United
States


Securities
and Exchange Commission


Washington,
D.C. 20549





Form
10-Q


QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2009





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.  Yes x    No
 ̈





Indicate
by check mark whether the 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).


Yes  ̈  No
 ̈





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
filer  x   Non-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  ̈   No
x





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 of  August 7,
2009


14,858,522









SMITHTOWN
BANCORP, INC.





INDEX





Part
      I - FINANCIAL INFORMATIONItem
      1.
                            Financial
      Statements
                            
                            3Consolidated
      Balance Sheets (Unaudited)June
      30, 2009 and December 31, 2008
                            
                            3Consolidated
      Statements of Income (Unaudited)`
                            Six
      and Three Months Ended June 30, 2009 and 2008
                            
                            4Consolidated
      Statements of Changes in Stockholders’ Equity (Unaudited)Six
      Months Ended June 30, 2009
                            
                            5Consolidated
      Statements of Cash Flows (Unaudited)Six
      Months Ended  June 30, 2009 and 2008
                            
                            6Notes
      to Unaudited Consolidated Financial Statements
                            
                            7Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results
      of  Operations
                            
                            16Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            
                            23Item
      4.
                            Controls
      and Procedures
                            
                            24Part
      II - OTHER INFORMATIONItem
      1.
                            Legal
      Proceedings
                            
                            24Item
      1A.
                            Risk
      Factors
                            
                            24Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            
                            24Item
      3.
                            Defaults
      Upon Senior Securities
                            
                            24Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            
                            24Item
      5.
                            Other
      Information
                            
                            25Item
      6.
                            Exhibits
      and Reports on Form 8-K
                            
                            25Signatures
                            
                            
                            25





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 Principal Executive Officer and Principal Financial Officer
pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350


2





Item
1.  Financial Statements


SMITHTOWN
BANCORP, INC.


Consolidated
Balance Sheets (unaudited)


(In
thousands, except share and per share amounts)


June 30, 2009
                  
                  
                  December 31, 2008ASSETSCash
      and due from banks
                  
                  $
                  16,962
                  
                  
                  $
                  17,205Federal
      funds sold
                  
                  
                  8,257
                  
                  
                  
                  8,764Total
      cash and cash equivalents
                  
                  
                  25,219
                  
                  
                  
                  25,969Term
      placements
                  
                  
                  507
                  
                  
                  
                  507Securities
      available for sale, at fair value
                  
                  
                  245,080
                  
                  
                  
                  57,698Securities
      held to maturity (fair value of $67 and $113,
respectively)
                  
                  
                  66
                  
                  
                  
                  112Total
      investment securities
                  
                  
                  245,146
                  
                  
                  
                  57,810Federal
      Home Loan Bank Stock
                  
                  
                  17,168
                  
                  
                  
                  15,916Loans
                  
                  
                  1,970,527
                  
                  
                  
                  1,688,700Less:
      allowance for loan losses
                  
                  
                  14,109
                  
                  
                  
                  11,303Loans,
      net
                  
                  
                  1,956,418
                  
                  
                  
                  1,677,397Premises
      and equipment
                  
                  
                  36,801
                  
                  
                  
                  32,994Cash
      value of company owned life insurance
                  
                  
                  19,887
                  
                  
                  
                  19,654Other
      real estate owned
                  
                  
                  6,972
                  
                  
                  
                  6,972Goodwill
                  
                  
                  3,923
                  
                  
                  
                  3,923Intangible
      assets
                  
                  
                  775
                  
                  
                  
                  956Other
      assets
                  
                  
                  29,299
                  
                  
                  
                  23,292Total
      assets
                  
                  $
                  2,342,115
                  
                  
                  $
                  1,865,390LIABILITIES
      AND STOCKHOLDERS' EQUITYDemand
      deposits
                  
                  $
                  128,630
                  
                  
                  $
                  123,620Saving,
      NOW and money market deposits
                  
                  
                  861,961
                  
                  
                  
                  548,502Time
      deposits of $100,000 or more
                  
                  
                  405,333
                  
                  
                  
                  326,073Other
      time deposits
                  
                  
                  387,415
                  
                  
                  
                  368,742Total
      deposits
                  
                  
                  1,783,339
                  
                  
                  
                  1,366,937Other
      borrowings
                  
                  
                  326,480
                  
                  
                  
                  326,480Subordinated
      debt
                  
                  
                  43,322
                  
                  
                  
                  38,836Other
      liabilities
                  
                  
                  35,588
                  
                  
                  
                  13,519Total
      liabilities
                  
                  
                  2,188,729
                  
                  
                  
                  1,745,772Stockholders'
      equity:Preferred
      stock, par value $.01 per share:
                    Authorized:
      1,000,000 and 100,000 shares at June 30, 2009 and December 31, 2008,
      respectively; no shares issued or outstanding
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, par value $.01 per share:
                      Authorized:
      35,000,000 and  20,000,000 shares at June 30, 2009 and December 31,
      2008, respectively; 16,910,386 and 13,851,341 shares issued at June 30,
      2009 and December 31, 2008, respectively; 14,858,522 and 11,799,477 shares
      outstanding at June 30, 2009 and December 31, 2008 ,
      respectively
                  
                  
                  169
                  
                  
                  
                  139Additional
      paid in capital
                  
                  
                  81,073
                  
                  
                  
                  51,947Retained
      earnings
                  
                  
                  84,575
                  
                  
                  
                  78,302Less:  Treasury
      stock at cost, 2,051,864 shares
                  
                  
                  (10,062
                  )
                  
                  
                  (10,062
                  )155,755
                  
                  
                  
                  120,326Accumulated
      other comprehensive loss
                  
                  
                  (2,369
                  )
                  
                  
                  (708
                  )Total
      stockholders' equity
                  
                  
                  153,386
                  
                  
                  
                  119,618Total
      liabilities and stockholders' equity
                  
                  $
                  2,342,115
                  
                  
                  $
                  1,865,390




See notes
to consolidated financial statements.




3





SMITHTOWN
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME (unaudited)


(In
thousands, except per share amounts)





For the three months ended June
      30,
                    
                    
                    For the six months ended June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Interest
      income:Loans
                    
                    $
                    28,043
                    
                    
                    $
                    20,703
                    
                    
                    $
                    53,542
                    
                    
                    $
                    39,965Investment
      securities:Taxable
                    
                    
                    843
                    
                    
                    
                    592
                    
                    
                    
                    1,706
                    
                    
                    
                    1,227Non
      taxable
                    
                    
                    147
                    
                    
                    
                    53
                    
                    
                    
                    195
                    
                    
                    
                    111Term
      placements
                    
                    
                    27
                    
                    
                    
                    -
                    
                    
                    
                    96
                    
                    
                    
                    -Federal
      funds sold
                    
                    
                    13
                    
                    
                    
                    157
                    
                    
                    
                    30
                    
                    
                    
                    165Other
                    
                    
                    225
                    
                    
                    
                    205
                    
                    
                    
                    307
                    
                    
                    
                    330Total
      interest income
                    
                    
                    29,298
                    
                    
                    
                    21,710
                    
                    
                    
                    55,876
                    
                    
                    
                    41,798Interest
      expense:Savings,
      NOW and money market deposits
                    
                    
                    3,520
                    
                    
                    
                    2,769
                    
                    
                    
                    6,649
                    
                    
                    
                    6,119Time
      deposits of $100,000 or more
                    
                    
                    3,282
                    
                    
                    
                    1,974
                    
                    
                    
                    6,711
                    
                    
                    
                    3,770Other
      time deposits
                    
                    
                    3,451
                    
                    
                    
                    2,753
                    
                    
                    
                    7,268
                    
                    
                    
                    5,425Other
      borrowings
                    
                    
                    2,262
                    
                    
                    
                    1,438
                    
                    
                    
                    4,486
                    
                    
                    
                    2,327Subordinated
      debt
                    
                    
                    477
                    
                    
                    
                    616
                    
                    
                    
                    993
                    
                    
                    
                    1,038Total
      interest expense
                    
                    
                    12,992
                    
                    
                    
                    9,550
                    
                    
                    
                    26,107
                    
                    
                    
                    18,679Net
      interest income
                    
                    
                    16,306
                    
                    
                    
                    12,160
                    
                    
                    
                    29,769
                    
                    
                    
                    23,119Provision
      for loan losses
                    
                    
                    1,800
                    
                    
                    
                    700
                    
                    
                    
                    3,000
                    
                    
                    
                    1,500Net
      interest income after provision for loan losses
                    
                    
                    14,506
                    
                    
                    
                    11,460
                    
                    
                    
                    26,769
                    
                    
                    
                    21,619Noninterest
      income:Revenues
      from insurance agency
                    
                    
                    953
                    
                    
                    
                    805
                    
                    
                    
                    1,875
                    
                    
                    
                    1,853Service
      charges on deposit accounts
                    
                    
                    551
                    
                    
                    
                    528
                    
                    
                    
                    1,118
                    
                    
                    
                    1,032Net
      gain on the sale of investment securities
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    522
                    
                    
                    
                    -Trust and
      investment services
                    
                    
                    194
                    
                    
                    
                    194
                    
                    
                    
                    327
                    
                    
                    
                    376Increase
      in cash value of company owned life insurance
                    
                    
                    117
                    
                    
                    
                    196
                    
                    
                    
                    233
                    
                    
                    
                    394Other
                    
                    
                    386
                    
                    
                    
                    510
                    
                    
                    
                    902
                    
                    
                    
                    924Sub-total
                    
                    
                    2,201
                    
                    
                    
                    2,233
                    
                    
                    
                    4,977
                    
                    
                    
                    4,579Other-than-temporary
      loss:Total
      impairment gain  (loss)
                    
                    
                    41
                    
                    
                    
                    -
                    
                    
                    
                    41
                    
                    
                    
                    -(Gain)
      loss recognized in other comprehensive  loss
                    
                    
                    (296
                    )
                    
                    
                    -
                    
                    
                    
                    (296
                    )
                    
                    
                    -Net
      impairment loss
                    
                    
                    (255
                    )
                    
                    
                    -
                    
                    
                    
                    (255
                    )
                    
                    
                    -Total
      noninterest income
                    
                    
                    1,946
                    
                    
                    
                    2,233
                    
                    
                    
                    4,722
                    
                    
                    
                    4,579Noninterest
      expense:Salaries
      and employee benefits
                    
                    
                    5,241
                    
                    
                    
                    4,222
                    
                    
                    
                    10,047
                    
                    
                    
                    8,217Net
      occupancy expense
                    
                    
                    1,981
                    
                    
                    
                    1,309
                    
                    
                    
                    3,780
                    
                    
                    
                    2,444Furniture
      and equipment expense
                    
                    
                    799
                    
                    
                    
                    667
                    
                    
                    
                    1,578
                    
                    
                    
                    1,324Amortization
      of intangible assets
                    
                    
                    90
                    
                    
                    
                    106
                    
                    
                    
                    181
                    
                    
                    
                    213Other
                    
                    
                    3,104
                    
                    
                    
                    1,487
                    
                    
                    
                    5,017
                    
                    
                    
                    2,565Total
      noninterest expense
                    
                    
                    11,215
                    
                    
                    
                    7,791
                    
                    
                    
                    20,603
                    
                    
                    
                    14,763Income
      before income taxes
                    
                    
                    5,237
                    
                    
                    
                    5,902
                    
                    
                    
                    10,888
                    
                    
                    
                    11,435Provision
      for income taxes
                    
                    
                    1,824
                    
                    
                    
                    1,951
                    
                    
                    
                    3,859
                    
                    
                    
                    3,909Net
      income
                    
                    $
                    3,413
                    
                    
                    $
                    3,951
                    
                    
                    $
                    7,029
                    
                    
                    $
                    7,526Basic
      earnings per share
                    
                    $
                    0.26
                    
                    
                    $
                    0.40
                    
                    
                    $
                    0.56
                    
                    
                    $
                    0.77Diluted
      earnings per share
                    
                    $
                    0.26
                    
                    
                    $
                    0.40
                    
                    
                    $
                    0.56
                    
                    
                    $
                    0.77Cash
      dividends declared
                    
                    $
                    0.04
                    
                    
                    $
                    0.04
                    
                    
                    $
                    0.08
                    
                    
                    $
                    0.08Comprehensive
      income
                    
                    $
                    2,308
                    
                    
                    $
                    3,667
                    
                    
                    $
                    5,368
                    
                    
                    $
                    6,274





See notes
to consolidated financial statements.


