**Table
            of Contents**
 
 **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 quarter ended September 30, 2006**





**Commission
      File #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 Office)
            (Zip
                Code)





**(631)
      360-9300**


(Registrant's
      telephone number, including area code)





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





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
      accelerated filer o Accelerated
      filer
x  Non-accelerated
      filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.): Yes o  No x





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





Shares
      of
      Common Stock ($.01 Par Value) Outstanding as of November 8, 2006


8,885,589





**Table
        of Contents**




**SMITHTOWN
      BANCORP, INC.**





INDEX





Part
                I - FINANCIAL INFORMATIONItem
                1.
            Financial
                StatementsUnaudited
                Consolidated Balance Sheets as of September 30, 2006
                and December 31, 2005Unaudited
                Consolidated Statements of Income for the Three
                Months Ended September 30, 2006 and 2005Unaudited
                Consolidated Statements of Income for the Nine
                Months Ended September 30, 2006 and 2005Unaudited
                Consolidated Statements of Changes in Stockholders’
                Equity For the Nine Months Ended September 30, 2006 and
                2005Unaudited
                Consolidated Statements of Cash Flows for the Nine
                Months Ended September 30, 2006 and 2005Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of OperationsItem
                3.
            Quantitative
                and Qualitative Disclosures About Market
                RiskItem
                4.
            Controls
                and ProceduresPart
                II - OTHER INFORMATIONItem
                1.
            Legal
                Proceedings - NoneRisk
                Factors - No change in factors as reported in Registrant’s Annual Report
                on Form 10-KItem
                2.
            Change
                in Securities and Use of Proceeds





Issuer
                Purchases of Equity Securities(a)
            
            (b)
            
            (c)
            
            (d)MaximumNumberTotal
                Number of
            
            (or
                ApproximateShares(or
                Units)
            
            Dollar
                Value) ofTotal
            
            
            
            Purchased
                as
            
            Shares(or
                Units)Number
            
            Average
            
            Part
                of Publicly
            
            That
                May Yet Beof
                Shares
            
            Price
            
            Announced
            
            Purchased
                Under(or
                Units)
            
            Paid
                Per
            
            Plans
            
            the
                PlansPeriod
            
            Purchased
            
            Share(or
                Unit)
            
            or
                Programs
            
            or
                ProgramsJuly
                1, 2006 - July 31, 2006
            
            
            0
            
            
            0
            
            
            0
            
            
            128,475August
                1, 2006 - August 31, 2006
            
            
            0
            
            
            0
            
            
            0
            
            
            128,475September
                1, 2006 - September 30, 2006
            
            
            0
            
            
            0
            
            
            0
            
            
            128,475Total
            
            
            0
            
            
            0
            
            
            0
            
            
            128,475





Item
                3.
            Defaults
                upon Senior Securities - NoneItem
                4.
            Submission
                of Matters to a Vote of Security Holders - NoneItem
                5.
            Other
                Information - None




-2-
 **Table
          of Contents**




Item
                6.
            Exhibits
                and Reports on Form 8-K




Exhibits


Exhibit
                Number
              Referred
                to in
              Item
                6.01
              of
                Regulation S-K
            
            Description
                of Exhibit31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a)31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a)32.1
            
            Certification
                of Chief Executive Officerpursuant
                to Rule 13a-14(b) and 18 U.S.C.Section
                135032.2
            
            Certification
                of Chief Financial Officerpursuant
                to Rule 13a-14(b) and 18 U.S.C.Section
                1350





(2)
                Reports
                    on Form 8-K





Other
      Events - Filed July 14, 2006 Incorporated
      by Reference


Other
      Events - Filed July 26, 2006 Incorporated
      by Reference


Results
      of Operation and Financial Condition - Filed July 27, 2006 Incorporated
      by Reference


Other
      Events - Filed August 31, 2006 Incorporated
      by Reference


Other
      Events - Filed September 20, 2006 Incorporated
      by Reference




Signatures


-3-
 **Table
            of Contents**




**SMITHTOWN
      BANCORP, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


(unaudited)





(in
                thousands, except share and per share data)
            
            As
                ofSeptember
                30, 2006
            
            December
                31, 2005**ASSETS**Cash
                and due from banks
            
            $
            10,480
            
            $
            13,107Federal
                funds sold
            
            
            11,371
            
            
            360Total
                cash and cash equivalents
            
            
            21,851
            
            
            13,467Investment
                securities:Available
                for sale:Obligations
                of U.S. treasury
            
            
            1,990
            
            
            6,896Obligations
                of U.S. government agencies
            
            
            97,499
            
            
            84,602Mortgage
                - backed securities
            
            
            3,366
            
            
            8,080Obligations
                of state and political subdivisions
            
            
            9,344
            
            
            13,523Other
                securities
            
            
            3,966
            
            
            1,990Total
                securities available for sale
            
            
            116,165
            
            
            115,091Held
                to maturity:Mortgage-backed
                securities
            
            
            51
            
            
            89Obligations
                of state and political subdivisions
            
            
            308
            
            
            1,012Total
                securities held to maturity (estimated fair value$373
                in 2006 and $1,135 in 2005)
            
            
            359
            
            
            1,101Total
                investment securities
            
            
            116,524
            
            
            116,192Restricted
                securities
            
            
            4,043
            
            
            6,338Loans
            
            
            805,056
            
            
            698,421Less:
                allowance for loan losses
            
            
            7,372
            
            
            5,964Loans,
                net
            
            
            797,684
            
            
            692,457Bank
                premises and equipment
            
            
            19,954
            
            
            18,446Other
                assetsCash
                value of bank-owned life insurance
            
            
            18,057
            
            
            17,575Goodwill
            
            
            2,077
            
            
            481Intangible
                assets
            
            
            2,127
            
            
            2,831Other
            
            
            13,364
            
            
            10,495Total
                other assets
            
            
            35,625
            
            
            31,382Total
                assets
            
            $
            995,681
            
            $
            878,282**LIABILITIES
                AND STOCKHOLDERS' EQUITY**LiabilitiesDeposits:Demand
                (non-interest bearing)
            
            $
            101,231
            
            $
            95,828Money
                market
            
            
            243,195
            
            
            217,386NOW
            
            
            36,080
            
            
            31,427Savings
            
            
            48,253
            
            
            45,481Time
            
            
            420,881
            
            
            306,803Total
                deposits
            
            
            849,640
            
            
            696,925Dividends
                payable
            
            
            355
            
            
            355Other
                borrowings
            
            
            55,000
            
            
            107,949Subordinated
                debt
            
            
            18,217
            
            
            11,000Other
                liabilities
            
            
            7,491
            
            
            6,203Total
                liabilities
            
            
            930,703
            
            
            822,432Stockholders'
                equityCommon
                Stock - $.01 par value (20,000,000 shares authorized: 10,750,920
                sharesissued;
                8,885,589shares outstanding)
            
            
            108
            
            
            108Additional
                paid in capital
            
            
            4,020
            
            
            4,372Unearned
                stock awards
            
            
            —
            
            
            (91
            )Retained
                earnings
            
            
            71,330
            
            
            62,124Accumulated
                other comprehensive loss
            
            
            (418
            )
            
            (601
            )75,040
            
            
            65,912Treasury
                stock (1,865,331 shares at cost)
            
            
            (10,062
            )
            
            (10,062
            )Total
                stockholders' equity
            
            
            64,978
            
            
            55,850Total
                liabilities and stockholders' equity
            
            $
            995,681
            
            $
            878,282See
                notes to consolidated financial statements.


