eastern District of New York on behalf of a putative class of all persons
and entities who purchased the Company’s common stock between March 13, 2008 and
February 1, 2010, alleging claims under Section 10(b) and Section 20(a) of the
securities Exchange Act of 1934.  The plaintiffs allege, among other
things, the Company’s loan loss reserve, fair value of its assets, recognition
of impaired assets and its internal and disclosure controls were materially
false, misleading or incomplete.
 
 On April
26, 2010, the Plaintiffs in the February 25, 2010 action moved to consolidate
their action with the action filed on March 29, 2010, to have itself appointed
lead plaintiff in the consolidated action and to obtain approval of its
selection of lead counsel.  The motion is currently pending.
 
 On April
22, 2010, an action was commenced in New York State Supreme Court, Kings County
by Robert I. Toussie against the Company and several of its officers.  The
complaint alleges claims for fraud and aiding and abetting fraud based upon,
among other things, the plaintiff’s allegation that during 2008 and 2009, one or
more defendants made material misrepresentations and incomplete statements to
the plaintiff concerning the Company’s loan losses, delinquent loans,
capitalization, quarterly earnings and financial soundness.  The complaint
seeks compensatory and punitive damages against the defendants.
 
 On May
12, 2010, the defendants removed the April 22, 2010 action to the United States
District Court for the Eastern District of New York.  The defendants
notified the court that the action was related to the February 25, 2010 and
March 29, 2010 actions.  On June 1, 2010, the plaintiff moved to remand the
action back to State court.  The defendants filed an opposition to the
plaintiff’s remand motion on June 15, 2010, and the plaintiff filed his reply on
June 22, 2010.  The plaintiff’s remand motion has been assigned to a
magistrate judge and is currently pending.
 
 On July
20, 2010, the first of two putative class action lawsuits was filed in New York
State Supreme Court, Suffolk County, against, among others, the Company and the
members of its Board of Directors, concerning the recently announced proposed
acquisition of the Company.  The complaints allege that the members of the
Board of Directors breached their fiduciary duty by causing the Company to agree
to the proposed acquisition, and that the Company aided and abetted those
alleged breaches of duty.  The complaints seek, among other relief, an
order enjoining the consummation of the proposed acquisition and rescinding the
acquisition agreement.
 
 The
Company and the individual defendants intend to vigorously defend all aspects of
these actions.
 
 Item
1A.            Risk Factors
 
 In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Items 1A: Risk Factors,” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and
the additional risk factor below, as such factors could materially affect the
Company’s business, financial condition, or future results. . The risks
described below and in the Annual Report on Form 10-K are not the only risks
that the Company faces. Additional risks and uncertainties not currently known
to the Company, or that the Company currently deems to be immaterial, also may
have a material impact on the Company’s business, financial condition, or
results.
  34
 
 The
proposed merger of the Company with People’s United described above under “Item
2.  - Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Proposed Plan of Merger with People’s United Financial,
Inc.” might not be consummated.  The merger is subject to approval by bank
regulatory authorities and by the shareholders of the Company and to the
satisfaction of various closing conditions.  The merger is the result of an
assessment by the Company and its board of directors of the Company’s strategic
alternatives in light of the financial challenges facing the Company.  The
Merger Agreement satisfies the requirement of the Consent Agreement to sell or
merge the Company and the Bank in the event that the required capital ratios are
not satisfied by June 30, 2010.  If the merger is not consummated, the
Company would be required to find an alternative approach to overcoming its
challenges and satisfying the relevant regulatory requirements, including
meeting the capital ratios required by the Consent Agreement and the Written
Agreement.  At this time, the Company has no other alternative to raise
capital or to enter into another merger agreement if the merger with People’s
United is not consummated.  In addition, the terms of the Merger Agreement
prohibit the Company and the Bank from taking certain actions to facilitate the
foregoing.
 
 If the
People’s United merger is not consummated, the Company may not be able to raise
any additional capital and, if it could raise any additional capital, such
capital is likely to be extremely dilutive to the Company’s existing
shareholders.  In addition, the Company may not be able to find another
merger partner or acquirer.  In such circumstances, a failure to raise such
capital or to find another merger partner or acquirer could result in further
and more severe regulatory actions against the Company and the
Bank.
 
 Item
2.    Unregistered Sales of Equity Securities and Use of
Proceeds
 
 None
 
 Item
3.    Defaults upon Senior Securities
 
 None
 
 Item
4.    Reserved
 
 Item
5.    Other Information
 
 None
 
 Item
6.    Exhibits and Reports on Form 8-K
 
 Exhibit
                
                DescriptionExhibit
      2.1
                
                Agreement
      and Plan of Merger, dated July 15, 2010, between People’s United
      Financial, Inc. and Smithtown Bancorp, Inc. (Incorporated by reference to
      Exhibit 2.1 of Form 8-K Current Report filed July 16, 2010,  File No.
      000-13314.)Exhibit
      10.1
                
                Written
      Agreement by and between Smithtown Bancorp, Inc. and Federal Reserve Bank
      of New York dated June 22, 2010.  (Incorporated by reference to
      Exhibit 9.01 of Form 8-K Current Report filed June 28, 2010, File No.
      000-13314.)Exhibit
      31.1
                
                Certification
      of Principal Executive Officer pursuant to Rule
  13a-14(a)Exhibit
      31.2
                
                Certification
      of Principal Financial Officer pursuant to Rule
  13a-14(a)Exhibit
      32
                
                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Rule
      13a-14(b) and 18 U.S.C. Section
1350
  35
 
 SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 SMITHTOWN
      BANCORP, INC.August
      2, 2010/s/ BRADLEY E. ROCKBradley
      E. Rock, Chairmanand
      Chief Executive Officer(Principal
      Executive Officer)/s/ CHRISTOPHER BECKERChristopher
      Becker, ExecutiveVice 
      President and Chief
                  Financial
      Officer(Principal
      Financial Officer)
  36