##### Table of Contents

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United States

Securities and Exchange Commission

Washington, D.C. 20549



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Form 10-Q



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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended June 30, 2006

Commission File #0 - 13314



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SMITHTOWN BANCORP, INC.

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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 Office)                        |  | (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 is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):



|                         |  |                        |  |                       
|------------------------ |  | ---------------------- |  | ----------------------
|Large accelerated filer ̈ |  | Accelerated filer    x |  | Non-accelerated filer ̈

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 8, 2006

8,885,589



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##### Table of Contents

SMITHTOWN BANCORP, INC.

INDEX



|                               |  |                                                                                                                      |  |   
|------------------------------ |  | -------------------------------------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                                                
|                               | 
|Part I - FINANCIAL INFORMATION |  |                                                                                                                     
|                               |  |                                                                                                                     
|Item 1.                        |  | Financial Statements                                                                                                 |  |   
|                               |  |                                                                                                                     
|                               |  | Unaudited Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005                                      |  | 4 
|                               |  |                                                                                                                     
|                               |  | Unaudited Consolidated Statements of Income for the Three Months Ended June 30, 2006 and 2005                        |  | 5 
|                               |  |                                                                                                                     
|                               |  | Unaudited Consolidated Statements of Income for the Six Months Ended June 30, 2006 and 2005                          |  | 6 
|                               |  |                                                                                                                     
|                               |  | Unaudited Consolidated Statements of Changes in Stockholders Equity For the Six Months Ended June 30, 2006 and 2005 |  | 7 
|                               |  |                                                                                                                     
|                               |  | Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005                      |  | 8 
|                               |  |                                                                                                                     
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                |  | 12
|                               |  |                                                                                                                     
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                           |  | 18
|                               |  |                                                                                                                     
|Item 4.                        |  | Controls and Procedures                                                                                              |  | 19
|                               | 
|Part II - OTHER INFORMATION    |  |                                                                                                                     
|                               |  |                                                                                                                     
|Item 1.                        |  | Legal Proceedings - None                                                                                             |  |   
|                               |  |                                                                                                                     
|                               |  | Risk Factors  No change in factors as reported in Registrants Annual Report on Form 10-K                           |  |   
|                               |  |                                                                                                                     
|Item 2.                        |  | Change in Securities and Use of Proceeds                                                                             |  |   

Issuer Purchases of Equity Securities



|                               |  |                                         |  |                                     |  |                                                                                       |  |                                                                                                                 
|------------------------------ |  | --------------------------------------- |  | ----------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|                               |  | (a)                                     |  | (b)                                 |  | (c)                                                                                   |  | (d)                                                                                                             
|Period                         |  | TotalNumberof Shares(or Units)Purchased |  | Average PricePaid PerShare(or Unit) |  | Total Number ofShares(or Units)Purchased asPart of
PubliclyAnnouncedPlans or Programs |  | MaximumNumber (or ApproximateDollar Value) ofShares(or Units)That May Yet BePurchased Underthe Plans or Programs
|April 1, 2006  April 30, 2006 |  | 1,800                                   |  | 24.44                               |  | 1,800                                                                                 |  | 132,675                                                                                                         
|May 1, 2006  May 31, 2006     |  | 4,200                                   |  | 26.06                               |  | 4,200                                                                                 |  | 128,475                                                                                                         
|June 1, 2006  June 30, 2006   |  | 0                                       |  | 0                                   |  | 0                                                                                     |  | 0                                                                                                               
|                               |  |                                         |  |                                     |  |                                                                                       |  |                                                                                                                 
|Total                          |  | 6,000                                   |  | 25.57                               |  | 6,000                                                                                 |  | 128,475                                                                                                         



|        |  |                                                                                                                            |  | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | 
|Item 3. |  | Defaults upon Senior Securities  None                                                                                     |  | 
|        |  |                                                                                                                           
|Item 4. |  | Submission of Matters to a Vote of Security Holders  Election of three directors to the Board of Directors of the Bancorp |  | 
|        |  |                                                                                                                           
|Item 5. |  | Other Information  None                                                                                                   |  | 



2



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##### Table of Contents

Item 6 Exhibits and Reports on Form 8-K

Exhibits



|                                                      |  |                                                                                               
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|Exhibit NumberReferred to inItem 601 ofRegulation S-K |  | Description of Exhibit                                                                        
|31.1                                                  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)                           
|                                                      | 
|31.2                                                  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)                           
|                                                      | 
|32.1                                                  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350
|                                                      | 
|32.2                                                  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350

(2) Reports on Form 8-K

Results of Operation and Financial Condition  Filed April 24, 2006

Incorporated by Reference

Other Events
 Filed May 31, 2006

Incorporated by Reference

Other Events  Filed July 5, 2006

Incorporated by Reference

Signatures



3



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##### Table of Contents

SMITHTOWN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share
data)



|                                                                                                                     |  |               |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                     |  | As of         |        
|                                                                                                                     |  | June 30, 2006 |         |   | December 31, 2005 |  
|ASSETS                                                                                                               |  |               |         |   |                   |   |         |  
|Cash and due from banks                                                                                              |  | $             | 12,718  |   |                   | $ | 13,107  |  
|Federal funds sold                                                                                                   |  |               | 8,547   |   |                   |   | 360     |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|                                                                                                                     |  |              
|Total cash and cash equivalents                                                                                      |  |               | 21,265  |   |                   |   | 13,467  |  
|Investment securities:                                                                                               |  |               |         |   |                   |   |         |  
|Available for sale:                                                                                                  |  |               |         |   |                   |   |         |  
|Obligations of U.S. treasury                                                                                         |  |               | 6,956   |   |                   |   | 6,896   |  
|Obligations of U.S. government agencies                                                                              |  |               | 93,612  |   |                   |   | 84,602  |  
|Mortgage - backed securities                                                                                         |  |               | 3,806   |   |                   |   | 8,080   |  
|Obligations of state and political subdivisions                                                                      |  |               | 11,774  |   |                   |   | 13,523  |  
|Other securities                                                                                                     |  |               | 1,999   |   |                   |   | 1,990   |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|                                                                                                                     |  |              
|Total securities available for sale                                                                                  |  |               | 118,147 |   |                   |   | 115,091 |  
|Held to maturity:                                                                                                    |  |               |         |   |                   |   |         |  
|Mortgage-backed securities                                                                                           |  |               | 62      |   |                   |   | 89      |  
|Obligations of state and political subdivisions                                                                      |  |               | 309     |   |                   |   | 1,012   |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total securities held to maturity (estimated fair value $373 in 2006 and $1,135 in 2005)                             |  |               | 371     |   |                   |   | 1,101   |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total investment securities                                                                                          |  |               | 118,518 |   |                   |   | 116,192 |  
|                                                                                                                     |  |              
|Restricted securities                                                                                                |  |               | 4,159   |   |                   |   | 6,338   |  
|Loans                                                                                                                |  |               | 786,413 |   |                   |   | 698,421 |  
|Less: allowance for loan losses                                                                                      |  |               | 7,073   |   |                   |   | 5,964   |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Loans, net                                                                                                           |  |               | 779,340 |   |                   |   | 692,457 |  
|                                                                                                                     |  |              
|Bank premises and equipment                                                                                          |  |               | 18,915  |   |                   |   | 18,446  |  
|                                                                                                                     |  |              
|Other assets                                                                                                         |  |               |         |   |                   |   |         |  
|Cash value of bank-owned life insurance                                                                              |  |               | 17,893  |   |                   |   | 17,575  |  
|Goodwill                                                                                                             |  |               | 481     |   |                   |   | 481     |  
|Intangible assets                                                                                                    |  |               | 2,357   |   |                   |   | 2,831   |  
|Other                                                                                                                |  |               | 13,258  |   |                   |   | 10,495  |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total other assets                                                                                                   |  |               | 33,989  |   |                   |   | 31,382  |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total assets                                                                                                         |  | $             | 976,186 |   |                   | $ | 878,282 |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                 |  |               |         |   |                   |   |         |  
|Liabilities                                                                                                          |  |               |         |   |                   |   |         |  
|Deposits:                                                                                                            |  |               |         |   |                   |   |         |  
|Demand (non-interest bearing)                                                                                        |  | $             | 101,274 |   |                   | $ | 95,828  |  
|Money market                                                                                                         |  |               | 247,967 |   |                   |   | 217,386 |  
|NOW                                                                                                                  |  |               | 35,259  |   |                   |   | 31,427  |  
|Savings                                                                                                              |  |               | 46,391  |   |                   |   | 45,481  |  
|Time                                                                                                                 |  |               | 397,343 |   |                   |   | 306,803 |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total deposits                                                                                                       |  |               | 828,234 |   |                   |   | 696,925 |  
|                                                                                                                     |  |              
|Dividends payable                                                                                                    |  |               | 355     |   |                   |   | 355     |  
|Other borrowings                                                                                                     |  |               | 62,000  |   |                   |   | 107,949 |  
|Subordinated debt                                                                                                    |  |               | 18,217  |   |                   |   | 11,000  |  
|Other liabilities                                                                                                    |  |               | 6,303   |   |                   |   | 6,203   |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                    |  |               | 915,109 |   |                   |   | 822,432 |  
|                                                                                                                     |  |              
|Stockholders equity                                                                                                 |  |               |         |   |                   |   |         |  
|Common Stock - $.01 par value (20,000,000 shares authorized: 10,750,921 shares issued; 8,885,589 shares outstanding) |  |               | 108     |   |                   |   | 108     |  
|Additional paid in capital                                                                                           |  |               | 3,994   |   |                   |   | 4,372   |  
|Unearned stock awards                                                                                                |  |               |        |   |                   |   | (91     | )
|Retained earnings                                                                                                    |  |               | 68,037  |   |                   |   | 62,124  |  
|Accumulated other comprehensive loss                                                                                 |  |               | (1,000  | ) |                   |   | (601    | )
|                                                                                                                     |  |               |         |   |                   |   |         |  
|                                                                                                                     |  |               | 71,139  |   |                   |   | 65,912  |  
|Treasury stock (1,865,331 shares at cost)                                                                            |  |               | (10,062 | ) |                   |   | (10,062 | )
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total stockholders equity                                                                                           |  |               | 61,077  |   |                   |   | 55,850  |  
|                                                                                                                     |  |               |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                           |  | $             | 976,186 |   |                   | $ | 878,282 |  
|                                                                                                                     |  |               |         |   |                   |   |         |  

See notes to consolidated financial statements.



