United
States


Securities
and Exchange Commission


Washington,
D.C. 20549





Form
10-Q


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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended March 31, 2010





Commission
File Number 0 - 13314





SMITHTOWN
BANCORP, INC.


(Exact
name of Registrant as specified in its charter)





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





(631)
360-9300


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes x    No
 ̈





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such
files).                                                           Yes x    No
 ̈





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





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





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





Shares of
Common Stock ($.01 Par Value) Outstanding as of May 7, 2010


14,967,508









SMITHTOWN
BANCORP, INC.





INDEX





Part
      I - FINANCIAL INFORMATIONItem 1.
                      Financial
      StatementsConsolidated
      Balance Sheets (Unaudited) March 31, 2010 and December 31,
      2009
                      
                      3Consolidated
      Statements of Income (Unaudited) Three Months Ended March 31, 2010 and
      2009
                      
                      4Consolidated
      Statements of Changes in Stockholders’ Equity (Unaudited) Three Months
      Ended March 31, 2010
                      
                      5Consolidated
      Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2010 and
      2009
                      
                      6Notes
      to Unaudited Consolidated Financial Statements
                      
                      7Item 2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      19Item 3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      29Item 4.
                      Controls
      and Procedures
                      
                      30Part II - OTHER INFORMATIONItem 1.
                      Legal
      Proceedings
                      
                      30Item 1A.
                      Risk
      Factors
                      
                      31Item 2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      
                      31Item 3.
                      Defaults
      Upon Senior Securities
                      
                      31Item 4.
                      Reserved
                      
                      31Item 5.
                      Other
      Information
                      
                      31Item 6.
                      Exhibits
                      
                      31Signatures





Exhibit
      31.1    Certification of Principal Executive Officer
      pursuant to Rule 13a-14(a)Exhibit
      31.2    Certification of Principal Financial Officer
      pursuant to Rule 13a-14(a)Exhibit
      32       Certification of Chief Executive
      Officer and Chief Financial Officer pursuant to Rule 13a-14(b) and 18
      U.S.C. Section
1350





2





Item
1. Financial Statements


Consolidated
Balance Sheets (unaudited)


(Dollar
amounts in thousands except share data)


March 31,2010
                
                
                December 31,2009ASSETSCash
      and cash equivalents
                
                $
                18,539
                
                
                $
                18,745Interest
      earning deposits with banks
                
                
                51,483
                
                
                
                3,409Total
      cash and cash equivalents
                
                
                70,022
                
                
                
                22,154Term
      placements
                
                
                507
                
                
                
                507Securities
      available for sale
                
                
                220,412
                
                
                
                397,274Securities
      held to maturity (fair value of $67 and $67, respectively)
                
                
                66
                
                
                
                66Loans
      held for sale
                
                
                15,650
                
                
                
                16,450Loans
                
                
                2,025,827
                
                
                
                2,090,896Less:
      allowance for loan losses
                
                
                51,231
                
                
                
                38,483Loans,
      net
                
                
                1,974,596
                
                
                
                2,052,413Restricted
      stock, at cost
                
                
                18,743
                
                
                
                18,353Real
      estate owned, net
                
                
                1,130
                
                
                
                2,013Premises
      and equipment, net
                
                
                50,629
                
                
                
                47,708Goodwill
                
                
                3,923
                
                
                
                3,923Intangible
      assets
                
                
                556
                
                
                
                616Cash
      value of company owned life insurance
                
                
                24,999
                
                
                
                24,874Accrued
      interest receivable and other assets
                
                
                48,304
                
                
                
                48,579Total
      assets
                
                $
                2,429,537
                
                
                $
                2,634,930LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities:Demand
      deposits
                
                $
                147,862
                
                
                $
                152,306Saving,
      NOW and money market deposits
                
                
                927,103
                
                
                
                999,066Time
      deposits of $100,000 or more
                
                
                425,110
                
                
                
                508,632Other
      time deposits
                
                
                372,514
                
                
                
                415,024Total
      deposits
                
                
                1,872,589
                
                
                
                2,075,028Other
      borrowings
                
                
                361,480
                
                
                
                352,820Subordinated
      debentures
                
                
                56,432
                
                
                
                56,351Accrued
      interest payable and other liabilities
                
                
                16,219
                
                
                
                14,976Total
      liabilities
                
                
                2,306,720
                
                
                
                2,499,175Commitments
      and contingent liabilities (Note 10)
                
                
                -
                
                
                
                -Stockholders'
      equity:Preferred
      stock, par value $.01 per share:Authorized:
      1,000,000 shares at March 31, 2010 and December 31, 2009, respectively; no
      shares issued or outstanding
                
                
                -
                
                
                
                -Common
      stock, par value $.01 per share:Authorized:
      35,000,000 shares at March 31, 2010 and December 31, 2009, respectively;
      17,019,372 and 16,907,346 shares issued at March 31, 2010 and December 31,
      2009, respectively; 14,967,508 and 14,855,482 shares outstanding at March
      31, 2010 and December 31, 2009, respectively
                
                
                170
                
                
                
                169Additional
      paid-in capital
                
                
                82,557
                
                
                
                82,318Retained
      earnings
                
                
                51,051
                
                
                
                64,820Treasury
      stock, at cost, 2,051,864 shares
                
                
                (10,062
                )
                
                
                (10,062
                )123,716
                
                
                
                137,245Accumulated
      other comprehensive loss
                
                
                (899
                )
                
                
                (1,490
                )Total
      stockholders' equity
                
                
                122,817
                
                
                
                135,755Total
      liabilities and stockholders' equity
                
                $
                2,429,537
                
                
                $
                2,634,930





See notes
to consolidated financial statements.





3





Consolidated
Statements of Income (unaudited)


(Dollar
amounts in thousands except share data)


For the three months ended March
      31,2010
                
                
                2009Interest
      income:Loans
                
                $
                27,817
                
                
                $
                25,499Taxable
      securities
                
                
                2,017
                
                
                
                863Tax
      exempt securities
                
                
                502
                
                
                
                48Interest
      earning deposits with banks
                
                
                18
                
                
                
                87Other
                
                
                244
                
                
                
                81Total
      interest income
                
                
                30,598
                
                
                
                26,578Interest
      expense:Savings,
      NOW and money market deposits
                
                
                2,515
                
                
                
                3,129Time
      deposits of $100,000 or more
                
                
                2,886
                
                
                
                3,099Other
      time deposits
                
                
                2,713
                
                
                
                4,147Other
      borrowings
                
                
                2,132
                
                
                
                2,224Subordinated
      debentures
                
                
                1,008
                
                
                
                516Total
      interest expense
                
                
                11,254
                
                
                
                13,115Net
      interest income
                
                
                19,344
                
                
                
                13,463Provision
      for loan losses
                
                
                25,000
                
                
                
                1,200Net
      interest income after provision for loan losses
                
                
                (5,656
                )
                
                
                12,263Noninterest
      income:Revenues
      from insurance agency
                
                
                840
                
                
                
                922Service
      charges on deposit accounts
                
                
                622
                
                
                
                567Net
      gain on the sale of investment securities
                
                
                518
                
                
                
                522Trust and
      investment services
                
                
                197
                
                
                
                133Increase
      in cash value of company owned life insurance
                
                
                125
                
                
                
                116OTTI loss:Total
      OTTI losses
                
                
                (495
                )
                
                
                -Portion
      of loss recognized in other comprehensive income
                
                
                -
                
                
                
                -Net
      impairment losses recognized in earnings
                
                
                (495
                )
                
                
                -Other
                
                
                627
                
                
                
                520Total
      noninterest income
                
                
                2,434
                
                
                
                2,780Noninterest
      expense:Salaries
      and employee benefits
                
                
                5,241
                
                
                
                4,806Occupancy
      and equipment
                
                
                4,001
                
                
                
                2,578Federal
      deposit insurance
                
                
                1,658
                
                
                
                550Amortization
      of intangible assets
                
                
                62
                
                
                
                91Other
                
                
                2,541
                
                
                
                1,367Total
      noninterest expense
                
                
                13,503
                
                
                
                9,392Income
      (loss) before income taxes
                
                
                (16,725
                )
                
                
                5,651Provision
      (benefit) for income taxes
                
                
                (2,956
                )
                
                
                2,035Net
      income (loss)
                
                $
                (13,769
                )
                
                $
                3,616Comprehensive
      income (loss)
                
                $
                (13,178
                )
                
                $
                3,060Basic
      earnings (loss) per share
                
                $
                (0.93
                )
                
                $
                0.31Diluted
      earnings (loss) per share
                
                $
                (0.93
                )
                
                $
                0.31





See notes
to consolidated financial statements.





4





Consolidated
Statements of Changes in Stockholders’ Equity (unaudited)


(Dollar
amounts in thousands except share data)


AccumulatedCommon Stock
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  
                  
                  
                  Other
                  
                  
                  Total
                  
                  
                  TotalShares
                    Outstanding
                  
                  
                  Amount
                  
                  
                  Paid
                    In Capital
                  
                  
                  Retained
                    Earnings
                  
                  
                  Treasury
                    Stock
                  
                  
                  Comprehensive
                    Loss
                  
                  
                  Stockholders’
                    Equity
                  
                  
                  Comprehensive
                    (Loss)Balance
      at January 1, 2010
                  
                  
                  14,855,482
                  
                  
                  $
                  169
                  
                  
                  $
                  82,318
                  
                  
                  $
                  64,820
                  
                  
                  $
                  (10,062
                  )
                  
                  $
                  (1,490
                  )
                  
                  $
                  135,755Comprehensive
      income:Net
      income (loss)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (13,769
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (13,769
                  )
                  
                  $
                  (13,769
                  )Change
      in unrealized gain (loss) on securities available for sale, net of
      reclassification and tax effects
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  571
                  
                  
                  
                  571
                  
                  
                  
                  571Change
      in unrealized gain (loss) on securities available for sale for which a
      portion of an OTTI has been recognized in earnings, net of
      reclassification and tax
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  77
                  
                  
                  
                  77
                  
                  
                  
                  77Changes
      in funded status of retirement plans, net of tax
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (57
                  )
                  
                  
                  (57
                  )
                  
                  
                  (57
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (13,178
                  )Issuance
      of shares for employee stock ownership plan
                  
                  
                  50,526
                  
                  
                  
                  1
                  
                  
                  
                  239
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  240Stock
      awards granted
                  
                  
                  61,500Balance
      at March 31, 2010
                  
                  
                  14,967,508
                  
                  
                  $
                  170
                  
                  
                  $
                  82,557
                  
                  
                  $
                  51,051
                  
                  
                  $
                  (10,062
                  )
                  
                  $
                  (899
                  )
                  
                  $
                  122,817





See notes
to consolidated financial statements.