4





SMITHTOWN
BANCORP, INC.


Consolidated
Statements of Changes in Stockholders’ Equity (unaudited)


(In
thousands,  except share amounts)





Common
                                    Shares
                                    Outstanding
                                  
                                  
                                  Stock
                                    Amount
                                  
                                  
                                  Additional
                                    Paid In
                                    Capital
                                  
                                  
                                  Retained
                                    Earnings
                                  
                                  
                                  Treasury
                                    Stock
                                  
                                  
                                  Accumulated
                                    Other
                                    ComprehensiveIncome
                                    (Loss)
                                  
                                  
                                  Total
                                    Stockholders’Equity
                                  
                                  
                                  Total
                                    Comprehensive
                                    Income (Loss)Balance
      at December 31, 2008
                                  
                                  
                                  11,799,477
                                  
                                  
                                  $
                                  139
                                  
                                  
                                  $
                                  51,947
                                  
                                  
                                  $
                                  78,302
                                  
                                  
                                  $
                                  (10,062
                                  )
                                  
                                  $
                                  (708
                                  )
                                  
                                  $
                                  119,618Comprehensive
      income:Cumulative
      effect of change in accounting principle,  adoption of FSP
      FAS115-2 and 124-2, net of tax
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  312
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (312
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (312
                                  )Net
      income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7,029
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  7,029
                                  
                                  
                                  
                                  7,029Net
      change in unrealized gains (losses) on securities available for sale, net
      of reclassification and tax
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (730
                                  )
                                  
                                  
                                  (730
                                  )
                                  
                                  
                                  (730
                                  )Change
      in unrealized  gains (losses) on securities available for sale
      for which a portion of an other-than-temporary  impairment has
      been recognized in earnings, net of reclassification and
    tax
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (359
                                  )
                                  
                                  
                                  (359
                                  )
                                  
                                  
                                  (359
                                  )Changes
      in funded  status of retirement plans, net of
tax
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (260
                                  )
                                  
                                  
                                  (260
                                  )
                                  
                                  
                                  (260
                                  )Total
      comprehensive income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  $
                                  5,368Cash
      dividends declared
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1,068
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1,068
                                  )Issuance
      of shares, net of offering costs
                                  
                                  
                                  3,000,000
                                  
                                  
                                  
                                  30
                                  
                                  
                                  
                                  28,156
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  28,186Warrants
      associated with subordinated debt issuance, net of cost
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  484
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  484Issuance
      of shares for employee stock ownership plan
                                  
                                  
                                  20,920
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  300
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  300Stock
      awards vested
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  186
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  186Stock
      awards granted
                                  
                                  
                                  38,125Balance
      at June 30, 2009
                                  
                                  
                                  14,858,522
                                  
                                  
                                  $
                                  169
                                  
                                  
                                  $
                                  81,073
                                  
                                  
                                  $
                                  84,575
                                  
                                  
                                  $
                                  (10,062
                                  )
                                  
                                  $
                                  (2,369
                                  )
                                  
                                  $
                                  153,386





See notes
to consolidated financial statements.


5





SMITHTOWN
BANCORP, INC.


Consolidated
Statements of Cash Flows (unaudited)


(In
thousands)





For the six months ended June
      30,
                      
                      2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      income
                      
                      $
                      7,029
                      
                      
                      $
                      7,526Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      on premises and equipment
                      
                      
                      1,981
                      
                      
                      
                      1,406Provision
      for loan losses
                      
                      
                      3,000
                      
                      
                      
                      1,500Net
      gain on investment securities
                      
                      
                      (522
                      )
                      
                      
                      -Other
      than temporary net impairment loss on securities
                      
                      
                      255
                      
                      
                      
                      -Net
      increase in other liabilities
                      
                      
                      2,353
                      
                      
                      
                      324Net
      increase in other assets
                      
                      
                      (2,198
                      )
                      
                      
                      (2,031
                      )Net
      increase in deferred taxes
                      
                      
                      (3,127
                      )
                      
                      
                      (2,568
                      )Amortization
      of unearned  restricted stock awards
                      
                      
                      180
                      
                      
                      
                      131Increase
      in cash surrender value of company owned life insurance
                      
                      
                      (233
                      )
                      
                      
                      (394
                      )Amortization
      of investment security premiums and (accretion) of
discount
                      
                      
                      849
                      
                      
                      
                      (108
                      )Amortization
      of intangible assets
                      
                      
                      181
                      
                      
                      
                      213Cash provided by operating
      activities
                      
                      
                      9,748
                      
                      
                      
                      5,999Cash
      flows from investing activitiesProceeds
      from calls, repayments, maturities and sales of available-for-sale
      securities
                      
                      
                      66,439
                      
                      
                      
                      34,169Proceeds
      from calls, repayments and maturities of held-to-maturity
      securities
                      
                      
                      46
                      
                      
                      
                      215Purchases
      of available-for-sale securities
                      
                      
                      (237,036
                      )
                      
                      
                      (46,129
                      )Purchases
      of restricted securities
                      
                      
                      (2,041
                      )
                      
                      
                      (14,447
                      )Redemptions
      of restricted securities
                      
                      
                      789
                      
                      
                      
                      2,927Loans
      made to customers, net
                      
                      
                      (281,827
                      )
                      
                      
                      (370,029
                      )Purchases
      of premises and equipment
                      
                      
                      (5,788
                      )
                      
                      
                      (5,302
                      )Cash
      used in investing activities
                      
                      
                      (459,418
                      )
                      
                      
                      (398,596
                      )Cash
      flows from financing activitiesNet
      increase in demand, money market, NOW and
      savings  deposits
                      
                      
                      318,469
                      
                      
                      
                      24,064Increase
      in time deposits
                      
                      
                      97,933
                      
                      
                      
                      97,852Cash
      dividends paid
                      
                      
                      (946
                      )
                      
                      
                      (785
                      )Federal
      Home Loan Bank term advances
                      
                      
                      -
                      
                      
                      
                      240,000Net
      increase in overnight borrowings
                      
                      
                      -
                      
                      
                      
                      13,375Proceeds
      from subordinated debt and warrant  issuance
                      
                      
                      5,000
                      
                      
                      
                      20,000Net
      proceeds from common stock issuance
                      
                      
                      28,464
                      
                      
                      
                      -Cash
      provided by financing activities
                      
                      
                      448,920
                      
                      
                      
                      394,506Net
      (decrease) increase  in cash and cash
equivalents
                      
                      
                      (750
                      )
                      
                      
                      1,909Cash
      and cash equivalents, beginning of period
                      
                      
                      25,969
                      
                      
                      
                      17,455Cash
      and cash equivalents, end of period
                      
                      $
                      25,219
                      
                      
                      $
                      19,364Supplemental
      Information - Cash Flows:Cash
      paid for:Interest
                      
                      $
                      26,010
                      
                      
                      $
                      17,946Income
      taxes
                      
                      
                      4,541
                      
                      
                      
                      4,545Schedule
      of noncash activitiesIssuance
      of common stock to employee stock ownership plan
                      
                      $
                      300
                      
                      
                      $
                      250Issuance
      of common stock to 2007 stock compensation plan
                      
                      
                      547
                      
                      
                      
                      460Increase
      in due to broker
                      
                      
                      19,716
                      
                      
                      
                      -


See notes
to consolidated financial statements.


6





Notes to
Consolidated Financial Statements (unaudited)


(In
thousands, except share and per share data)





Note
1  –  Financial Statement Presentation





The
consolidated financial statements include the accounts of Smithtown Bancorp,
Inc., a New York-chartered bank holding company with one direct wholly-owned
subsidiary, Bank of  Smithtown (or the Bank), a New York-chartered
commerical bank, and three other direct wholly owned 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 has three wholly owned
subsidiaries, Bank of Smithtown Financial Services, Inc., Bank of Smithtown
Insurance Agents and Brokers, Inc. and BOS Preferred Funding
Corporation.





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, 2008 consolidated balance sheet was derived from the Company’s
December 31, 2008 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, 2009.  In the
opinion of management, the accompanying unaudited interim consolidated financial
statements contain all adjustments (consisting solely of normal recurring
accruals) 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, 2009 are not necessarily indicative of those
that may be expected for the year ending December 31, 2009.





In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported asset and liability balances
and revenue and expense amounts and the disclosure of contingent assets and
liabilities.  Actual results could differ significantly from those
estimates.





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 as required by Financial Accounting
Standards Board (“FASB”) Staff Position (“FSP”) Emerging Issues Task Force
(“EITF”) 03-6-1.  Basic earnings per common share is computed by
dividing net income allocated to common stock by the weighted average number of
common shares outstanding during the period which excludes the participating
securities.  Diluted earnings per common share includes the dilutive
effect of the 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.





For the three months ended June
      30,
                  
                  
                  For the six months ended June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008BasicDistributed
      earnings allocated to common stock
                  
                  $
                  471
                  
                  
                  $
                  390
                  
                  
                  $
                  941
                  
                  
                  $
                  781Undistributed
      earnings allocated to common stock
                  
                  
                  2,923
                  
                  
                  
                  3,541
                  
                  
                  
                  6,051
                  
                  
                  
                  6,711Net
      earnings allocated to common stock
                  
                  $
                  3,394
                  
                  
                  $
                  3,931
                  
                  
                  $
                  6,992
                  
                  
                  $
                  7,492Weighted
      average common shares outstanding, including shares considered
      participating securities
                  
                  
                  13,216,764
                  
                  
                  
                  9,838,819
                  
                  
                  
                  12,530,304
                  
                  
                  
                  9,832,896Less:  weighted
      average participating securities
                  
                  
                  (73,974
                  )
                  
                  
                  (48,411
                  )
                  
                  
                  (66,812
                  )
                  
                  
                  (44,059
                  )Weighted
      average shares
                  
                  
                  13,142,790
                  
                  
                  
                  9,790,408
                  
                  
                  
                  12,463,492
                  
                  
                  
                  9,788,837Basic
      earnings per common share
                  
                  $
                  0.26
                  
                  
                  $
                  0.40
                  
                  
                  $
                  0.56
                  
                  
                  $
                  0.77DilutedNet
      earnings allocated to common stock
                  
                  $
                  3,394
                  
                  
                  $
                  3,931
                  
                  
                  $
                  6,992
                  
                  
                  $
                  7,492Weighted
      average common shares outstanding for basic earnings per common
      share
                  
                  
                  13,142,790
                  
                  
                  
                  9,790,408
                  
                  
                  
                  12,463,492
                  
                  
                  
                  9,788,837Add:  Dilutive
      effect of warrants issued to purchase common stock
                  
                  
                  268
                  
                  
                  
                  -
                  
                  
                  
                  134
                  
                  
                  
                  -Weighted
      average shares and dilutive potential common shares
                  
                  
                  13,143,058
                  
                  
                  
                  9,790,408
                  
                  
                  
                  12,463,626
                  
                  
                  
                  9,788,837Diluted
      earnings per common share
                  
                  $
                  0.26
                  
                  
                  $
                  0.40
                  
                  
                  $
                  0.56
                  
                  
                  $
                  0.77




7





Dividends
of $5 and $4 were paid on unvested shares with non-forfeitable dividend rights
for the first six months of 2009 and 2008, respectively, none of which was
included in net income as compensation expense as all awards are expected to
vest.  The Company’s adoption of FSP EITF 03-6-1 had no effect on
basic and diluted earnings per common share for the three and six month periods
ending June 30, 2008.





Note 3 –
Stock-Based Compensation





The Board
of Directors determines restricted stock awarded under the 2007 Stock
Compensation Plan (“Stock Compensation Plan”).  During the first six
months ended June 30, 2009 and 2008, the Board of Directors
elected  to grant restricted stock awards of  38,125 and
22,000 shares, respectively.  Shares were issued in 2009 and 2008 at
an average price of $14.34 and $20.89 per share, respectively.