4



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##### Table of Contents

SMITHTOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)



|                                                    |  |                                     |           |      |   |          
|--------------------------------------------------- |  | ----------------------------------- | --------- | ---- | - | ---------
|                                                    |  | For the Three Months Ended June 30,
|                                                    |  | 2006                                |           | 2005
|Interest income                                     |  |                                     |           |      |   |          
|Loans                                               |  | $                                   | 15,210    |      | $ | 10,191   
|Federal funds sold                                  |  |                                     | 69        |      |   | 125      
|Investment securities:                              |  |                                     |           |      |   |          
|Taxable:                                            |  |                                     |           |      |   |          
|Obligations of U.S. treasury                        |  |                                     | 62        |      |   | 61       
|Obligations of U.S. government agencies             |  |                                     | 1,082     |      |   | 795      
|Mortgage - backed securities                        |  |                                     | 45        |      |   | 44       
|Other securities                                    |  |                                     | 22        |      |   | 35       
|                                                    |  |                                     |           |      |   |          
|Subtotal                                            |  |                                     | 1,211     |      |   | 935      
|Exempt from federal income taxes:                   |  |                                     |           |      |   |          
|Obligations of state & political subdivisions       |  |                                     | 118       |      |   | 112      
|Other                                               |  |                                     | 58        |      |   | 53       
|                                                    |  |                                     |           |      |   |          
|Total interest income                               |  |                                     | 16,666    |      |   | 11,416   
|                                                    |  |                                     |           |      |   |          
|Interest expense                                    |  |                                     |           |      |   |          
|Money market accounts (including savings)           |  |                                     | 2,165     |      |   | 969      
|Time deposits of $100,000 or more                   |  |                                     | 2,167     |      |   | 797      
|Other time deposits                                 |  |                                     | 1,721     |      |   | 1,243    
|Other borrowings                                    |  |                                     | 677       |      |   | 588      
|Subordinated debt                                   |  |                                     | 338       |      |   | 169      
|                                                    |  |                                     |           |      |   |          
|Total interest expense                              |  |                                     | 7,068     |      |   | 3,766    
|                                                    |  |                                     |           |      |   |          
|Net interest income                                 |  |                                     | 9,598     |      |   | 7,650    
|Provision for loan losses                           |  |                                     | 500       |      |   | 85       
|                                                    |  |                                     |           |      |   |          
|Net interest income after provision for loan losses |  |                                     | 9,098     |      |   | 7,565    
|                                                    |  |                                     |           |      |   |          
|Noninterest income                                  |  |                                     |           |      |   |          
|Trust and investment services                       |  |                                     | 123       |      |   | 111      
|Service charges on deposit accounts                 |  |                                     | 472       |      |   | 504      
|Revenues from insurance agency                      |  |                                     | 943       |      |   | 897      
|Net gain (loss) on sales of investment securities   |  |                                     |          |      |   | 9        
|Increase in cash value of bank owned life insurance |  |                                     | 161       |      |   | 159      
|Other                                               |  |                                     | 612       |      |   | 416      
|                                                    |  |                                     |           |      |   |          
|Total noninterest income                            |  |                                     | 2,311     |      |   | 2,096    
|                                                    |  |                                     |           |      |   |          
|Noninterest expense                                 |  |                                     |           |      |   |          
|Salaries                                            |  |                                     | 2,797     |      |   | 2,478    
|Pension and other employee benefits                 |  |                                     | 605       |      |   | 559      
|Net occupancy expense of bank premises              |  |                                     | 858       |      |   | 826      
|Furniture and equipment expense                     |  |                                     | 495       |      |   | 442      
|Amortization of intangible assets                   |  |                                     | 137       |      |   | 36       
|Other                                               |  |                                     | 1.150     |      |   | 954      
|                                                    |  |                                     |           |      |   |          
|Total noninterest expense                           |  |                                     | 6,042     |      |   | 5,295    
|                                                    |  |                                     |           |      |   |          
|Income before income taxes                          |  |                                     | 5,367     |      |   | 4,366    
|Provision for income taxes                          |  |                                     | 1,822     |      |   | 1,668    
|                                                    |  |                                     |           |      |   |          
|Net income                                          |  | $                                   | 3,545     |      | $ | 2,698    
|                                                    |  |                                     |           |      |   |          
|Basic earnings per share                            |  | $                                   | 0.40      |      | $ | 0.30     
|Diluted earnings per share                          |  | $                                   | 0.40      |      | $ | 0.30     
|Cash dividends declared                             |  | $                                   | 0.04      |      | $ | 0.04     
|Weighted average common shares outstanding          |  |                                     | 8,866,891 |      |   | 8,879,153
|Weighted average common equivalent shares           |  |                                     | 8,869,717 |      |   | 8,879,153
|Comprehensive income                                |  | $                                   | 3,241     |      | $ | 3,176    

See notes to consolidated financial statements.



5



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##### Table of Contents

SMITHTOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

(in thousands, except per share data)



|                                                    |  |                                   |           |   |      |   |          
|--------------------------------------------------- |  | --------------------------------- | --------- | - | ---- | - | ---------
|                                                    |  | For the Six Months Ended June 30,
|                                                    |  | 2006                              |           |   | 2005
|Interest income                                     |  |                                   |           |   |      |   |          
|Loans                                               |  | $                                 | 28,923    |   |      | $ | 19,947   
|Federal funds sold                                  |  |                                   | 222       |   |      |   | 330      
|Investment securities:                              |  |                                   |           |   |      |   |          
|Taxable:                                            |  |                                   |           |   |      |   |          
|Obligations of U.S. treasury                        |  |                                   | 123       |   |      |   | 72       
|Obligations of U.S. government agencies             |  |                                   | 1,935     |   |      |   | 1,176    
|Mortgage - backed securities                        |  |                                   | 103       |   |      |   | 88       
|Other securities                                    |  |                                   | 44        |   |      |   | 74       
|                                                    |  |                                   |           |   |      |   |          
|Subtotal                                            |  |                                   | 2,205     |   |      |   | 1,410    
|Exempt from federal income taxes:                   |  |                                   |           |   |      |   |          
|Obligations of state & political subdivisions       |  |                                   | 243       |   |      |   | 229      
|Other                                               |  |                                   | 105       |   |      |   | 95       
|                                                    |  |                                   |           |   |      |   |          
|Total interest income                               |  |                                   | 31,698    |   |      |   | 22,011   
|                                                    |  |                                   |           |   |      |   |          
|Interest expense                                    |  |                                   |           |   |      |   |          
|Money market accounts (including savings)           |  |                                   | 4,045     |   |      |   | 1,708    
|Time deposits of $100,000 or more                   |  |                                   | 3,428     |   |      |   | 1,389    
|Other time deposits                                 |  |                                   | 3,779     |   |      |   | 2,549    
|Other borrowings                                    |  |                                   | 1,393     |   |      |   | 1,189    
|Subordinated debt                                   |  |                                   | 548       |   |      |   | 323      
|                                                    |  |                                   |           |   |      |   |          
|Total interest expense                              |  |                                   | 13,193    |   |      |   | 7,158    
|                                                    |  |                                   |           |   |      |   |          
|Net interest income                                 |  |                                   | 18,505    |   |      |   | 14,853   
|Provision for loan losses                           |  |                                   | 1,100     |   |      |   | 225      
|                                                    |  |                                   |           |   |      |   |          
|Net interest income after provision for loan losses |  |                                   | 17,405    |   |      |   | 14,628   
|                                                    |  |                                   |           |   |      |   |          
|Noninterest income                                  |  |                                   |           |   |      |   |          
|Trust and investment services                       |  |                                   | 243       |   |      |   | 214      
|Service charges on deposit accounts                 |  |                                   | 975       |   |      |   | 975      
|Revenues from insurance agency                      |  |                                   | 1,964     |   |      |   | 1,764    
|Net gain (loss) on sales of investment securities   |  |                                   | (11       | ) |      |   | 13       
|Increase in cash value of bank owned life insurance |  |                                   | 318       |   |      |   | 316      
|Other                                               |  |                                   | 1,206     |   |      |   | 767      
|                                                    |  |                                   |           |   |      |   |          
|Total noninterest income                            |  |                                   | 4,695     |   |      |   | 4,049    
|                                                    |  |                                   |           |   |      |   |          
|Noninterest expense                                 |  |                                   |           |   |      |   |          
|Salaries                                            |  |                                   | 5,447     |   |      |   | 4,868    
|Pension and other employee benefits                 |  |                                   | 1,239     |   |      |   | 1,168    
|Net occupancy expense of bank premises              |  |                                   | 1,731     |   |      |   | 1,605    
|Furniture and equipment expense                     |  |                                   | 1,033     |   |      |   | 877      
|Amortization of intangible assets                   |  |                                   | 383       |   |      |   | 36       
|Other                                               |  |                                   | 2.192     |   |      |   | 2,042    
|                                                    |  |                                   |           |   |      |   |          
|Total noninterest expense                           |  |                                   | 12,025    |   |      |   | 10,596   
|                                                    |  |                                   |           |   |      |   |          
|Income before income taxes                          |  |                                   | 10,075    |   |      |   | 8,081    
|Provision for income taxes                          |  |                                   | 3,452     |   |      |   | 3,034    
|                                                    |  |                                   |           |   |      |   |          
|Net income                                          |  | $                                 | 6,623     |   |      | $ | 5,047    
|                                                    |  |                                   |           |   |      |   |          
|Basic earnings per share                            |  | $                                 | 0.75      |   |      | $ | 0.57     
|Diluted earnings per share                          |  | $                                 | 0.75      |   |      | $ | 0.57     
|Cash dividends declared                             |  | $                                 | 0.08      |   |      | $ | 0.08     
|Weighted average common shares outstanding          |  |                                   | 8,866,356 |   |      |   | 8,878,982
|Weighted average common equivalent shares           |  |                                   | 8,869,959 |   |      |   | 8,878,982
|Comprehensive income                                |  | $                                 | 6,224     |   |      | $ | 5,101    