5





Consolidated
Statements of Cash Flows (unaudited)


(Dollar
amounts in thousands except share data)


For
      the three months ended March 31,2010
                            
                            
                            2009Cash
      flows from operating activitiesNet
      income (loss)
                            
                            $
                            (13,769
                            )
                            
                            $
                            3,616Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      on premises and equipment
                            
                            
                            1,363
                            
                            
                            
                            971Provision
      for loan losses
                            
                            
                            25,000
                            
                            
                            
                            1,200Deferred
      tax asset valuation allowance
                            
                            
                            4,100
                            
                            
                            
                            -Net
      gain on investment securities
                            
                            
                            (518
                            )
                            
                            
                            (522
                            )Loss
      on sale of real estate owned
                            
                            
                            22
                            
                            
                            
                            2Other
      than temporary net impairment loss on securities
                            
                            
                            495
                            
                            
                            
                            -Net
      increase in other liabilities
                            
                            
                            1,801
                            
                            
                            
                            1,321Net
      (increase) decrease in other assets
                            
                            
                            (3,000
                            )
                            
                            
                            1,547Net
      increase in deferred taxes
                            
                            
                            (1,737
                            )
                            
                            
                            (1,378
                            )Amortization
      of unearned restricted stock awards
                            
                            
                            114
                            
                            
                            
                            107Amortization
      of ESOP awards
                            
                            
                            60
                            
                            
                            
                            75Increase
      in cash surrender value of company owned life insurance
                            
                            
                            (125
                            )
                            
                            
                            (116
                            )Investment
      securities amortization of premium/(accretion) ofdiscount,
      net
                            
                            
                            (28
                            )
                            
                            
                            (30
                            )Amortization
      of intangible assets
                            
                            
                            60
                            
                            
                            
                            91Cash
      provided by operating activities
                            
                            
                            13,838
                            
                            
                            
                            6,882Cash
      flows from investing activitiesProceeds
      from calls, repayments, maturities and sales of available-for-sale
      securities
                            
                            
                            178,005
                            
                            
                            
                            37,285Purchases
      of available-for-sale securities
                            
                            
                            -
                            
                            
                            
                            (81,026
                            )Net
      increase in term placements
                            
                            
                            -
                            
                            
                            
                            (125,000
                            )Net
      purchases of restricted securities
                            
                            
                            (390
                            )
                            
                            
                            -Net
      decrease (increase) in loans
                            
                            
                            53,617
                            
                            
                            
                            (134,485
                            )Proceeds
      from the sale of real estate owned
                            
                            
                            861
                            
                            
                            
                            -Purchases
      of premises and equipment
                            
                            
                            (4,284
                            )
                            
                            
                            (2,415
                            )Cash
      provided by (used in) investing activities
                            
                            
                            227,809
                            
                            
                            
                            (305,641
                            )Cash
      flows from financing activitiesNet
      (decrease) increase in demand, money market, NOW and savings
      deposits
                            
                            
                            (76,407
                            )
                            
                            
                            159,373Net
      (decrease) increase in time deposits
                            
                            
                            (126,032
                            )
                            
                            
                            143,697Cash
      dividends paid
                            
                            
                            -
                            
                            
                            
                            (472
                            )Net
      increase in other borrowings
                            
                            
                            8,660
                            
                            
                            
                            -Cash
      (provided by) used in financing activities
                            
                            
                            (193,779
                            )
                            
                            
                            302,598Net
      increase in cash and cash equivalents
                            
                            
                            47,868
                            
                            
                            
                            3,839Cash
      and cash equivalents, beginning of period
                            
                            
                            22,154
                            
                            
                            
                            25,969Cash
      and cash equivalents, end of period
                            
                            $
                            70,022
                            
                            
                            $
                            29,808Supplemental
      Information - Cash Flows:Cash
      paid for:Interest
                            
                            $
                            12,089
                            
                            
                            $
                            11,651Income
      taxes
                            
                            
                            -
                            
                            
                            
                            118





See notes
to consolidated financial statements.





6





Notes
to Consolidated Financial Statements (unaudited)


(Dollar
amounts in thousands except share data)


Note
1 – Financial Statement Presentation





The
consolidated financial statements include the accounts of Smithtown Bancorp,
Inc., (“Company”), a New York State-chartered bank holding company with its New
York State-chartered commercial bank subsidiary, Bank of Smithtown
(“Bank”), and three other subsidiaries, Smithtown Bancorp Capital Trust I,
Smithtown Bancorp Capital Trust II and Smithtown Bancorp Capital Trust III, all
of which were formed for the purpose of issuing trust preferred
securities. Bank of Smithtown has four wholly owned subsidiaries, Bank of
Smithtown Financial Services, Inc., Bank of Smithtown Insurance Agents and
Brokers, Inc., BOS Preferred Funding Corporation and SBRE Realty
Corp. Intercompany transactions and balances are eliminated in
consolidation.





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





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





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





Note 2 –
Earnings Per Common Share





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





For the three months ended March31,2010
                  
                  
                  2009BasicNet
      (Loss)
                  
                  $
                  (13,769
                  )
                  
                  $
                  -Distributed
      earnings allocated to common stock
                  
                  
                  -
                  
                  
                  $
                  471Undistributed
      earnings allocated to common stock
                  
                  
                  -
                  
                  
                  
                  3,126Net
      earnings allocated to common stock
                  
                  $
                  -
                  
                  
                  $
                  3,597Weighted
      average common shares outstanding, including shares considered
      participating securities
                  
                  
                  14,920,208
                  
                  
                  
                  11,847,678Less: weighted
      average participating securities
                  
                  
                  (87,203
                  )
                  
                  
                  (59,571
                  )Weighted
      average shares
                  
                  
                  14,833,005
                  
                  
                  
                  11,788,107Basic
      earnings (loss) per common share
                  
                  $
                  (0.93
                  )
                  
                  $
                  0.31DilutedNet
      (Loss)
                  
                  $
                  (13,769
                  )
                  
                  $
                  -Net
      earnings allocated to common stock
                  
                  $
                  -
                  
                  
                  $
                  3,597Weighted
      average common shares outstanding for basic earnings per common
      share
                  
                  
                  14,833,005
                  
                  
                  
                  11,788,107Add: Dilutive
      effect of warrants issued to purchase common stock
                  
                  
                  -
                  
                  
                  
                  -Weighted
      average shares and dilutive potential common shares
                  
                  
                  14,833,005
                  
                  
                  
                  11,788,107Diluted
      earnings (loss) per common share
                  
                  $
                  (0.93
                  )
                  
                  $
                  0.31




7




No
dividends were paid during the three months ended March 31, 2010. Dividends
of $3 were paid on unvested shares with non-forfeitable dividend rights during
the three months ended March 31, 2009, none of which were included in net income
as compensation expense as all awards were expected to vest.





Participating
securities totaling 113,170, representing shares of restricted common stock, and
475,000 warrants to purchase common stock were not included in the calculation
of earnings per share because they were not dilutive.




Note 3 –
Stock-Based Compensation





The Board
of Directors determines restricted stock awarded under the 2007 Stock
Compensation Plan (“Stock Compensation Plan”). Compensation expense is
recognized over the vesting period of the awards based on the fair value of the
stock at issue date. The fair value of the stock was determined using the
closing price at the date of issuance. Restricted shares vest ratably over
five years.The
board of directors elected to issue 61,500 and 38,125 shares of non-vested
restricted stock under the Stock Compensation Plan for the quarters ending March
31, 2010 and 2009, respectively.





A summary
of changes in the Company’s nonvested shares for the quarter ending March 31,
2010 follows:





Shares
                  
                  
                  Weighted
                    Average Grant
                    Date Share
                    ValueNonvested
      at January 1, 2010
                  
                  
                  51,670
                  
                  
                  $
                  17.51Granted
                  
                  
                  61,500
                  
                  
                  
                  4.75Nonvested
      at March 31, 2010
                  
                  
                  113,170
                  
                  
                  
                  10.58





As of
March 31, 2010, there was $1,083 of total unrecognized compensation cost related
to nonvested shares granted under the Plan. The cost is expected to be
recognized over a weighted-average period of 4.75 years.




Note
4 – Investment Securities





The
following table summarizes the amortized cost and fair value of the
available-for-sale securities and held-to-maturity investment securities
portfolios at March 31, 2010 and December 31, 2009 and the corresponding amounts
of gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss):




Gross
                    
                    
                    GrossAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    ValueMarch 31, 2010Available
      for saleU.S.
      government sponsored entities and agencies
                    
                    $
                    5,000
                    
                    
                    $
                    11
                    
                    
                    $
                    -
                    
                    
                    $
                    5,011Obligations
      of state and political subdivisions
                    
                    
                    59,300
                    
                    
                    
                    701
                    
                    
                    
                    (106
                    )
                    
                    
                    59,895Mortgage-backed
      securities: residential
                    
                    
                    142,125
                    
                    
                    
                    2,261
                    
                    
                    
                    -
                    
                    
                    
                    144,386Collateralized
      mortgage obligations
                    
                    
                    4,543
                    
                    
                    
                    -
                    
                    
                    
                    (18
                    )
                    
                    
                    4,525Other
                    
                    
                    9,843
                    
                    
                    
                    -
                    
                    
                    
                    (3,248
                    )
                    
                    
                    6,595Total
      available for sale
                    
                    $
                    220,811
                    
                    
                    $
                    2,973
                    
                    
                    $
                    (3,372
                    )
                    
                    $
                    220,412Held
      to maturityObligations
      of state and political subdivisions
                    
                    $
                    66
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    
                    $
                    67December 31, 2009Available
      for saleU.S.
      government sponsored entities and agencies
                    
                    $
                    5,000
                    
                    
                    $
                    -
                    
                    
                    $
                    (34
                    )
                    
                    $
                    4,966Obligations
      of state and political subdivisions
                    
                    
                    59,339
                    
                    
                    
                    761
                    
                    
                    
                    (114
                    )
                    
                    
                    59,986Mortgage-backed
      securities: residential
                    
                    
                    319,543
                    
                    
                    
                    1,447
                    
                    
                    
                    (212
                    )
                    
                    
                    320,778Collateralized
      mortgage obligations
                    
                    
                    4,545
                    
                    
                    
                    8
                    
                    
                    
                    -
                    
                    
                    
                    4,553Other
                    
                    
                    10,338
                    
                    
                    
                    -
                    
                    
                    
                    (3,347
                    )
                    
                    
                    6,991Total
      available for sale
                    
                    $
                    398,765
                    
                    
                    $
                    2,216
                    
                    
                    $
                    (3,707
                    )
                    
                    $
                    397,274Held
      to maturityObligations
      of state and political subdivisions
                    
                    $
                    66
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    
                    $
                    67





8





The
proceeds from sales and calls of securities and the associated gains and
losses for the three months ended March 31, are listed below:





2010
                  
                  
                  2009Proceeds
                  
                  $
                  161,823
                  
                  
                  $
                  30,432Gross
      gains
                  
                  
                  653
                  
                  
                  
                  522Gross
      losses
                  
                  
                  135
                  
                  
                  
                  -





The tax
provision related to these realized gains and losses was $181 and $183,
respectively.





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




March 31, 2010Amortized
                  
                  
                  FairCost
                  
                  
                  ValueAvailable
      for saleWithin
      one year
                  
                  $
                  7,498
                  
                  
                  $
                  4,251One
      to five years
                  
                  
                  8,341
                  
                  
                  
                  8,485Five
      to ten years
                  
                  
                  26,465
                  
                  
                  
                  26,756Beyond
      ten years
                  
                  
                  178,507
                  
                  
                  
                  180,920Total
                  
                  $
                  220,811
                  
                  
                  $
                  220,412Held
      to maturityWithin
      one year
                  
                  $
                  33
                  
                  
                  $
                  33One
      to five years
                  
                  
                  33
                  
                  
                  
                  34Total
                  
                  $
                  66
                  
                  
                  $
                  67





Securities
pledged at March 31, 2010, had a carrying amount of $136,756 and were
pledged to secure public deposits, treasury tax and loan deposits and FHLB
borrowings.




At March
31, 2010, there were no holdings of securities of any one issuer, other than the
U.S. Government and its entities and agencies, in an amount greater than 10% of
shareholders’ equity.




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





Less Than 12 Months
                    
                    
                    12 Months or More
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    LossMarch 31, 2010Available
      for saleObligations
      of state and political subdivisions
                    
                    $
                    13,368
                    
                    
                    $
                    (106
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    13,368
                    
                    
                    $
                    (106
                    )Mortgage-backed
      securities
                    
                    
                    4,525
                    
                    
                    
                    (18
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,525
                    
                    
                    
                    (18
                    )Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,116
                    
                    
                    
                    (3,248
                    )
                    
                    
                    4,116
                    
                    
                    
                    (3,248
                    )Total
                    
                    $
                    17,893
                    
                    
                    $
                    (124
                    )
                    
                    $
                    4,116
                    
                    
                    $
                    (3,248
                    )
                    
                    $
                    22,009
                    
                    
                    $
                    (3,372
                    )December 31, 2009Available
      for saleU.S.
      Government sponsored entities and agencies
                    
                    $
                    4,966
                    
                    
                    $
                    (34
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,966
                    
                    
                    $
                    (34
                    )Obligations
      of state and political subdivisions
                    
                    
                    13,312
                    
                    
                    
                    (114
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    13,312
                    
                    
                    
                    (114
                    )Mortgage-backed
      securities
                    
                    
                    82,283
                    
                    
                    
                    (
      212
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    82,283
                    
                    
                    
                    (212
                    )Other
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,511
                    
                    
                    
                    (3,347
                    )
                    
                    
                    4,511
                    
                    
                    
                    (3,347
                    )Total
                    
                    $
                    100,561
                    
                    
                    $
                    (360
                    )
                    
                    $
                    4,511
                    
                    
                    $
                    (3,347
                    )
                    
                    $
                    105,072
                    
                    
                    $
                    (3,707
                    )





9





Other-Than-Temporary-Impairment





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





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





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





At March
31, 2010, the Company’s securities portfolio totaled $220,478, of which $22,009
was in an unrealized loss position. The majority of unrealized losses are
related to the Company’s municipal and other securities, as discussed
below:




MunicipalSecurities





At March
31, 2010, all of the municipal securities held by the Company had underlying
ratings of A or better by one of the major rating agencies. Because the
decline in fair value is attributable to changes in interest rates and not
credit quality, and because the Company does not have the intent to sell these
municipal securities and it is likely that it will not be required to sell the
securities before their anticipated recovery, the Company does not consider
these securities to be other-than-temporarily impaired at March 31,
2010.