The Bank
recognizes compensation expense for restricted stock awards over the vesting
period, or remaining service period, if shorter, based on the fair market value
of the shares on the date they are awarded.  The vesting period is
generally five years with 20% vesting annually on December 31 for each of the
first five years after the award is made.  Compensation expense
attributed to restricted stock awards was $73 and $180 for the three and six
months ended June 30, 2009, respectively, and $65 and $131 for the three and six
months ended June 30, 2008, respectively. The income tax benefits resulting from
this expense for the three and six months ended June 30, 2009 were $26 and $65,
respectively, and for the three and six months ended June 30, 2008 were $22 and
$45, respectively.





As of
June 30, 2009 and 2008, there was approximately $1,129 and $899 of unrecognized
compensation costs related to nonvested retricted shares.  These
costs  are expected to be recognized over a period of
4.5  years and 3.5 years, respectively.





A summary
of the status of the Company’s nonvested  restricted shares as of June
30, 2009 is as follows:





Weighted
      AverageShares
                  
                  
                  Grant Date Share ValueNonvested
      at beginning of period
                  
                  
                  35,849
                  
                  
                  $
                  21.42Granted
                  
                  
                  38,125
                  
                  
                  
                  14.34Vested
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at end of period
                  
                  
                  73,974
                  
                  
                  $
                  17.77





The fair
value of nonvested restricted shares at June 30, 2009 was $946.





Note 4–
Post Retirement Benefits





The Bank
sponsors post-retirement medical and life insurance plans for a closed group of
prior employees.  The following table details the interest cost,
amortization cost of the unrecognized transition obligation, and the
amortization of the net gain for the comparable three and six month
periods.





For the
Three Months Ending


Amortization
                  
                  
                  Amortization
                  
                  
                  Total
      NetInterest Cost
                  
                  
                  Cost
                  
                  
                  of Net Gain
                  
                  
                  ExpenseJune
      30, 2009
                  
                  $
                  3
                  
                  
                  $
                  8
                  
                  
                  $
                  3
                  
                  
                  $
                  8June
      30, 2008
                  
                  
                  3
                  
                  
                  
                  8
                  
                  
                  
                  3
                  
                  
                  
                  8





For the
Six Months Ending


Amortization
                  
                  
                  Amortization
                  
                  
                  Total
      NetInterest Cost
                  
                  
                  Cost
                  
                  
                  of Net Gain
                  
                  
                  ExpenseJune
      30, 2009
                  
                  $
                  6
                  
                  
                  $
                  16
                  
                  
                  $
                  6
                  
                  
                  $
                  16June
      30, 2008
                  
                  
                  6
                  
                  
                  
                  16
                  
                  
                  
                  6
                  
                  
                  
                  16





Since the
plans hold no assets, the Bank did not contribute and does not expect to
contribute to the plans during 2009 and 2008, other than to fund the payments
for the benefits.





The Bank
adopted  nontax-qualified Executive and Director Incentive Retirement
Plans.  While these plans are funded from the general assets of the
Bank, life insurance policies were acquired for the purpose of serving as the
primary income source for the accruals during the service
period.  Benefits under the Incentive Retirement Plans are based
solely on the amounts contributed by the Bank.  The Bank’s expense for
these plans was $94 and $190 for the three and six month periods ended June 30,
2009, respectively, and $90 and $180 for the three and six month periods ended
June 30, 2008, respectively.


8





The Bank
has a supplemental life insurance plan for most members of management, with life
insurance policies serving as the primary income source for the benefits accrued
during the participants’ service period.  The benefit provides post
retirement life insurance up to a maximum of two and one-half times annual
salary.  In accordance with EITF Issue No. 06-4, the Bank has recorded
a liability representing the cost of maintaining this insurance during the
expected retirement period. This cost is expensed over  the service
period.  The Bank’s expense for these plans was $10 and $21 for the
three and six month periods ended June 30, 2009, respectively, and $12 and $25
for the three and six month periods ended June 30, 2008, respectively. At June
30, 2009 and 2008, the combined cash value of these insurance policies was
$7,827 and $7,611.





During
2004 the Bank adopted a Supplemental Executive Retirement Agreement for the
Chief Executive Officer.  Life insurance policies were purchased for
the purpose of serving as the primary income source for the accruals during the
service period.    A liability has been accrued for the
obligation under this plan of $2,403 as of June 30, 2009. The Bank’s expense for
these plans was $193 and $355 for the three and six month periods ended June 30,
2009, respectively, and $116 and $233 for the three and six month periods ended
June 30, 2008, respectively.





Note 5 -
Subordinated Debentures





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
Offering Rate (“LIBOR”) plus 2.99%.  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 after October 8,
2008.





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 June
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 June
30, 2011.





In 2008 a
third trust formed by the Company issued $20,000 of floating rate trust
preferred securities due June 1, 2038. The securities bear interest at 3 month
LIBOR plus 3.75%. 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 June 1, 2013.





In
accordance with FASB Interpretation No. 46, as revised in December 2003, the
trusts are not consolidated with the Company.  Accordingly, the
Company does not report the securities issued by the trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Company
and held by the trust, as these are no longer eliminated in
consolidation.





On June
29, 2009, the Bank issued $5,000 of fixed rate subordinated notes due July 1,
2019; the notes bear interest at 11%. The Bank, subject to obtaining prior
approval of the Federal Deposit Insurance Corporation (the “FDIC”) and the
Superintendent of the New York Department of Banking (the “Superintendent”), may
redeem the subordinated notes, in whole or in part, on any interest payment date
beginning on July 1, 2014.





Note 6 –
Warrants





On June
29, 2009 the Company issued a Warrant for Common Shares (“Warrant”) to each
purchaser of subordinated notes issued by the Bank on June 29,
2009.  The Company issued a total of 125,000 Warrants which may not be
exercised until June 29, 2010 and if not exercised are void after June 29,
2016.  The Warrants are exercisable at $11.50 per
share.  The Warrants were valued using the Black-Scholes model
adjusted to take into account dividends paid on the underlying
securities.  The fair value of the Warrants was recorded as an
increase to additional paid in capital.





Note 7 –
Fair Value




Statement
of Financial Accounting Standards (“SFAS”) No. 157 defines fair value as 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. SFAS No. 157 also establishes a fair value hierarchy
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The standard describes
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 Level 1 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.




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




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). Information such as historical and current
performance of the underlying collateral, deferral/default rates, collateral
coverage ratios, cash flow projections, liquidity and credit premiums required
by a market participant, and financial trend analysis with respect to the
individual issuing financial institutions, are utilized in determining
individual security valuations.  Due to current market conditions as
well as the limited trading activity of these securities, the market value of
the securities is highly sensitive to assumption changes and market
volatility.


9




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 typically
significant and result in a Level 3 classification of the inputs for determining
fair value.




Assets
and liabilities measured at fair value under SFAS No. 157 on a recurring
basis, including financial assets and liabilities for which the Company has
elected the fair value option, are summarized in the following
table.




Fair Value Measurements at UsingCarrying
                      Value
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)Financial
      AssetsJune
      30, 2009Available
      for sale securities
                    
                    $
                    245,080
                    
                    
                    $
                    -
                    
                    
                    $
                    238,790
                    
                    
                    $
                    6,290Financial
      AssetsDecember
      31, 2008Available
      for sale securities
                    
                    $
                    57,698
                    
                    
                    $
                    -
                    
                    
                    $
                    48,955
                    
                    
                    $
                    8,743




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 three
month and six month periods ended June 30, 2009:





Investment
      Securities Available
                    for
      SaleThree
      months ended June 30, 2009Balance
      of recurring Level 3 assets at April 1, 2009
                  
                  $
                  7,812Total
      gains or losses (realized/unrealized):Included
      in earnings - unrealized
                  
                  
                  (255
                  )Included
      in other comprehensive income
                  
                  
                  (1,267
                  )Balance
      of recurring Level 3 assets at June 30, 2009
                  
                  $
                  6,290Six
      months ended June 30, 2009Balance
      of recurring Level 3 assets at January 1, 2009
                  
                  $
                  8,743Total
      gains or losses (realized/unrealized):Included
      in earnings - unrealized
                  
                  
                  (255
                  )Included
      in other comprehensive income
                  
                  
                  (2,192
                  )Principal
      pay down
                  
                  
                  (6
                  )Balance
      of recurring Level 3 assets at June 30, 2009
                  
                  $
                  6,290


10





Assets
measured at fair value on a non-recurring basis are summarized below in the
following table.





Fair Value Measurements at UsingCarrying
                      Value
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant
                      Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)June
      30, 2009Impaired
      loans
                    
                    $
                    2,855
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,855December
      31, 2008Impaired
      loans
                    
                    $
                    2,334
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,334





Collateral
dependent impaired loans, which are measured for impairment using the fair value
of the collateral, had a carrying amount of $3,231, with a valuation allowance
of $376, resulting in no additional provision for loan losses for the six month
period ended  June 30, 2009.





In
accordance with FSP FAS 107-1, the carrying amounts and estimated fair values of
financial instruments, at June 30, 2009 and December 31, 2008 are provided in
the following table.





June
      30, 2009
                  
                  
                  December
      31, 2008Carrying Amount
                  
                  
                  Estimated Fair Value
                  
                  
                  Carrying Amount
                  
                  
                  Estimated Fair ValueFinancial
      assetsCash
      and due from banks
                  
                  $
                  16,962
                  
                  
                  $
                  16,962
                  
                  
                  $
                  17,205
                  
                  
                  $
                  17,205Federal
      funds sold
                  
                  
                  8,257
                  
                  
                  
                  8,257
                  
                  
                  
                  8,764
                  
                  
                  
                  8,764Term
      placements
                  
                  
                  507
                  
                  
                  
                  507
                  
                  
                  
                  507
                  
                  
                  
                  507Securities
      available for sale
                  
                  
                  245,080
                  
                  
                  
                  245,080
                  
                  
                  
                  57,698
                  
                  
                  
                  57,698Securities
      held to maturity
                  
                  
                  66
                  
                  
                  
                  67
                  
                  
                  
                  112
                  
                  
                  
                  113FHLB
      Stock
                  
                  
                  17,168
                  
                  
                  
                  N/A
                  
                  
                  
                  15,916
                  
                  
                  
                  N/ALoans,
      net
                  
                  
                  1,970,527
                  
                  
                  
                  1,962,297
                  
                  
                  
                  1,688,700
                  
                  
                  
                  1,678,539Accrued
      interest receivable
                  
                  
                  10,428
                  
                  
                  
                  10,428
                  
                  
                  
                  8,232
                  
                  
                  
                  8,232Financial
      liabilitiesDeposits
                  
                  
                  1,783,339
                  
                  
                  
                  1,796,587
                  
                  
                  
                  1,366,937
                  
                  
                  
                  1,371,934FHLB
      advances and other borrowings
                  
                  
                  326,480
                  
                  
                  
                  341,597
                  
                  
                  
                  326,480
                  
                  
                  
                  351,412Subordinated
      debt
                  
                  
                  43,322
                  
                  
                  
                  43,322
                  
                  
                  
                  38,836
                  
                  
                  
                  38,836Accrued
      interest payable
                  
                  
                  4,425
                  
                  
                  
                  4,425
                  
                  
                  
                  4,205
                  
                  
                  
                  4,205





The
Company used the following methods and assumptions in estimating the fair value
of its financial instruments:





Cash and
due from banks, federal funds sold and term placements: Carrying amounts
approximate fair value, since these instruments are either payable on demand or
have short-term maturities.





FHLB
stock: It was not practicable to determine the fair value of FHLB stock due to
restrictions placed on its transferability.





Loans:
The estimated fair values of real estate mortgage loans and other loans
receivable are based on discounted cash flow calculations that apply available
market benchmarks when establishing discount factors for the types of
loans.





Deposits:
The estimated fair value of time deposits are based on discounted cash flow
calculations that apply interest rates currently being offered by the Bank for
deposits with similar remaining maturities to a schedule of aggregated expected
monthly maturities. Stated value is fair value for all other
deposits.





Borrowings
and subordinated debt: The estimated fair value of borrowed funds and
subordinated debt is based on the discounted value of contractual cash flows
using interest rates currently in effect for borrowings with similar maturities
and collateral requirements.





Accrued
interest receivable and payable: For these short-term instruments, the carrying
amount is a reasonable estimate of the fair value.





The fair
value of off-balance sheet items including loan commitments, unused lines of
credit, and letters of credit is not material.