See notes to consolidated financial statements.



6



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##### Table of Contents

SMITHTOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

(unaudited)

(in thousands, except shares outstanding)



|                                          |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ----------------- | - | ------------------------ | ------ | --- | ---------------- | - | ----- | ------------- |  | - | ------------------- | - |  | ----------------------------------------- | ------- | - | ------------------------ | - | --- | - |  | - | ------ | - |  | - | ------ | -
|                                          |  | Common Stock      |   | AdditionalPaid InCapital |        |     | RetainedEarnings |   |       | TreasuryStock |  |   | UnearnedStockAwards |   |  | AccumulatedOtherComprehensiveIncome(Loss) |         |   | TotalStockholdersEquity |  
|                                          |  | SharesOutstanding |   |                          | Amount |     |                  |   |       |               | 
|Balance at 12/31/2004                     |  | 8,885,589         |   |                          | $      | 108 |                  | $ | 4,372 |               |  | $ | 52,480              |   |  | $                                         | (10,062 | ) |                          | $ |    |   |  | $ | 45     |   |  | $ | 46,943 |  
|Comprehensive income:                     |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|Net income                                |  |                   |   |                          |        |     |                  |   |       |               |  |   | 5,047               |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   | 5,047  |  
|Other comprehensive loss , net of tax     |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   | 54     |   |  |   | 54     |  
|                                          |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|Total comprehensive income                |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   | 5,101  |  
|Cash dividends declared                   |  |                   |   |                          |        |     |                  |   |       |               |  |   | (711                | ) |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   | (711   | )
|                                          |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|Balance at 6/30/2005                      |  | 8,885,589         |   |                          | $      | 108 |                  | $ | 4,372 |               |  | $ | 56,816              |   |  | $                                         | (10,062 | ) |                          | $ |    |   |  | $ | 99     |   |  | $ | 51,333 |  
|                                          |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|Balance at 12/31/2005                     |  | 8,885,589         |   |                          | $      | 108 |                  | $ | 4,372 |               |  | $ | 62,124              |   |  | $                                         | (10,062 | ) |                          | $ | (91 | ) |  | $ | (601   | ) |  | $ | 55,850 |  
|Comprehensive income:                     |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|Net income                                |  |                   |   |                          |        |     |                  |   |       |               |  |   | 6,623               |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   | 6,623  |  
|Other comprehensive income, net of tax    |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   | (399   | ) |  |   | (399   | )
|                                          |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|Total comprehensive income                |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   | 6,224  |  
|Cash dividends declared                   |  |                   |   |                          |        |     |                  |   |       |               |  |   | (710                | ) |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   | (710   | )
|Transfer due to the adoption of SFAS 123R |  |                   |   |                          |        |     |                  |   | (91   | )             |  |   |                     |   |  |                                           |         |   |                          |   | 91  |   |  |   |        |   |  |   |       |  
|Stock awards vested                       |  |                   |   |                          |        |     |                  |   | 36    |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   | 36     |  
|Stock awards granted                      |  | 14,625            |   |                          |        |     |                  |   | (323  | )             |  |   |                     |   |  |                                           | 323     |   |                          |   |     |   |  |   |        |   |  |   |       |  
|Treasury stock purchases                  |  | (14,625           | ) |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           | (323    | ) |                          |   |     |   |  |   |        |   |  |   | (323   | )
|                                          |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  
|Balance at 6/30/2006                      |  | 8,885,589         |   |                          | $      | 108 |                  | $ | 3,994 |               |  | $ | 68,037              |   |  | $                                         | (10,062 | ) |                          | $ |    |   |  | $ | (1,000 | ) |  | $ | 61,077 |  
|                                          |  |                   |   |                          |        |     |                  |   |       |               |  |   |                     |   |  |                                           |         |   |                          |   |     |   |  |   |        |   |  |   |        |  

See notes to consolidated financial statements.



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##### Table of Contents

SMITHTOWN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                                  |  |                                   |         |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | --------------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                  |  | For the Six Months Ended June 30, |        
|                                                                                  |  | 2006                              |         |   | 2005 |  
|Cash flows from operating activities                                              |  |                                   |         |   |      |   |          |  
|Net income                                                                        |  | $                                 | 6,623   |   |      | $ | 5,047    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                   |         |   |      |   |          |  
|Depreciation on premises and equipment                                            |  |                                   | 453     |   |      |   | 828      |  
|Provision for loan losses                                                         |  |                                   | 1,100   |   |      |   | 225      |  
|Net (gain) loss on sale of investment securities                                  |  |                                   | 11      |   |      |   | (13      | )
|Net increase (decrease) in other liabilities                                      |  |                                   | 318     |   |      |   | (254     | )
|Net (increase) decrease in other assets                                           |  |                                   | 389     |   |      |   | (666     | )
|Net increase in deferred taxes                                                    |  |                                   | (486    | ) |      |   | (238     | )
|Amortization of unearned stock awards                                             |  |                                   | 36      |   |      |   |         |  
|Increase in cash surrender value of officers life insurance policies             |  |                                   | (318    | ) |      |   | (316     | )
|Amortization of investment security premiums and accretion of discounts, net      |  |                                   | (36     | ) |      |   | (204     | )
|Amortization of intangible assets                                                 |  |                                   | 383     |   |      |   | 36       |  
|                                                                                  |  |                                   |         |   |      |   |          |  
|Cash provided by operating activities                                             |  |                                   | 8,473   |   |      |   | 4,445    |  
|                                                                                  |  |                                  
|Cash flows from investing activities                                              |  |                                   |         |   |      |   |          |  
|Mortgage-backed securities:                                                       |  |                                   |         |   |      |   |          |  
|Proceeds from calls, repayments, maturities and sales of available for sale       |  |                                   | 4,218   |   |      |   | 2,651    |  
|Proceeds from calls, repayments and maturities of held to maturity                |  |                                   | 27      |   |      |   | 44       |  
|Other securities:                                                                 |  |                                   |         |   |      |   |          |  
|Proceeds from calls, repayments, maturities and sales of available for sale       |  |                                   | 17,062  |   |      |   | 18,364   |  
|Proceeds from calls, repayments and maturities of held to maturity                |  |                                   | 703     |   |      |   | 202      |  
|Purchase of investment securities:                                                |  |                                   |         |   |      |   |          |  
|Available for sale                                                                |  |                                   | (25,012 | ) |      |   | (81,600  | )
|Purchases of restricted securities                                                |  |                                   | (2,220  | ) |      |   |         |  
|Redemptions of restricted securities                                              |  |                                   | 4,149   |   |      |   | 810      |  
|Loans made to customers, net                                                      |  |                                   | (90,006 | ) |      |   | (48,916  | )
|Purchase of premises and equipment                                                |  |                                   | (922    | ) |      |   | (3,885   | )
|                                                                                  |  |                                   |         |   |      |   |          |  
|Cash used in investing activities                                                 |  |                                   | (92,001 | ) |      |   | (112,330 | )
|                                                                                  |  |                                  
|Cash flows from financing activities                                              |  |                                   |         |   |      |   |          |  
|Net increase in demand deposits, money market, NOW and savings                    |  |                                   | 40,770  |   |      |   | 57,448   |  
|Net increase in time deposits                                                     |  |                                   | 90,539  |   |      |   | 73,432   |  
|Cash dividends paid                                                               |  |                                   | (711    | ) |      |   | (652     | )
|Net decrease in other borrowings                                                  |  |                                   | (45,949 | ) |      |   | (17,500  | )
|Proceeds from subordinated debt issue                                             |  |                                   | 7,000   |   |      |   |         |  
|Purchase of treasury stock                                                        |  |                                   | (323    | ) |      |   |         |  
|                                                                                  |  |                                   |         |   |      |   |          |  
|Cash provided by financing activities                                             |  |                                   | 91,326  |   |      |   | 112,728  |  
|                                                                                  |  |                                   |         |   |      |   |          |  
|Net change in cash and cash equivalents                                           |  |                                   | 7,798   |   |      |   | 4,843    |  
|Cash and cash equivalents, beginning of period                                    |  |                                   | 13,467  |   |      |   | 9,633    |  
|                                                                                  |  |                                   |         |   |      |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                                 | 21,265  |   |      | $ | 14,476   |  
|                                                                                  |  |                                   |         |   |      |   |          |  
|Supplemental disclosures of cash flow information                                 |  |                                   |         |   |      |   |          |  
|Cash paid during the year for:                                                    |  |                                   |         |   |      |   |          |  
|Interest                                                                          |  | $                                 | 12,309  |   |      | $ | 6,615    |  
|Income taxes                                                                      |  |                                   | 3,705   |   |      |   | 3,102    |  

See notes to consolidated financial statements.