-4-
 **Table
          of Contents**




**SMITHTOWN
                BANCORP, INC.**
              **CONSOLIDATED
                STATEMENTS OF INCOME**
              (unaudited)




(in
                thousands, except share and per share data)
            
            For
                the Three Months EndedSeptember
                30,2006
            
            2005Interest
                incomeLoans
            
            $
            15,757
            
            $
            11,432Federal
                funds sold
            
            
            127
            
            
            146Investment
                securities:Taxable:Obligations
                of U.S. treasury
            
            
            45
            
            
            62Obligations
                of U.S. government agencies
            
            
            1,119
            
            
            815Mortgage
                - backed securities
            
            
            43
            
            
            47Other
                securities
            
            
            27
            
            
            26Subtotal
            
            
            1,234
            
            
            950Exempt
                from federal income taxes:Obligations
                of state & political subdivisions
            
            
            105
            
            
            119Other
            
            
            75
            
            
            54Total
                interest income
            
            
            17,298
            
            
            12,701Interest
                expenseMoney
                market accounts (including savings)
            
            
            2,278
            
            
            1,196Time
                deposits of $100,000 or more
            
            
            1,659
            
            
            882Other
                time deposits
            
            
            2,861
            
            
            1,518Other
                borrowings
            
            
            572
            
            
            600Subordinated
                debt
            
            
            355
            
            
            185Total
                interest expense
            
            
            7,725
            
            
            4,381Net
                interest income
            
            
            9,573
            
            
            8,320Provision
                for loan losses
            
            
            300
            
            
            300Net
                interest income after provision for loan losses
            
            
            9,273
            
            
            8,020Noninterest
                incomeTrust
                and investment services
            
            
            121
            
            
            116Service
                charges on deposit accounts
            
            
            448
            
            
            500Revenues
                from insurance agency
            
            
            984
            
            
            900Net
                gain on sales of investment securities
            
            
            205
            
            
            --Increase
                in cash value of bank owned life insurance
            
            
            164
            
            
            157Other
            
            
            588
            
            
            460Total
                noninterest income
            
            
            2,510
            
            
            2,133Noninterest
                expenseSalaries
            
            
            2,823
            
            
            2,652Pension
                and other employee benefits
            
            
            587
            
            
            575Net
                occupancy expense of bank premises
            
            
            907
            
            
            800Furniture
                and equipment expense
            
            
            560
            
            
            487Amortization
                of intangible assets
            
            
            229
            
            
            18Other
            
            
            1,051
            
            
            911Total
                noninterest expense
            
            
            6,157
            
            
            5,443Income
                before income taxes
            
            
            5,626
            
            
            4,710Provision
                for income taxes
            
            
            1,977
            
            
            1,764Net
                income
            
            $
            3,649
            
            $
            2,946Basic
                earnings per share
            
            $
            0.41
            
            $
            0.33Diluted
                earnings per share
            
            $
            0.41
            
            $
            0.33Cash
                dividends declared
            
            $
            0.04
            
            $
            0.04Weighted
                average common shares outstanding
            
            
            8,867,968
            
            
            8,879,497Weighted
                average common equivalent shares
            
            
            8,871,139
            
            
            8,879,681Comprehensive
                income
            
            $
            4,231
            
            $
            2,515See
                notes to consolidated financial statements.


-5-
 **Table
          of Contents**




**SMITHTOWN
                BANCORP, INC.**
              **CONSOLIDATED
                STATEMENTS OF INCOME**
              (unaudited)




(in
                thousands, except share and per share data)
            
            For
                the Nine Months EndedSeptember
                30,2006
            
            2005Interest
                incomeLoans
            
            $
            44,680
            
            $
            31,379Federal
                funds sold
            
            
            349
            
            
            476Investment
                securities:Taxable:Obligations
                of U.S. treasury
            
            
            168
            
            
            134Obligations
                of U.S. government agencies
            
            
            3,054
            
            
            1,991Mortgage
                - backed securities
            
            
            146
            
            
            135Other
                securities
            
            
            71
            
            
            100Subtotal
            
            
            3,439
            
            
            2,360Exempt
                from federal income taxes:Obligations
                of state & political subdivisions
            
            
            348
            
            
            348Other
            
            
            180
            
            
            149Total
                interest income
            
            
            48,996
            
            
            34,712Interest
                expenseMoney
                market accounts (including savings)
            
            
            6,323
            
            
            2,904Time
                deposits of $100,000 or more
            
            
            4,075
            
            
            2,271Other
                time deposits
            
            
            7,652
            
            
            4,067Other
                borrowings
            
            
            1,965
            
            
            1,789Subordinated
                debt
            
            
            903
            
            
            508Total
                interest expense
            
            
            20,918
            
            
            11,539Net
                interest income
            
            
            28,078
            
            
            23,173Provision
                for loan losses
            
            
            1,400
            
            
            525Net
                interest income after provision for loan losses
            
            
            26,678
            
            
            22,648Noninterest
                incomeTrust
                and investment services
            
            
            364
            
            
            330Service
                charges on deposit accounts
            
            
            1,423
            
            
            1,475Revenues
                from insurance agency
            
            
            2,948
            
            
            2,664Net
                gain on sales of investment securities
            
            
            194
            
            
            13Increase
                in cash value of bank owned life insurance
            
            
            482
            
            
            473Other
            
            
            1,794
            
            
            1,227Total
                noninterest income
            
            
            7,205
            
            
            6,182Noninterest
                expenseSalaries
            
            
            8,270
            
            
            7,520Pension
                and other employee benefits
            
            
            1,826
            
            
            1,743Net
                occupancy expense of bank premises
            
            
            2,638
            
            
            2,405Furniture
                and equipment expense
            
            
            1,593
            
            
            1,364Amortization
                of intangible assets
            
            
            612
            
            
            54Other
            
            
            3,243
            
            
            2,953Total
                noninterest expense
            
            
            18,182
            
            
            16,039Income
                before income taxes
            
            
            15,701
            
            
            12,791Provision
                for income taxes
            
            
            5,429
            
            
            4,798Net
                income
            
            $
            10,272
            
            $
            7,993Basic
                earnings per share
            
            $
            1.16
            
            $
            0.90Diluted
                earnings per share
            
            $
            1.16
            
            $
            0.90Cash
                dividends declared
            
            $
            0.12
            
            $
            0.12Weighted
                average common shares outstanding
            
            
            8,866,895
            
            
            8,879,155Weighted
                average common equivalent shares
            
            
            8,873,669
            
            
            8,880,063Comprehensive
                income
            
            $
            10,455
            
            $
            7,616See
                notes to consolidated financial statements.


-6-
 **Table
          of Contents**


**SMITHTOWN
        BANCORP, INC.**
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY**
 (unaudited)


(in
              thousands, except shares outstanding)


AccumulatedCommon
                Stock
            
            Additional
            
            
            
            
            
            Unearned
            
            Other
            
            TotalShares
            
            
            
            Paid
                In
            
            Retained
            
            Treasury
            
            Stock
            
            Comprehensive
            
            Stockholders’Outstanding
            
            Amount
            
            Capital
            
            Earnings
            
            Stock
            
            Awards
            
            Income(Loss)
            
            EquityBalance
                at 12/31/2004
            
            
            8,885,589
            
            $
            108
            
            $
            4,372
            
            $
            52,480
            
            $
            (10,062
            )
            $
            —
            
            $
            45
            
            $
            46,943Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            7,993
            
            
            
            
            
            
            
            
            
            
            
            7,993Other
                comprehensiveloss
                , net of tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (377
            )
            
            (377
            )Total
                comprehensiveincome
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,616Cash
                dividends declared
            
            
            
            
            
            
            
            
            
            
            
            (1,066
            )
            
            
            
            
            
            
            
            
            
            
            (1,066
            )Stock
                awards vested
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12
            
            
            
            
            
            12Stock
                awards granted
            
            
            (6,900
            )
            
            
            
            
            
            
            
            
            
            
            114
            
            
            (114
            )
            
            
            
            
            ---Treasury
                stock purchases
            
            
            6,900
            
            
            
            
            
            
            
            
            
            
            
            (114
            )
            
            
            
            
            
            
            
            (114
            )Balance
                at 9/30/2005
            
            
            8,885,589
            
            $
            108
            
            $
            4,372
            
            $
            59,407
            
            $
            (10,062
            )
            $
            (102
            )
            $
            (332
            )
            $
            53,391Balance
                at 12/31/2005
            
            
            8,885,589
            
            $
            108
            
            $
            4,372
            
            $
            62,124
            
            $
            (10,062
            )
            $
            (91
            )
            $
            (601
            )
            $
            55,850Comprehensive
                income:Net
                income
            
            
            
            
            
            
            
            
            
            
            
            10,272
            
            
            
            
            
            
            
            
            
            
            
            10,272Other
                comprehensiveincome,
                net of tax
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            183
            
            
            183Total
                comprehensiveincome
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10,455Cash
                dividends declared
            
            
            
            
            
            
            
            
            
            
            
            (1,066
            )
            
            
            
            
            
            
            
            
            
            
            (1,066
            )Transfer
                due to theadoption
                of SFAS 123R
            
            
            
            
            
            
            
            
            (91
            )
            
            
            
            
            
            
            
            91
            
            
            
            
            
            —Stock
                awards vested
            
            
            
            
            
            
            
            
            62
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            62Stock
                awards granted
            
            
            14,625
            
            
            
            
            
            (323
            )
            
            
            
            
            323
            
            
            
            
            
            
            
            
            —Treasury
                stock purchases
            
            
            (14,625
            )
            
            
            
            
            
            
            
            
            
            
            (323
            )
            
            
            
            
            
            
            
            (323
            )Balance
                at 9/30/2006
            
            
            8,885,589
            
            $
            108
            
            $
            4,020
            
            $
            71,330
            
            $
            (10,062
            )
            $
            —
            
            $
            (418
            )
            $
            64,978


See
      notes
      to consolidated financial statements.