11





Note 8 –
Loans





Loans as of June 30, 2009
and December 31, 2008 consisted of the following:





June
      30,
                            
                            
                            December
      31,2009
                            
                            
                            2008Real
      estate loansConstruction
                            
                            $
                            398,769
                            
                            
                            $
                            390,067Commercial
                            
                            
                            903,630
                            
                            
                            
                            760,125Residential:1-4
      family
                            
                            
                            218,904
                            
                            
                            
                            183,632Multi
      family
                            
                            
                            399,016
                            
                            
                            
                            304,938Total
                            
                            
                            617,920
                            
                            
                            
                            488,570Commercial
      and industrial loans
                            
                            
                            51,862
                            
                            
                            
                            51,630Loans
      to individuals for household, family and other personal
      expenditures
                            
                            
                            1,549
                            
                            
                            
                            2,004All
      other loans (including overdrafts)
                            
                            
                            767
                            
                            
                            
                            403Total
      loans, gross
                            
                            
                            1,974,497
                            
                            
                            
                            1,692,799Less:Deferred
      fees
                            
                            
                            3,970
                            
                            
                            
                            4,099Allowance
      for loan losses
                            
                            
                            14,109
                            
                            
                            
                            11,303Loans,
      net
                            
                            $
                            1,956,418
                            
                            
                            $
                            1,677,397





Individually
impaired loans were as follows:


June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Loans
      with no allocated allowance for loan losses
                  
                  $
                  19,661
                  
                  
                  $
                  799Loans
      with allocated allowance for loan losses
                  
                  
                  4,256
                  
                  
                  
                  1,853Total
                  
                  $
                  23,917
                  
                  
                  $
                  2,652





Impaired
loans at June 30, 2009 and December 31, 2008 were $23,917 and $2,652,
respectively. The amount of the allowance for loan losses allocated to these
loans was $940 and $318. The average recorded investment in impaired loans
during the six months ended June 30, 2009 and 2008 was $15,942 and $340,
respectively.





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 would first be
applied to principal outstanding and then to accrued interest.





At June
30, 2009 and 2008, loans with unpaid principal balances on which the Bank is no
longer accruing interest were $9,292 and $313, respectively. At June 30, 2009
and 2008, there were $20,292 and $2,488 of loans past due 90 days or more and
still accruing interest.





A summary
of information concerning interest income on nonaccrual loans at June 30
follows:





2009
                  
                  
                  2008Gross
      interest income which would have been recorded during the year under
      original contract terms
                  
                  $
                  257
                  
                  
                  $
                  14Gross
      interest income recorded during the year
                  
                  
                  71
                  
                  
                  
                  10





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





Note 9 –
Investment Securities




The
following table summarizes the amortized cost, unrealized gains, unrealized
losses and estimated fair value of the available-for-sale and held-to-maturity
investment securities at June 30, 2009 and December 31,
2008.


12





EstimatedAmortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  ValueJune
      30, 2009Available
      for SaleU.S.
      Government sponsored entities and agencies
                  
                  $
                  18,316
                  
                  
                  $
                  69
                  
                  
                  $
                  (34
                  )
                  
                  $
                  18,351State
      and political subdivisions
                  
                  
                  50,075
                  
                  
                  
                  61
                  
                  
                  
                  (831
                  )
                  
                  
                  49,305Mortgage-backed
      securities - residential
                  
                  
                  162,966
                  
                  
                  
                  1,416
                  
                  
                  
                  (294
                  )
                  
                  
                  164,088Collateralized  mortgage
      obligations
                  
                  
                  4,547
                  
                  
                  
                  19
                  
                  
                  
                  -
                  
                  
                  
                  4,566Collateralized
      debt obligations
                  
                  
                  3,046
                  
                  
                  
                  -
                  
                  
                  
                  (1,703
                  )
                  
                  
                  1,343Equity
      securities
                  
                  
                  2,480
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,480Other
      securities
                  
                  
                  7,085
                  
                  
                  
                  -
                  
                  
                  
                  (2,138
                  )
                  
                  
                  4,947Total
      available for sale securities
                  
                  $
                  248,515
                  
                  
                  $
                  1,565
                  
                  
                  $
                  (5,000
                  )
                  
                  $
                  245,080Held
      to maturityState
      and political subdivisions
                  
                  $
                  66
                  
                  
                  $
                  1
                  
                  
                  $
                  -
                  
                  
                  $
                  67





EstimatedAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    ValueDecember  31,
2008Available
      for SaleU.S.
      Government sponsored entities and agencies
                    
                    $
                    18,982
                    
                    
                    $
                    144
                    
                    
                    $
                    (117
                    )
                    
                    $
                    19,009State
      and political subdivisions
                    
                    
                    4,629
                    
                    
                    
                    22
                    
                    
                    
                    (16
                    )
                    
                    
                    4,635Mortgage-backed
      securities - residential
                    
                    
                    22,780
                    
                    
                    
                    96
                    
                    
                    
                    (45
                    )
                    
                    
                    22,831Collateralized
      debt obligations
                    
                    
                    2,821
                    
                    
                    
                    -
                    
                    
                    
                    (578
                    )
                    
                    
                    2,243Equity
      securities
                    
                    
                    2,480
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,480Other
      securities
                    
                    
                    7,102
                    
                    
                    
                    -
                    
                    
                    
                    (602
                    )
                    
                    
                    6,500Total
      available for sale securities
                    
                    $
                    58,794
                    
                    
                    $
                    262
                    
                    
                    $
                    (1,358
                    )
                    
                    $
                    57,698Held
      to maturityState
      and political subdivisions
                    
                    $
                    112
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    
                    $
                    113




The
amortized cost and fair value of the investment securities portfolio are shown
by contractual maturity. Actual maturities can be expected to differ from
contractual maturities due to prepayment or call privileges of the
issuer.




June
      30, 2009EstimatedAmortized
                        
                        
                        FairCost
                        
                        
                        ValueAvailable
      for saleWithin
      one year
                        
                        $
                        900
                        
                        
                        $
                        906One
      to five years
                        
                        
                        10,016
                        
                        
                        
                        9,724Five
      to ten years
                        
                        
                        25,531
                        
                        
                        
                        25,098After
      10 years
                        
                        
                        212,068
                        
                        
                        
                        209,352Total
                        
                        $
                        248,515
                        
                        
                        $
                        245,080Held
      to maturityWithin
      one year
                        
                        $
                        33
                        
                        
                        $
                        33One
      to five years
                        
                        
                        33
                        
                        
                        
                        34Total
                        
                        $
                        66
                        
                        
                        $
                        67





The
following table summarizes the investment securities with unrealized losses at
June 30, 2009  and December 31, 2008 by aggregated major security type
and length of time in a continuous unrealized loss position.


13





Less than 12 Months
                    
                    
                    12 Months or More
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    LossJune
      30, 2009Available
      for SaleU.S.
      Government sponsored entities and agencies
                    
                    $
                    4,966
                    
                    
                    $
                    (34
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,966
                    
                    
                    $
                    (34
                    )State
      and political subdivisions
                    
                    
                    39,711
                    
                    
                    
                    (831
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    39,711
                    
                    
                    
                    (831
                    )Mortgage-backed
      securities - residential
                    
                    
                    39,904
                    
                    
                    
                    (294
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    39,904
                    
                    
                    
                    (294
                    )Collateralized
      debt obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,343
                    
                    
                    
                    (1,703
                    )
                    
                    
                    1,343
                    
                    
                    
                    (1,703
                    )Other
      securities
                    
                    
                    3,151
                    
                    
                    
                    (1,849
                    )
                    
                    
                    1,796
                    
                    
                    
                    (289
                    )
                    
                    
                    4,947
                    
                    
                    
                    (2,138
                    )Total
      available for sale securities
                    
                    $
                    87,732
                    
                    
                    $
                    (3,008
                    )
                    
                    $
                    3,139
                    
                    
                    $
                    (1,992
                    )
                    
                    $
                    90,871
                    
                    
                    $
                    (5,000
                    )December  31,
2008Available
      for SaleU.S.
      Government sponsored entities and agencies
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,883
                    
                    
                    $
                    (117
                    )
                    
                    $
                    4,883
                    
                    
                    $
                    (117
                    )State
      and political subdivisions
                    
                    
                    929
                    
                    
                    
                    (16
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    929
                    
                    
                    
                    (16
                    )Mortgage-backed
      securities - residential
                    
                    
                    3,436
                    
                    
                    
                    (26
                    )
                    
                    
                    8,491
                    
                    
                    
                    (19
                    )
                    
                    
                    11,927
                    
                    
                    
                    (45
                    )Collateralized
      debt obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,417
                    
                    
                    
                    (578
                    )
                    
                    
                    1,417
                    
                    
                    
                    (578
                    )Other
      securities
                    
                    
                    4,600
                    
                    
                    
                    (400
                    )
                    
                    
                    1,900
                    
                    
                    
                    (202
                    )
                    
                    
                    6,500
                    
                    
                    
                    (602
                    )Total
      available for sale securities
                    
                    $
                    8,965
                    
                    
                    $
                    (442
                    )
                    
                    $
                    16,691
                    
                    
                    $
                    (916
                    )
                    
                    $
                    25,656
                    
                    
                    $
                    (1,358
                    )





At June
30, 2009 and 2008, there were no holdings of securities of any one issuer, other
than U.S. Government sponsored enities and agencies, in an amount greater than
10% of stockholders’ equity.





Proceeds
from sales and calls of securities available for sale were $46,904 and $27,315
for the six months ended June 30, 2009 and 2008, respectively. Gross gains of
$522 were realized on sales during the first six months of
2009.  There were no gross gains in 2008 and no gross losses in 2009
and 2008.





Proceeds
from calls of securities available for sale were $11,176 and $1,539 for the
three months ended June 30, 2009 and 2008, respectively. There were no gross
gains or gross losses during the second quarter of 2009 and 2008.





Other-Than-Temporary-Impairment


Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis. The investment securities portfolio is evaluated for OTTI by
segregating the portfolio into two general segments and applying the appropriate
OTTI model. Investment securities classified as available for sale or
held-to-maturity are generally evaluated for OTTI under SFAS No. 115,Accounting for Certain Investments
in Debt and Equity Securities. However, certain purchased beneficial
interests, including collateralized debt obligations, that had credit ratings at
the time of purchase of below AA are evaluated using the model outlined in EITF
Issue No. 99-20,Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that Continue to be Held by a Transfer in Securitized Financial
Assets.





In
determining OTTI under the SFAS No. 115 model, 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 sell the debt
security before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.





The
second segment of the portfolio uses the OTTI guidance provided by EITF 99-20
that is specific to purchased beneficial interests that, on the purchase date,
were rated below AA. Under the EITF 99-20 model, 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. An OTTI is deemed
to have occurred if there has been an adverse change in the remaining expected
future cash flows.





When OTTI
occurs under either model, the amount of the OTTI recognized in earnings depends
on whether the Company 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 the Company intends to sell
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, the
OTTI is recognized in earnings equal to the entire difference between the
investment’s amortized cost basis and its estimated fair value at the balance
sheet date. If the Company 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 basis less any current-period loss, the
OTTI is 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 cash flows 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.


14





As of
June 30, 2009, the Company’s investment security portfolio had $90,871 in an
unrealized loss position. $84,581 of unrealized losses are related to the
Company’s mortgage-backed securities, US government sponsored entities and
agencies and state and  political subdivisions. $6,290 of the
unrealized loss positions are related to the Company’s collateralized debt
obligations and other securities. At June 30, 2009, all mortgage-backed
securities including collateralized mortgage obligations (“CMOs”) held by the
Company were issued by U.S. government-sponsored entities and agencies,
primarily Government National Mortgage Association (Ginnie Mae), Fannie Mae and
Freddie Mac, institutions which the government has affirmed its commitment to
support. State and political subdivision securities are upper
medium  investment grade or higher rated and most are
insured.  Because the decline in fair value is attributable to changes
in interest rates, and not credit quality, and because the Company does not have
the intent to sell these securities and it is likely that it will not be
required to sell the securities before their anticipated recovery, the Company
does not consider these securities to be other-than-temporarily impaired at June
30, 2009.





The
Company’s unrealized losses on collaterized debt obligations and other
securities relate to its investment in two pooled trust preferred securities,
one single issuer trust preferred security and one corporate bond.