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##### Table of Contents

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. (the Company) and its wholly-owned subsidiary, Bank of Smithtown (the Bank) (collectively referred to as the Company).
Since 1984, when the former shareholders of Bank of Smithtown became shareholders of Smithtown Bancorp, Inc., several additional subsidiaries have been added to the Bank. In April 2001, the Bank established a new corporation, Bank of Smithtown
Insurance Agency, Inc., now known as Bank of Smithtown Financial Services, Inc. for the purpose of offering tax deferred annuities and mutual funds. In August 2004, the Bank acquired Seigerman-Mulvey Co., Inc., now known as Bank of Smithtown
Insurance Agents and Brokers, Inc. for the purpose of selling insurance products and services. As of February 2006, the Bank completed the formation of Bank of Smithtown Preferred Funding Corporation, a real estate investment trust, formed as a
vehicle for capital enhancement. The corporation holds a majority of the consumer and commercial real estate loans of the Bank. These three corporations are subsidiaries of the Bank and report their income on a consolidated basis using the accrual
method of accounting. During September 2003 and March 2006, the Company formed Smithtown Bancorp Capital Trust I and II, respectively. These trusts issued $11,000 and $7,000 of trust preferred securities as part of pooled offerings. The Company
issued subordinated debentures to the trusts in exchange for the proceeds of the offerings. These debentures represent the sole assets of the trusts, the proceeds of which were used in the ordinary course of business, primarily to fund the
Banks new loan originations. The Companys financial condition and operating results principally reflect those of the Bank. All intercompany balances and amounts have been eliminated. For further information refer to the consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2005.

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. The
December 31, 2005 consolidated balance sheet was derived from the Companys December 31, 2005 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, 2006. In the opinion of management, the accompanying unaudited interim
consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Companys financial position and its results of operations for the periods presented.



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##### Table of Contents

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

Earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding for the respective period. Diluted earnings per share, which reflect the potential dilution that could occur if
dilutive stock awards were fully vested and resulted in the issuance of common stock that then shared in the earnings of the Company, is computed by dividing net income by the weighted average number of common equivalent shares outstanding for the
respective period.

Computation of per share income

(in thousands, except per share data)



|                                                      |  |                    |           |              |   |          
|----------------------------------------------------- |  | ------------------ | --------- | ------------ | - | ---------
|                                                      |  | Three Months Ended
|                                                      |  | June 30,2006       |           | June 30,2005
|Net income                                            |  | $                  | 3,545     |              | $ | 2,698    
|Common equivalent shares:                             |  |                    |           |              |   |          
|Weighted average common shares outstanding*           |  |                    | 8,866,891 |              |   | 8,878,690
|Weighted average common equivalent shares*            |  |                    | 2,826     |              |   | 463      
|                                                      |  |                    |           |              |   |          
|Weighted average common and common equivalent Shares* |  |                    | 8,866,891 |              |   | 8,879,153
|                                                      |  |                    |           |              |   |          
|Basic earnings per share                              |  | $                  | 0.40      |              | $ | 0.30     
|                                                      |  |                    |           |              |   |          
|Diluted earnings per share                            |  | $                  | 0.40      |              | $ | 0.30     
|                                                      |  |                    |           |              |   |          

---

|* | Weighted average common shares outstanding and weighted average common equivalent shares have been restated for June 30, 2005 based upon the 3:2 stock split in the form of a
50% stock dividend declared by the Companys Board of Directors on March 27, 2006. The stock dividend was payable on May 5, 2006 to all shareholders of record as of April 21, 2006.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 3  Other Stock-Based Compensation

At the April 21, 2005 Annual Meeting the shareholders of Smithtown Bancorp approved the adoption of the Smithtown Bancorp Restricted Stock Plan. 150,000 shares of common stock have been allocated to the Plan. In 2005, 6,900 shares of
restricted stock were awarded to the recipients. On January 25, 2006, an additional 14,625 shares were awarded.

For accounting purposes, the Company
recognizes compensation expense for shares of common stock awarded under the Restricted Stock Plan in 2005 and 2006 over the vesting period at the fair market value of the shares on the date they are awarded. The vesting period is five years with
twenty percent of the award for each year vesting annually on December 31 of each year. For the three and six month periods ended June 30, 2006, the Company recognized $36 and $22 of compensation expense related to the shares awarded. The
income tax benefits resulting from this expense were $12 and $7 during these periods respectively.

As of June 30, 2006, there was approximately $378
of unrecognized compensation costs related to nonvested restricted stock plan shares. Those costs are expected to be recognized over a period of 4.5 years.

A summary of the status of the Companys nonvested restricted stock plan shares as of June 30, 2006 and changes during the quarter ended June 30, 2006 is as follows:



|                                 |  |        |   |  |                                         |      
|-------------------------------- |  | ------ | - |  | --------------------------------------- | -----
|                                 |  | Shares |   |  | Weighted Average Grant Date Share Value
|Nonvested at beginning of period |  | 13,368 |   |  | $                                       | 18.41
|Granted                          |  | 6,000  |   |  |                                         | 25.57
|Vested                           |  | (1,375 | ) |  |                                         | 21.43
|                                 |  |        |   |  |                                         |      
|Nonvested at end of period       |  | 17,993 |   |  | $                                       | 20.57
|                                 |  |        |   |  |                                         |      



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##### Table of Contents

Note 4 Employee Benefits

During 2006, the Bank continues to fund a 401(K) Defined Contribution Plan and an Employee Stock Ownership Plan for substantially all of its employees. Expenses related
to these two plans for the three and six month comparative periods were:



|                                 |  |                                     |    |      |   |   
|-------------------------------- |  | ----------------------------------- | -- | ---- | - | --
|                                 |  | For the Three Months Ended June 30,
|                                 |  | 2006                                |    | 2005
|401(K) Defined Contribution Plan |  | $                                   | 37 |      | $ | 33
|Employee Stock Ownership Plan    |  |                                     | 50 |      |   | 45



|                                 |  |                                   |     |      |   |   
|-------------------------------- |  | --------------------------------- | --- | ---- | - | --
|                                 |  | For the Six Months Ended June 30,
|                                 |  | 2006                              |     | 2005
|401(K) Defined Contribution Plan |  | $                                 | 78  |      | $ | 70
|Employee Stock Ownership Plan    |  |                                   | 101 |      |   | 90

It is expected that the Banks costs for these two plans for the twelve months ending December 31, 2006
will be approximately $160 and $200, respectively. Bank of Smithtown also continues to sponsor 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 Ended |  | Interest Cost |   | AmortizationCost |   | Amortizationof Net Gain |  | TotalExpense
|June 30, 2006              |  | $             | 4 |                  | $ | 8                       |  | $            | 2 |  | $ | 14
|June 30, 2005              |  |               | 5 |                  |   | 8                       |  |              | 2 |  |   | 15



|                         |  |               |   |                  |   |                         |  |              |   |  |   |   
|------------------------ |  | ------------- | - | ---------------- | - | ----------------------- |  | ------------ | - |  | - | --
|For the Six Months Ended |  | Interest Cost |   | AmortizationCost |   | Amortizationof Net Gain |  | TotalExpense
|June 30, 2006            |  | $             | 8 |                  | $ | 16                      |  | $            | 3 |  | $ | 27
|June 30, 2005            |  |               | 9 |                  |   | 16                      |  |              | 3 |  |   | 28

Since the plans hold no assets, the Bank did not contribute and does not expect to contribute to the plans during
2005 and 2006, other than to fund the payments for the benefits. The Bank has also adopted a nontax qualified Executive and Director Incentive Retirement Plan. While this plan is 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 Plan are based solely on the amount contributed by the Bank. The contributions accrued under
this plan for the three and six month periods were:



|                          |  |                                     |    |                                   |   |      |  |      |     |  |   |    
|------------------------- |  | ----------------------------------- | -- | --------------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                          |  | For the Three Months Ended June 30, |    | For the Six Months Ended June 30,
|                          |  | 2006                                |    | 2005                              |   | 2006 |  | 2005
|Incentive Retirement Plan |  | $                                   | 66 |                                   | $ | 57   |  | $    | 125 |  | $ | 127

The Bank has a similar supplemental life insurance plan for all members of management, with similar life insurance
policies serving as the primary income source for the benefits accrued during the participants service period. The benefit provides post retirement life insurance up to a maximum of two and one-half times annual salary. At June 30, 2006
and 2005, the combined cash value of these insurance policies was $14,042 and $13,552. The Bank has also established a non-tax qualified Deferred Compensation Plan for certain directors and executive officers. This group of employees defers a
portion of its compensation. A liability has been accrued for the obligation under this plan. During 2004 the Bank adopted a Supplemental Executive Retirement Plan for the Chief Executive Officer. This plan is partially funded by a life insurance
policy with a cash value at June 30, 2006 and 2005 of $3,851 and $3,705. The Banks expense for this plan for the comparable three and six month periods was:



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##### Table of Contents

|                                       |  |                                     |    |                                   |   |      |  |      |     |  |   |    
|-------------------------------------- |  | ----------------------------------- | -- | --------------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                                       |  | For the Three Months Ended June 30, |    | For the Six Months Ended June 30,
|                                       |  | 2006                                |    | 2005                              |   | 2006 |  | 2005
|Supplemental Executive Retirement Plan |  | $                                   | 66 |                                   | $ | 69   |  | $    | 125 |  | $ | 138

Note 5. Subordinated Debentures

In September, 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 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 this trust. The Company may redeem the subordinated debentures, in whole or in part, at a premium declining ratably to par on October 8, 2008.