-7-
 **Table
          of Contents**




**SMITHTOWN
                BANCORP, INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS**(unaudited)
            
            For
                the Nine Months(in
                thousands)
            
            Ended
                September 30,2006
            
            2005**Cash
                flows from operating activities**Net
                income
            
            $
            10,272
            
            $
            7,993Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                on premises and equipment
            
            
            1,438
            
            
            1,271Provision
                for loan losses
            
            
            1,400
            
            
            525Net
                gain on sale of investment securities
            
            
            (194
            )
            
            (13
            )Net
                increase in other liabilities
            
            
            1,505
            
            
            1,740Net
                increase in other assets
            
            
            (2,514
            )
            
            (1,218
            )Net
                increase in deferred taxes
            
            
            (140
            )
            
            (950
            )Amortization
                of unearned stock awards
            
            
            62
            
            
            11Increase
                in cash surrender value of officers’ life insurance
                policies
            
            
            (482
            )
            
            (473
            )Amortization
                of investment security premiums and accretion of discounts,
                net
            
            
            (63
            )
            
            (212
            )Amortization
                of intangible assets
            
            
            612
            
            
            54Cash
                provided
                by operating activities
            
            
            11,896
            
            
            8,728**Cash
                flows from investing activities**Mortgage-backed
                securities:Proceeds
                from calls, repayments, maturities and sales of available for
                sale
            
            
            4,676
            
            
            3,185Proceeds
                from calls, repayments and maturities of held to maturity
            
            
            38
            
            
            62Other
                securities:Proceeds
                from calls, repayments, maturities and sales of available for
                sale
            
            
            24,802
            
            
            23,564Proceeds
                from calls, repayments and maturities of held to maturity
            
            
            703
            
            
            457Purchases
                of investment securities:Available
                for sale
            
            
            (29,977
            )
            
            (91,057
            )Held
                to maturity
            
            
            —
            
            
            (50
            )Purchases
                of restricted securities
            
            
            (2,419
            )
            
            —Redemptions
                of restricted securities
            
            
            4,464
            
            
            1,800Loans
                made to customers, net
            
            
            (106,635
            )
            
            (81,825
            )Payment
                for Bank of Smithtown Insurance Agents and Brokers, Inc.
            
            
            (1,596
            )
            
            ---Purchase
                of premises and equipment
            
            
            (2,945
            )
            
            (4,569
            )Cash
                used in investing activities
            
            
            (108,889
            )
            
            (148,433
            )**Cash
                flows from financing activities**Net
                increase in demand deposits, money market, NOW and savings
            
            
            38,637
            
            
            70,215Net
                increase in time deposits
            
            
            114,078
            
            
            119,902Cash
                dividends paid
            
            
            (1,066
            )
            
            (1,007
            )Net
                decrease in other borrowings
            
            
            (52,949
            )
            
            (37,500
            )Proceeds
                from subordinated debt issue
            
            
            7,000
            
            
            —Purchase
                of treasury stock
            
            
            (323
            )
            
            (114
            )Cash
                provided by financing activities
            
            
            105,377
            
            
            151,496Net
                change in cash and cash equivalents
            
            
            8,384
            
            
            11,791Cash
                and cash equivalents, beginning of period
            
            
            13,467
            
            
            9,633Cash
                and cash equivalents, end of period
            
            $
            21,851
            
            $
            21,424Supplemental
                disclosures of cash flow informationCash
                paid during the year for:Interest
            
            $
            19,173
            
            $
            10,775Income
                taxes
            
            
            6,055
            
            
            5,190See
                notes to consolidated financial statements.





-8-
 **Table
            of Contents**




Notes
      to Consolidated Financial Statements -
      Unaudited


(in
      thousands, except share and per share data)





Note
      1 -
      Financial Statement Presentation





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





The
      accompanying unaudited interim consolidated financial statements have been
      prepared pursuant to the rules and regulations for reporting on Form 10-Q.
      Accordingly, certain disclosures required by U.S. generally accepted accounting
      principles are not included herein. These interim statements should be read
      in
      conjunction with the consolidated financial statements and notes included in
      the
      Annual Report on Form 10-K filed by the Company with the Securities and Exchange
      Commission. The December 31, 2005 consolidated balance sheet was derived from
      the Company’s December 31, 2005 audited financial statements included in the
      Annual Report on Form 10-K.





Interim
      statements are subject to possible adjustments in connection with the annual
      audit of the Company for the year ending December 31, 2006. In the opinion
      of
      management, the accompanying unaudited interim consolidated financial statements
      contain all adjustments (consisting of normal recurring accruals) necessary
      to
      present fairly the Company’s financial position and its results of operations
      for the periods presented.





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





Note
      2 -
      Earnings Per Common Share





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





Three
                Months EndedSeptember30,
            
            September
                30,2006
            
            2005Computation
                of per share income(in
                thousands, exceptshare
                and per share data)Net
                income
            
            $
            3,649
            
            $
            2,946Common
                equivalent shares:Weighted
                average common shares outstanding*
            
            
            8,867,968
            
            
            8,879,497Weighted
                average common equivalent shares*
            
            
            3,171
            
            
            184Weighted
                average common and common equivalent shares*
            
            
            8,871,139
            
            
            8,879,681Basic
                earnings per share
            
            $
            0.41
            
            $
            0.33Diluted
                earnings per share
            
            $
            0.41
            
            $
            0.33





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


-9-
 **Table
          of Contents**




Note
      3 -
      Other Stock-Based Compensation





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





For
      accounting purposes, the Company recognizes compensation expense for shares
      of
      common stock awarded under the Restricted Stock Plan in 2005 and 2006 over
      the
      vesting period at the fair market value of the shares on the date they are
      awarded. The vesting period is five years with twenty percent of the award
      for
      each year vesting annually on December 31 of each year. For the three and nine
      month periods ended September 30, 2006, the Company recognized $26 and $62
      of
      compensation expense related to the shares awarded. The income tax benefits
      resulting from this expense were $9 and $20 during these periods,
      respectively.





As
      of
      September 30, 2006, there was approximately $352 of unrecognized compensation
      costs related to nonvested restricted stock plan shares. Those costs are
      expected to be recognized over a period of 4.25 years.





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




Weighted
                AverageShares
            
            Grant
                Date Share ValueNonvested
                at beginning of period
            
            
            17,993
            
            $
            20.57Granted
            
            
            0
            
            
            0Vested
            
            
            (1,076
            )
            
            20.27Nonvested
                at end of period
            
            
            16,917
            
            $
            20.59


Note
      4-
      Employee Benefits





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




For
                the Three Months EndedSeptember
                30,2006
            
            2005401(K)
                Defined Contribution Plan
            
            $
            41
            
            $
            36Employee
                Stock Ownership Plan
            
            
            50
            
            
            45




For
                the Nine Months EndedSeptember
                30,2006
            
            2005401(K)
                Defined Contribution Plan
            
            $
            119
            
            $
            106Employee
                Stock Ownership Plan
            
            
            151
            
            
            135





It
      is
      expected that the Bank’s costs for these two plans for the twelve months ending
      December 31, 2006 will be approximately $160 and $200, respectively. Bank of
      Smithtown also continues to sponsor post-retirement medical and life insurance
      plans for a closed group of prior employees. The following table details the
      interest cost, amortization cost of the unrecognized transition obligation,
      and
      the amortization of the net gain for the comparable three and nine month
      periods.