The
following table presents the book value, gross unrealized loss and estimated
fair value for the corporate bond held by the Company at June 30,
2009.




Book
      Value
                  
                  
                  Gross
                    Unrealized
      Loss
                  
                  
                  Estimated
      Fair
                    ValueColumbia
      Financial Capital Trust I Note
                  
                  $
                  2,085
                  
                  
                  $
                  (289
                  )
                  
                  $
                  1,796





The
following table presents detailed information for each trust preferred security
held by the Company at June 30, 2009.





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
                                          
                                          
                                          
                                          (1,849
                                          )
                                          
                                          
                                          3,151
                                          
                                          NA
                                          
                                          
                                          1
                                          
                                          
                                          None
                                          
                                          
                                          
                                          -Trust
      Preferred Funding III LTD Series 144A
                                          
                                          Pooled
                                          
                                          
                                          B-2
                                          
                                          
                                          
                                          1,867
                                          
                                          
                                          
                                          (1,029
                                          )
                                          
                                          
                                          838
                                          
                                          Ca/CC
                                          
                                          
                                          27
                                          
                                          
                                          
                                          12.95
                                          %
                                          
                                          
                                          (15.3
                                          )%Trust
      Preferred Funding I
                                          
                                          Pooled
                                          
                                          
                                          B
                                          
                                          
                                          
                                          1,179
                                          
                                          
                                          
                                          (674
                                          )
                                          
                                          
                                          505
                                          
                                          Caa3/CCC
                                          
                                          
                                          15
                                          
                                          
                                          
                                          34.66
                                          %
                                          
                                          
                                          (29.1
                                          )%Total
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          8,046
                                          
                                          
                                          
                                          (3,552
                                          )
                                          
                                          
                                          4,494





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 to recover its investment in these
securities if the Company sold the securities at this time.





Our
analysis of the two pooled  investments falls within the scope of EITF
99-20. 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 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 most 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 the June 30, 2009 analysis, our model
indicated other-than-temporary impairment on both of these securities, both of
which experienced additional defaults or deferrals during the period. These two
securities had OTTI losses of $877, of which $255 was recorded as expense and
$622 was recorded in other comprehensive income, gross of tax. These two
securities remained classified as available for sale at June 30, 2009, and
 together, the four securities above accounted for all of the
unrealized loss in the collateralized debt obligation and other securities
categories at June 30, 2009.





The table
below presents a rollforward of the credit losses recognized in earnings for the
three month period ended June 30, 2009.


15





Beginning
      balance, April 1, 2009
                  
                  $
                  -Amounts
      related to credit loss for which an other-than-temporary impairment was
      not previously recognized
                  
                  
                  127Additions/SubtractionsReductions
      for increase in cash flows expected to be collected that are recognized
      over the remaining life of the security
                  
                  
                  -Increases
      to the amount related to the credit loss for which other-than-temporary
      impairment was previously recognized
                  
                  
                  128Ending
      balance, June 30, 2009
                  
                  $
                  255





Through
the period ended March 31, 2009, the Company recognized cumulative
other-than-temporary impairment charges of $865 for various securities. The
Company adopted FSP No. 115-2 and No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments,effective April 1, 2009 and reversed
$312, net of tax of $175, for the non-credit portion of the cumulative OTTI
charge. The adoption was recognized as a cumulative effect adjustment that
increased retained earnings and decreased accumulated other comprehensive income
$312, net of tax of $175, as of April 1, 2009.   As a result of
implementing the new standard, the amount of OTTI recognized in income for the
period was $255, gross of tax. Had the standard not been issued, the amount of
OTTI that would have been recognized in income for the period would have been
$900, gross of tax.




Note 10 –
Subsequent Events





On July
27, 2009, the Bank issued $14,000 of fixed rate subordinated notes due July 1,
2019. The notes bear interest at 11%. The Bank, subject to obtaining prior
approval of the Federal Deposit Insurance Corporation (“FDIC”) and the
Superintendent of the New York Department of Banking (“Superintendent”), may
redeem the subordinated notes, in whole or in part, on any interest payment date
beginning on July 1, 2014. On the same date, the Company issued a Warrant for
Common Shares (“Warrant”) to each purchaser of subordinated notes issued by the
Bank. The Company issued 350,000 Warrants, which may not be exercised until
June 29, 2010 and if not exercised are void after June 29, 2016. The Warrants
are exercisable at $11.50 per share.  The net value of the warrants
will be an increase to additional paid in capital.  The net proceeds
from the debt offering and warrants issued will be used to support the Company’s
planned deposit and loan growth. These financial statements consider events that
occurred through August 7, 2009, the date the financial statements were
issued.





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


(In
thousands, except share and per share data)





Private
Securities Litigation Reform Act Safe Harbor Statement





Certain
statements contained in this report that are not statements of historical fact
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that, such
statements are not specifically identified as such. 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 the Company or with
the Company’s approval that are not statements of historical fact and constitute
forward-looking statements within the meaning of the Act. Examples of
forward-looking statements include, but are not limited to: (i) projections of
revenues, expenses, income or loss, earnings or loss per share, the payment or
nonpayment of dividends, capital structure and other financial items; (ii)
statements of the Company’s plans, objectives and expectations or those of its
management or Board of Directors, including those relating to products or
services; (iii) statements of future economic performance; and (iv) statements
of assumptions underlying such statements. Words such as “believes,”
“anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,”
“should,” “may” and other similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.





Forward-looking
statements involve risks and uncertainties that may cause actual results to
differ materially from those in such statements. Factors that could cause actual
results to differ from those discussed in the forward-looking statements
include, but are not limited to:





-
            Our
      ability to continue to increase and manage our commercial, residential and
      multi-family real estate loans and commercial and industrial
      loans-
            Local,
      regional, national and international economic conditions and the impact
      they may have on the Company and its customers and the Company’s
      assessment of that impact-
            Changes
      in the level of non-performing assets and charge-offs-
            Changes
      in estimates of future reserve requirements based upon the periodic
      review thereof under relevant regulatory and accounting
      requirements-
            The
      effects of and changes in trade and monetary and fiscal policies and laws,
      including the interest rate policies of the Federal Reserve
      Board-
            Inflation,
      interest rate, securities market and monetary fluctuations, including
      changes in the interest rate yield curve-
            Political
      instability-
            Acts
      of war or terrorism-
            The
      level of future deposit premium assessments-
            Possible
      impairments of securities held by us, including those issued by government
      entities and agencies-
            The
      impact of the current financial crisis on our loan portfolio (including
      cash flow and collateral values), investment
      portfolio,  customers and capital market
    activities-
            Our
      ability to raise capital to fund our growth plans-
            The
      impact of the current governmental effort to restructure the U.S.
      financial and regulatory system-
            The
      impact of new consumer and borrower protection
  legislation-
            Our
      ability to recruit new personnel and integrate such persons into our
      operations to support our growth plan-
            The
      timely development and acceptance of new products and services and
      perceived overall value of these products and services by
      users




16





-
            Our
      ability to continue to rely on a limited number of senior executives,
      including our chief executive officer-
            Changes
      in consumer spending, borrowings and savings habits-
            Changes
      in the financial performance and/or condition of the Company’s
      borrowers-
            Technological
      changes-
            Acquisitions
      and integration of acquired businesses-
            The
      ability to increase market share and control expenses-
            Changes
      in the competitive environment among financial holding companies and other
      financial service providers, including the emergence of new loan and
      deposit competitors-
            The
      quality and composition of the Company’s investment
    portfolio-
            The
      effect of changes in laws and regulations (including laws and regulations
      concerning taxes, banking, securities and insurance) with which the
      Company and its subsidiaries must comply-
            The
      effect of changes in accounting policies and practices, as may be adopted
      by the regulatory agencies, the SEC, the Public Company Accounting
      Oversight Board, the Financial Accounting Standards Board and other
      accounting standard setters-
            Changes
      in the Company’s organization, compensation and benefit
    plans-
            The
      costs and effects of legal and regulatory developments, including the
      resolution of legal proceedings or regulatory or other governmental
      inquiries and the results of regulatory examinations or
      reviews-
            Greater
      than expected costs or difficulties related to the opening and/or
      operation of new branch offices or the integration of new products and
      lines of business, or both-
            The
      impact of developments in the secondary market impacting our loan
      pricing-
            The
      impact of changes in the financial services industry on our local
      marketplaceOur
      success in originating and managing loans ranging in size from $2 million
      to $20 million-
            The
      Company’s success at managing the risk involved in the foregoing
      items





Forward-looking
statements speak only as of the date on which such statements are made. The
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made,
or to reflect the occurrence of unanticipated events.





Overview





A summary
of the Company’s financial highlights for the second quarter of  2009
follows:





-Continued
growth in the Company’s loans and deposits totaling $147,342 and $113,332,
respectively


-Net
income for the quarter and the year to date of $3,413 and
$7,029, respectively


-Net
interest margin of 3.06% for the quarter, up thirty basis points from 2.76% in
the first quarter of 2009


-The
successful public issuance of $30,000 in common stock


-The sale
of $5,000 in subordinated notes by the Bank and the related  issuance
of 125,000 warrants to purchase Company common stock





For the
second quarter of 2009 we experienced a slight decline in net income from the
first quarter and a 16.13% reduction in basic and diluted earnings per share
(EPS) from $.31 per share for the first three months of the year to $.26 for the
second  three months.  This reduction in EPS was primarily
due to an increased number of outstanding common shares resulting
from  a public offering of the Company’s common stock
during  the second quarter of 2009.   Revenue
increased  during the second quarter as a result of  8.08%
loan growth  and 143.10% securities growth funded from existing
overnight investments and term placements as well as deposit
growth.  Growth within the loan portfolio continued to trend similarly
to that during the first quarter of 2009 and the year 2008, with a majority of
the funding  in multi-family mortgage loans, residential mortgages,
commercial mortgages and first lien home equity lines of credit.  The
average yield on the loan portfolio increased slightly from 5.89% during the
first quarter of 2009 to 5.90% for the second quarter.  Security
purchases included government sponsored entity and  agency
mortgage-backed securities and New York municipal securities.  Deposit
growth was strong during the second quarter as the Company’s six newest branches
opened last year and earlier this year continued to attract new
customers.  The growth in total deposits for the
quarter  totaled $113,332, an  increase of 6.79% over the
prior quarter.  While the downturn in the economy may be showing signs
of slowing, we continue to capitalize on the strengths of our bank relative to
the competition.   The strongest category of deposit growth
during the quarter was in the savings, NOW and money market accounts, continuing
the trend from the prior quarter.  This segment of deposits grew by
$148,796, or 20.86%.  The Company’s cost of funds benefitted from both
the change in mix and repricing of maturing time deposits to current lower
rates.  The cost of deposits for the quarter was 2.39%, down from
2.74% in the prior quarter.





The
Company successfully completed a $30,000  public offering of common
stock resulting in net proceeds, after estimated offering expenses, of
$28,183.  Subsequent to the equity offering the Bank issued $5,000 of
subordinated notes and the Company issued 125,000 warrants to purchase common
shares.  The net proceeds of the subordinated notes after estimated
offering expenses totaled $4,736.  The warrants had a net estimated
value of $484 reflected as an increase to additional paid in
capital.  The net proceeds from the equity and debt offerings will be
used to support our continued deposit and loan growth.


17





Comparison
of Financial Position at June 30, 2009 and December 31, 2008





Total
assets at June 30, 2009 were $2,342,115, an increase of $476,725, or 25.56%,
from the prior year end.  The largest segment of assets remains the
loan portfolio, which represented 84.13% and 90.53% of total assets as of June
30, 2009 and December 31, 2008, respectively.  Loan growth for
the first six months trended toward more permanent residential and commercial
real estate fundings, rather than construction funding, which continues to
represent a smaller percentage of total loans.  Total residential
loans including 1-4 family homes as well as multi-family homes represented
31.30% of the loan portfolio at June 30, 2009 as compared to 28.86% at December
31, 2008. Total commercial real estate loans represented 45.75% of the loan
portfolio at June 30, 2009 as compared to 44.91% at December 31,
2008.  The growth in this segment of the portfolio for the second
quarter of 2009 and year to date was $88,349 and $143,505, respectively. Average
loan to value ratios within the 1 to 4 family mortgage loans, the multi-family
mortgages and the commercial mortgages as of June 30, 2009 were 47.95%, 64.15%
and 53.35%, respectively. The properties that secure these loans are located
throughout Long Island, and the five boroughs of New York City, where price
depreciation has not been as much as has been witnessed in other parts of the
country. All loan to value ratios are based on original appraisals at the time
of origination with the exception of loans with updated appraisals due to a
possible change in the loans’s credit quality.  Please see note 8 to
the consolidated financial statements in this report for a further breakout of
the major loan categories at June 30, 2009 and December 31, 2008.