Other
Securities





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





The
following table presents detailed information for each trust preferred security
held by the Company at March 31, 2010.




Issuer
                        
                        Single
                          Issuer
                          or
                          Pooled
                        
                        Class
                        
                        
                        Book
                          Value
                        
                        
                        Gross
                          Unrealized
                          Loss
                        
                        
                        Estimated
                          Fair Value
                        
                        Credit
                          Rating
                        
                        Number
                          of Paying
                          Banks in
                          Issuance
                        
                        
                        Deferrals
                          and
                          Defaults as
                          % of
                          Collateral
                        
                        
                        Excess
                          Subordination
                          as a Percent of
                          Paying
                          CollateralFairfield
      County Bank Trust Preferred
                        
                        Single
                        
                        -
                        
                        
                        $
                        5,000
                        
                        
                        $
                        (1,801
                        )
                        
                        $
                        3,199
                        
                        NA
                        
                        
                        1
                        
                        
                        None
                        
                        
                        
                        -Trust
      Preferred Funding III LTD Series 144A
                        
                        Pooled
                        
                        B-2
                        
                        
                        
                        1,213
                        
                        
                        
                        (820
                        )
                        
                        
                        393
                        
                        Ca/C
                        
                        
                        24
                        
                        
                        
                        27.97
                        %
                        
                        
                        (23.9
                        )%Trust
      Preferred Funding I
                        
                        Pooled
                        
                        B
                        
                        
                        
                        1,150
                        
                        
                        
                        (626
                        )
                        
                        
                        524
                        
                        Caa3/C
                        
                        
                        14
                        
                        
                        
                        37.36
                        %
                        
                        
                        (29.8
                        )%Total
                        
                        
                        
                        
                        
                        
                        $
                        7,363
                        
                        
                        $
                        (3,247
                        )
                        
                        $
                        4,116





10





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





Our
analysis of two of these investments includes $2,363 book value of pooled trust
preferred securities (CDOs). The issuers in these securities are primarily
banks. The Company uses the OTTI evaluation model to compare the present
value of expected cash flows to the previous estimate to ensure there are no
adverse changes in cash flows during the quarter. The OTTI model considers
the structure and term of the CDO and the financial condition of the underlying
issuers. Specifically, the model details interest rates, principal balances
of note classes and underlying issuers, the timing and amount of interest and
principal payments of the underlying issuers, and the allocation of the payments
to the note classes. The current estimate of expected cash flows is based
on the recent trustee reports and any other relevant market information
including announcements of interest payment deferrals or defaults of underlying
trust preferred securities. Assumptions used in the model include expected
future default rates and prepayments. We assume no recoveries on defaults
and treat all interest payment deferrals as defaults. Upon completion of
the March 31, 2010 analysis, our model indicated OTTI on Trust Preferred Funding
III LTD Series 144A, which experienced additional defaults or deferrals during
the period. This security had OTTI losses recognized in earnings of
$495. The two CDOs remained classified as available for sale at March 31,
2010, and together, the two CDOs and one single issuer trust preferred security
accounted for all of the unrealized losses in the other securities category at
March 31, 2010. Principal and interest payments on each trust preferred securityhave beenmade on a timely basisthrough March 31, 2010.





The
discount rates used to support the realizable value in trust preferred
securities is the actual index and margin on each security. The discount
rates used for the estimated fair value of the two CDOs and the one single
issuer trust preferred security were 14% and 13%, respectively, at March
31, 2010. Management determined these rates based on discussions with our
investment bankers regarding newly issued bank debt. Management also
reviewed the current internal risk ratings of the collateral underlying the
securities.





Future
deferrals and defaults on the two CDOs are estimated based on an analysis of the
collateral underlying the security. Particular detail is paid to each
bank’s nonperforming assets to total loans, total risk based capital ratio and
Texas ratio (nonperforming assets plus restructured loans/tangible capital plus
the allowance for loan losses). These three ratios are weighted to
calculate a credit risk rating (“CRR”) for each bank. The CRR, based on a
scale of 1 being the best and 5 being the worst, is used as the basis for future
default assumptions. Banks known to have deferred or defaulted prior, or
subsequent, to the reporting date and banks with a CRR of 4 or higher as of the
reporting date are considered to default immediately in our discounted cash flow
pricing model (“model”). As of March 31, 2010 other future default rates
were estimated at 50.00% if the CRR was 3.50 to 3.99, 25.00% if the CRR was 3.00
to 3.49, 12.50% if the CRR was 2.50 to 2.99, 6.25% if the CRR was 2.00 to 2.49
and 3.00% if the CRR was 1.99 or less. These weightings generate an overall
estimate of future defaults that are spread over the remaining maturity of the
security in our Model.




Trust
Preferred Funding I has experienced $30,000 in defaults and $21,000 in
deferrals, but did not have any new defaults or deferrals in the first quarter
of 2010. Trust Preferred Funding III LTD Series 144A has experienced
$24,250 in defaults and $60,500 in deferrals with $5,000 of the deferrals
announced in the first quarter of 2010. Our Model as of March 31, 2010,
estimated $46,015 and $19,796 in future defaults in Trust Preferred Funding III
LTD Series 144A and Trust Preferred Funding I, respectively.




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




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




Changes
in unrealized losses relating to securities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) still held at
March 31, 2010 totaled $395.





The table
below presents a roll forward of the credit losses recognized in earnings from
December 31, 2009 through March 31, 2010:





Beginning
      balance, December 31, 2009
                  
                  $
                  414Additions/Subtractions:Increases
      to the amount related to the credit loss for which OTTI was previously
      recognized
                  
                  
                  495Ending
      balance, March 31, 2010
                  
                  $
                  909





11





Note
5 – Loans





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





March
      31,
                  
                  
                  December
      31,2010
                  
                  
                  2009Commercial
      and industrial loans
                  
                  $
                  46,420
                  
                  
                  $
                  48,625Real
      estate:Land
      and construction
                  
                  
                  316,948
                  
                  
                  
                  353,772Commercial
                  
                  
                  970,923
                  
                  
                  
                  997,097Multifamily
                  
                  
                  479,648
                  
                  
                  
                  478,840Residential
                  
                  
                  213,827
                  
                  
                  
                  214,548Consumer
                  
                  
                  1,718
                  
                  
                  
                  2,082Less:
      Net deferred loan fees
                  
                  
                  3,657
                  
                  
                  
                  4,068Total
      loans
                  
                  
                  2,025,827
                  
                  
                  
                  2,090,896Allowance
      for loan losses
                  
                  
                  51,231
                  
                  
                  
                  38,483Net
      loans
                  
                  $
                  1,974,596
                  
                  
                  $
                  2,052,413





Individually
impaired loans were as follows:


March
      31,
                  
                  
                  December
      31,2010
                  
                  
                  2009Loans
      with no allocated allowance for loan losses
                  
                  $
                  106,664
                  
                  
                  $
                  133,155Loans
      with allocated allowance for loan losses
                  
                  
                  112,106
                  
                  
                  
                  79,385Total
                  
                  $
                  218,770
                  
                  
                  $
                  212,540Amount
      of the allowance for loan losses allocated
                  
                  $
                  28,221
                  
                  
                  $
                  21,630Average
      of individually impaired loans during the year
                  
                  
                  218,282
                  
                  
                  
                  44,685Interest
      income recognized during impairment
                  
                  
                  751
                  
                  
                  
                  495





Included
in impaired loans above are troubled debt restructurings as
follows:





March
      31,
                  
                  
                  December
      31,2010
                  
                  
                  2009Troubled
      debt restructurings with no allocated allowance for loan
      losses
                  
                  $
                  10,293
                  
                  
                  $
                  29,842Troubled
      debt restructurings with allocated allowance for loan
    losses
                  
                  
                  31,712
                  
                  
                  
                  12,791Total
                  
                  $
                  42,005
                  
                  
                  $
                  42,633Amount
      of the allowance for loan losses allocated to troubled debt
      restructurings
                  
                  $
                  6,776
                  
                  
                  $
                  2,571





The Company has no funds committed to
customers whose loans are classified as a troubled debt restructuring at March
31, 2010. At December 31, 2009, $51 was committed to customers whose loans were
classified as a troubled debt restructuring.




Recognition
of interest income on impaired loans, as for all other loans, is discontinued
when reasonable doubt exists as to the full collectability of principal or
interest. Any payments received on impaired loans are applied to the recorded
investment in the loan. No interest was earned for the three months ended March
31, 2010 and for 2009 on the cash basis for impaired loans.





Nonaccrual
loans and loans past due 90 days and still accruing were as
follows:





March
      31,
                
                
                December
      31,2010
                
                
                2009Nonaccrual
      loans
                
                
                200,810
                
                
                
                130,172Loans
      past due 90 days and still accruing
                
                
                2,759
                
                
                
                -Troubled
      debt restructurings not included in nonperforming loans
                
                
                8,119
                
                
                
                26,937








12





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





Note 6 -
Fair Value





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





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


Level 2 –
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.


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





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





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





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





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





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




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





Fair Value Measurements atMarch 31, 2010 UsingQuoted Prices
                  in Active
                  Markets for
                  Identical Assets
                
                
                Significant Other
                  Observable
                  Inputs
                
                
                Significant Other
                  Unobservable
                  InputsCarrying Value
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Assets:Available
      for sale securitiesU.S.
      government sponsored entities and agencies
                
                $
                5,011
                
                
                $
                -
                
                
                $
                5,011
                
                
                $
                -Obligations
      of state and political subdivisions
                
                
                59,895
                
                
                
                -
                
                
                
                59,895
                
                
                
                -Mortgage-backed
      securities: residential
                
                
                144,386
                
                
                
                -
                
                
                
                144,386
                
                
                
                -Collateralized
      mortgage obligations
                
                
                4,525
                
                
                
                -
                
                
                
                4,553
                
                
                
                -Other
                
                
                6,595
                
                
                
                -
                
                
                
                2,479
                
                
                
                4,116





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





13





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





Fair
      Value Measurements Using SignificantUnobservable Inputs (Level
    3)Available
      for Sale SecuritiesBalance
      of recurring Level 3 assets at January 1, 2010
                  
                  $
                  4,511Total
      gains or losses (realized/unrealized):Included
      in earnings – realizedIncluded
      in earnings – unrealized
                  
                  
                  (495
                  )Included
      in other comprehensive income
                  
                  
                  100Purchases,
      sales, issuances and settlements, netTransfers
      in and/or out of Level 3
                  
                  
                  -Balance
      of recurring Level 3 assets at March 31, 2010
                  
                  $
                  4,116





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





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





Fair
      Value Measurements at
                  March 31, 2010 UsingQuoted
      Pricesin
      Active
                
                
                Significant
      Other
                
                
                Significant
      OtherMarkets
      for
                
                
                Observable
                
                
                UnobservableIdentical
      Assets
                
                
                Inputs
                
                
                InputsCarrying Value
                
                
                (Level 1)
                
                
                ( Level 2)
                
                
                ( Level 3)Assets:Impaired
      loans
                
                $
                112,106
                
                
                $
                -
                
                
                $
                -
                
                
                $
                83,885Other
      real estate owned, net
                
                
                1,130
                
                
                
                -
                
                
                
                -
                
                
                
                1,130Loans
      held for sale
                
                
                15,650
                
                
                
                -
                
                
                
                15,650
                
                
                
                -





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





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $112,106, with a
valuation allowance of $28,221 at March 31, 2010, resulting in an additional
provision for loan losses of $6,591 for the quarter ending March 31,
2010. At December 31, 2009, impaired loans had a carrying amount of
$79,385, with a valuation allowance of $21,630, resulting in an additional
provision for loan losses of $21,305 for the year ending December 31,
2009.





14





Other
real estate owned, which is measured at the lower of carrying or fair value less
costs to sell, had a net carrying amount of $1,130, which is made up of the
outstanding balance of $8,102, net of a valuation allowance of $6,972 at March
31, 2010. Proceeds from
salesof other real estate
owned were $861forthethreemonths endedMarch31, 2010.Gross losses of $22were realized on sales during the
firstthreemonths of 2010.At December 31, 2009, other real estate
ownedhad a net carrying amount of $2,013, which was made up of the
outstanding balance of $8,985, net of a valuation allowance of $6,972. A
write-down of $6,872 was recorded for the year ending December 31, 2009. There
were no sales of other real estate owned during 2009.