For
                the Three Months EndedAmortization
            
            Amortization
            
            Total
                NetInterest
                Cost
            
            Cost
            
            Of
                Net Gain
            
            ExpenseSeptember30, 2006
            
            $
            4
            
            $
            8
            
            $
            2
            
            $
            10September30, 2005
            
            
            5
            
            
            8
            
            
            2
            
            
            11




-10-
 **Table
          of Contents**




For
                theNine
                Months EndedAmortization
            
            Amortization
            
            Total
                NetInterest
                Cost
            
            Cost
            
            Of
                Net Gain
            
            ExpenseSeptember30, 2006
            
            $
            12
            
            $
            24
            
            $
            5
            
            $
            31September30, 2005
            
            
            14
            
            
            24
            
            
            4
            
            
            33





Since
      the
      plans hold no assets, the Bank did not contribute and does not expect to
      contribute to the plans during 2005 and 2006, other than to fund the payments
      for the benefits. The Bank has also adopted a nontax qualified Executive and
      Director Incentive Retirement Plan. While this plan is funded from the general
      assets of the Bank, life insurance policies were acquired for the purpose of
      serving as the primary income source for the accruals during the service period.
      Benefits under the Incentive Retirement Plan are based solely on the amount
      contributed by the Bank. The contributions accrued under this plan for the
      three
      and nine month periods were:





For
                the Three Months Ended
            
            For
                the Nine Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005Incentive
                Retirement Plan
            
            $
            65
            
            $
            57
            
            $
            190
            
            $
            164





The
      Bank
      has a similar supplemental life insurance plan for
      all
      members of management, with similar life insurance policies serving as the
      primary income source for the benefits accrued during the participant’s service
      period. The benefit provides post retirement life insurance up to a maximum
      of
      two and one-half times annual salary. At September 30, 2006 and 2005, the
      combined cash value of these insurance policies was $14,169 and **$** 13,674.
      The Bank has also established a non-tax qualified Deferred Compensation Plan
      for
      certain directors and executive officers. This group of employees defers a
      portion of its compensation. A liability has been accrued for the obligation
      under this plan. During 2004 the Bank adopted a Supplemental Executive
      Retirement Plan for the Chief Executive Officer. This plan is partially funded
      by life insurance policies with a total cash value at September 30, 2006 and
      2005 of $3,888 and **$** 3,741.
      The Bank’s expense for this plan for the comparable three and nine month periods
      was:





For
                the Three Months Ended
            
            For
                the Nine Months EndedSeptember
                30,
            
            September
                30,2006
            
            2005
            
            2006
            
            2005Supplemental
                Executive Retirement Plan
            
            $
            66
            
            **$**
            69
            
            $
            191
            
            $
            206








Note
      5.
      Subordinated Debentures





In
      September, 2003 a trust formed by the Company issued $11,000 of floating rate
      trust preferred securities as part of a pooled offering of such securities
      due
      October 8, 2033. The securities bear interest at 3-month LIBOR plus 2.99%.
      The
      Company issued subordinated debentures to the trust in exchange for the proceeds
      of the offering: the debentures and related debt issuance costs represent the
      sole assets of this trust. The Company may redeem the subordinated debentures,
      in whole or in part, at a premium declining ratably to par by October 8,
      2008.





In
      March
      2006, an additional trust formed by the Company issued $7,000 of trust preferred
      securities as part of a pooled offering of such securities due June 30, 2036.
      These securities bear interest at 6.53% for the first five years, at which
      point
      they become floating rate securities that bear interest at 3-month LIBOR plus
      1.43%. The Company issued subordinated debentures to the trust in exchange
      for
      the proceeds of the offering: the debentures and related debt issuance costs
      represent the sole assets of this trust. The Company may redeem these
      subordinated debentures, in whole or in part, at a premium declining ratably
      to
      par by June 30, 2011.





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





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


(in
      thousands, except share and per share data)





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


-11-
 **Table
            of Contents**




exhaustive.
      Other sections of this report may include additional factors that could
      adversely impact the Company’s performance.





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





Summary





Economic
      conditions within the Company’s market area remain unchanged from second quarter
      of 2006. Growth in the local economy continues at a healthy pace. Gasoline
      prices reached a peak during the middle of the quarter and have since leveled
      off. Overall, inflation appears to be under control through the Federal Reserve
      Bank’s seventeen rate adjustments, the last one being at its June 29, 2006
      Federal Open Market Committee meeting. There continues to be talk regarding
      the
      real estate market “bubble” and slight price adjustments have been evident in
      the Company’s market area. Inventory of houses for sale has grown, with
      corresponding purchases of houses slower during July and August, with a pickup
      evident during September. While homes may take slightly longer to sell, at
      slightly reduced prices compared to last year when prices were at an all time
      high, homes nevertheless are selling. Further price reductions in the Company’s
      market area may continue as previously overvalued properties experience modest
      declines. As the Bank typically maintains fairly conservative loan to value
      ratios, it remains insulated from most declines in property values. The effect
      of the seventeen Federal Reserve Bank increases has slowed down the refinance
      and home equity lending business, an area of lending in which Bank of Smithtown
      does not aggressively partake. Real estate development and construction remain
      strong within the five boroughs of New York City. Long Island, by contrast,
      is
      more limited for real estate development and new construction due to limited
      available land. In conjunction with the financing of some new land development,
      there remain significant financing opportunities for building improvements
      and
      re-construction of existing homes on Long Island.





The
      seventeen rate increases effected by the Federal Open Market Committee have
      continued to positively impact the Bank’s loan portfolio, as approximately one
      third of the loans within the portfolio reprice every ninety days. 28.25% of
      the
      portfolio are floating rate loans indexed to the Wall Street Journal prime
      rate
      and reprice immediately. Although the Federal Reserve Board’s rate increases
      have exerted negative pressure on deposit pricing, management’s control over
      deposit rate adjustments have kept margin erosion to a level that is lower
      than
      most of its peers, over the the three and nine month periods ending September
      30, 2006.




A
      continued positive economic picture for the Company’s market area bodes well for
      its fundamental line of business - commercial real estate lending on Long Island
      and New York City. Third quarter results of operations provide evidence of
      the
      Company’s continued growth in commercial real estate lending as well as growth
      in deposits.




The
      Company’s competition for deposits within its service area remains fierce. As
      was characteristic of the first six months of 2006, new financial institutions
      looking to gain market share continue to “invade” the area, while existing banks
      continue to expand their franchise on Long Island and in New York City. Credit
      unions, insurance companies, investment banks and brokerages continue to try
      to
      steal away bank customers, and other entrants into the financial arena, such
      as
      online banks, enter the market frequently. Obtaining reasonably priced funding
      to fuel loan growth has been and will continue to be the Company’s biggest
      challenge. Yet significant and continued deposit growth provides evidence of
      the
      Company’s ability to substitute some rate sensitivity in its customers for truly
      superior service. Although some margin compression is inevitable as long as
      the
      yield curve remains inverted or flat and the competition for deposits remains
      strong, results of operations for the Company during the third quarter of 2006
      evidence its continued ability to substantially grow loans and deposits with
      decreases in margin far smaller than most of its peers. Based on the level
      of
      earnings for the first nine months of 2006, and management’s projections of
      continued growth in assets throughout the remainder of the year, expectations
      for another year of record earnings by the Company are strong.





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





-
            Growth
                in EPS for the third quarter of 2006 over 2005 was 24.24%, and over
                the
                nine months of 2005 was 28.89%


-
            An
                increase in net income for the third quarter of 2006 over 2005 of
                23.87%


-
            An
                increase in net income for the first nine months of 2006 over 2005
                of
                28.52%


-
            An
                ROAE for the third quarter of 22.93% as compared to 22.37% for the
                third
                quarter of 2005


-
            An
                ROAE for the first nine months of 22.75% vs. 21.15% for the same
                period in
                2005


-
            Loan
                and deposit growth for the third quarter equal to 2.37% and 2.58%,
                respectively