Investment securities increased by
324.09% from December 31, 2008 to June 30, 2009. Purchases included a
combination of Government sponsored entity and agencyfixed
rate pass through mortgage backed securities and CMOs as well as New York
municipal securities.  Mortgage related and municipal security
purchases for the three month period ended June 30, 2009 totaled $107,596 and
$44,680, respectively.  Mortgage related security purchases were
predominatedly 5.5% and 6% coupons with estimated average lives of less than 3
years at the time of purchase providing a steady stream of monthly cash
flow.  Municipal purchases were completed with maturities ranging from
2 to 15 years with an average tax equivalent (TE) yield to maturity of
approximately 5%. Several Government sponsored entity and agency bonds were
called during the quarter totaling $10,989.





Federal
funds sold and term placements totaled $8,764 at June 30, 2009 and $9,271 at
December 31, 2008.  While these balances did not change materially
from the prior year end to the current reporting period,  they were
reduced significantly during the second quarter of 2009 from a high of $136,851
at March 31, 2009. With yields on these overnight and short term investments
hovering near zero, the reduction in these balance sheet categories with the
simultaneous increase in investment securities aided  in the
significant 30 basis point increase in net interest margin for the second
quarter.





Bank
premises and equipment increased by $3,807, or 11.54%, from December 31, 2008 to
June 30, 2009.  This was a result of the completion and opening of 2
new branches, in Port Jefferson, Long Island  and Chelsea, New York
City as well as the construction in progress of many additional future branch
sites.  Currently there are nine new branch projects under development
that are expected to open in the next twelve months.   Management
constantly strives to obtain low cost, stable sources of funding which it has
achieved through an expanding branch network, and for that reason continues to
explore all viable opportunities. However, opportunities for good branch
locations are not always available.





The
primary driver of asset growth has been  increased
deposits.  For the six months ended June 30, 2009 deposits grew by
$416,402, or 30.46%.  Savings, NOW and money market deposits produced
the largest growth representing 75.28% of  total year to date deposit
growth.  This category now equals 48.33% of the total deposit
portfolio.  Demand deposits decreased to a 7.21% level from 9.04% and
certificates of deposit decreased to 44.45% from 50.83% of total deposits at
year end 2008.  The cost of interest bearing deposits decreased from
the first quarter of 2009 to the second quarter of 2009 from 2.95% to
2.57%.    Other borrowings remained at the December 31, 2008
level of $326,480.  Subordinated debt increased to $43,322 at June 30,
2009 from $38,836 at the prior year end as the result of the Bank issuing $5,000
in fixed rate subordinated notes.  Other liabilities
increased from $13,519 to $35,588 primarily due to an increase in accrued
expenses including federal and state taxes payable, an increase in the reserve
for supplemental executive retirement benefits, a reserve for the FDIC special
assessment to be collected on September 30, 2009, and a payable due to the
Company’s brokers for investment security purchases settling in July 2009 in the
amount of $19,716.





Stockholders’
equity increased by $33,768, or 28.23%, the result of the net proceeds of the
equity offering of $28,186, net income of $7,029, the net fair value of warrants
issued to purchase common stock of $484 offset by other comprehensive loss of
$1,349 due primarily to the increase in temporary impairment of certain
investment securities, the issuance of common shares for the Company’s ESOP Plan
and awards vested under the Company’s Stock Compensation Plan of 2007 of $486
and dividends declared to shareholders of $1,068.





The
Company and the Bank are subject to the risk based capital guidelines
administered by bank regulatory agencies.  The guidelines require all
banks and bank holding companies to maintain a minimum ratio of total risk based
capital to total risk weighted assets of 8%, including Tier I capital to total
risk weighted assets of 4% and a Tier I capital to average assets ratio of at
least 4%.  As of June 30, 2009, the most recent notification from the
corresponding regulatory agency has categorized the Company as well capitalized
under the regulatory framework for prompt corrective action.  As of
June 30, 2009, the Company’s risk weighted capital to risk weighted assets, Tier
I capital to risk weighted assets and Tier I capital to average assets capital
ratios were 11.64%,10.60% and 8.49%, well above these minimum
guidelines.  The Company’s year to date return on average equity was
10.78% and year to date return on average assets was .66%.





Asset
Quality





The
following table presents information regarding our allowance for
loan  losses:





2009
                  
                  
                  2008Beginning
      balance
                  
                  $
                  11,303
                  
                  
                  $
                  8,250Less
      charge-offs:Commercial
      and industrial loans
                  
                  
                  240
                  
                  
                  
                  -Loans
      to individuals for household, family and other personal
      expenditures
                  
                  
                  37
                  
                  
                  
                  16All
      other loans (including overdrafts)
                  
                  
                  55
                  
                  
                  
                  31Total
      charge-offs
                  
                  
                  332
                  
                  
                  
                  47Recoveries
                  
                  
                  138
                  
                  
                  
                  46Net
      charge-offs
                  
                  
                  194
                  
                  
                  
                  (1
                  )Provision
      charged to current expense
                  
                  
                  3,000
                  
                  
                  
                  1,500Balance
      at June 30
                  
                  $
                  14,109
                  
                  
                  $
                  9,749Allowance
      for loan losses to loans
                  
                  
                  0.72
                  %
                  
                  
                  0.72
                  %Net
      charge-offs to average loans
                  
                  
                  0.01
                  %
                  
                  
                  -
                  %




18





The
determination of this amount as of any balance sheet date is subjective in
nature and requires material estimates based on historical experience, the
economic environment, trends in the portfolio, concentrations of loan balance,
specific reserves that need to be maintained for internally classified loans,
and other factors.  Management believes the allowance for loan losses
is adequate to absorb probable incurred losses inherent in the Bank’s loan
portfolio.





The table
below sets forth the amounts and categories of our non-performing assets at the
dates indicated.   As of June 30, 2009 the Company had $79 in
troubled debt restructures.





At
      June 30,
                  
                  
                  At
      December 31,2009
                  
                  
                  2008Non-accrual
      loans:Real
      estate loans, construction
                  
                  $
                  8,249
                  
                  
                  $
                  1,341Real
      estate loans, residential
                  
                  
                  328
                  
                  
                  
                  328Commercial
      and industrial loans
                  
                  
                  707
                  
                  
                  
                  178All
      other loans (including overdrafts)
                  
                  
                  8
                  
                  
                  
                  6Total
      non-accrual loans
                  
                  $
                  9,292
                  
                  
                  $
                  1,853Loans
      greater than 90 days delinquent and still accruing:Real
      estate loans, construction
                  
                  $
                  8,484
                  
                  
                  $
                  2,261Real
      estate loans, other:Commercial
                  
                  
                  1,959
                  
                  
                  
                  1,131Residential
                  
                  
                  9,325
                  
                  
                  
                  15Commercial
      and industrial loans
                  
                  
                  524
                  
                  
                  
                  -Total
      accruing loans past due 90 days or more
                  
                  $
                  20,292
                  
                  
                  $
                  3,407Total
      nonperforming loans
                  
                  $
                  29,584
                  
                  
                  $
                  5,260Other
      nonperforming assets:Other
      real estate owned
                  
                  $
                  6,972
                  
                  
                  $
                  6,972Total
      nonperforming assets
                  
                  $
                  36,556
                  
                  
                  $
                  12,232Total
      nonperforming loans to total loans
                  
                  
                  1.50
                  %
                  
                  
                  .31
                  %Total
      nonperforming assets to total assets
                  
                  
                  1.56
                  %
                  
                  
                  .66
                  %Allowance
      for loan losses to total nonperforming loans
                  
                  
                  47.69
                  %
                  
                  
                  214.89
                  %





Loans
past due 90 days or more remain on accrual status if they are both well secured
and in the process of collection.  All other loans 90 days or more past due
or loans where management has serious doubts about further collectability of
principal or interest, even though the loan is currently performing, are placed
on nonaccrual status. When a loan is placed on nonaccrual status, unpaid
interest credited to income is reversed.  Interest received on
nonaccrual loans generally is applied against principal.  Generally,
loans are restored to accrual status when the obligation is brought current, has
performed in accordance with the contractual terms for a reasonable period of
time and the ultimate collectability of the total contractual principal and
interest is no longer in doubt.





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 receivable, net, 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.  The
level of unallocated reserves was arrived at after an in depth analysis of the
unique characteristics of the Company’s portfolio.  Factors such as
the high growth rate of the portfolio over the past several years, the
historical performance of the portfolio including delinquencies, net charge-off
ratios and the level of nonperforming loans have been considered in determining
the level of unallocated reserves.  Additional factors including local
economic conditions, loan concentrations, and the experience level of lending
staff, all contribute to the final determination of the unallocated portion of
the allowance.


19





2009Amount
                  
                  
                  %
      of Total
                    LoansCommercial
                  
                  $
                  1,533
                  
                  
                  
                  2.63
                  %Real
      estate
                  
                  
                  11,408
                  
                  
                  
                  97.25Consumer
      and other
                  
                  
                  119
                  
                  
                  
                  0.12Unallocated
                  
                  
                  1,049Total
      at June 30,
                  
                  $
                  14,109
                  
                  
                  
                  100.0
                  %





Nonperforming
loans increased during the first six months of 2009 from $5,260 to $29,584 and
now represent 1.50% of total loans as compared to .31% at December 31,
2008.  This ratio compares to 3.02%  representing the March 31, 2009
FDIC peer group ratio of 316 banks in the nation with assets from $1 billion to
$3 billion.  Over 83% of nonperforming loans are represented by six
loans.  One of these six, a single family home loan in the amount of $7,951
secured with a first mortgage on property valued at $10,300, is in the process
of foreclosure and is expected to take an extended period of time to
collect.  Another in the amount of $8,000 is secured with a first mortgage
on property valued at $19,000 which has been placed in foreclosure but is
expected to self correct within thirty days.  Three of these loans totaling
$7,393 are secured by real estate with appraised values totaling $13,505. 
One loan in the amount of $1,341 is secured by real estate re-appraised at
$1,300.  Management has established a specific reserve on this loan in the
amount of $230.





Our 30-89
day past due category of loans increased to $19,941 at June 30, 2009, a 131%
increase from $8,632 at December 31, 2008.  This delinquent loan
category represents fifteen loans.The holdover from the previous period, a
commercial mortgage in the amount of $1,423, continues to reduce its delinquency
and is expected to be fully current within sixty days.  One of the new
loans is a land acquisition loan in the amount of $5,699 secured with a first
mortgage on property appraised at $8,000.  Settlement to bring it
current in all respects is expected within thirty days.  A second loan
which is a commercial mortgage in the amount of $8,252 secured with property
valued at $11,350 is expected to self correct within 30 days. A third loan is a
construction loan in the amount of $2,177 on property valued at $3,900 which has
some minor litigation issues.  The remaining loans in this category
are either relatively minor and/or are not expected to require any substantial
reserves by the Company.





At June
30, 2009 and December 31, 2008, the Company had a total of $502,110 and $495,728
in interest only mortgage loans. These loans pose a potentially higher credit
risk because of the lack of principal amortization. However, management believes
the risk is mitigated through the Company’s loan terms and underwriting
standards, including its policies on loan-to-value ratios.





Offsetting
credit quality  trends has been a shift in the mix of the loan
portfolio to permanent residential and commercial mortgages from construction
lending. Residential and commercial mortgages comprised 77.05% of total
loans at June 30, 2009 compared to 73.77% at December 31,
2008. Construction loans made up 20.20% of total loans at June 30, 2009
compared to 23.04% at December  31, 2008.