Loans held for sale, which are carried
at the lower of cost or fair value, were carried at the fair value of $15,650 at
March 31, 2010. Charge offs of $1,864 were recognized during the first quarter
of 2010 on the loans held for sale at March 31, 2010 before they were classified
as held for sale.Proceeds from sales of loans held for sale were $4,000
for the three months ended March 31, 2010. There were no gains or losses
realized on sales during the first three months of 2010. Loans held for sale at December 31,
2009 totaled $16,450. Charge offs of $9,883 were recognized in 2009 on the loans
held for sale at December 31, 2009 before they were classified as held for sale.
There were no sales of loans held for sale in 2009.




The
carrying amounts and estimated fair values of financial instruments at March 31,
2010 and December 31, 2009 were as follows:





March 31, 2010
                
                
                December 31, 2009Carrying
                
                
                Fair
                
                
                Carrying
                
                
                FairAmount
                
                
                Value
                
                
                Amount
                
                
                ValueFinancial
      assets:Cash
      and due from banks
                
                $
                18,539
                
                
                $
                18,539
                
                
                $
                18,745
                
                
                $
                18,745Interest
      earning deposits with banks
                
                
                51,483
                
                
                
                51,483
                
                
                
                3,409
                
                
                
                3,409Term
      placements
                
                
                507
                
                
                
                507
                
                
                
                507
                
                
                
                507Securities
      available for sale
                
                
                220,412
                
                
                
                220,412
                
                
                
                397,274
                
                
                
                397,274Securities
      held to maturity
                
                
                66
                
                
                
                67
                
                
                
                66
                
                
                
                67Restricted
      stock
                
                
                18,743
                
                
                NA
                
                
                
                18,353
                
                
                NALoans
      held for sale
                
                
                15,650
                
                
                
                15,650
                
                
                
                16,450
                
                
                
                16,450Loans,
      net
                
                
                1,974,596
                
                
                
                1,824,273
                
                
                
                2,090,896
                
                
                
                1,975,640Other
      real estate owned
                
                
                1,130
                
                
                
                1,130
                
                
                
                2,013
                
                
                
                2,013Accrued
      interest receivable
                
                
                9,211
                
                
                
                9,211
                
                
                
                10,152
                
                
                
                10,152Financial
      liabilities:Deposits
                
                
                1,872,589
                
                
                
                1,881,665
                
                
                
                2,075,028
                
                
                
                2,086,245FHLB
      advances and otherBorrowings
                
                
                361,480
                
                
                
                373,765
                
                
                
                352,820
                
                
                
                303,354Subordinated
      debt
                
                
                56,433
                
                
                
                20,965
                
                
                
                56,351
                
                
                
                28,480Accrued
      interest payable
                
                
                3,761
                
                
                
                3,761
                
                
                
                4,597
                
                
                
                4,597





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




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




Note 7 –
Other Borrowings and Subordinated Debentures





Advances
from the FHLB were as follows:





March
      31, 2010:Maturities
      from April 2010 through September 2018, fixed rate at rates from 0.50% to
      3.15%, averaging 2.38%
                  
                  
                  360,000December
      31, 2009:Overnight
      line of credit at 0.34%
                  
                  $
                  36,340Maturities
      from January 2010 through September 2018, fixed rate at rates from 2.18%
      to 3.61%, averaging 2.70%
                  
                  
                  315,000





15





Each term
advance is payable at its maturity date with a prepayment penalty if paid before
the maturity date. All advances are periodically callable, with the
exception of $50,000 maturing in April of 2010. The advances were collateralized
by $715,581 and $884,328 of first mortgage loans at March 31, 2010 and December
31, 2009, respectively. The collateral at March 31, 2010 has been delivered
to the FHLB and at December 31, 2009 was under a blanket lien
arrangement. Based on this collateral and the Company’s holdings of FHLB
stock, the Company is eligible to borrow up to an additional $158,695 at March
31, 2010.





In 2003,
a trust formed by the Company issued $11,000 of floating rate trust preferred
securities as part of a pooled offering of such securities due October 8, 2033.
The securities bear interest at 3 month London Interbank Offered Rate (“LIBOR”)
plus 2.99% with a rate of 3.24% as of March 31, 2010. The Company issued
subordinated debentures to the trust in exchange for the proceeds of the
offering. The debentures and related debt issuance costs represent the sole
assets of the trust. The Company may redeem the subordinated debentures, in
whole or in part, on any interest payment date after October 8,
2008.





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





In 2008,
a third trust formed by the Company issued $20,000 of floating rate trust
preferred securities due September 1, 2038. The securities bear interest at 3
month LIBOR plus 3.75% with a rate of 4.00% as of March 31, 2010. The
Company issued subordinated debentures to the trust in exchange for the proceeds
of the offering. The debentures and related debt issuance costs represent the
sole assets of the trust. The Company may redeem the subordinated debentures, in
whole or in part, at a premium declining ratably to par on September 1,
2013.





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





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





Note 8 –
Post Retirement Benefits





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




A
nontax-qualified executive and director incentive retirement plan covers certain
directors and executive officers. Under the plan, the Company can award up to
10% of the executive officer’s salary for the prior fiscal year and up to 25% of
a director’s fees for the prior fiscal year. The Company pays each participant
the amount awarded plus interest either over 15 years or in a lump sum at normal
retirement age. The Bank’s expense for these plans was $58 and $96 for the three
months ended March 31, 2010 and 2009, respectively.




A
nontax-qualified deferred compensation plan covers all directors and executive
officers. Under the plan, directors may elect to defer a portion of their fees
and executive officers may elect to defer a portion of their compensation. Upon
retirement or termination of service, the Company pays each participant the
amount of their deferrals plus interest over 5 years, 10 years or in a lump sum
payment. A liability is accrued for the obligation under this plan. The Bank’s
expense for these plans was $8 and $7 for the three months ended March 31, 2010
and 2009, respectively.





16





Certain
members of management are covered by group term replacement life insurance. The
benefit provides postretirement life insurance up to a maximum of two and one
half times final annual base salary. The Bank’s expense for these plans was $11
for the three month periods ended March 31, 2010 and 2009,
respectively.




The Chief
Executive Officer (“CEO”) has a Supplemental Executive Retirement Agreement
(“SERA”). Under the plan, the CEO receives a lifetime benefit at retirement,
with a guaranteed 15 years, based on seventy percent of his final three-year
average base salary reduced by various offsets including employer contributions
under the 401(k) Plan, the Executive Incentive Retirement Plan, as well as 50%
of his Social Security benefit. The Bank’s expense for this plan was $351 and
$162 for the three month periods ended March 31, 2010 and 2009,
respectively.





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





Three months ended March 31,
                
                SERA Benefits
                
                
                Postretirement Medical and Life
                  Benefits2010
                
                
                2009
                
                
                2010
                
                
                2009Service
      cost
                
                $
                179
                
                
                $
                133
                
                
                $
                -
                
                
                $
                -Interest
      cost
                
                
                61
                
                
                
                37
                
                
                
                4
                
                
                
                3Amortization
      of net (gain)/loss
                
                
                111
                
                
                
                15
                
                
                
                (1
                )
                
                
                (3
                )Amortization
      of unrecognized transition obligation
                
                
                -
                
                
                
                -
                
                
                
                8
                
                
                
                8Net
      periodic benefit cost
                
                $
                351
                
                
                $
                185
                
                
                $
                11
                
                
                $
                8





Note 9 –
Income Taxes





The
Company had an income tax benefit for the first quarter of 2010 of $2,956 due to
a net operating loss before taxes of $16,725. The gross income tax benefit was
$7,056 offset by a valuation allowance on the Company’s deferred tax asset of
$4,100. An assessment of the Company’s deferred tax asset at March 31, 2010 of
$23,652, led to the decision to record the valuation allowance. Based on the
Company’s operating losses over the past two quarters, the ability to realize
the full benefits of the deferred tax asset has become impaired. In determining
the need for a valuation allowance Management considered the Company’s ability
to realize carry back benefits of the current losses as well as the ability to
realize future tax benefits based on tax planning strategies that are feasible
and could be implemented. Management also considered the Company’s history of
earnings prior to the fourth quarter of 2009 and that a majority of the charge
offs and nonperforming loans are concentrated in the land and construction
portfolio. Therefore, management also considered projected earnings over the
next 12 quarters after stress testing projections for additional provisions for
loan losses. The Company evaluates the need for a valuation allowance for its
deferred tax asset on a quarterly basis.





Note 10 -
Loan Commitments and Other Related Activities





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





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





March 31, 2010
                
                
                December 31, 2009Fixed
                
                
                Variable
                
                
                Fixed
                
                
                VariableRate
                
                
                Rate
                
                
                Rate
                
                
                RateCommitments
      to make loans
                
                $
                -
                
                
                $
                5,215
                
                
                $
                2,742
                
                
                $
                16,971Unused
      lines of credit
                
                
                1,118
                
                
                
                87,765
                
                
                
                1,108
                
                
                
                107,456Standby
      letters of credit
                
                
                -
                
                
                
                20,136
                
                
                
                -
                
                
                
                18,281





Note 11 –
Regulatory Capital Matters





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





17





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





The
Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2010
and December 31, 2009 are in the following table. As a result of the
Consent Agreement, the Bank is categorized as adequately capitalized for
regulatory capital purposes.




Actual
                        
                        
                        Required For Capital
                          Adequacy Purposes
                        
                        
                        To Be Well
                          Capitalized Under
                          Prompt Corrective
                          Action ProvisionsAmount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        Ratio
                        
                        
                        Amount
                        
                        
                        RatioMarch31,
      2010Total
      capital to risk weighted assets:Consolidated
                        
                        $
                        191,187
                        
                        
                        
                        10.10
                        %
                        
                        $
                        151,441
                        
                        
                        
                        8.00
                        %
                        
                        $
                        NA
                        
                        
                        NA
                        %Bank
                        
                        
                        188,442
                        
                        
                        
                        9.96
                        
                        
                        
                        151,306
                        
                        
                        
                        8.00
                        
                        
                        
                        189,133
                        
                        
                        
                        10.00Tier
      1 capital to risk weighted assets:Consolidated
                        
                        
                        149,587
                        
                        
                        
                        7.90
                        
                        
                        
                        75,721
                        
                        
                        
                        4.00
                        
                        
                        NA
                        
                        
                        NABank
                        
                        
                        146,863
                        
                        
                        
                        7.77
                        
                        
                        
                        75,653
                        
                        
                        
                        4.00
                        
                        
                        
                        113,480
                        
                        
                        
                        6.00Tier
      1 capital to average assets:Consolidated
                        
                        
                        149,587
                        
                        
                        
                        6.00
                        
                        
                        
                        99,752
                        
                        
                        
                        4.00
                        
                        
                        NA
                        
                        
                        NABank
                        
                        
                        146,863
                        
                        
                        
                        5.90
                        
                        
                        
                        99,649
                        
                        
                        
                        4.00
                        
                        
                        
                        124,562
                        
                        
                        
                        5.00





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






Based on
the Bank’s March 31, 2010 total risk weighted assets of $1,891,326 and total
month end assets used for leverage of $2,414,904, the Bank would have to have
total capital of $208,046 and Tier 1 capital $170,219 to meet the capital
requirements of the Consent Agreement.




Attempts
to meet the capital requirements of the Consent Agreement so far this year have
focused on shrinking the balance sheet through reductions in loans through
amortization and problem loan workouts, reductions in investment securities
through maturities, principal repayments and sales and decreases in deposits
through pricing strategies.  The Company has also considered, and will
continue to consider, balance sheet restructuring to shift assets from
higher regulatory capital risk weighting categories to lower risk weighting
categories.  Based on actual results of operations for the first
quarter of 2010 as well as results of efforts to shrink the balance sheet, the
Bank will provide updated plans and forecasts based on known information to the
FDIC and Banking Department regarding our capital requirements.  The
plans and forecasts will consider expanded alternatives to include:
 
 ·
              Selling
      one or more packages of nonperforming
loans
 ·
              Selling
      one or more packages of performing
loans
 ·
              Raising
      capital
 ·
              A
      combination of the foregoing
strategies
 
 Should
the Bank be unable to meet the required capital ratios by June 30, 2010, the
Consent Agreement requires immediate notification to the FDIC and Banking
Department and provides a 60 day period to either meet the ratios or to submit a
written plan describing the primary means and timing by which the Bank shall
meet or exceed the minimum requirements, as well as a contingency plan for the
sale or merger of the Bank in the event the primary sources of capital are not
available.
 