Growth
      in
      earnings per share for the nine month period ending September 30, 2006 as
      compared to the same period ending September 30, 2005 was 28.89%. This increase
      is once again virtually all attributable to increased earnings as the minimal
      decrease in weighted average number of shares outstanding since September 30,
      2005 has been due exclusively to purchases and vesting of shares in the
      Company’s restricted stock plan. Net income for the third quarter increased by
      23.86% over the same quarter in 2005, due in large part to the 15.06% growth
      in
      net interest income. This is due to a greatly increased average balance of
      $923,183 in interest earning assets for the third quarter of 2006 as compared
      to
      $754,666 for the same quarter in 2005. Yield on these same interest earning
      assets for the third quarter of 2006 was 7.52% as  -12-
 **Table
            of Contents**


compared
      to 6.76% in 2005. Growth in noninterest income of $377 or 17.67% also has
      contributed to the increased net income. The largest contributors to this growth
      during third quarter 2006 include: increased revenues from Bank of Smithtown
      Insurance Agents and Brokers, Inc. and Bank of Smithtown Financial Services,
      Inc., fee income from additional commercial services offered by our branches,
      fee income related to customers’ usage of debit cards, fees earned related to
      balances held at correspondent banks for the purpose of official check clearing
      and recoveries of prior demand deposit charge-offs. During the first quarter
      of
      2006, the Company completed the formation of an additional subsidiary of the
      Bank. This subsidiary, BOS Preferred Funding Corporation, is a real estate
      investment trust, and was formed as a vehicle for capital enhancement for the
      Bank. The corporation holds a majority of the Bank’s consumer and commercial
      real estate loans. Income from this subsidiary is passed along to the Bank
      in
      the form of a dividend, and as such, the Company may exclude 60% of this
      dividend income from its New York State taxable income. This resulted in a
      reduction in the Company’s effective tax rate from 37.90% for the twelve month
      period ended December 31, 2005 to 32.98% for the nine month period ended
      September 30, 2006. Asset growth of 13.37% during the first nine months of
      2006
      represent a continuation of the strong organic growth that has been
      characteristic of the Company over the past ten years. This growth is primarily
      the result of an increased deposit and loan base. During the first nine months
      of 2006 loan growth of 15.27%, the annualized equivalent of over 20% growth,
      was
      in line with the Company’s average ten year loan growth rate of 22.9%. Although
      loan growth during the third quarter was significantly lower than that of
      previous quarters, this was due to several loans not being able to close by
      quarterend. Those loans, however, closed immediately thereafter and loan growth
      actually increased by over $20,000 during the first week of October. Deposit
      acquisition also continued at a rapid pace, with an increase of 21.91% during
      the first nine months of the year, a very significant increase in light of
      the
      fact that this growth was accomplished, once again, with only one new branch
      opening on the last weekend of the third quarter. Growth in deposits during
      the
      third quarter of 2006 was also slower than in prior quarters this year and
      was
      limited to the funding necessary for new loan originations. As rate pressures
      have increased during the year, acquisition of interest bearing deposits has
      been limited to those balances that could be obtained at rates lower than
      comparable Federal Home Loan Bank advance rates. Efforts to attract new demand
      deposits remained strong throughout the quarter, although these balances
      actually contracted. Of the $21,406 increase in total deposits from June 30,
      2006 to September 30, 2006, the increase in certificates of deposits, savings
      and NOW accounts of $26,221 was offset with a decrease in demand deposits and
      money market deposits of $43 and $4,772. As discussed above, competition for
      demand deposits in particular is fierce. As checking accounts have become a
      commodity with little differentiation among financial institutions, it has
      become one of the most difficult of accounts to attract away from other banks.
      The Company’s year-to-date efficiency ratio increased slightly from 51.88% at
      June 30, 2006 to 52.08% at September 30, 2006. The ratio improved from September
      30, 2005 due to improved efficiencies and further integration of the Bank of
      Smithtown Insurance Agents and Brokers, Inc. The slight increase this quarter
      was due to the increased expenses related to the new branch opening and may
      increase again as we approach the opening of the next branch office during
      the fourth quarter of this year. Capital ratios have remained stable at
      September 30, a result of both increased earnings and the issuance of additional
      subordinated debt during the first quarter. Regulatory capital ratios remain
      at
      the well capitalized level. In order to increase the liquidity of the Company’s
      stock by reducing its price, the Board of Directors declared a 3:2 stock split
      in the form of a 50% stock dividend to all holders of record as of April 21,
      2006 and effected on May 5, 2006. This was the fifth stock split declared by
      the
      Board during the past eight years.





***Comparison
      of Financial Position at September 30, 2006 and June 30,
      2006***





The
      structure of the Bank’s balance sheet remained stable during the third quarter
      of 2006. The largest segment of the Company’s interest earning assets remains
      its loan portfolio, which represents 80.85% of total assets. Growth during
      the
      third quarter of 2006 was concentrated in the real estate mortgage and
      construction financing segments of the portfolio with over $21,230 of net loan
      growth experienced. The composition of the loan portfolio at September 30 and
      June 30, 2006 was as follows:




September
                30, 2006
            
            June
                30, 2006Real
                estate loansConstruction
            
            
            208,732
            
            
            25.87
            %
            $
            199,913
            
            
            25.36
            %Residential
            
            
            168,303
            
            
            20.86
            
            
            161,049
            
            
            20.43Commercial
            
            
            383,486
            
            
            47.52
            
            
            378,329
            
            
            47.99Agricultural
            
            
            1,695
            
            
            .21
            
            
            1,695
            
            
            0.21Commercial
              and industrial
            
            
            41,447
            
            
            5.14
            
            
            44,861
            
            
            5.69Consumer
            
            
            2,420
            
            
            .30
            
            
            2,327
            
            
            0.29Other
                loans
            
            
            835
            
            
            .10
            
            
            253
            
            
            0.03Total
                loans
            
            
            806,918
            
            
            100.00
            %
            
            788,427
            
            
            100.00
            %Less:Deferred
                fees
            
            
            1,862
            
            
            
            
            
            2,014Allowance
                for loan losses
            
            
            7,372
            
            
            
            
            
            7,073Loans,
                net
            
            $
            797,684
            
            
            
            
            $
            779,340





As
      can be
      seen from the above table, the segmentation of the loan portfolio remained
      stable during the third quarter. The Company’s primary lending focus remains
      commercial real estate and construction and land loans. During the third quarter
      of 2006, deposits served as the primary funding vehicle for new loans. Currently
      the Company’s loan to deposit ratio is a strong 94.75%. The largest increase in
      volume within the loan portfolio during the third quarter of 2006 was in the
      construction loan portfolio, and the majority of these loans were for
      residential projects located in Suffolk County and Brooklyn. These types of
      loans tend to have shorter terms than commercial or residential loans. Much
      of
      this construction lending leads to more permanent financing after completion
      of
      the project, which the Company may also provide. The two next largest increases
      in the portfolio were in residential and commercial real estate loans. The
      commercial real estate loans were made for varied purposes including mixed
      use
      (commercial and residential), retail, professional and medical facilities.
      These
      loans are collateralized by


-13-
 **Table
            of Contents**




properties
      located in Manhattan, Brooklyn, Queens, Nassau and Suffolk.




As
      of
      September 30, 2006 nonperforming loans increased to $8,436, mostly because
      management decided to place one slow-paying loan on nonaccrual status. This
      one
      mortgage loan with a principal balance of $7,226 has been in the 30-89 day
      category at each previous quarter’s end since the first quarter of 2005, and has
      been discussed in all of the Company’s quarterly reports since December
      2004.





The
      loan
      is secured by a leasehold mortgage on two adjacent six-story buildings located
      on Madison Avenue in New York City. The value of the leasehold was appraised
      at
      $11,800 in November, 2003. At the present time, the buildings are partially
      tenanted. The Bank continues to pursue a variety of options which include:
      the
      borrower refinancing other business property in order to obtain funds sufficient
      to bring the loan current; finding additional tenants in order to bring both
      buildings to full occupancy; and/or a sale of the leasehold interest. The same
      borrower had two other loans in New York City with the Bank and both of these
      properties were sold during 2005 without the need for a foreclosure proceeding
      and without any loss to the Bank. The Bank has no other loans to this
      borrower.





The
      balance of nonperforming loans consists of two loans totaling $1,201 to entities
      owned by a sole principal who passed away earlier this year. Both loans are
      secured by properties in Suffolk County. Two of the properties are developed
      with commercial buildings. One property is fully rented and the other is
      partially rented. The other property is an adjacent vacant corner lot on a
      heavily-traveled main road. Offers to purchase the properties have been made
      at
      prices that exceed the debt on the properties. An administrator of the estate
      was just appointed by the Surrogate’s Court and a resolution of these two loans
      may now effectively proceed.




The
      30-89
      day category has been substantially reduced from $8,930 to $422 because of
      the
      migration of the three loans discussed above to nonaccrual status.