In March 2006, an additional trust formed by the Company issued $7,000 of 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 first five years,
at which point they become floating rate securities that bear interest 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 this trust. The Company may redeem these subordinated debentures, in whole or in part, at a premium declining ratably to par on June 30, 2011.

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.

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

(in thousands, except share and per share data)

This report may contain certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, but actual results may differ materially from anticipated future results. Forward-looking statements may be identified by the use of the
words believe, expect, anticipate, project, estimate, will be, will continue, will likely result, or similar expressions. The Companys ability to
predict results or the actual effect of future strategic plans is inherently uncertain. Factors that could have a material adverse effect on the operation of the Company and its subsidiaries include, but are not limited to, changes in: general
economic conditions, interest rates, deposit flows, loan demand, competition, accounting principles and guidelines, and governmental, regulatory and technological factors affecting the Companys operations, pricing, products, and services and
other risk factors disclosed in the Companys reports as filed with the Securities and Exchange Commission. The factors included here are not exhaustive. Other sections of this report may include additional factors that could adversely impact
the Companys performance.

Investors are cautioned not to place undue reliance on forward-looking statements as a prediction of actual results.
Except as required by applicable law or regulation, the Company undertakes no obligation to republish or revise forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated
results. Investors are advised, however, to consult any further disclosures the Company makes on related subjects in its reports to the Securities and Exchange Commission.

Summary

Economic conditions within the
Companys market area continue to remain strong through the second quarter of 2006. Growth in the local economy continues at a healthy pace. Gasoline prices leveled off during the early and mid periods of the quarter and then began on a
slightly upward trend again toward the end of the quarter. Overall, inflation appears to be under control through the Federal Reserve Banks seventeen rate adjustments. There continues to be much talk regarding the real estate market
bubble, but only slight price adjustments have been evident in the Companys market area. While there continues to be an increase in the number of homes for sale as of the end of second quarter 2006, there also appears to be an
increased audience of buyers. While homes may take slightly longer to sell, at slightly reduced prices compared to last year when prices were at an all time high, homes nevertheless are selling. The effect of the seventeen Federal Reserve Bank
increases has slowed down the refinance and home equity lending business, an area of lending to which Bank of Smithtown does not aggressively partake. Although mortgage rates have climbed, they still remain affordable to most buyers within the
Companys service area. A continuation of Federal Reserve Bank increases could potentially change this condition. Real estate development and construction remain strong within Manhattan and its five boroughs. Long Island, by contrast, is more
limited for real estate development and new construction due to limited available land. In place of new construction, there is much more opportunity for building improvements and re-construction of existing homes.

Rate increases effected by the Federal Open Market Committee have continued to positively impact the Banks loan portfolio, as approximately one third of the loans
within the portfolio reprice every ninety days. 28.25% of the portfolio are floating rate loans indexed to the highest rate published as the prime rate in the Wall Street Journal and reprice immediately. Although the Federal Reserve Boards
rate increases tend to exert negative pressure on deposit pricing, with managements tight control over deposit rate adjustments, the Bank experienced no margin erosion during the second quarter of 2006.



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##### Table of Contents

A strong local economy bodes well for the Companys fundamental line of business  commercial real estate
lending on Long Island, and New York City. Second quarter results of operations provide evidence of the Companys continued growth in commercial real estate lending, with continued strong asset quality.

The Companys competition for deposits within its service area remains fierce. New financial institutions looking to gain marketshare continue to invade
the area, while existing banks continue to expand their franchise on Long Island and in Manhattan and its boroughs. Credit unions offer deposit accounts and consumer loans at rates that are beyond those that most banks can match. Insurance
companies, investment banks and brokerages continue to try to steal away bank customers, and new entrants into the financial arena enter the market frequently. Obtaining reasonably priced funding to fuel loan growth has been and will continue to be
the Companys biggest challenge. Margin compression is inevitable as long as the yield curve remains inverted or flat and the competition for deposits remains strong. Results of operations for the Company during the second quarter of 2006
evidence its continued ability to substantially grow loans and deposits with no margin compression. Based on the level of earnings for the first six months of 2006, and managements projections of continued growth in assets throughout the
remainder of the year, expectations for another year of record earnings by the Company are strong.

Results of operation for the second quarter of 2006
have continued to be positive. The most significant results of the quarter and year were as follows:



| |  |  | EPS growth over second quarter and the first half of 2005 equal to 33.33% and 31.58%, respectively
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | An increase in net income for the second quarter of 2006 over 2005 of 31.39%
| | - |  | ----------------------------------------------------------------------------



| |  |  | An increase in net income for the first six months of 2006 over 2005 of 31.23%
| | - |  | ------------------------------------------------------------------------------



| |  |  | An ROAE for the second quarter of 23.71% as compared to 21.27% for the second quarter of 2005
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | An ROAE for the first six months of 22.65% vs. 20.50% for the same period in 2005
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Loan and deposit growth for the second quarter equal to 5.53% and 6.08%, respectively
| | - |  | -------------------------------------------------------------------------------------

Growth in earnings per share for the period from June 30, 2005 to June 30, 2006 reached 31.58%. This increase is virtually all attributable to increased earnings as the minimal decrease in weighted average
number of shares outstanding since June 30, 2005 was due exclusively to purchases for the restricted stock plan. Net income for the quarter increased by 31.39% over the same quarter in 2005, due in large part to the growth in net interest
income. A significantly higher volume of average interest earning assets totalling $894,423 at a slightly higher net interest margin of 4.31% is responsible for this increase. Growth in non-interest income of $215 or 10.26% also has contributed to
the increased net income. The largest contributors to this growth during second quarter 2006 were increased revenues from Bank of Smithtown Insurance Agents and Brokers, Inc., fee income from additional commercial services offered by our branches,
fee income related to customers usage of debit cards and fees earned related to balances held at correspondent banks for the purpose of official check clearing. During the first quarter of 2006, the Company completed the formation of an
additional subsidiary of the Bank. This subsidiary, BOS Preferred Funding Corporation, is a real estate investment trust, and was formed as a vehicle for capital enhancement for the Bank. The corporation holds a majority of the Banks consumer
and commercial real estate loans. Income from this subsidiary is passed along to the Bank in the form of a dividend, and as such, the Company may exclude 60% of this dividend income from its New York State taxable income. This resulted in a
reduction in the Companys effective tax rate from 37.90% for the twelve month period ended December 31, 2005 to 34.26% for the six month period ended June 30, 2006. Asset growth of 5.61% and 5.24% during the first and second quarters
of 2006 represent a continuation of the strong organic growth that has been characteristic of the Company over the past ten years. This growth is primarily the result of an increased deposit and loan base. During the first and second quarters, net
loan growth of 6.69% and 5.53%, the annualized equivalent of over 24% growth, was also in line with the Companys average ten year loan growth rate of 22.9%. Deposit acquisition also continued at a rapid pace, with an increase of 12.03% and
6.08% during first and second quarter, respectively, a very significant increase in light of the fact that this growth was accomplished, once again, without any additional branch openings.The rapid deposit growth during the first quarter of
the year is typical based on the activity of municipalities that maintain balances at the Bank. As discussed in the Companys Annual Report on Form 10-K as of December 31, 2005, the demand for a high volume of funds by municipalities at
yearend results in a decrease in their balances by December 31. During the first quarter, the deposits of these municipalities are returned to the Bank. Various deposit campaigns and promotions were also run during the first quarter which
resulted in a large volume of new core deposits as well as certificates of deposit. Growth during the second quarter of 2006 was slower and was limited to the funding necessary for new loan originations. As rate pressures have increased during the
year, acquisition of interest bearing deposits was limited to those balances that could be obtained at rates lower than comparable Federal Home Loan Bank advance rates. Efforts to attract new demand deposits, however, remained strong throughout the
quarter, although results were marginal. Of the $47,450 increase in total deposits from March 31, 2006 to June 30, 2006, the increase in certificates of deposit was $58,336 with a corresponding decrease in demand deposits and money market
deposits of $6,231 and $6,726. Once again, municipal deposits are primarily responsible for the decline in money market balances. The withdrawal of funds in late June from their deposit accounts to settle their end of school year payables is
responsible for approximately $15,000 of money market account runoff. These deposits are usually returned to the Bank as the third and fourth quarter progress. The Companys year-to-date efficiency ratio decreased from 52.98% for the quarter
ended March 31, 2006 to 50.85% for the quarter ended June 30, 2006. This ratio continues to decline as Company efficiencies improve, and integration of the Bank of Smithtown Insurance Agents and Brokers, Inc. is more fully realized. This
ratio may increase again as we approach the opening of our two newest branch offices during third and fourth quarter of this year. Capital ratios remain strong at June 30, a result of both increased earnings and the issuance of additional
subordinated debt during the first quarter. Regulatory capital ratios remain at the well capitalized level. In order to increase the liquidity of the Companys stock by reducing its price, the Board of Directors declared a 3:2 stock split
in the form of a 50% stock dividend to all holders of record as of April 21, 2006 and effected on May 5, 2006. This was the fifth stock split declared by the Board during the past eight years.