 Banking
regulators solely determine the Bank’s progress toward compliance with
provisions of the Consent Agreement.  Accordingly it is possible
banking regulators in the future could impose further and more stringent
conditions whose impact could be material.


18











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


(Dollar
amounts in thousands except share data)





About
Forward-Looking Statements





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





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





Overview





This
discussion and analysis should be read in conjunction with the Company’s
consolidated financial statements, notes thereto and other financial information
appearing elsewhere in this report. Dollar amounts in thousands except
share data.





The
Company recorded a net loss for the first quarter of 2010 of $13,769, or $0.93
per fully diluted share. Net charge offs and declining real estate values
on impaired loans, especially in the Bank’s land and construction portfolio led
to a provision for loan losses of $25,000. After net charge offs of $12,252
during the quarter, the allowance for loan losses at March 31, 2010 totaled
$51,231 or 2.53% of total loans. Nonperforming loans at March 31, 2010 were
$203,569, or 10.05%, of total loans. At December 31, 2009, nonperforming
loans were $130,172, or 6.23%, of total loans. However, impaired loans
remained relatively flat from the prior year-end totaling $218,770 at March 31,
2010 compared to $212,540 at December 31, 2009.




Attempts
to meet the capital requirements of the Consent Agreement so far this year have
focused upon shrinking the balance sheet, which the Bank has been able to
do, as assets at March 31, 2010 were $2,429,537, down 7.80% from $2,634,930
at year-end 2009. Loans, including loans held for sale, decreased by
$65,869 during the first quarter. On the liability side of the balance
sheet, deposits were decreased by $202,439, including $126,032 of certificates
of deposit. As deposit reductions outpaced loan decreases, investment
securities were reduced by $176,862. The success in shrinking the balance
sheet to meet the capital requirements has been more than offset by the loss for
the quarter resulting largely from the $25,000 provision for loan losses and a
valuation allowance of $4,100 against the Company’s deferred tax
asset.





19





No new
branches were opened during the quarter, but four new branch projects remain
under development with expected completion dates between the middle of 2010 and
the first quarter of 2011. These locations have FDIC and Banking Department
approval to establish a branch and the Bank is obligated under lease
agreements. The board of directors and management believe the expanding
branch network continues to add to the franchise value of the
Company.





During
the first quarter of 2010, the Bank made the following progress in complying
with the Consent Agreement provisions:





i.
            The
      Bank submitted to the FDIC and Banking Department a revised lending
      policy to provide additional guidance and control over the lending
      functions.





ii.
            The
      Bank submitted to the FDIC and Banking Department a revised independent
      loan review policy and program to ensure that it is consistent with the
      Bank’s loan review policy and that is sufficiently comprehensive to assess
      risks in the Bank’s lending and minimize credit
  losses.





iii.
            The
      Bank has eliminated from its books all assets or portions of assets
      classified as “Loss.”





iv.
            The
      Bank completed and submitted to the FDIC and Banking Department a plan for
      systematically reducing and monitoring its CRE loan concentration of
      credit to an amount, which is commensurate with the Bank’s business
      strategy, management expertise, size and
  location.





v.
            The
      Bank completed and submitted to the FDIC and Banking Department a plan to
      reduce assets classified “Doubtful” and
  “Substandard.”





vi.
            The
      Bank completed and submitted to the FDIC and Banking Department a profit
      plan and comprehensive budget for all categories of income and expense for
      the calendar year 2010.





vii.
            The
      Bank provides updated plans and forecasts based on the known information
      at the time to the FDIC and Banking Department regarding our capital
      requirements.





The
Company has made progress shrinking the loan portfolio. However, it appears
that although a case by case resolution of problem credits brings the best price
for each loan, it is also a slow process that, when combined with migration
of new loans to the nonperforming category, may not allow us to reach our
capital requirements as quickly as we had hoped. Should the Bank be unable
to meet the required ratios by the end of the second quarter of 2010, the
Consent Agreement requires immediate notification to the FDIC and Banking
Department and provides a 60 day period to either meet the ratios or to submit a
written plan describing the primary means and timing by which the Bank shall
meet or exceed the minimum requirements, as well as a contingency plan for the
sale or merger of the Bank in the event the primary sources of capital are not
available. Accordingly, we have decided to expand the alternatives we are
exploring to include selling one or more packages of nonperforming loans,
selling one or more packages of performing loans, raising capital if necessary,
or some ‘hybrid’ combination of the foregoing strategies. No assurances can
be provided that we will be able to successfully implement any of these
alternatives or if we are successful what the ultimate terms will be. Cash
dividends will remain suspended and the Company has decided to defer interest
payments on its trust preferred securities.




On April
13, 2010, the FDIC approved an interim rule extending the Transaction Account
Guarantee Program (“TAG Program”), which offers deposit insurance on the entire
amount of all noninterest bearing checking accounts through December 31, 2010.
The Bank has decided to continue its participation in the TAG Program through
this latest extension period.




Net
Income (Loss)





The net
loss for the quarter ending March 31, 2010 totaled $13,769, or $0.93 per diluted
share, while net income for the quarter ending March 31, 2009 totaled $3,616, or
$0.31 per diluted share. Significant trends for 2010 include: (i) a $23,800, or
1983.33%, increase in the provision for loan losses; (ii) a $5,881, or 43.68%,
increase in net interest income; (iii) a $346, or 12.45%, decrease in total
noninterest income; (iv) a $4,111, or 43.77%, increase in total noninterest
expense and (v) a net income tax benefit of $2,956, after netting a $4,100
deferred tax asset valuation allowance, during for the first quarter of 2010
compared to a $2,035 income tax expense for the first quarter of
2009.





Net
Interest Income





Net
interest income, the primary contributor to earnings, represents the difference
between income on interest earning assets and expense on interest bearing
liabilities. Net interest income depends upon the volume of interest earning
assets and interest bearing liabilities and the interest rates earned or paid on
them.





20





The
following table sets forth certain information relating to the Company's average
consolidated statements of financial condition and its consolidated statements
of income for the periods indicated and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Interest income on
investment securities is shown on a tax equivalent (“TE”) basis. Interest income
on nontaxable investment securities depicted below have been grossed up by .54
to estimate the TE yield. Yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods shown. Average balances are derived from daily average balances and
include nonaccrual loans, if any. The yields and costs include fees, which are
considered adjustments to yields.




For
      the three months ended
                          March 31, 2010
                        
                        
                        For
      the three months ended
                          March 31, 2009Average
                        
                        
                        
                        
                        
                        Average
                        
                        
                        Average
                        
                        
                        
                        
                        
                        AverageBalance
                        
                        
                        Interest
                        
                        
                        Rate
                        
                        
                        Balance
                        
                        
                        Interest
                        
                        
                        RateASSETSInterest
      earning assets:Investment
      securities:Taxable
                        
                        $
                        201,257
                        
                        
                        $
                        2,017
                        
                        
                        
                        4.01
                        %
                        
                        $
                        70,291
                        
                        
                        $
                        864
                        
                        
                        
                        4.91
                        %Nontaxable
                        
                        
                        60,413
                        
                        
                        
                        773
                        
                        
                        
                        5.12
                        
                        
                        
                        4,660
                        
                        
                        
                        74
                        
                        
                        
                        6.38Total
      investment securities
                        
                        
                        261,670
                        
                        
                        
                        2,790
                        
                        
                        
                        4.26
                        
                        
                        
                        74,951
                        
                        
                        
                        938
                        
                        
                        
                        5.00Loans
                        
                        
                        2,095,779
                        
                        
                        
                        27,817
                        
                        
                        
                        5.32
                        
                        
                        
                        1,738,104
                        
                        
                        
                        25,499
                        
                        
                        
                        5.88Interest
      earning deposits with banks
                        
                        
                        33,564
                        
                        
                        
                        13
                        
                        
                        
                        0.15
                        
                        
                        
                        48,730
                        
                        
                        
                        17
                        
                        
                        
                        0.14Term
      placements
                        
                        
                        507
                        
                        
                        
                        5
                        
                        
                        
                        3.94
                        
                        
                        
                        65,618
                        
                        
                        
                        69
                        
                        
                        
                        0.42Other
      interest earning assets
                        
                        
                        18,106
                        
                        
                        
                        244
                        
                        
                        
                        5.39
                        
                        
                        
                        15,997
                        
                        
                        
                        81
                        
                        
                        
                        2.03Total
      interest earning assets
                        
                        
                        2,409,626
                        
                        
                        
                        30,869
                        
                        
                        
                        5.13
                        
                        
                        
                        1,943,400
                        
                        
                        
                        26,604
                        
                        
                        
                        5.49Noninterest
      earning assets:Cash
      and cash equivalents
                        
                        
                        21,450
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        19,645Other
      assets
                        
                        
                        75,764
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        74,801Total
      assets
                        
                        $
                        2,506,840
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,037,846LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesInterest
      bearing liabilities:Savings,
      NOW and money market deposits
                        
                        $
                        964,713
                        
                        
                        $
                        2,515
                        
                        
                        
                        1.06
                        %
                        
                        $
                        621,113
                        
                        
                        $
                        3,129
                        
                        
                        
                        2.04
                        %Time
      deposits of $100,000 or more
                        
                        
                        476,282
                        
                        
                        
                        2,886
                        
                        
                        
                        2.46
                        
                        
                        
                        392,229
                        
                        
                        
                        3,409
                        
                        
                        
                        3.52Other
      time deposits
                        
                        
                        364,043
                        
                        
                        
                        2,713
                        
                        
                        
                        3.02
                        
                        
                        
                        415,042
                        
                        
                        
                        3,837
                        
                        
                        
                        3.75Other
      borrowings
                        
                        
                        347,324
                        
                        
                        
                        2,132
                        
                        
                        
                        2.46
                        
                        
                        
                        326,480
                        
                        
                        
                        2,224
                        
                        
                        
                        2.76Subordinated
      debt
                        
                        
                        56,394
                        
                        
                        
                        1,008
                        
                        
                        
                        7.15
                        
                        
                        
                        38,836
                        
                        
                        
                        516
                        
                        
                        
                        5.31Total
      interest bearing liabilities
                        
                        
                        2,208,756
                        
                        
                        
                        11,254
                        
                        
                        
                        2.06
                        
                        
                        
                        1,793,700
                        
                        
                        
                        13,115
                        
                        
                        
                        2.96Noninterest
      bearing liabilities:Demand
      deposits
                        
                        
                        149,922
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        109,620Other
      liabilities
                        
                        
                        6,417
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        13,283Total
      liabilities
                        
                        
                        2,365,095
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,916,603Stockholders'
      equity
                        
                        
                        141,745
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        121,243Total
      liabilities and stockholders' equity
                        
                        $
                        2,506,840
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        2,037,846Net
      interest income (TE)/interest rate spread
                        
                        
                        
                        
                        
                        $
                        19,615
                        
                        
                        
                        3.07
                        %
                        
                        
                        
                        
                        
                        $
                        13,489
                        
                        
                        
                        2.53
                        %Net
      interest earning assets/net interest margin
                        
                        $
                        200,870
                        
                        
                        
                        
                        
                        
                        
                        3.24
                        %
                        
                        $
                        149,700
                        
                        
                        
                        
                        
                        
                        
                        2.76
                        %Less:
      tax equivalent adjustment
                        
                        
                        
                        
                        
                        
                        271
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        26Net
      interest income
                        
                        
                        
                        
                        
                        $
                        19,344
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        13,463





The
Bank’s net interest margin increased 48 basis points during the quarter ending
March 31, 2010 compared to the same period last year. Asset yields were lower on
investment securities and loans resulting in a decrease in the average yield on
total interest earning assets of 36 basis points, or 6.56%. Lower yields are
attributed to a continued low rate environment and reversals of interest on
loans moving to nonaccrual status. The lower yields on interest earning assets
were more than offset by lower interest expense on interest bearing liabilities.
The average rate on interest bearing liabilities decreased 90 basis points in
the first quarter of 2010 from the first quarter of 2009, a 30.41%
drop.