**** The
      allowance for loan loss account increased from June 30, 2006 to September 30,
      2006 by $299, largely a result of the provision for loan losses of $300. Based
      on specific reserves for internally classified loans and multiple factors
      including historical loss experience and current economic conditions, management
      feels the level of the allowance for loan losses provides adequate coverage.
      At
      September 30, 2006 and June 30, 2006, the Bank’s reserve ratio (the allowance
      for loan losses as a percentage of end of period loans) was .92% and .90%,
      respectively. This level of reserves is adequate due to the quality of the
      portfolio and is within the range of peer group banks. The allowance for loan
      losses is an amount that management currently believes will be adequate to
      absorb possible incurred losses inherent in the Bank’s loan portfolio. In
      determining the allowance for loan losses, there is not an exact amount but
      rather a range for what constitutes an appropriate amount. The determination
      of
      this amount as of any balance sheet date is subjective in nature and requires
      material estimates based on historical experience, the economic environment,
      trends in the portfolio, concentrations of loan balances and various other
      factors. The portion of the loan loss allowance allocated to each loan category
      does not represent the total available for probable incurred losses which may
      occur within the loan category since the loan loss allowance is a valuation
      applicable to the entire loan portfolio. Management has also set up a reserve
      for unfunded loan commitments and the balance in this account at September
      30,
      2006 was $112. This amount is reflected in other liabilities on the balance
      sheet.





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





September
                30,
              2006
            
            June
                30,
              2006Securities
                available for saleObligations
                of U.S.treasury
            
            $
            1,990
            
            $
            6,956Obligations
                of U.S. government agencies
            
            
            97,499
            
            
            93,612Mortgage-backed
                securities
            
            
            3,366
            
            
            3,806Obligations
                of state and political subdivisions
            
            
            9,344
            
            
            11,774Other
                securities
            
            
            3,966
            
            
            1,999Total
                securities available for sale
            
            $
            116,165
            
            $
            118,147Securities
                held
                to maturityMortgage-backed
                securities
            
            $
            51
            
            $
            62Obligations
                of state and political subdivisions
            
            
            308
            
            
            309Totalsecurities held to maturity
            
            $
            359
            
            $
            371Total
                investment securities
            
            $
            116,524
            
            $
            118,518





Investment
      securities decreased
      by a slight 1.68% from June 30, 2006 to September 30, 2006. During the third
      quarter, $250 of municipal securities and $5,000 of a U.S. Treasury note with
      a
      combined weighted average yield of 2.44% matured. These securities were replaced
      with $5,000 of U.S. Government Agency securities and a trust preferred security
      with a weighted average yield of 5.66%. Also during the quarter, $5,670 of
      municipal securities with a weighted average yield of 4.91% were sold, resulting
      in a net gain on sale of $205. Management’s intent remains to hold most
      securities to maturity.





Net
      unrealized losses on available for sale securities as of September 30, 2006
      and
      June 30, 2006 was $735 and $1,753. These unrealized losses have not been
      recognized into income because the bonds are of high credit quality, management
      has the intent and ability to hold them for the forseeable future and the
      decline in fair value is largely due to increases in market interest rates.
      The
      fair value is expected to recover as


-14-
 **Table
            of Contents**




the
      securities approach their maturity date and/or market rates
      decline.





Bank
      premises and equipment increased by $1,508 or 8.18% from June 30, 2006 to
      September 30, 2006, as construction on new branch offices continued during
      the
      quarter. The Company’s new Bohemia office opened during the last week of the
      third quarter. It is expected that the Company’s new Coram branch will open
      during the later part of the fourth quarter. Other assets increased by 4.81%,
      primarily the result of the third payment for the purchase of Bank of Smithtown
      Insurance Agents and Brokers, Inc. made on September 1, 2006. This payment
      was
      recorded to goodwill.





On
      the
      liability side of the balance sheet, total deposits increased by 2.58% from
      the
      end of the second quarter of 2006 to September 30, 2006. The composition of
      deposits was as follows:




September
                30,
            
            June
                30,2006
            
            2006Demand
                (non interest bearing)
            
            $
            101,231
            
            $
            101,274Money
                market
            
            
            243,195
            
            
            247,967NOW
            
            
            36,080
            
            
            35,259Savings
            
            
            48,253
            
            
            46,391Time
            
            
            420,881
            
            
            397,343Total
                deposits
            
            $
            849,640
            
            $
            828,234





The
      large st
      increase in deposits during the second quarter was in time deposit accounts
      which grew by 5.92%. These deposits were gathered to provide the funding for
      new
      loan originations. Although the rates paid on the promotional products were
      high, they were below comparable term Federal Home Loan Bank advance rates.
      The
      majority of the certificates opened were within the six to twelve month maturity
      time frame, so as to be able to take advantage of a lower rate environment,
      should that be the direction the Federal Reserve Bank moves at the time of
      their
      maturity. As compared to the first quarter of 2006, during which time most
      new
      deposits were core, both second and third quarter actually evidenced a decrease
      in core deposits, continued proof of the fierce competition for these deposits.
      The competition for deposits continues to be very strong in the Long Island
      market with new entrants into the marketplace increasing continuously. Banks
      with both physical locations and on-line only, savings institutions, insurance
      companies, brokerage and investment banking firms, credit unions and other
      non-financial companies are the Bank’s primary competitors, and acquisition of
      additional reasonably priced deposits to fund future loan growth remains the
      Bank’s biggest challenge. With a limited number of new customers in the Bank’s
      service areas, part of the challenge becomes the ability to draw customers
      away
      from other deposit collecting institutions. The Bank remains committed to
      increasing core deposits by reducing rate sensitivity with service to our
      customers as well as offering a full array of products including insurance,
      brokerage and trust services. Savings balances increased by $1,862 or 4.01%,
      due
      in large part to the new Premium savings account that provides tiered interest
      rates tied to incremental balance levels. Money market balances decreased by
      1.92% from June 30 to September 30, 2006. A portion of these balances were
      transferred into higher paying, less liquid certificates of deposit within
      the
      Bank. The Bank continued to promote its Elite money market account throughout
      the quarter and was very successful in acquiring new money. These new deposits
      of over $9,000 were acquired at rates well below any overnight or term borrowing
      rates. The Company’s success at adding these relatively low cost savings and
      money market balances as well as reasonably priced certificates of deposit
      certainly contributed to only a three basis point tightening of net interest
      margin during third quarter.





Other
      borrowings decreased from $62,000 at June 30, 2006 to $55,000 at September
      30,
      2006. Due to the availability of lower cost funds obtained through new savings
      and time deposits, one matured borrowing and another borrowing that was called
      were repaid. The $55,000 in borrowings at quarterend were in the form of nine
      term advances from the Federal Home Loan Bank of New York. The weighted average
      maturity and rate of the Bank’s current nine term advances is approximately 1.75
      years and 3.96%, respectively. All of these borrowings are collateralized by
      residential and commercial mortgages under a specific lien arrangement with
      the
      Federal Home Loan Bank of New York as well as with various securities issued
      by
      Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and the
      Government National Mortgage Association. During the month of March 2006, a
      second trust formed by the Company issued $7,000 of adjustable rate trust
      preferred securities as part of a pooled offering of such securities due June
      30, 2036. The securities bear interest at a rate of 6.53% for the first five
      years, after which the rate fluctuates with the 3-month Libor rate plus 1.43%.
      The Company issued subordinated debentures to the trust in exchange for the
      proceeds of the offering; the debentures represent the sole assets of the newly
      formed trust. The Company may redeem the subordinated debentures, in whole
      or in
      part, at a premium declining ratably to par by June 30, 2011. This was the
      second pooled offering of such securities by the Company. The first offering
      was
      issued in 2003 for $11,000. These floating rate securities bear interest at
      a
      rate of 3 month Libor plus 2.99%. The proceeds of both of these offerings were
      used in the ordinary course of business, primarily as a vehicle for funding
      new
      loans.





Stockholders’
      equity increased from $61,077 at June 30 to $64,978 at September 30, 2006,
      an
      increase of 6.39%, primarily the result of $3,649 of net income. The Company
      and
      the Bank are subject to the risk based capital guidelines administered by bank
      regulatory agencies. The guidelines require all banks and bank holding companies
      to maintain a minimum ratio of total risk based capital to total risk weighted
      assets of 8%, including Tier I capital to total risk weighted assets of 4%
      and a
      Tier I capital to average assets ratio of at least 4%. As of September 30,
      2006,
      the most recent notification from the corresponding regulatory agency
      categorized the Company as well capitalized under the regulatory framework
      for
      prompt corrective action. There are no conditions or events since such
      notifications that management believes have changed this classification. As
      of
      September 30, 2006, the Company’s capital ratios were 10.89%, 9.95% and 8.10%,
      well above these minimum guidelines. At its March 27, 2006 Board Meeting, the
      Board of Directors of Smithtown Bancorp approved a 3:2 stock split in the form
      of a 50% stock dividend for all shareholders of record as of April 21, 2006
      payable May 5, 2006. This represented the Company’s fifth stock split in the
      past


-15-
 **Table
            of Contents**




eight
      years. As of May 5, 2006, total outstanding shares were 8,885,589. Earnings
      per
      share have been restated as a result of the stock split.