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##### Table of Contents

Comparison of Financial Position at June 30, 2006 and March 31, 2006

The structure of the Banks balance sheet remained stable during the second quarter of 2006. The largest segment of the Companys interest
earning assets remains its loan portfolio, which represents 80.56% of total assets. Growth during the second quarter of 2006 was concentrated in the portfolio with over $41,244 of net loan growth experienced. The composition of the loan portfolio at
June 30 and March 31, 2006 was as follows:



|                          |  |               |         |  |                |   |  |   |         |  |        |  
|------------------------- |  | ------------- | ------- |  | -------------- | - |  | - | ------- |  | ------ | -
|                          |  | June 30, 2006 |         |  | March 31, 2006 |  
|Real estate loans         |  |               |         |  |                |   |  |   |         |  |        |  
|Construction              |  |               | 199,913 |  | 25.36          | % |  | $ | 194,351 |  | 26.02  | %
|Residential               |  |               | 161,049 |  | 20.43          |   |  |   | 130,274 |  | 17.44  |  
|Commercial                |  |               | 378,329 |  | 47.99          |   |  |   | 377,559 |  | 50.54  |  
|Agricultural              |  |               | 1,695   |  | .21            |   |  |   | 1,695   |  | 0.23   |  
|Commercial and industrial |  |               | 44,861  |  | 5.69           |   |  |   | 41,118  |  | 5.50   |  
|Consumer                  |  |               | 2,327   |  | .29            |   |  |   | 1,781   |  | 0.24   |  
|Other loans               |  |               | 253     |  | .03            |   |  |   | 261     |  | 0.03   |  
|                          |  |               |         |  |                |   |  |   |         |  |        |  
|Total loans               |  |               | 788,427 |  | 100.00         | % |  |   | 747,039 |  | 100.00 | %
|Less:                     |  |               |         |  |                |   |  |   |         |  |        |  
|Deferred fees             |  |               | 2,014   |  |                |   |  |   | 1,870   |  |        |  
|Allowance for loan losses |  |               | 7,073   |  |                |   |  |   | 6,552   |  |        |  
|                          |  |               |         |  |                |   |  |   |         |  |        |  
|Loans, net                |  | $             | 779,340 |  |                |   |  | $ | 738,617 |  |        |  
|                          |  |               |         |  |                |   |  |   |         |  |        |  

As can be seen from the above table, the segmentation of the loan portfolio remained stable during the second
quarter. The Companys primary lending focus remains commercial real estate and construction and land loans. During the second quarter of 2006, deposits served as the primary funding vehicle for new loans. Currently the Companys loan to
deposit ratio is a strong 94.95%. The largest increase in volume within the loan portfolio during the second quarter of 2006 was in the residential real estate loan portfolio, and was primarily in one to four family residential properties. These
types of loans tend to have a longer average life than short term construction loans, which need to be replaced frequently, but a shorter average life than commercial real estate loans. It is a strategic goal of management to increase the volume of
residential loans during 2006. The increase in commercial real estate loans was attributable to loans for varied purposes including mixed use (commercial and residential), retail, professional and medical facilities. These loans were collateralized
by properties located in Manhattan, Brooklyn, Queens, Nassau and Suffolk. Asset quality remains strong. Nonperforming loans continue to be at very low levels, standing at less than .08% of the total loan portfolio at quarter-end. Loans past due 30
through 89 days increased from $7,599 at March 31, 2006 to $8,930 as of June 30, 2006. Of the $8,930 in loans past due 30  89 days, most of that balance remains in one loan which was first discussed in the Companys 10K as of
December 31, 2004. The principal balance of the loan is $7,226 secured by a leasehold mortgage on two six-story buildings located on Madison Avenue in New York City. The value of the leasehold was appraised at $11,800 in November, 2003. The
borrower continues to make payments, but the payments have been slow. The Bank continues to explore a variety of options with the borrower which will either bring the payments current or result in a sale of the leasehold interest. Whatever the
resolution of this matter, given the value of the property, the Bank would not expect to lose any principal on this loan. If it were to become necessary, however, to foreclose on the leasehold mortgage and place the loan on nonaccrual status until
the property interest is sold, it is possible that this process and the attendant expenses could result in a small reduction in earnings. The same borrower had two other loans in New York City with the Bank, and both of these properties were sold
during 2005 without the need for a foreclosure proceeding and without any loss to the Bank. The balance of $1,704 in the 30  89 day category rests in two commercial real estate loans to the same entity, the sole principal of which recently
passed away. Both properties are tenanted and appear to have equity in them, and the Bank has begun to work with the counsel to the representative of the principals estate to resolve these matters. Two additional commercial real estate loans
to an entity owned by the same principal totalling $603 are past due 90 days or more , but remain accruing loans. Cash flow from these two properties is more than sufficient to cover the debt service and is expected to be released to the Bank during
third quarter. Non-accrual loans at June 30, 2006 total $10.The allowance for loan loss account increased from March 31, 2006 to June 30, 2006 by $521, largely a result of the provision for loan losses of $500. Based on
specific reserves for internally classified loans and multiple factors including historical loss experience and current economic conditions, management feels the level of the allowance for loan losses provides adequate coverage. At June 30,
2006 and March 31, 2006, the Banks reserve ratio (the allowance for loan losses as a percentage of end of period loans) was .90% and .88%, respectively. This level of reserves is adequate due to the quality of the portfolio and is within
the range of peer group banks. The allowance for loan losses is an amount that management currently believes will be adequate to absorb possible incurred losses inherent in the Banks loan portfolio. In determining the allowance for loan
losses, there is not an exact amount but rather a range for what constitutes an appropriate amount. 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 balances and various other factors. The portion of the loan loss allowance allocated to each loan category does not represent the total available for probable incurred losses
which may occur within the loan category since the loan loss allowance is a valuation applicable to the entire loan portfolio. Management has also set up a reserve for unfunded loan commitments and the balance in this account at June 30, 2006
was $109. This amount is reflected in other liabilities on the balance sheet.

The next largest category of interest earning assets is the Companys
investment portfolio. The composition of the portfolio at June 30, 2006 and March 31, 2006 was as follows:



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##### Table of Contents

|                                                |  |               |         |                |   |        
|----------------------------------------------- |  | ------------- | ------- | -------------- | - | -------
|                                                |  | June 30, 2006 |         | March 31, 2006
|Securities available for sale                   |  |               |         |                |   |        
|Obligations of U.S. treasury                    |  | $             | 6,956   |                | $ | 6,924  
|Obligations of U.S. government agencies         |  |               | 93,612  |                |   | 94,065 
|Mortgage-backed securities                      |  |               | 3,806   |                |   | 4,243  
|Obligations of state and political subdivisions |  |               | 11,774  |                |   | 12,644 
|Other securities                                |  |               | 1,999   |                |   | 2,000  
|                                                |  |               |         |                |   |        
|Total securities available for sale             |  | $             | 118,147 |                | $ | 119,876
|                                                |  |              
|Securities held to maturity                     |  |               |         |                |   |        
|Mortgage-backed securities                      |  | $             | 62      |                | $ | 74     
|Obligations of state and political subdivisions |  |               | 309     |                |   | 932    
|                                                |  |               |         |                |   |        
|Total securities held to maturity               |  | $             | 371     |                | $ | 1,006  
|                                                |  |              
|Total investment securities                     |  | $             | 118,518 |                | $ | 120,882
|                                                |  |               |         |                |   |        

Investment securities decreased by a slight 1.96% from March 31, 2006 to June 30, 2006, with minimal
activity within the portfolio during the quarter. As interest rates continued to increase during the second quarter with two additional upward rate adjustments made by the Federal Reserve Bank, it became increasingly important to manage the
acquisition of new funding with the origination of new loans. Although perfect matching of the two balances is not often attainable, the Company had no excess funds during the quarter to invest in securities. During short periods of excess deposits,
the funds remained in federal funds sold as the yield on these funds was at times higher than could be obtained in the securities markets. The $1,740 of short term wholesale borrowings entered into at the end of the first quarter of 2006 were paid
off with deposits that were acquired early in the second quarter.

Unrealized losses on available for sale securities as of June 30, 2006 and
March 31,2006 was $1,753 and $1,222. These unrealized losses have not been recognized into income because the bonds are of high credit quality, management has the intent and ability to hold them for the forseeable future and the decline in fair
value is largely due to increases in market interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline.

Bank premises and equipment increased slightly from March 31 to June 30, 2006, as construction on new branch offices was begun or continued during the quarter. Shortly after March 31, construction of
the Companys new Bohemia office began. It is expected that this new location will open during the third quarter. Other assets increased by 2.88%, primarily the result of deferred taxes and accrued expenses.