Net
interest income increased $5,881, or 43.68%, to $19,344 in the first quarter of
2010 from $13,463 in first quarter of 2009. The driver of this increase was
growth in volume. Average total interest earning assets increased to $2,409,626
in the quarter ended March 31, 2010 from $1,943,400 in the same period last
year, a 23.99% increase. During the first quarter of 2010 average total interest
bearing liabilities increased to $2,208,756, a 23.14% increase from $1,793,700
in the first quarter of 2009.




21




Asset
Quality





The table
below sets forth the amounts and categories of our nonperforming assets,
including troubled debt restructurings (See Note 5), at the dates
indicated.




At
      March 31,
                        
                        
                        At
      December 31,2010
                        
                        
                        2009Nonaccrual
      loans:Real
      estate loans:Land
      and construction
                        
                        $
                        107,108
                        
                        
                        $
                        52,590Commercial
                        
                        
                        56,005
                        
                        
                        
                        57,026Multifamily
                        
                        
                        21,997
                        
                        
                        
                        7,870Residential
                        
                        
                        11,859
                        
                        
                        
                        9,575Commercial
      and industrial loans
                        
                        
                        3,831
                        
                        
                        
                        3,097All
      other loans (including overdrafts)
                        
                        
                        10
                        
                        
                        
                        14Total
      nonaccrual loans
                        
                        $
                        200,810
                        
                        
                        $
                        130,172Loans
      past due 90 days or more and still accruing:Real
      estate loans:Land
      and construction
                        
                        $
                        2,759
                        
                        
                        $
                        -Total
      nonperforming loans
                        
                        $
                        203,569
                        
                        
                        $
                        130,172Other
      nonperforming assets:Other
      real estate owned
                        
                        $
                        1,130
                        
                        
                        $
                        2,013Total
      nonperforming assets
                        
                        $
                        204,699
                        
                        
                        $
                        132,185Total
      nonperforming loans to total loans
                        
                        
                        10.05
                        %
                        
                        
                        6.23
                        %Total
      nonperforming assets to total assets
                        
                        
                        8.40
                        %
                        
                        
                        5.02
                        %Allowance
      for loan losses to total nonperforming loans
                        
                        
                        25.17
                        %
                        
                        
                        29.56
                        %





The
following table sets forth certain types of loans which management believes to
be considered higher risk loans because of the lack of principal amortization, a
collateral position subordinate to another creditor, or increased defaults due
to slowdowns in the construction and real estate sales sector during the
economic recession. The table quantifies their respective percentage of the
Company’s total loans, the total allowance for loan losses balance allocated to
these loans and the level of nonperforming loans within these
categories.




March 31, 2010
                    
                    Amount
                    
                    
                    Percentage of
                      Loan
                      Portfolio
                    
                    
                    Total Reserve
                      Allocation
                    
                    
                    Nonperforming
                      LoansInterest
      only land and construction loans
                    
                    $
                    313,833
                    
                    
                    
                    15.49
                    %
                    
                    $
                    19,363
                    
                    
                    $
                    97,028Interest
      only commercial mortgages
                    
                    
                    38,476
                    
                    
                    
                    1.90
                    
                    
                    
                    928
                    
                    
                    
                    1,798Home
      equity lines/loans - 1st
      liens
                    
                    
                    19,377
                    
                    
                    
                    0.95
                    
                    
                    
                    -
                    
                    
                    
                    160Home
      equity lines/ loans - 2nd liens
                    
                    
                    8,878
                    
                    
                    
                    0.44
                    
                    
                    
                    -
                    
                    
                    
                    598Interest
      only commercial loans
                    
                    
                    29,345
                    
                    
                    
                    1.45
                    
                    
                    
                    476
                    
                    
                    
                    2,492Interest
      only consumer loans
                    
                    
                    551
                    
                    
                    
                    0.03
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    410,460
                    
                    
                    
                    20.26
                    %
                    
                    $
                    20,767
                    
                    
                    $
                    102,076





The
following table describes the activity in the allowance for loan losses account
followed by a key loan ratio for the periods ended:





For
      the three months
                          ended
                          March 31, 2010
                        
                        
                        For
      the three months
                          ended
                          March 31, 2009Allowance
      for loan losses at beginning of period
                        
                        $
                        38,483
                        
                        
                        $
                        11,303Charge
      offs:Commercial
                        
                        
                        593
                        
                        
                        
                        54Real
      estate:Land
      and construction
                        
                        
                        8,378
                        
                        
                        
                        -Commercial
                        
                        
                        2,285
                        
                        
                        
                        -Multifamily
                        
                        
                        869
                        
                        
                        
                        -Residential
                        
                        
                        164Consumer
                        
                        
                        30
                        
                        
                        
                        44Total
                        
                        
                        12,319
                        
                        
                        
                        98Recoveries:Real
      estate:Multifamily
                        
                        
                        52Consumer
                        
                        
                        15
                        
                        
                        
                        6Total
                        
                        
                        67
                        
                        
                        
                        6Net
      charge offs
                        
                        
                        (12,252
                        )
                        
                        
                        (92
                        )Provision
      for loan losses
                        
                        
                        25,000
                        
                        
                        
                        1,200Allowance
      for loan losses at end of period
                        
                        $
                        51,231
                        
                        
                        $
                        12,411Ratio
      of net charge offs during period to average loans
    outstanding
                        
                        
                        0.59
                        %
                        
                        
                        0.01
                        %





22





Allocation
of Allowance for Loan Losses





The
following table sets forth the allocation of the Company’s allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the date indicated. The portion of the loan loss allowance allocated to
each loan category does not represent the total available for future losses,
which may occur within the loan category since the total loan loss allowance is
a valuation allocation applicable to the entire loan portfolio.




March 31, 2010
                  
                  
                  December 31, 2009Amount
                  
                  
                  Percentage
      of
                    Loans
      to
                    Total Loans
                  
                  
                  Amount
                  
                  
                  Percentage
      of
                    Loans
      to
                    Total LoansCommercial
                  
                  $
                  1,486
                  
                  
                  
                  2.3
                  %
                  
                  $
                  1,883
                  
                  
                  
                  3.1
                  %Real
      estate
                  
                  
                  45,139
                  
                  
                  
                  97.6
                  
                  
                  
                  35,802
                  
                  
                  
                  96.8Consumer
      and other
                  
                  
                  123
                  
                  
                  
                  0.1
                  
                  
                  
                  138
                  
                  
                  
                  0.1Unallocated
                  
                  
                  4,483
                  
                  
                  
                  0.0
                  
                  
                  
                  660
                  
                  
                  
                  -Total
                  
                  $
                  51,231
                  
                  
                  
                  100.0
                  %
                  
                  $
                  38,483
                  
                  
                  
                  100.0
                  %





The
Company made a $25,000 provision for loan losses for the period ended March 31,
2010. The Company received a number of updated appraisals on impaired loans
in late March and April that demonstrated a continued trend of declining values
from the original appraisals. These new appraisals were largely responsible
for the increase in specific allocations on impaired loans of $6,591. Loan
charge offs totaled $12,252 during the first quarter of 2010, a significant
increase from $92 during the same period last year. The general allocation
portion of the allowance for loan losses has been adjusted to account for the
higher historical charge offs. For example, the general allocation for non
owner occupied commercial mortgages has increased to 75 basis points at March
31, 2010 from 53 basis points at December 31, 2009 and the general allocation on
multifamily mortgages has increased to 60 basis points from 40 basis points over
the same time period. Land and construction loans made up the largest
portion of total charge offs in the first quarter of 2010, totaling
$8,378. As a result, the general allocation applied to this portfolio
increased to 397 basis points at March 31, 2010 from 350 basis points at
December 31, 2009.





Nonperforming
loans totaled $203,569, or 10.05%, of total loans as of March 31, 2010, as
compared to $130,172, or 6.23%, as of December 31, 2009. Nonperforming
loans include $38,511 of restructured loans that are in nonaccrual status. In
addition, delinquent loans increased as loans 30-89 days past due totaled
$52,949, or 2.61%, of total loans at March 31, 2010 compared to $20,756, or
..99%, of total loans at December 31, 2009.




The ratio
of the allowance for loan losses to total nonperforming loans as of March 31,
2010 and December 31, 2009 was 25.17% and 29.56%, respectively. The ratio of the
allowance for loan losses to total loans increased to 2.53% at March 31, 2010
from 1.84% at December 31, 2009. Net charge offs for the first quarter of 2010
totaled 0.59% of average total loans. Net charge offs for the full year 2009
were 1.22% of average total loans.




23




Noninterest
Income




Noninterest
income decreased $346, or 12.45%, for the first three months of 2010 over the
comparable period in 2009. Total noninterest income was reduced $495 due to the
net loss on OTTI recognized in earnings during the quarter. Gross revenues from
the Company’s insurance subsidiary decreased $82, or 8.89% as premiums and
corresponding commissions are down as a result of the soft insurance market.
Service charge income increased 9.70% due to an increased volume of transaction
accounts resulting from branch expansion efforts during 2009. Net gains on the
sale of investment securities were nearly flat from the same period in the
prior year. Income from trust and investment management services increased $64,
or 48.12%, due to efforts to move deposit relationships off the balance sheet
and into alternative investment products to meet the requirements of the Consent
Agreement. Other noninterest income increased $107, or 20.58%, mainly the result
of loan fees generated from renewals.




Noninterest
Expense




Noninterest
expense increased $4,111, or 43.77%, for the first three months of 2010 as
compared to the same period in 2009. The Company’s Federal deposit insurance
increased $1,108, or 201.45%, due to a combination of increased deposits over
the same period in the prior year and higher risk based insurance premiums
resulting from the Consent Agreement. Occupancy and equipment expense increased
55.20%, consistent with the 50% increase in branch locations during 2009. Salary
and employee benefits increased $435, or 9.05%, mainly the result of the new
branch locations. Other noninterest expenses increase $1,174, or 85.88%, due to
costs attributed to the impaired loan portfolio such as legal fees, collection
expenses, real estate taxes and insurance for properties in
foreclosure.




Income
Tax Expense/Benefit





The
Company had an income tax benefit for the first quarter of 2010 of $2,956 due to
a net operating loss before taxes of $16,725. An assessment of the Company’s
deferred tax asset at March 31, 2010 of $23,652, led to the decision to record a
valuation allowance of $4,100. Based on the Company’s operating losses over the
past two quarters, the ability to realize the full benefits of the deferred tax
asset has become impaired. In determining the need for a valuation allowance
Management considered the Company’s ability to realize carry back benefits of
the current losses as well as the ability to realize future tax benefits based
on tax planning strategies that are feasible and could be implemented.
Management also considered the Company’s history of earnings prior to the fourth
quarter of 2009 and that a majority of the charge offs and nonperforming loans
are concentrated in the land and construction portfolio. Therefore, management
also considered projected earnings over the next 12 quarters after stress
testing projections for additional provisions for loan losses. The Company
evaluates the need for a valuation allowance for its deferred tax asset on a
quarterly basis.





Financial
Condition





Total
assets were $2,429,537 at March 31, 2010, a decrease of $205,393, or 7.80%, from
the previous year-end. This decrease in assets was driven predominantly by a
decrease in deposits of $202,439, or 9.76%, including $126.0 million of
certificates of deposit. Plans to meet the capital requirements of the
Consent Agreement so far this year have focused upon shrinking the balance
sheet. Our efforts, through pricing and other means, to retain multiple
service customers and let go single service CD customers have been
successful. Total loans, including loans held for sale, at March 31, 2010
were $2,041,477, a decrease of $65,869 from the previous year-end. Finally,
with respect to efforts to shrink the balance sheet, as deposit reductions
outpaced loan decreases, investment securities were reduced by
$176,862.





The
decrease in loans during the first quarter of 2010 included the resolution of
seven problem real estate loans in the amount of $45,120. In the course of
these resolutions, the Bank recovered $39,128 of principal and charged off
$5,992, representing a loss rate of approximately 13.28%. These
resolutions, however, were more than offset by the movement of some loans
previously identified at December 31, 2009 as impaired loans into the
nonperforming loan category, as well as some new impaired loans.




Loans





The
Company’s loan portfolio consists mainly of real estate loans secured by
commercial and residential properties located primarily within the Bank’s market
area of Long Island, the five boroughs of New York City and the greater
metropolitan area. Most classifications of loans had decreases from the
prior year-end. Land and construction loans showed the biggest decline of
$36,824, or 10.41%, as the Bank continued to look to reduce its exposure in this
loan category. Commercial real estate loans had a $26,174 decrease and combined
with the decrease on land and construction loans represents the Company’s
progress in reducing its CRE loan exposure as per the terms of the Consent
Agreement.