The
      Company had quarterly and year to date returns on average equity of 22.93%
      and
      22.75% and quarterly and year to date returns on average assets of 1.49% and
      1.45% at September 30, 2006.





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





Net
      income for the three months ended September 30, 2006 and 2005 was $3,649 and
      $2,946, an increase of 23.86% and is due primarily to the 15.06% increase in
      net
      interest income. This increase in net interest income is the result of a 25.26%
      increase in interest income on investment securities and a 37.83% increase
      in
      interest on loans. The average balance of the Company’s investment portfolio
      increased from $95,333 at September 30, 2005 to $116,444 at September 30, 2006.
      During the course of the year, loan originations are funded first from existing
      deposits. Once accomplished, any excess deposits are channeled into investment
      securities so as to maximize returns. Due to the fluctuations in timing of
      loan
      originations, the investment portfolio was increased in size at various points
      during the September 2005 to September 2006 period. The combination of an
      increased average balance of securities totalling $21,111 and an increased
      average taxable equivalent yield on these securities of fifty basis points
      resulted in the higher interest income. Similarly, average loans increased
      from
      year to year by $164,403 and the average yield on these loans also increased
      by
      eighty basis points, resulting in increased interest income on these loans
      for
      the three month period of $4,325. Interest income on federal funds sold
      decreased over the year to year period as the average volume of these funds
      decreased by $12,972. It was the increase in average rate paid on these federal
      funds of 2.02% which caused the interest income to only decline by 26.68%.
      Interest expense increased by 76.33% for the third quarter of 2006 as compared
      to the third quarter of 2005. The greatest increase was on interest expense
      for
      the Company’s subordinated debt. This debt increased in average balance by
      $7,000 and in average rate by 17.71% as a result of the additional issuance
      placed on the Company’s balance sheet as of March 29, 2006. The next largest
      increase in interest expense during third quarter 2006 vs. third quarter 2005
      was in money market expense. Although these additional money market accounts
      have increased the Bank’s cost of funds, based on the weighted average rate of
      4.50% for the third quarter, a comparable Federal Home Loan Bank borrowing
      would
      have cost the Company well over 5.25%. The next largest category of increased
      interest expense was for time deposit balances. Average balances on these
      deposits increased by $127,944 since September 2005. The average rate paid
      for
      these funds increased from 3.55% for the three months ended September 30, 2005
      to 4.42% for the comparable period in 2006. These time deposits still remain
      a
      low cost form of funding and most of them have maturities of six to twelve
      months.




The
      Company’s net interest margin for the three and nine month periods ending
      September 30, 2006 was 4.20% and 4.25%, respectively, a decrease from 4.31%
      and
      4.28% for the three and six month periods ended June 30, 2006. Some future
      margin compression is possible based on the lagging effect of four Federal
      Reserve Bank rate adjustments in 2006 as well as the possibility of increased
      rate competition for deposits.





Noninterest
      income increased by 17.67% during the comparable three month periods in 2006
      and
      2005. A large part of this increase was due to a fee generating service provided
      at some of our branch offices related to cash counting. The increase is also
      a
      result of additional revenues received from Bank of Smithtown Insurance Agents
      and Brokers, Inc. and Bank of Smithtown Financial Services, Inc.. Income from
      the Company’s trust and investment services division has also increased by 4.31%
      this quarter over the comparable period in 2005 due to the continued fees
      received from the administration of a large estate. In line with general trends
      in the economy, income from debit card transactions has continued to increase.
      Recent studies have concluded that debit card usage has actually surpassed
      the
      usage of checks by consumers, and that result has been recognized by the Company
      in the form of increased fee income. Service charge income on demand deposit
      accounts, however, has continued in a downward trend this year. Most new
      checking accounts as well as many older accounts are now free checking. Fees
      received from the Company’s Overdraft Honor program continue to be significant,
      but are mitigated by the loss of monthly service charge income. Noninterest
      expense also increased by 13.12% during the current three month period over
      the
      same period last year due in large part to increased occupancy and furniture
      and
      fixture expense. Third quarter 2006 noninterest expense was higher than third
      quarter noninterest expense in 2005 due to the capital expenditures and related
      depreciation expense for the construction of new branch offices. It is also
      due
      to the new rental expenses and maintenance costs for these properties. Also
      adding to increased noninterest expense in the current year is the amortization
      of the intangible assets acquired as a result of the payments made for the
      Bank
      of Smiththown Insurance Agents and Brokers, Inc. acquisition. Finally, although
      tax dollars accrued have increased over the three month period in 2006 as
      compared to 2005, the effective tax rate of the Company has actually been
      reduced by 6.17% due to the 60% exclusion from New York State taxable income
      of
      dividends received from BOS Preferred Funding Inc..





Comparision
      of Operating Results for the Nine Months Ended September 30, 2006 and
      2005





Net
      income for the nine months ended September 30, 2006 and 2005 was $10,272 and
      $7,993, an increase of 28.51%. This increase was a result of the higher average
      balance of interest earning assets held during 2006 over 2005 and the higher
      average rate of interest earned on these assets. This increase of $172,872
      in
      average volume and 88 basis points in average rate resulted in $14,284 of
      increased interest income on these assets. The two major components of interest
      income, loans and investment securities, both grew in volume during 2006 over
      2005, and in conjunction with the increased rate environment, interest income
      on
      loans and securities increased by 42.19%. As new deposits were collected during
      2006, these funds were first used to reduce the level of borrowings outstanding
      at yearend 2005, and then were deployed primarily into new loan originations.
      The average balance of interest bearing liabilities also increased during the
      nine month period in 2006 over the comparable period in 2005. The result of
      this
      increased average volume of $166,968 and increased average rate of 1.06% caused
      an increase in interest expense of $9,379. This increase in interest expense
      was
      the result of remaining competitive on the rates paid for deposit products.
      Net
      interest income for the comparable nine month periods grew by $4,921 on a tax
      equivalent basis. The Company’s net interest margin for the nine month period of
      2006 was 4.25% as compared to 4.36% for the comparable period in 2005.


-16-
 **Table
            of Contents**




The
      level
      of noninterest income also increased by 16.55% during the nine month period
      of
      2006 over the same period in 2005. This increase was largely the result of
      additional income generated from commercial cash counting services offered
      at
      various branch offices as well as additional income earned by the Bank’s
      insurance subsidiary, Bank of Smithtown Insurance Agents and Brokers, Inc.
      and
      Bank of Smithtown Financial Services, Inc.. Also responsible for the increased
      noninterest income during 2006 was the gain on sale of investment securities
      of
      $194 as compared to $13 in 2005. Noninterest expense also increased 13.36%
      during the first nine months of 2006 over the comparable period in 2005, and
      this increase was due to additional depreciation expenses related to new branch
      offices and the computer equipment required for these offices. Also contributing
      to the higher level of noninterest expense was the increased amortization of
      intangible assets acquired as a result of payments made for the insurance agency
      acquisition in 2004. Income taxes accrued for the nine month period ended
      September 30, 2006 was 13.15% higher than for the same period in 2005, but
      the
      effective tax rate for the Company during 2006 was 33% as compared to 36% during
      2005. The reason for the reduced effective tax rate in 2006 is due to the
      formation of BOS Preferred Funding Corp. during the first quarter of 2006.
      Earnings per share for the nine month period in 2006 was $1.16 as compared
      to
      $.90 during the comparable period in 2005, an increase of 28.89%.




The
      following table details certain information relating to the Company’s average
      consolidated statements of financial condition and its consolidated statements
      of income for the periods indicated and reflects the average yield on assets
      and
      average cost of liabilities for the periods indicated. Interest income on
      investment securities is shown on a tax-equivalent basis. Yields and costs
      are
      derived by dividing income or expense by the average balance of assets or
      liabilities, respectively, for the periods shown. Average balances are derived
      from daily average balances and include non-performing loans, if any. The yields
      and costs include fees, which are considered adjustments to yields.