Comparison
of Operating Results for the Six Months Ended June 30, 2009 and
2008





Net
income for the six months ended June 30, 2009 was $7,029 compared to $7,526 for
the comparable period in 2008, a decrease of 6.60%. The primary reason for the
decline in net income was the increased accrued expense for the FDIC special
assessment to be collected on September 30, 2009.  This special
assessment of $1,076  plus  the Company’s normal quarterly
assessment totaled $1,722, an increase over the assessment for the second
quarter of 2008 of $1,556 or 939.28%.   Also contributing to the
decreased net income for the first six months of 2009 as compared to the same
period in 2008 is the increased provision for loan losses.  This
increased provision was the result of the growth in the loan portfolio coupled
with increased nonperforming and past due loans resulting from the economic
downturn.





The
Company’s primary driver of  net income remains net interest income
which, despite an eighty four basis point drop in net interest margin for the
first six months of 2009 as compared to the same period in 2008, increased by
$6,650 due to growth in interest earning assets.  Another positive
trend has been the upward movement of net interst margin from the end of the
first quarter of 2009 to June 30, 2009 in the amount of thirty basis points,
primarily the result of the reallocation of excess cash into investment
securities.





The
following table details 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
basis.  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 non-performing loans, if any.  The yields and costs include
fees, which are considered adjustments to yields.  Non-accrual loans
are included in average loan balances.  Interest income on these loans
has not been recorded and therefore is not included.


20





AVERAGE  BALANCE
SHEET AND YIELD ANALYSIS





For the
      Six Months Ended
                          
                          
                          For the
      Six Months EndedJune
      30, 2009
                          
                          
                          June
      30, 2008Average
                          
                          
                          
                          
                          
                          Average
                          
                          
                          Average
                          
                          
                          
                          
                          
                          AverageBalance
                          
                          
                          Interest
                          
                          
                          Rate
                          
                          
                          Balance
                          
                          
                          Interest
                          
                          
                          RateASSETSInterest-earning
      assets:Investment
      securities:Taxable
                          
                          $
                          96,895
                          
                          
                          $
                          1,706
                          
                          
                          
                          3.52
                          %
                          
                          $
                          48,918
                          
                          
                          $
                          1,227
                          
                          
                          
                          5.02
                          %Nontaxable
                          
                          
                          10,662
                          
                          
                          
                          300
                          
                          
                          
                          5.63
                          
                          
                          
                          5,859
                          
                          
                          
                          171
                          
                          
                          
                          5.84Total
      investment securities
                          
                          
                          107,557
                          
                          
                          
                          2,006
                          
                          
                          
                          3.73
                          
                          
                          
                          54,777
                          
                          
                          
                          1,398
                          
                          
                          
                          5.10Loans
                          
                          
                          1,820,570
                          
                          
                          
                          53,542
                          
                          
                          
                          5.89
                          
                          
                          
                          1,153,028
                          
                          
                          
                          39,965
                          
                          
                          
                          6.94Federal
      funds sold
                          
                          
                          39,026
                          
                          
                          
                          30
                          
                          
                          
                          0.16
                          
                          
                          
                          16,147
                          
                          
                          
                          165
                          
                          
                          
                          2.02Term
      placements
                          
                          
                          50,010
                          
                          
                          
                          97
                          
                          
                          
                          0.39
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Other
      interest-earning assets
                          
                          
                          24,278
                          
                          
                          
                          307
                          
                          
                          
                          2.54
                          
                          
                          
                          9,022
                          
                          
                          
                          330
                          
                          
                          
                          7.36Total
      interest-earning assets
                          
                          
                          2,041,441
                          
                          
                          
                          55,982
                          
                          
                          
                          5.49
                          
                          
                          
                          1,232,974
                          
                          
                          
                          41,858
                          
                          
                          
                          6.80Noninterest-earning
      assets
                          
                          
                          97,163
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          80,593Total
      assets
                          
                          $
                          2,138,604
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          1,313,567LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesInterest-bearing
      liabilities:Savings,
      NOW and money market deposits
                          
                          $
                          708,502
                          
                          
                          $
                          6,649
                          
                          
                          
                          1.89
                          %
                          
                          $
                          475,536
                          
                          
                          $
                          6,119
                          
                          
                          
                          2.59
                          %Time
      deposits
                          
                          
                          805,077
                          
                          
                          
                          13,979
                          
                          
                          
                          3.50
                          
                          
                          
                          435,343
                          
                          
                          
                          9,195
                          
                          
                          
                          4.25Total
      interest-bearing deposits
                          
                          
                          1,513,579
                          
                          
                          
                          20,628
                          
                          
                          
                          2.75
                          
                          
                          
                          910,879
                          
                          
                          
                          15,314
                          
                          
                          
                          3.38Federal
      Home Loan Bank borrowings
                          
                          
                          326,853
                          
                          
                          
                          4,486
                          
                          
                          
                          2.77
                          
                          
                          
                          170,693
                          
                          
                          
                          2,327
                          
                          
                          
                          2.74Subordinated
      debt
                          
                          
                          38,888
                          
                          
                          
                          993
                          
                          
                          
                          5.11
                          
                          
                          
                          31,514
                          
                          
                          
                          1,038
                          
                          
                          
                          6.55Total
      interest-bearing liabilities
                          
                          
                          1,879,320
                          
                          
                          
                          26,107
                          
                          
                          
                          2.80
                          
                          
                          
                          1,113,086
                          
                          
                          
                          18,679
                          
                          
                          
                          3.37Noninterest-bearing
      liabilities:Demand
      deposits
                          
                          
                          115,567
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          106,431Other
      liabilities
                          
                          
                          13,304
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          8,311Total
      liabilities
                          
                          
                          2,008,191
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,227,828Stockholders'
      equity
                          
                          
                          130,413
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          85,739Total
      liabilities & stockholders’ equity
                          
                          $
                          2,138,604
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          1,313,567Net
      interest income/interest rate spread
                          
                          
                          
                          
                          
                          
                          29,875
                          
                          
                          
                          2.69
                          %
                          
                          
                          
                          
                          
                          
                          23,179
                          
                          
                          
                          3.43
                          %Net
      interest earning assets/net interest margin
                          
                          $
                          162,121
                          
                          
                          
                          
                          
                          
                          
                          2.92
                          %
                          
                          $
                          119,888
                          
                          
                          
                          
                          
                          
                          
                          3.76
                          %Less:
      Tax equivalent adjustment
                          
                          
                          
                          
                          
                          
                          106
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          60Net
      interest income
                          
                          
                          
                          
                          
                          $
                          29,769
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          23,119





During
2008, the greatly increased volume of interest earning assets was largely offset
by decreased yields on those assets. During  2008, the Federal Reserve
Bank reduced the target federal funds rate by 400 basis points with a
corresponding drop in the prime rate. With an average balance of $440,996 in
floating prime rate loans during 2008, the interest income for the first six
months of 2009 was also greatly reduced putting downward pressure on the net
interest margin.  Another negative impact on the margin during
the first six months of 2009 was the increased average balances in federal funds
sold and term placements in the CDARs network.  Deposits flowed into
the Company’s newest branches at a very rapid pace during the first three months
of 2009.  Customers’ “flight to safety” was evidenced by the level of
new accounts that were opened during the quarter.  New loan approval
rates were high, as was evidenced by monthend and quarterend commitment levels,
but the timing of the new deposits and the closing of the new loans did not
match and consequently the Company held excess cash that was earning a minimal
level of interest.  This mismatch was largely corrected during the
second quarter when excess cash was redirected into significantly higher earning
loans and  investment securities.  Deposit growth slowed
during the second quarter, and loan closings outpaced deposit
collection.  As of June 30, 2009  the total balance in term
placements and  federal funds sold was reduced to $8,764.





Interest
bearing liabilities, mainly deposits, have also increased
significantly.  Throughout the first six months of 2009 savings, NOW
and money market deposits have gradually increased as a percentage of total
deposits.  In addition, time deposits have been repricing at lower
current market rates.  The combination of a larger mix of lower cost
core deposits and lower rate time deposits  has offset the larger
volume of  interest bearing liabilities and reduced the average cost
of  interest bearing liabilities.  The average balance of
FHLB borrowings was significantly higher during the first half of 2009 as a
result of the advances taken during early 2008 when funding for new loan
originations was not  available through deposits and often was less
expensive through FHLB borrowings.  The average rate paid on the
Company’s trust preferred securities during the first six months of 2008 was
6.55%.  It has  decreased by 141  basis points
during the first six months of 2009, as two of the three issuances are based on
the LIBOR, which declined over 200 basis points from June 30, 2008.





The
provision for loan losses was $3,000 for the first six months of 2009 and $1,500
for the same period in 2008. The increase in the provision expense was
mainly the result of continued growth in total loans coupled with reduced asset
quality ratios due to the economic recession.  Based on our continuing
review of the overall loan portfolio, a 100% increase in the provision for the
first six months of 2009 compared to the first six months of 2008 was
adequate.  In view of the adverse conditions in the local and national
economy as well as the growth in our loan portfolio, there can be no assurance
that our provision for loan losses will not be higher in future
periods.





Noninterest
income increased by 3.12% due largely to the net gain on sale of investment
securities. During the first quarter of 2009 the Company opted to realize gains
in the mortgage backed securities portfolio in anticipation of accelerating
prepayments as well as the desire to shift a portion of the portfolio into lower
risk securities.  Income from trust and investment management services
decreased by 13.03% due to reduced net asset values.  Service charge
income increased  by 8.33%  due to an increased volume of
transaction  accounts as well as the new overdraft program entered
into during 2008 which collects fee income in return for payment of low level
overdrafts.  Gross revenues from the Company’s insurance subsidiary
declined slightly, by 1.19%, due to softened insurance markets as well as
reduced premiums.  The gain in  cash surrender value of
company owned life insurance decreased by 40.86%, indicative of overall reduced
rates of return. Other noninterest income decreased by 2.38%, mainly the result
of decreased loan fees generated from short term loans.


21





Noninterest
expense increased by 39.55%.  FDIC assessment expenses increased
dramatically from $166 at June 30, 2008 to $1,722 at June 30,
2009.  $1,076 of the FDIC assessment was the result of a special
assessment during the second quarter of 2009.  Other increases in
noninterest expense relate to the growth in branches from June 30, 2008 to June
30, 2009 from 17 to 21and the number of full time equivalent employees from 225
to 270.   A majority of the increases in salary, benefits,
occupancy and equipment, business development and other overhead expenses relate
in large part to the costs associated with these additional locations and
additional staff.  Other increases in these categories are the result
of the usual increases associated with the costs of doing business such
as  increases in health insurance premiums of 20%.





Provision
for income taxes decreased by 1.28% for the six month period ended June 30,
2009, mainly the result in lower income before taxes.





Liquidity
and Commitments





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 of investment securities, principal
reductions on mortgage-backed securities, “unpledged” securities, overnight
federal funds sold, 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 for anticipated loan growth and potential deposit
outflows.





On June
30, 2009 total loan commitments outstanding were $348,533, of which $137,768
represented available lines on funded loans, $192,025 represented available
lines on unfunded loans and $18,740 represented letters of credit.  At
June 30, 2008 these commitments totaled $409.8 million, of which $211.6 million
represented available lines on funded loans, $181.3 million represented
available lines on unfunded loans and $16.9 million represented letters of
credit.  As of June 30, 2009, $509,316 of certificates of deposit were
scheduled to mature in the next twelve months.  Based on historical
analysis, management believes that most of such certificates of deposit will
remain with the Bank. However, if these maturing deposits do not remain with us,
we will be required to seek other sources of funds.  Depending on
market conditions, we may be required to pay higher rates on such deposits or
borrowings than we currently pay on these funds.





The
Company’s principal source of liquidity is dividends from the
Bank.  The dividends received from the Bank are used primarily for
dividends to the stockholders, and also for interest payments on the
subordinated debt.