With
97.82% of the Bank’s loan portfolio secured by real estate, the portfolio is
subject to additional risk due to the downturn in the real estate market. The
effects of the economic recession, especially commercial real estate
difficulties, took, and will continue to take, a significant toll on our
portfolio. The land and construction portfolio, in particular speculative
construction, was impacted to the greatest degree resulting in charge offs well
above historical rates.





24





The
following table sets forth the major classifications of loans:




March
      31,
                    2010
                  
                  
                  December
      31,
                    2009Real
      estate:Land
      and construction
                  
                  $
                  316,948
                  
                  
                  $
                  353,772Commercial
                  
                  
                  970,923
                  
                  
                  
                  997,097Multifamily
                  
                  
                  479,648
                  
                  
                  
                  478,840Residential
                  
                  
                  213,827
                  
                  
                  
                  214,548Agricultural
                  
                  
                  -
                  
                  
                  
                  -Commercial
      and industrial loans
                  
                  
                  46,420
                  
                  
                  
                  48,625Loans
      to individuals for household, family and other personal
      expenditures
                  
                  
                  1,464
                  
                  
                  
                  1,740All
      other loans (including overdrafts)
                  
                  
                  254
                  
                  
                  
                  342Less:
      Net deferred loan fees
                  
                  
                  3,657
                  
                  
                  
                  4,068Total
      loans
                  
                  $
                  2,025,827
                  
                  
                  $
                  2,090,896





Nonaccrual,
Past Due and Restructured Loans





The
following table sets forth the Bank's nonaccrual, contractually past due and
restructured loans:





March
      31,
                    2010
                  
                  
                  December
      31,
                    2009Loans
      past due 90 days or more and still accruing
                  
                  $
                  2,759
                  
                  
                  $
                  -Nonaccrual
      loans
                  
                  
                  200,810
                  
                  
                  
                  130,172Trouble
      Debt Restructured loans
                  
                  
                  47,005
                  
                  
                  
                  47,633





The
amount of gross interest income that would have been recorded in 2010 on
nonaccrual and restructured loans if the loans had been current in accordance
with their original terms was $3,210. The amount of interest income that was
recorded in 2010 on nonaccrual and restructured loans was $390.





A loan is
moved to nonaccrual status at 90 days past due unless the loan is both well
secured and in the process of collection. All interest accrued but not received
for loans placed on nonaccrual is reversed against interest
income. Interest received on such loans is accounted for on a cash basis,
until qualifying for return to accrual status. Loans are returned to
accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.





Impaired
loans of $218,770, plus loans held for sale of $15,650 and loans past due 90
days or more and still accruing interest of $2,759 that are not considered
impaired total $237,179. The $237,179 less nonaccrual loans of $200,810
represents $33,611 of impaired loans that are still performing, which management
believes it is probable the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. In addition to loans
identified as impaired that are still performing, there is a total of $81,410 of
loans that are not considered impaired, where management has serious doubts as
to the ability of the borrowers to comply with the present loan repayment terms.
Potential problem loans are the sum of the $33,611 and $81,410 above, or
$115,021.




Securities





Securities
totaled $220,478 at March 31, 2010, down 44.51% from $397,340 at December 31,
2009. Sales and principal payments of government sponsored entity and agency
mortgage-backed securities used to offset the decrease in deposits caused the
reduction.





The
following schedule presents the estimated fair value for securities available
for sale and the amortized cost for securities held to maturity as detailed in
the Company's balance sheets as of March 31, 2010 and December 31,
2009.




March
      31,
                    2010
                  
                  
                  December
      31,
                    2009Available
      for saleU.S.
      government sponsored entities and agencies
                  
                  $
                  5,011
                  
                  
                  $
                  4,966Obligations
      of state and political subdivisions
                  
                  
                  59,895
                  
                  
                  
                  59,986Mortgage-backed
      securities: residential
                  
                  
                  144,386
                  
                  
                  
                  320,778Collateralized
      mortgage obligations
                  
                  
                  4,525
                  
                  
                  
                  4,553Other
      securities
                  
                  
                  6,595
                  
                  
                  
                  6,991Total
      available for sale
                  
                  $
                  220,412
                  
                  
                  $
                  397,274Held
      to maturityObligations
      of state and political subdivisions
                  
                  $
                  66
                  
                  
                  $
                  66





25





The following table
presents the amortized costs and estimated fair values of securities by
contractual maturity at March 31, 2010:





Within
      One Year
              
              
              After One
      But
                Within
      Five Years
              
              
              After Five
      But
                Within
      Ten Years
              
              
              After
      Ten Years
              
              
              TotalAmortized
                Cost
              
              
              Estimated
                Fair
      Value
              
              
              Yield
              
              
              Amortized
                Cost
              
              
              Estimated
                Fair
      Value
              
              
              Yield
              
              
              Amortized
                Cost
              
              
              Estimated
                Fair
      Value
              
              
              Yield
              
              
              Amortized
                Cost
              
              
              Estimated
                Fair
      Value
              
              
              Yield
              
              
              Amortized
                Cost
              
              
              Estimated
                Fair
      ValueAvailable
      for saleU.S.
      government sponsored entities and agencies
              
              $
              -
              
              
              $
              -
              
              
              
              -
              %
              
              $
              -
              
              
              $
              -
              
              
              
              -
              %
              
              $
              5,000
              
              
              $
              5,011
              
              
              
              4.00
              %
              
              $
              -
              
              
              $
              -
              
              
              
              -
              %
              
              $
              5,000
              
              
              $
              5,011Obligations
      of state and political subdivisions
              
              
              135
              
              
              
              135
              
              
              
              5.20
              
              
              
              8,341
              
              
              
              8,485
              
              
              
              3.42
              
              
              
              20,465
              
              
              
              20,745
              
              
              
              3.39
              
              
              
              30,359
              
              
              
              30,530
              
              
              
              3.98
              
              
              
              59,300
              
              
              
              59,895Mortgage-backed
      securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              142,125
              
              
              
              144,386
              
              
              
              5.43
              
              
              
              142,125
              
              
              
              144,386Collateralized
      mortgage obligations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,543
              
              
              
              4,525
              
              
              
              5.00
              
              
              
              4,543
              
              
              
              4,525Other
      securities
              
              
              7,363
              
              
              
              4,116
              
              
              
              3.57
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,000
              
              
              
              1,000
              
              
              
              3.00
              
              
              
              1,480
              
              
              
              1,479
              
              
              
              3.75
              
              
              
              9,843
              
              
              
              6,595Total
      available for sale
              
              $
              7,498
              
              
              $
              4,251
              
              
              
              3.60
              %
              
              $
              8,341
              
              
              $
              8,485
              
              
              
              3.42
              %
              
              $
              26,465
              
              
              $
              26,756
              
              
              
              3.49
              %
              
              $
              178,507
              
              
              $
              180,920
              
              
              
              5.15
              %
              
              $
              220,811
              
              
              $
              220,412Held
      to maturityObligations
      of state and political subdivisions
              
              $
              33
              
              
              $
              33
              
              
              
              4.34
              %
              
              $
              33
              
              
              $
              34
              
              
              
              4.34
              %
              
              $
              -
              
              
              $
              -
              
              
              
              -
              %
              
              $
              -
              
              
              $
              -
              
              
              
              -
              %
              
              $
              66
              
              
              $
              67





26





Deposits
& Other Borrowings





Total
deposits decreased $202,439, or 9.76%, for the period ended March 31, 2010 from
December 31, 2009. The largest segment of the portfolio was savings, NOW and
money market deposits, which decreased $71,963, or 7.20%, in the first quarter
of 2010. Strategies implemented to meet the terms of the Consent Agreement led
to the shrinkage in total deposits.




At March
31, 2010, the remaining maturities of the Bank's time deposits in amounts of
$100,000 or more were as follows:




3
      months or less
                  
                  $
                  78,552Over
      3 through 6 months
                  
                  
                  108,132Over
      6 through 12 months
                  
                  
                  148,419Over
      12 months
                  
                  
                  90,007Total
                  
                  $
                  425,110





Other
borrowings increased slightly to $361,480 at March 31, 2010 from $352,820 at
December 31, 2009. Included in other borrowings are $1,480 of secured borrowings
that are a financial arrangement with the Senior Housing Crime Prevention
program that are secured by U.S. government agency bonds. At maturity, the
Company has the option to repay the secured borrowings simultaneous with the
release of the collateral or to renew the borrowings.





The
following table sets forth the Bank's borrowed funds:,




March 31, 2010
                  
                  
                  December 31, 2009FHLBNY
      OLOC:Maximum
      month end balance during the period
                  
                  $
                  -
                  
                  
                  $
                  36,340Average
      balance during the period
                  
                  
                  7,177
                  
                  
                  
                  1,801Weighted
      average interest rate during the period
                  
                  
                  0.44
                  %
                  
                  
                  0.38
                  %Weighted
      average interest rate at period end
                  
                  
                  0.34
                  
                  
                  
                  0.34Term
      advances from FHLBNY:Maximum
      month end balance during the period
                  
                  $
                  360,000
                  
                  
                  $
                  325,000Average
      balance during the period
                  
                  
                  338,667
                  
                  
                  
                  324,247Weighted
      average interest rate during the period
                  
                  
                  2.50
                  %
                  
                  
                  2.77
                  %Weighted
      average interest rate at period end
                  
                  
                  2.38
                  
                  
                  
                  2.70Senior
      Housing Crime Prevention:Maximum
      month end balance during the period
                  
                  $
                  1,480
                  
                  
                  $
                  1,480Average
      balance during the period
                  
                  
                  1,480
                  
                  
                  
                  1,480Weighted
      average interest rate during the period
                  
                  
                  1.79
                  %
                  
                  
                  1.79
                  %Weighted
      average interest rate at period end
                  
                  
                  1.79
                  
                  
                  
                  1.79





Liquidity





Liquidity
provides the source of funds for anticipated deposit outflow and loan growth.
The Bank’s primary sources of liquidity include deposits, repayments of loan
principal, maturities and sales of investment securities, principal reductions
on mortgage-backed securities, “unpledged” securities, deposits with banks, and
borrowing potential from correspondent banks. The primary factors affecting
these sources of liquidity are their immediate availability if necessary and
current market rates of interest, which can cause fluctuations in levels of
deposits and prepayments on loans and securities. Management believes that the
Bank’s liquidity level is sufficient to meet funding needs while under the terms
of the Consent Agreement.





The Bank
has the ability, as a member of the FHLB system, to borrow against residential
and commercial mortgages owned by the Bank and pledged to FHLB. As a result of
entering into the Consent Agreement, the FHLB has required the Bank to
physically deliver the pledged loan collateral during the first quarter of 2010.
At December 31, 2009, the collateral pledged to the FHLB was under a blanket
lien arrangement and delivered electronically. Management determined the
amount of physical collateral to be delivered based on its estimate of a
sufficient amount of unused available credit from the FHLB to meet liquidity
needs. At April 19, 2010, the unused available credit totaled $158,695, which
represents a decrease of $326,534 from the December 31, 2009 amount of
$485,229.The Bank
has the ability to deliver additional collateral should the need arise and is in
the process of preparing $100 million worth of loans for physical delivery as a
contingency plan. As of March 31, 2010, the Bank had no collateralized overnight
borrowings, which was down from $36,340 at December 31, 2009. The Bank had
$360,000 and $310,000 in collateralized term advances outstanding with the FHLB
as of March 31, 2010 and December 31, 2009, respectively. At March 31, 2010, the
Company has $70,022 in cash and cash equivalents, a 216.07% increase from the
December level of $22,154, as additional interest earning deposits are being
maintained by the Bank at the Federal Reserve Bank of New York for increased
liquidity while under the Consent Agreement.





27





The
Company’s principal source of liquidity is dividends from the Bank. Cash
available to service Company trust preferred debt obligations, to pay expenses
and for distribution of dividends to shareholders is primarily derived from
dividends paid by the Bank to the Company. Under the Consent Agreement, the
Bank’s payment of dividends requires prior approval of the FDIC and Banking
Department. As of March 31, 2010, the Company had $1,289 cash and cash
equivalents. The Company presently plans to use the cash and cash
equivalents to pay its expenses. Interest payments on trust preferred
securities were made during the first quarter of 2010, but the Company will
defer interest payments on its trust preferred securities in the upcoming
quarter to preserve cash for operating expenses due to the dividend
restrictions. In the event the Company subsequently needs additional funds
and the FDIC and Banking Department are unwilling to approve a dividend from the
Bank, the Company will need to raise additional capital or borrow funds to meet
liquidity needs.