On the liability side of the balance sheet, total deposits increased by 6.08% from the end of the first quarter of 2006 to June 30, 2006. The composition of
deposits was as follows:



|                              |  |               |         |                |   |        
|----------------------------- |  | ------------- | ------- | -------------- | - | -------
|                              |  | June 30, 2006 |         | March 31, 2006
|Demand (non interest bearing) |  | $             | 101,274 |                | $ | 107,505
|Money market                  |  |               | 247,967 |                |   | 254,693
|NOW                           |  |               | 35,259  |                |   | 34,369 
|Savings                       |  |               | 46,391  |                |   | 45,210 
|Time                          |  |               | 397,343 |                |   | 339,007
|                              |  |               |         |                |   |        
|Total deposits                |  | $             | 828,234 |                | $ | 780,784
|                              |  |               |         |                |   |        

The largest increase in deposits during the second quarter was in time deposit accounts which grew by 17.21%.
These deposits were gathered to provide the funding for new loan originations. Although the rates paid on the promotional products were high, they were below comparable term Federal Home Loan Bank advance rates. The majority of the certificates
opened were within the six to fifteen month maturity time frame, so as to be able to take advantage of a lower rate environment, should that be the direction the Federal Reserve Bank moves at the time of their maturity. As compared to the first
quarter of 2006, during which time most new deposits were core, second quarter actually evidenced a decrease in core deposits, continued proof of the fierce competition for these deposits. The competition for deposits continues to be very strong in
the Long Island market with new entrants into the marketplace increasing continuously. Banks, savings institutions, insurance companies, brokerage and investment banking firms, credit unions and other non-financial companies are the Banks
primary competitors, and acquisition of additional reasonably priced deposits to fund future loan growth remains the Banks biggest challenge. With a limited number of new customers in the Banks service areas, part of the challenge
becomes the ability to draw customers away from other deposit collecting institutions. The Bank remains committed to increasing core deposits by providing the best non-rate sensitive service to our cutomers as well as a full array of
products including insurance, brokerage and trust services. Savings balances increased by 2.61%, due in large part to the new Premium savings account that provides tiered interest rates tied to incremental balance levels. Money market balances
decreased by 2.64% from March 31 to June 30, 2006, due primarily to over $15,000 in withdrawals at the end of the quarter by municipalities for their required seasonal payments. The Bank continued to promote its Elite money market account
throughout the quarter and was very successful in acquiring new money. These new deposits of over $16,000 were acquired at rates well below any overnight or term borrowing rates. The Companys success at adding these relatively low cost savings
and money market balances as well as reasonably priced certificates of deposit certainly contributed to the increase in net interest margin achieved during the second quarter.



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##### Table of Contents

Other borrowings decreased from $63,740 at March 31, 2006 to $62,000 at June 30, 2006. The $62,000 in
borrowings at quarterend were in the form of eleven term advances from the Federal Home Loan Bank of New York. The one overnight line of credit for $1,740 that was outstanding at March 31 was paid off early in the second quarter. The weighted
average maturity and rate of the Banks current eleven term advances is 1.92 years and 4.01%, respectively. All of these borrowings are collateralized by residential and commercial mortgages under a specific lien arrangement as well as various
securities issued by Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association. During the month of March 2006, a second trust formed by the Company issued $7,000 of adjustable rate trust
preferred securities as part of a pooled offering of such securities due June 30, 2036. The securities bear interest at a rate of 6.53% for the first five years, after which the rate fluctuates with the 3-month Libor rate plus 1.43%. The
Company issued subordinated debentures to the trust in exchange for the proceeds of the offering; the debentures represent the sole assets of the newly formed trust. The Company may redeem the subordinated debentures, in whole or in part, at a
premium declining ratably to par on June 30, 2011. This was the second pooled offering of such securities by the Company. The first offering was issued in 2003 for $11,000. These floating rate securities bear interest at a rate of 3 month Libor
plus 2.99%. The proceeds of both of these offerings were used in the ordinary course of business, primarily as a vehicle for funding new loans.

Stockholders equity increased from $58,323 at March 31 to $61,077 at June 30, 2006, an increase of 4.72%, primarily the result of $3,545 of net income. 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, 2006, the most recent notification from the corresponding regulatory agency categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since such notifications that management believes have changed this classification. As of June 30, 2006, the Companys capital ratios were 10.86%, 9.94% and 8.15%,
well above these minimum guidelines. At its March 27, 2006 Board Meeting, the Board of Directors of Smithtown Bancorp approved a 3:2 stock split in the form of a 50% stock dividend for all shareholders of record as of April 21, 2006
payable May 5, 2006. This represented the Companys fifth stock split in the past eight years. As of May 5, 2006, total outstanding shares were 8,885,589. Earnings per share have been restated as a result of the stock split.

The Company had quarterly and year to date returns on average equity of 23.71% and 22.65% and quarterly and year to date returns on average assets of
1.49% and 1.43% at June 30, 2006.

Comparison of Operating Results for the Three Months Ended June 30, 2006 and
2005

Net income for the three months ended June 30, 2006 and 2005 was $3,545 and $2,698, an increase of 31.39% and is due primarily to the 25.46%
increase in net interest income. This increase in net interest income is the result of a 26.93% increase in interest income on investment securities and a 49.25% increase in interest on loans. The average balance of the Companys investment
portfolio increased significantly from June 30, 2005 to June 30, 2006. During the course of the year, loan originations are funded from existing deposits first. Once accomplished, any excess deposits are channeled into investment
securities so as to maximize returns. Due to the fluctuations in timing of loan originations, the investment portfolio was increased in size at various points over the June 2005 to June 2006 year. The combination of an increased average balance of
securities totalling $28,817 and an increased average taxable equivalent yield on these securities of forty basis points resulted in the higher interest income. Similarly, average loans increased from year to year by $161,862 and the average yield
on these loans also increased by ninety one basis points, resulting in increased interest income on these loans for the three month period of $5,019. Interest income on federal funds sold decreased over the year to year period as the average volume
of these funds decreased by $16,141. It was the increase in average rate paid on these federal funds of 2.08% which caused the interest income to only decline by 32.73%. Interest expense increased by 80.31% for the second quarter of 2006 as compared
to the second quarter of 2005. The greatest increase in interest expense was on time deposits. These deposits increased in average balance by $122,853 and in average rate by 18.62% for the first six months of 2006 vs. the same period in 2005.
Although these additional time deposits have increased the Banks cost of funds, based on the weighted average rate of 4.84% and weighted average maturity of .54 years for the time deposits acquired this year, a comparable Federal Home Loan
Bank term borrowing would have cost the Company well over 5%. The next largest category of increased interest expense was for money market balances. Average balances on these deposits increased by $45,556 since June 2005. The average rate paid for
these funds increased from 1.61% for the first six months of 2005 to 3.14% at June 30, 2006, still a very low cost form of funding. The interest expense for the Companys subordinated debt also increased from June 2005 to June 2006, as a
result of the increase in the 3-month Libor rate and the addition of the $7,000 new offering added to the balance sheet as of March 29, 2006.

The
Companys net interest margin for the three and six month period ending June 30, 2006 was 4.31% and 4.28%, respectively, an increase from 4.25% at March 31, 2006. In light of two additional Federal Reserve Bank rate adjustments since
March 31, 2006, a three basis point increase in margin is unlike the results most of our peers have experienced, and is a credit to the Companys Asset Liability Management Committee. Expectations of future margin compression are assumed
based on strengthening competition for deposits and increases in market interest rates.

Noninterest income increased by 10.26% during the comparable three
month period in 2006 and 2005. A large part of this increase was due to a fee generating service provided at some of our branch offices related to cash counting. The increase is also a result of additional revenues received from Bank of Smithtown
Insurance Agents and Brokers, Inc. Income from the Companys trust and investment services division has



16



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##### Table of Contents

also increased by 10.81% this quarter over the comparable period in 2005 due to the fees received from the administration of a large estate In line with
general trends in the economy, income from debit card transactions has continued to increase. Recent studies have concluded that debit card usage has actually surpassed the usage of checks by consumers, and that result has been recognized by the
Company in the form of increased fee income. Noninterest expense also increased by 14.11% during the current three month period over the same period last year due in large part to compensation expense. Second quarter 2006 expense was higher than
second quarter expense in 2005 due to higher salary, benefit costs, and incentive compensation accruals related to the Companys expectations for current year performance. Also adding to increased noninterest expense in the current year is the
amortization of the intangible assets acquired as a result of the payments made for the Bank of Smiththown Insurance Agents and Brokers, Inc. acquisition. Occupancy and furniture and equipment expense continue to increase at 3.87% and 11.99%,
respectively, this quarter over the same quarter in 2005 primarily related to increasing rental expenses on existing and new lease arrangements. Increased depreciation expenses related to existing building and leasehold improvements as well as
technology upgrades have also contributed to the increase in furniture and equipment expense. Finally, although tax dollars accrued have increased over the six month period in 2006 as compared to 2005, the effective tax rate of the Company has
actually been reduced by 9.60 % due to the 60% exclusion from New York State taxable income of dividends received from BOS Preferred Funding Inc.

Comparision of Operating Results for the Six Months Ended June 30, 2006 and 2005

Net income for the six months ended
June 30, 2006 and 2005 was $6,623 and $5,047, an increase of 31.23%. This increase was a result of the higher average balance of interest earning assets held during 2006 over 2005 and the higher average rate of interest earned on these assets.
This increase of $174,991 in average volume and .94% in average rate resulted in $9,694 of increased interest income on these assets. The two major components of interest income, loans and investment securities, both grew during 2006 over 2005, and
as a result of the increased rate environment, their respective interest rates also increased. As new deposits were collected during 2006, these funds were first used to reduce the level of borrowings outstanding at yearend 2006, and then were
deployed primarily into new loan originations. The average balance of interest bearing liabilities also increased during the six month period in 2006 over the comparable period in 2005. The result of this increased average volume of $165,623 and
increased average rate of 1.08% caused an increase in interest expense of $6,035. This increase in interest expense was a natural derivative of remaining competitive on the rates paid for deposit products. Net interest income for the comparable six
month periods grew by $3,665, on a tax equivalent basis. The Companys net interest margin for the six month period of 2006 was 4.28% as compared to 4.32% for the comparable period in 2005.