AVERAGE
                BALANCE SHEET AND YIELD ANALYSIS




For
                the Nine Months Ended
            
            For
                the Nine Months EndedSeptember
                30, 2006
            
            September
                30, 2005Average
            
            
            
            Average
            
            Average
            
            
            
            AverageBalance
            
            Interest
            
            Rate
            
            Balance
            
            Interest
            
            RateASSETSInterest-earning
                assets:Investment
                securities:Taxable
            
            $
            103,653
            
            $
            3,439
            
            
            4.42
            %
            $
            80,721
            
            $
            2,360
            
            
            3.90
            %Nontaxable
            
            
            12,791
            
            
            528
            
            
            5.50
            
            
            14,612
            
            
            526
            
            
            4.80Total
                investment securities
            
            
            116,444
            
            
            3,967
            
            
            4.54
            
            
            95,333
            
            
            2,886
            
            
            4.04Total
                loans
            
            
            754,853
            
            
            44,680
            
            
            7.89
            
            
            590,450
            
            
            31,379
            
            
            7.09Federal
                funds sold
            
            
            9,592
            
            
            349
            
            
            4.80
            
            
            22,564
            
            
            476
            
            
            2.78Other
                interest-earning assets
            
            
            4,327
            
            
            180
            
            
            5.57
            
            
            3,997
            
            
            149
            
            
            4.99Total
                interest-earning assets
            
            
            885,216
            
            
            49,176
            
            
            7.41
            
            
            712,344
            
            
            34,890
            
            
            6.53Non-interest-earning
                assets
            
            
            58,156
            
            
            
            
            
            
            
            
            52,943Total
                assets
            
            $
            943,372
            
            
            
            
            
            
            
            $
            765,287LIABILITIES
                AND STOCKHOLDERS' EQUITYLiabilitiesInterest-bearing
                liabilities:Savings
                deposits (including NOW)
            
            $
            80,663
            
            $
            396
            
            
            0.66
            %
            $
            85,548
            
            $
            169
            
            
            0.26
            %Money
                market
            
            
            246,619
            
            
            5,927
            
            
            3.21
            
            
            204,300
            
            
            2,735
            
            
            1.79Time
                deposits
            
            
            369,402
            
            
            11,727
            
            
            4.24
            
            
            241,458
            
            
            6,338
            
            
            3.51Total
                interest-bearing deposits
            
            
            696,684
            
            
            18,050
            
            
            3.46
            
            
            531,306
            
            
            9,242
            
            
            2.33Other
                borrowings
            
            
            65,375
            
            
            1,965
            
            
            4.02
            
            
            68,529
            
            
            1,789
            
            
            3.49Subordinated
                debt
            
            
            15,744
            
            
            903
            
            
            7.56
            
            
            11,000
            
            
            508
            
            
            6.08Total
                interest-bearing liabilities
            
            
            777,803
            
            
            20,918
            
            
            3.59
            
            
            610,835
            
            
            11,539
            
            
            2.53Non-interest
                bearing liabilities:Demand
                deposits
            
            
            100,787
            
            
            
            
            
            
            
            
            100,144Other
                liabilities
            
            
            4,570
            
            
            
            
            
            
            
            
            3,925Total
                liabilities
            
            
            883,160
            
            
            
            
            
            
            
            
            714,904Stockholders'
                equity
            
            
            60,212
            
            
            
            
            
            
            
            
            50,383Total
                liabilites & stockholders equity
            
            $
            943,372
            
            
            
            
            
            
            
            $
            765,287Net
                interest income/interest rate spread
            
            
            
            
            $
            28,258
            
            
            3.82
            %
            
            
            
            $
            23,351
            
            
            4.00
            %Net
                earning assets/net yield on averageinterest
                earning assets
            
            $
            107,413
            
            
            
            
            
            4.25
            %
            $
            101,509
            
            
            
            
            
            4.36
            %





-17-
 **Table
            of Contents**




Liquidity
      and Commitments





Liquidity
      provides the source of funds for anticipated deposit outflow and loan growth.
      The Bank’s primary sources of liquidity include deposits, repayments of loan
      principal, maturities of investment securities, principal reductions on
      mortgage-backed securities, “unpledged” securities available for sale, overnight
      federal funds sold, and borrowing potential from correspondent banks. The
      primary factors affecting these sources of liquidity are their immediate
      availability if necessary and current market rates of interest, which can cause
      fluctuations in levels of deposits and prepayments on loans and securities.
      The
      Bank’s total liquidity level at September 30, 2006 was strong due to the high
      levels of unpledged marketable securities available for sale, and unused lines
      of credit from correspondent banks. In addition to these sources of liquidity,
      additional **** borrowing
      potential from the Federal Home Loan Bank at September 30, 2006 was
      $117,025.





On
      September 30, 2006 total loan commitments outstanding were $260,437, of which
      $126,405 represented available lines on funded loans, and $9,054 represented
      letters of credit. At September 30, 2005 these commitments totaled $186,775
      with
      available lines of $107,296 and letters of credit totalling $6,477.





Impact
      of
      Inflation and Changing Prices





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





Recent
      Regulatory and Accounting Developments




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





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




Staff
      Accounting Bulletin No.108 (“SAB 108”) provides guidance on the consideration of
      the effects of prior year financial statement misstatements in quantifying
      current year misstatements for the purpose of a materiality assessment.
      Diversity in practice currently exists as to quantifying financial statement
      misstatements. Therefore the potential under current practice for the build
      up
      of improper amounts on the balance sheet has been reviewed and addressed. The
      Company is reviewing this accounting bulletin, but has not yet determined the
      effect of adopting the Bulletin, which is effective for years ending after
      November 15, 2006.





Item
      3.- Quantitative and Qualitative Disclosures About Market
      Risk





Significant
      changes in the level of market interest rates may adversely affect the value
      of
      the Company’s interest earning assets and interest bearing liabilities. This
      change in rates could also affect the level of net interest income and
      ultimately net income of the Company. The Company utilizes the results of a
      dynamic simulation model to quantify the estimated exposure to net interest
      income fluctuations resulting from sustained interest rate changes. Management
      monitors simulated net interest income sensitivity over a rolling two year
      horizon. This simulation captures the impact of changing interest rates on
      the
      interest income received and interest expense paid on all interest sensitive
      assets and liabilities. This sensitivity is then compared to policy limits
      internally set by the Asset Liability Committee that specify a maximum tolerance
      level for net interest income exposure over a one year horizon given both an
      upward and downward shift in interest rates. This simulation modeling is done
      on
      a quarterly basis. The last simulation model was prepared as of August 31,
      2006
      and was modeled on a 100 basis point downward and 100 and 200 basis point upward
      shift in rates. A parallel and pro rata shift in rates over a twenty four month
      period was assumed. The following reflects the Company’s income sensitivity
      analysis over a one year time frame as of August 31, 2006 and August 31,
      2005.


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 **Table
          of Contents**






(in
                thousands)Change
                In Interest Rates
            
            As
                of August 31, 2006
            
            As
                of August 31,2005In
                Basis Points
            
            Potential
                Change In Net
            
            Potential
                Change In Net(Rate
                Shock)
            
            Interest
                Income
            
            Interest
                Income$
                Change
            
            %
                Change
            
            $
                Change
            
            %
                ChangeUp
                200 basis points
            
            
            886
            
            
            2.02
            
            
            2,147
            
            
            6.17Up
                100 basis points
            
            
            1,874
            
            
            4.27
            
            
            1,481
            
            
            4.26Static
            
            
            —
            
            
            —
            
            
            —
            
            
            —Down
                100 basis points
            
            
            (128
            )
            
            (0.29
            )
            
            27
            
            
            .08




Item
      4. - Controls and Procedures





An
      evaluation was performed under the supervision and with the participation of
      the
      Company’s management, including the Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures (as defined in Rule 131-15(e) promulgated
      under the Securities and Exchange Act of 1934, as amended) as of September
      30,
      2006. Based on that evaluation, the Company’s management, including the Chief
      Executive Officer and Chief Financial Officer, concluded that the Company’s
      disclosure controls and procedures were effective. There has been no change
      in
      the Company’s internal controls over financial reporting during the quarter that
      has materially affected, or is reasonably likely to affect, the Company’s
      internal control over financial reporting.


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 **Table
          of Contents**
  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.


November
      8, 2006




/s/
      Bradley E. Rock


Bradley
      E. Rock, Chairman, President and


Chief
      Executive Officer




/s/
      Anita
      M. Florek


Anita
      M.
      Florek, Executive Vice President and


Chief
      Financial Officer


-20-