Capital
Resources





Total
stockholders’ equity was $122,817 at March 31, 2010, a decrease of $12,938, or
9.53%, from December 31, 2009, primarily due the net loss of
$13,769.





Attempts
to meet the capital requirements of the Consent Agreement so far this year have
focused upon shrinking the balance sheet. Total assets at March 31 were
down 7.80% from year-end 2009. During the first quarter loans, including
loans held for sale, decreased by $65,869 and investment securities were reduced
by $176,862. On the liability side of the balance sheet, deposits were
decreased by $202,439. The success in shrinking the balance to meet the
capital requirements has been more than offset by the loss for the quarter
resulting largely from the $25,000 provision for loan losses and a valuation
allowance of $4,100 against the Company’s deferred tax asset. As a result,
we have decided to expand the alternatives we are exploring to meet the capital
requirement of the Consent Agreement to include selling one or more packages of
nonperforming loans, selling one or more packages of performing loans, raising
capital if necessary, or some ‘hybrid’ combination of the foregoing
strategies.




The
Company had returns on average equity of (38.88%) and 11.93%, and returns on
average assets of (2.20%) and 0.71% for the periods ended March 31, 2010 and
2009, respectively. The equity to assets ratio was 5.06% and 5.15% at March 31,
2010 and December 31, 2009, respectively. No dividends were paid for the period
ended March 31, 2010. The Company paid dividends of $472 for the period ended
March 31, 2009.





Recent
Regulatory and Accounting Developments





Adoption
of New Accounting Guidance





In
January 2010, the Financial Accounting Standards Board (“FASB”) amended existing
guidance to improve disclosure requirements related to fair value measurements.
New disclosures are required for significant transfers in and out of Level 1 and
Level 2 fair value measurements and the reasons for the transfers. In addition,
the FASB clarified guidance related to disclosures for each class of assets and
liabilities as well as disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3. The impact of adoption on
January 1, 2010 was not material as it required only disclosures, which are
included in the Fair Value footnote.





In June
2009, the FASB amended existing guidance to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. This amended guidance addresses (1) practices
that are not consistent with the intent and key requirements of the original
guidance and (2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors. The impact
of adoption on January 1, 2010 was not material.





In June
2009, the FASB amended guidance for consolidation of variable interest entities
by replacing the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity. The new approach focuses on identifying which
enterprise has the power to direct the activities of a variable interest entity
that most significantly impact the entity’s economic performance and (1) the
obligation to absorb losses of the entity or (2) the right to receive benefits
from the entity. Additional disclosures about an enterprise’s involvement in
variable interest entities are also required. The impact of adoption on January
1, 2010 was not material.





28





In
December 2007, the FASB enhanced existing guidance for the use of the
acquisition method of accounting (formerly the purchase method) for all business
combinations, for an acquirer to be identified for each business combination and
for intangible assets to be identified and recognized separately from goodwill.
An entity in a business combination is required to recognize the assets
acquired, the liabilities assumed and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. Additionally, there were changes in requirements for
recognizing assets acquired and liabilities assumed arising from contingencies
and recognizing and measuring contingent consideration. Disclosure requirements
for business combinations were also enhanced. The impact of adoption on January
1, 2009 was not material.




In April
2009, the FASB issued amended clarifying guidance to address application issues
raised by preparers, auditors and members of the legal profession on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The impact of adoption on January 1, 2009 was not
material.





In
January 2010, the FASB issued amended clarifying guidance addressing
implementation issues related to the changes in ownership provisions. The impact
of adoption on January 1, 2010 was not material.





Newly
Issued But Not Yet Effective Accounting Guidance




In
January 2010, the FASB amended existing guidance related to fair value
measurements requiring new disclosures for activity in Level 3 fair value
measurements. In the reconciliation for fair value measurements using
significant unobservable inputs (Level 3), a reporting entity should present
separately information about purchases, sales, issuances, and settlements (that
is, on a gross basis rather than as one net number). These disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. The impact of adoption is expected to be
immaterial.





Item 3.
Quantitative and Qualitative Disclosures about Market Risk





Management
considers interest rate risk to be the most significant market risk for the
Company. Market risk is the risk of loss from adverse changes in market prices
and rates. Interest rate risk is the exposure to adverse changes in the net
income of the Company as a result of changes in interest rates. The Company’s
primary earnings source is net interest income, which is affected by changes in
the level of interest rates, the relationship between rates, the impact of
interest rate fluctuations on asset prepayments, the level and composition of
deposits and liabilities, and the credit quality of earning assets. The
Company’s objectives in its asset and liability management are to maintain a
strong, stable net interest margin, to utilize its capital effectively without
taking undue risks, to maintain adequate liquidity, and to reduce vulnerability
of its operations to changes in interest rates.





The
Company’s Asset and Liability Committee evaluates at least quarterly the impact
of changes in market interest rates on assets and liabilities, net interest
margin, capital and liquidity. Risk assessments are governed by policies and
limits established by senior management, which are reviewed and approved by the
board of directors at least annually. The economic environment continually
presents uncertainties as to future interest rate trends. The Asset and
Liability Committee regularly utilizes a model that projects net interest income
based on increasing or decreasing interest rates in order to be better able to
respond to changes in interest rates.





Changes
in interest rates affect the value of the Company’s interest earning assets and
in particular its securities portfolio. Generally, the value of securities
fluctuates inversely with changes in interest rates. Increases in interest rates
could result in decreases in the market value of interest earning assets, which
could adversely affect the Company’s stockholders’ equity and its results of
operations if sold. The Company is also subject to reinvestment risk associated
with changes in interest rates. Changes in market interest rates also could
affect the type (fixed rate or adjustable rate) and amount of loans originated
by the Company and the average life of loans and securities, which can impact
the yields earned on the Company’s loans and securities. Changes in interest
rates may affect the average life of loans and mortgage related securities. In
periods of decreasing interest rates, the average life of loans and securities
held by the Company may be shortened to the extent increased prepayment activity
occurs during such periods which, in turn, may result in the reinvestment of
funds from such prepayments into lower yielding assets. Under these
circumstances, the Company is subject to reinvestment risk to the extent that it
is unable to reinvest the cash received from such prepayments at rates that are
comparable to the rates on existing loans and securities. Additionally,
increases in interest rates may result in decreasing loan prepayments with
respect to fixed rate loans (and therefore an increase in the average life of
such loans), may result in a decrease in loan demand, and make it more difficult
for borrowers to repay adjustable rate loans.





29





The
Company utilizes the results of a detailed and dynamic simulation model to
quantify the estimated exposure to net interest income to sustained interest
rate changes. Management routinely monitors simulated net interest income
sensitivity over a rolling two-year horizon. The simulation model captures the
seasonality of the Company’s deposit flows and the impact of changing interest
rates on the interest income received and the interest expense paid on all
assets and liabilities reflected on the Company’s balance sheet. This
sensitivity analysis is compared to the asset and liability policy limits that
specify a maximum tolerance level for net interest income exposure over a
one-year horizon. A 100, 200 and 300 basis point upward and downward shift in
interest rates over a one-year time horizon was considered at March 31, 2010 and
December 31, 2009. A parallel and pro rata shift in rates over a twelve-month
period is assumed.





The
following table reflects the Bank’s income sensitivity analysis as of March 31,
2010 and December 31, 2009:





Change In Interest
                        Rates In Basis Points
                      
                      As of March 31,
                        2010
                      
                      
                      As of December 31,
                        2009Potential Change In
                      
                      
                      Potential Change In(Rate
      Shock)
                      
                      Net
      Interest Income
                      
                      
                      Net
      Interest Income$
      Change
                      
                      
                      %
      Change
                      
                      
                      $
      Change
                      
                      
                      %
      ChangeUp
      300 basis points
                      
                      
                      2,097
                      
                      
                      
                      2.67
                      
                      
                      
                      1,048
                      
                      
                      
                      1.18Up
      200 basis points
                      
                      
                      1,351
                      
                      
                      
                      1.72
                      
                      
                      
                      880
                      
                      
                      
                      0.99Up
      100 basis points
                      
                      
                      698
                      
                      
                      
                      0.89
                      
                      
                      
                      542
                      
                      
                      
                      0.61Static
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Down
      100 basis points
                      
                      
                      (385
                      )
                      
                      
                      (0.49
                      )
                      
                      
                      (667
                      )
                      
                      
                      (0.75
                      )Down
      200 basis points
                      
                      
                      (873
                      )
                      
                      
                      (1.11
                      )
                      
                      
                      (1,541
                      )
                      
                      
                      (1.74
                      )Down
      300 basis points
                      
                      
                      (1,465
                      )
                      
                      
                      (1.86
                      )
                      
                      
                      (2,603
                      )
                      
                      
                      (2.94
                      )





The
preceding sensitivity analysis does not represent a Company forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including, but not
limited to, the nature and timing of interest rate levels and yield curve
shapes, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, and reinvestment and replacement of asset and
liability cash flows. While assumptions are developed based upon perceived
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences may change.





Also, as
market conditions vary from those assumed in the sensitivity analysis, actual
results will also differ due to prepayment and refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals,
prepayment penalties and product preference changes and other internal and
external variables. Furthermore, the sensitivity analysis does not reflect
actions that management might take in responding to, or anticipating changes in,
interest rates and market conditions.





Item 4.
Controls and Procedures





An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 131-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
March 31, 2010. Based on that evaluation, the Company’s management, including
the Principal Executive Officer and Principal Financial Officer, concluded that
the Company’s disclosure controls and procedures were effective. There has been
no change in the Company’s internal controls over financial reporting during the
quarter that has materially affected, or is reasonably likely to affect, the
Company’s internal control over financial reporting.





Part II -
Other Information





Item
1.    Legal Proceedings





On
February 25, 2010 and March 29, 2010, the Company and several of its officers
and its directors were named in two lawsuits commenced in United States District
Court, Eastern District of New York on behalf of a putative class of all persons
and entities who purchased the Company’s common stock between March 13, 2008 and
February 1, 2010, alleging claims under Section 10(b) and Section 20(a) of the
securities Exchange Act of 1934. The plaintiffs allege, among other things,
the Company’s loan loss reserve, fair value of its assets, recognition of
impaired assets and its internal and disclosure controls were materially false,
misleading or incomplete.




30




On April
22, 2010, an action was commenced in New York State Supreme Court, Kings County
by Robert I. Toussie against the Company and several of its officers. The
complaint alleges claims for fraud and aiding and abetting fraud based upon,
among other things, the plaintiff’s allegation that during 2008 and 2009, one or
more defendants made material misrepresentations and incomplete statements to
the plaintiff concerning the Company’s loan losses, delinquent loans,
capitalization, quarterly earnings and financial soundness. The complaint
seeks compensatory and punitive damages against the defendants.




The
Company and the individual defendants intend to vigorously defend all aspects of
these actions.




Item
1A.           Risk
Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Items 1A: Risk Factors,” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as
such factors could materially affect the Company’s business, financial
condition, or future results. In the three months ended March 31, 2010, there
were no material changes to the risk factors disclosed in the Company’s 2009
Annual Report on Form 10-K. The risks described in the Annual Report on Form
10-K are not the only risks that the Company faces. Additional risks and
uncertainties not currently known to the Company, or that the Company currently
deems to be immaterial, also may have a material impact on the Company’s
business, financial condition, or results.





Item
2.     Unregistered Sales of Equity Securities and Use
of Proceeds





None
..




Item
3.    Defaults upon Senior Securities





None





Item
4.    Reserved





Item
5.    Other Information





None





Item
6.    Exhibits and Reports on Form 8-K




Exhibit
              
              DescriptionExhibit
      31.1
              
              Certification
      of Principal Executive Officer pursuant to Rule
  13a-14(a)Exhibit
      31.2
              
              Certification
      of Principal Financial Officer pursuant to Rule
  13a-14(a)Exhibit
      32
              
              Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Rule
      13a-14(b) and 18 U.S.C. Section
1350




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.May
      7, 2010/s/ BRADLEY E. ROCKBradley
      E. Rock, Chairmanand
      Chief Executive Officer(Principal
      Executive Officer)/s/ CHRISTOPHER BECKERChristopher
      Becker, Executive
                  Vice
      President and Chief
                  Financial
      Officer(Principal
      Financial Officer)





31