The level of noninterest income also increased by 15.95% during the six month period of 2006 over the same period in 2005. This increase was largely the result of
additional income earned by the Banks insurance subsidiary, Bank of Smithtown Insurance Agents and Brokers, Inc., and additional income generated from commercial cash counting services offered at various branch offices. Noninterest expense
also increased 13.49% during 2006 over 2005, and this increase was primarily due to additional depreciation expenses related to new branch offices and the computer equipment required for these offices. Also contributing to the higher level of
noninterest expense was the increased amortization of intangible assets acquired as a result of payments made for the insurance agency acquisition. Earnings per share for the six month period in 2006 was $.75 as compared to $.57, an increase of
31.58%.

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.

AVERAGE BALANCE SHEET AND YIELD ANALYSIS



|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|--------------------------------------------------------------- |  | -------------------------------------- | ------- | -------- | -------------------------------------- | ----------- |  | ---- | -------------- |  | -------- | ------- | ----------- | - | ------- |  | ---- | -
|                                                                |  | For the Six Months Ended June 30,
2006 |         |          | For the Six Months Ended June 30,
2005 |            
|                                                                |  | AverageBalance                         |         | Interest |                                        | AverageRate |  |      | AverageBalance |  | Interest |         | AverageRate |  
|ASSETS                                                          |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Interest-earning assets:                                        |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Investment securities:                                          |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Taxable                                                         |  | $                                      | 101,784 |          | $                                      | 2,205       |  | 4.33 | %              |  | $        | 71,815  |             | $ | 1,410   |  | 3.93 | %
|Nontaxable                                                      |  |                                        | 13,411  |          |                                        | 368         |  | 5.49 |                |  |          | 14,563  |             |   | 347     |  | 4.77 |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Total investment securities                                     |  |                                        | 115,195 |          |                                        | 2,573       |  | 4.47 |                |  |          | 86,378  |             |   | 1,757   |  | 4.07 |  
|                                                                |  |                                        |         |          |                                        |            
|Total Loans                                                     |  |                                        | 736,672 |          |                                        | 28,923      |  | 7.85 |                |  |          | 574,810 |             |   | 1 9,947 |  | 6.94 |  
|Federal funds sold                                              |  |                                        | 9,584   |          |                                        | 222         |  | 4.63 |                |  |          | 25,725  |             |   | 330     |  | 2.55 |  
|Other interest-earning assets                                   |  |                                        | 4,468   |          |                                        | 105         |  | 4.74 |                |  |          | 4,015   |             |   | 95      |  | 4.73 |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Total interest-earning assets                                   |  |                                        | 865,919 |          |                                        | 31,823      |  | 7.35 |                |  |          | 690,928 |             |   | 22,129  |  | 6.41 |  
|Non-interest-earning assets                                     |  |                                        | 57,777  |          |                                        |             |  |      |                |  |          | 51,924  |             |   |         |  |      |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Total assets                                                    |  | $                                      | 923,696 |          |                                        |             |  |      |                |  | $        | 742,852 |             |   |         |  |      |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|LIABILITIES AND STOCKHOLDERS EQUITY                            |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Liabilities                                                     |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Interest-bearing liabilities:                                   |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Savings deposits (including NOW)                                |  | $                                      | 79,242  |          | $                                      | 211         |  | 0.54 | %              |  | $        | 85,618  |             | $ | 108     |  | 0.25 | %
|Money market                                                    |  |                                        | 245,608 |          |                                        | 3,834       |  | 3.15 |                |  |          | 200,052 |             |   | 1,600   |  | 1.61 |  
|Time deposits                                                   |  |                                        | 350,719 |          |                                        | 7,207       |  | 4.14 |                |  |          | 227,866 |             |   | 3,938   |  | 3.49 |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Total interest-bearing deposits                                 |  |                                        | 675,569 |          |                                        | 11,252      |  | 3.36 |                |  |          | 513,536 |             |   | 5,646   |  | 2.22 |  
|                                                                |  |                                        |         |          |                                        |            
|Other borrowings                                                |  |                                        | 69,333  |          |                                        | 1,393       |  | 4.05 |                |  |          | 68,837  |             |   | 1,189   |  | 3.48 |  
|Subordinated debt                                               |  |                                        | 14,094  |          |                                        | 548         |  | 7.73 |                |  |          | 11,000  |             |   | 323     |  | 5.84 |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Total interest-bearing liabilities                              |  |                                        | 758,996 |          |                                        | 13,193      |  | 3.51 |                |  |          | 593,373 |             |   | 7,158   |  | 2.43 |  
|Non-interest bearing liabilities:                               |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Demand deposits                                                 |  |                                        | 99,863  |          |                                        |             |  |      |                |  |          | 99,034  |             |   |         |  |      |  
|Other liabilities                                               |  |                                        | 6,348   |          |                                        |             |  |      |                |  |          | 1,210   |             |   |         |  |      |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Total liabilities                                               |  |                                        | 865,207 |          |                                        |             |  |      |                |  |          | 693,617 |             |   |         |  |      |  
|Stockholders equity                                            |  |                                        | 58,489  |          |                                        |             |  |      |                |  |          | 49,235  |             |   |         |  |      |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Total liabilites & stockholders equity                          |  | $                                      | 923,696 |          |                                        |             |  |      |                |  | $        | 742,852 |             |   |         |  |      |  
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|                                                                |  |                                        |         |          |                                        |            
|Net interest income/interest rate spread                        |  |                                        |         |          | $                                      | 18,630      |  | 3.84 | %              |  |          |         |             | $ | 14,971  |  | 3.98 | %
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  
|Net earning assets/net yield on average interest earning assets |  | $                                      | 106,923 |          |                                        |             |  | 4.28 | %              |  | $        | 97,555  |             |   |         |  | 4.32 | %
|                                                                |  |                                        |         |          |                                        |             |  |      |                |  |          |         |             |   |         |  |      |  



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##### Table of Contents

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 available for sale, 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. The Banks total liquidity level at June 30, 2006 was strong due to
the high levels of unpledged marketable securities available for sale, and unused lines of credit from correspondent banks. In addition to these sources of liquidity, additional borrowing potential from the Federal Home Loan Bank at June 30,
2006 was $113,598.

On June 30, 2006 total loan commitments outstanding were $234,085, of which $130,723 represented available lines on funded loans,
and $9,419 represented letters of credit. At June 30, 2005 these commitments totaled $183,188 with available lines of $98,358 and letters of credit totalling $6,083.

Impact of Inflation and Changing Prices

The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without
considering the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation
and changes in prices. Interest rates do not necessarily move in the same direction or magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors, which are beyond the control of the Company, including the
influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the Federal Reserve Bank.

Recent Regulatory and Accounting Developments

SFAS 123R, Accounting for Stock-Based Compensation, Revised, requires all companies to record compensation cost for equity investments provided to employees in return for employee service. The cost is measured at
the fair value of the equity instruments when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the equity investments. The guidance in this SFAS was adopted as of January 1, 2006 and
does not have a material effect on the Company.

SFAS 48, Accounting for Uncertainty In Income Taxes, revises the recognition tests for
tax positions taken in tax returns such that a tax benefit is recorded only when it is more likely than not that the tax position will be allowed upon examination by taxing authorities. The amount of such a tax benefit to record is the largest
amount that is more likely than not to be allowed. Any reduction in deferred tax assets or increase in tax liabilities upon adoption will correspondingly reduce retained earnings. The Company has not yet determined the effect of adopting this
Interpretation, which is effective for it on January 1, 2007.

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 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. This simulation modeling is done on a quarterly basis. The last simulation model was prepared as of
May 31, 2006 and was modeled on a 100 basis point downward and 100 and 200 basis point upward shift in rates. A parallel and pro rata shift in rates over a twenty four month period was assumed. The following reflects the Companys income
sensitivity analysis over a one year time frame as of May 31, 2006 and May 31, 2005.



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##### Table of Contents

|                                                                     |  |                                                          |  |                                                         |  |          |   |  |          |  
|-------------------------------------------------------------------- |  | -------------------------------------------------------- |  | ------------------------------------------------------- |  | -------- | - |  | -------- | -
|(in thousands) Change In Interest Rates In Basis Points (Rate Shock) |  | As of May 31, 2006Potential Change In NetInterest Income |  | As of May 31,2005Potential Change In NetInterest Income | 
|                                                                     |  | $ Change                                                 |  | % Change                                                |  | $ Change |   |  | % Change |  
|Up 200 basis points                                                  |  | 1,640                                                    |  | 3.88                                                    |  | 1,650    |   |  | 4.92     |  
|Up 100 basis points                                                  |  | 1,768                                                    |  | 4.18                                                    |  |         |   |  |         |  
|Static                                                               |  |                                                         |  |                                                        |  |         |   |  |         |  
|Down 100 basis points                                                |  | 236                                                      |  | 0.56                                                    |  | (1,184   | ) |  | (3.53    | )

Item 4.-Controls and Procedures

An evaluation was performed under the supervision and with the participation of the
Companys management, including the Chief Executive Officer and Chief 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, 2006. Based on that evaluation, the Companys management, including the Chief Executive Officer and Chief 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.

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 8, 2006/s/ Bradley E. RockBradley E. Rock, Chairman, President and Chief Executive
Officer/s/ Anita M. FlorekAnita M. Florek, Executive Vice President and Treasurer




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