Recent
Regulatory and Accounting Developments




In April
2009, the FASB issued FSP No. 115-2 and No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments,which amends existing guidance for
determining whether impairment is other-than-temporary (“OTTI”) for debt
securities.  The FSP requires an entity to assess whether it intends
to sell, or it is more likely than not that it will be required to sell a
security in an unrealized loss position before recovery of its amortized cost
basis.  If either of these criteria is met, the entire difference
between amortized cost and fair value is recognized in earnings.  For
securities that do not meet the aforementioned criteria, the amount of
impairment recognized in earnings is limited to the amount related to credit
losses, while impairment related to other factors is recognized in other
comprehensive income.    Additionally, the FSP expands and
increases the frequency of existing disclosures about other-than-temporary
impairments for debt and equity securities.  This FSP is effective for
interim and annual reporting periods ending after June 15, 2009. Through the
period ended March 31, 2009, the Company recognized cumulative other
-than-temporary impairment charges of $865 for various securities. The Company
adopted the FSP effective April 1, 2009 and reversed $312, net of tax of $175,
for the non-credit portion of the cumulative OTTI charge. The adoption was
recognized as a cumulative effect adjustment that increased retained earnings
and decreased accumulated other comprehensive income $312, net of tax of $175,
as of April 1, 2009.   As a result of implementing the new
standard, the amount of OTTI recognized in income for the period was $255, gross
of tax. Had the standard not been issued, the amount of OTTI that would have
been recognized in income for the period would have been $900, gross of
tax.




In April
2009, the FASB issued FSP No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset and Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. This FSP
emphasizes that even if there has been a significant decrease in the volume and
level of activity, the objective of a fair value measurement remains the
same.  Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants.  The FSP
provides a number of factors to consider when evaluating whether there has been
a significant decrease in the volume and level of activity for an asset or
liability in relation to normal market activity.   In addition,
when transactions or quoted prices are not considered orderly, adjustments to
those prices based on the weight of available information may be needed to
determine the appropriate fair value.  The FSP also requires increased
disclosures.  This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied
prospectively.  Early adoption is permitted for periods ending after
March 15, 2009.  The adoption of this FSP at June 30, 2009 did not
have a material impact on the results of operations or financial
position.




In
April 2009, the FASB issued FSP No. 107-1 and APB 28-1,Interim Disclosures about Fair
Value of Financial Instruments. This FSP amends FASB Statement
No. 107,Disclosures about Fair
Value of Financial Instruments , to require disclosures about fair value
of financial instruments for interim reporting periods of publicly traded
companies that were previously only required in annual financial statements.
This FSP is effective for interim reporting periods ending after June 15,
2009.  The adoption of this FSP at June 30, 2009 did not have a
material impact on the results of operations or financial position as it only
required disclosures which are included in Note 7.





In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(SFAS No. 157).  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset.  The
standard is effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No.
157. This FSP delayed the effective date of SFAS No. 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value on a recurring basis (at least annually) for fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years. The adoption of SFAS No. 157 did not have a material impact on the
Company’s consolidated financial position or results of
operations.


22





In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted In Share-Based Payment Transactions Are Participating
Securities.  This FSP addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share (EPS) under the two-class method described in paragraphs 60
and 61 of FASB Statement No. 128, Earnings per Share.  FSP EITF 03-6-1
is effective for years beginning after December 15, 2008 and interim periods
within those years.  Prior earnings per share amounts have been
retrospectively adjusted to conform with the provisions of this FSP. Adoption of
the FSP in 2009 did not have a material impact to the Company’s financial
statements or earnings per share calculation.





In May
2009, the FASB issued SFAS No. 165 “Subsequent Events.”  The objective
of this statement is to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued.  The
Statement is effective for interim and annual financial periods ending after
June 15, 2009.  The adoption this quarter resulted in additional
disclosure, but no material impact to the results over operations or financial
position.





On June
12, 2009, the FASB issued Statements No. 166, Accounting for Transfers of
Financial Assets, and No. 167, Amendments to FASB Interpretation
No. 46(R).  Statement No. 166 is a revision to FASB Statement
No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and will require more information about transfers of
financial assets, including securitization transactions, and where entities have
continuing exposure to the risks related to transferred financial assets. It
eliminates the concept of a “qualifying special-purpose entity,” changes the
requirements for derecognizing financial assets, and requires additional
disclosures.   Statement No. 167 amends FIN 46(R) to replace the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with a qualitative approach focused on identifying which enterprise has
the power to direct the activities of a variable interest entity (VIE) 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.   Unlike FIN 46 (R), this Statement requires ongoing
reconsideration of whether (1) an entity is a VIE and (2) an enterprise is the
primary beneficiary of a VIE.  Statement Nos. 166 and 167 will be
effective at the start of the first fiscal year beginning after November 15,
2009.  The adoption of these standards are not expected to impact the
Company’s consolidated financial statements.




On June
29, 2009, the FASB issued FASB Statement No. 168, The
FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles – A Replacement of
FASB Statement No. 162.With
the issuance of this statement, theFASB
Accounting Standards Codification(“Codification”) became the source of
authoritative U.S. generally accepted accounting principles (GAAP) recognized by
the FASB to be applied by nongovernmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (SEC) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of this Statement, the Codification
superseded all then-existing non-SEC accounting and reporting standards. All
other nongrandfathered non-SEC accounting literature not included in the
Codification became nonauthoritative. The issuance of the Codification is not
intended to change GAAP.  This Statement is effective for financial
statements issued for interim and annual periods ending after September 15,
2009.  The adoption of this standard is not expected to impact the
Company’s consolidated financial statements.




The SEC's
Office of the Chief Accountant published Staff Accounting Bulletin (SAB) No.
112. SAB 112 which was effective June 10, 2009 and amends or rescinds portions
of the interpretive guidance included in the Staff Accounting Bulletin Series to
make the relevant interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. Specifically,
SAB 112 aims to bring existing guidance into conformity with recent
pronouncements by the FASB, including FASB Statement No. 141 (Revised December
2007), Business
Combinations, and FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements.The adoption of this
bulletin is not expected to impact the Company’s consolidated financial
statements.





Item 3.-
Quantitative and Qualitative Disclosures About Market Risk





Significant
changes in the level of market interest rates may adversely affect the value of
the Company’s interest-earning assets.  This change in rates could
also affect the level of net interest income and ultimately net income of the
Company.  The Company utilizes the results of a dynamic
simulation  model to quantify the estimated exposure to net interest
income fluctuations resulting from sustained interest rate
changes.  Management monitors simulated net interest income
sensitivity over a rolling two year horizon. This simulation captures the impact
of changing interest rates on the interest income received and interest expense
paid on all interest sensitive assets and liabilities.  This
sensitivity is then compared to policy limits internally set by the Asset
Liability Committee (“ALCO”) that specify a maximum tolerance level for net
interest income exposure over a one year horizon given both an upward and
downward shift in interest rates. The ALCO will continue to adjust this approach
as market conditions warrant.





This
simulation  modeling is done on a quarterly basis, most recently as
of  May 31, 2009. Only a 100 and 200 parallel and pro rata basis point
upward shift in rates was assumed over a twenty four month planning
horizon.  As short-term interest rates remained low during the first
half of 2009, it could not be assumed in projections that further reductions in
rates would produce meaningful results The following table reflects the
Company’s income sensitivity analysis over a one year time frame as of May 31,
2009 .  As of May 31, 2009, the Company’s change in net interest
income that would result from the respective potential interest rate shocks was
within policy limits. The results of this simulation have been reviewed with the
President, the Board of Directors and senior management.


23





Change In Interest Rates
                  
                  As
      of May 31, 2009In Basis Points
                  
                  Potential
      Change In Net(Rate Shock)
                  
                  Interest$ Change
                  
                  
                  % ChangeUp
      200 basis points
                  
                  
                  8,385
                  
                  
                  
                  9.01Up
      100 basis points
                  
                  
                  4,300
                  
                  
                  
                  4.62Static
                  
                  
                  -
                  
                  
                  
                  -Down
      100 basis points
                  
                  NM
                  
                  
                  NM





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, 2009.  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 –None





Item 1A.
            Risk
      Factors





The
following risk factors represent material updates and additions to the risk
factors previously disclosed in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2008 (“Form 10-K”).  The risk factors below
should be read in conjunction with the risk factors and other information
disclosed in our Form 10-K. Additional risks not presently known to us, or that
we currently deem immaterial, may also adversely affect our business, financial
condition or results of operations.





Any
Future FDIC Special Assessments or Increases in Insurance Premiums Would
Adversely Impact Our Earnings





On May
22, 2009, the FDIC adopted a final rule levying a five basis point special
assessment on each insured depository institution's assets minus Tier 1 capital
as of June 30, 2009.  The special assessment is payable on September
30, 2009.  We recorded an expense of $1,076 during the quarter ended
June 30, 2009 to reflect the special assessment.  The final rule
permits the FDIC’s Board of Directors to levy up to two additional special
assessments of up to five basis points each during 2009 if the FDIC estimates
that the Deposit Insurance Fund reserve ratio will fall to a level that the
FDIC’s Board of Directors believes would adversely affect public confidence or
to a level that will be close to or below zero.  The FDIC has publicly
announced that it is probable that it will levy an additional special assessment
of up to five basis points later in 2009, the amount and timing of which are
currently uncertain.  Any further special assessments that the FDIC
levies will be recorded as an expense during the appropriate
period.  In addition, the FDIC materially increased the general
assessment rate and, therefore, our FDIC general insurance premium expense will
increase substantially compared to prior periods.





Our
Expanding Branch Network May Adversely Affect Our Financial
Performance





We are
planning, subject to market conditions, municipal approvals and other factors,
to open approximately nine new branches within the next 12 months. There are
considerable costs involved in opening branches and new branches generally
require a period of time to generate sufficient revenues to offset their costs.
It takes time for a new branch to gather sufficient loans and deposits to
generate enough income to offset its expenses, some of which, like salaries and
occupancy expense, are relatively fixed costs.  No assurance can be
given that the new branches will achieve profitability.





Item 2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds - Issuer Purchases of
      Equity Securities – The issuer did not repurchase anyof
      its shares during the six month period ended June 30,
  2009.





Item 3.
            Defaults
      upon Senior Securities – None





Item 4.
            Submission
      of Matters to a Vote of Security
Holders





There
were three propositions voted on at the Annual Meeting of Shareholders
(“meeting”)  held May 7, 2009; (1) the election of three directors to
serve a term of three years, (2) a proposal to amend the Company’s Certificate
of Incorporation to increase the number of authorized Common Shares from
20,000,000 shares, par value $0.01 to 35,000,000 shares, par value $0.01 and
authorized Preferred Shares from 100,000 shares, par value $0.01 to 1,000,000
shares, par value $0.01, and (3) the approval of the appointment of Crowe
Horwath LLP, as the Company’s independent auditors for the year ending December
31, 2009.





The
directors elected at the meeting  were Bradley E. Rock, Patricia C.
Delaney and Joseph M. Winters.  The directors continuing in office
were Patrick A. Given, Robert W. Scherdel, Hyukmun Kwon, Barry M. Seigerman,
Manny Schwartz and George H. Duncan.


24





The
voting results on the propositions were as follows:  (1) Proposition
No. 1, Election of  Directors  (a) Bradley E. Rock – votes
cast for – 9,938,957, votes cast against – 879,775, (b) Patricia C. Delaney –
Votes cast for – 9,907,180, votes cast against – 911,552 and (c) Joseph M.
Winters – votes cast for – 10,216,120, votes cast against –
602,612.  (2) Proposition No. 2, proposal to amend the Company’s
Certificate of Incorporation to increase the number of authorized Common Shares
from 20,000,000 shares, par value $0.01 to 35,000,000 shares, par value $0.01
and authorized Preferred Shares from 100,000 shares, par value $0.01 to
1,000,000 shares, par value $0.01 – votes cast for –7,012,978, votes cast
against – 1,645,764.  (3) Proposition No. 3, Approval of the
Appointment of Crowe Horwath LLP, as Independent Auditors for the Year Ending
December 31, 2009 – votes cast for – 10,614,117, votes cast against –
164,480.





Item
5.       Other Information –
None





Item
6.       Exhibits and Reports on Form
8-K




Exhibit
      3.1
              Certificate
      of Incorporationas
      amended through May 7, 2009


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 Principal Executive Officer and Principal Financial Officer pursuant to
      Rule 13a-14(b) and 18 U.S.C. Section
1350





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
      7, 2009/s/ BRADLEY E. ROCKBradley
      E. Rock, Chairman, Presidentand
      Chief Executive Officer(Principal
      Executive Officer)/s/ ANITA M. FLOREKAnita
      M. Florek, Executive Vice Presidentand
      Chief Financial Officer(Principal
      Financial and Accounting
Officer)




25