United
States


Securities
and Exchange Commission


Washington,
D.C. 20549





Form
10-Q


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


THE
SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended March 31, 2009





Commission
File Number 0 - 13314





SMITHTOWN
BANCORP, INC.


(Exact
name of Registrant as specified in its charter)





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





(631)
360-9300


(Registrant's
telephone number, including area code)





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





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





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





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





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





Shares of
Common Stock ($.01 Par Value) Outstanding as of  May 8,
2009


11,858,522











SMITHTOWN
BANCORP, INC.





INDEX





Part
      I - FINANCIAL INFORMATIONItem
      1.
                                                                                    Financial
      Statements (Unaudited)Unaudited
      Consolidated Balance Sheets as of  March 31, 2009 and December
      31, 2008
                                                                                    3Unaudited
      Consolidated Statements of Income for the Three Months Ended March 31,
      2009 and 2008
                                                                                    4Unaudited
      Consolidated Statements of Changes in Stockholders’ Equity For the Three
      Months Ended March 31, 2009 and 2008
                                                                                    5Unaudited
      Consolidated Statements of Cash Flows for the Three Months
      Ended  March 31, 2009 and 2008
                                                                                    6Unaudited
      Notes to Consolidated Financial Statements
                                                                                    7Item
      2.
                                                                                    Management’s
      Discussion and Analysis of Financial Condition and Results
      of  Operations
                                                                                    15Item
      3.
                                                                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                                                                    23Item
      4.
                                                                                    Controls
      and Procedures
                                                                                    24Part
      II - OTHER INFORMATIONItem
      1.
                                                                                    Legal
      Proceedings
                                                                                    24Item
      1A.
                                                                                    Risk
      Factors
                                                                                    24Item
      2.
                                                                                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                                                    24Item
      3.
                                                                                    Defaults
      Upon Senior Securities
                                                                                    24Item
      4.
                                                                                    Submission
      of Matters to a Vote of Security Holders
                                                                                    24Item
      5.
                                                                                    Other
      Information
                                                                                    24Item
      6.
                                                                                    Exhibits
                                                                                    24-25Signatures
                                                                                    
                                                                                    25Index
      to Exhibits
                                                                                    26


2





SMITHTOWN
BANCORP, INC.


CONSOLIDATED
BALANCE SHEETS


(unaudited)


(In
thousands, except share data)


March 31, 2009
                    
                    
                    December 31, 2008ASSETSCash
      and due from banks
                    
                    $
                    18,464
                    
                    
                    $
                    17,205Federal
      funds sold
                    
                    
                    11,344
                    
                    
                    
                    8,764Total
      cash and cash equivalents
                    
                    
                    29,808
                    
                    
                    
                    25,969Term
      placements
                    
                    
                    125,507
                    
                    
                    
                    507Investment
      securities:Available
      for sale:Obligations
      of U.S. government agencies
                    
                    
                    24,443
                    
                    
                    
                    19,009Mortgage
      - backed securities
                    
                    
                    61,517
                    
                    
                    
                    22,831Obligations
      of state and political subdivisions
                    
                    
                    4,488
                    
                    
                    
                    4,635Other
      securities
                    
                    
                    10,292
                    
                    
                    
                    11,223Total
      securities available for sale
                    
                    
                    100,740
                    
                    
                    
                    57,698Held
      to maturity:Obligations
      of state and political subdivisions
                    
                    
                    112
                    
                    
                    
                    112Total
      securities held to maturity (estimated fair value$113
      in 2009 and  2008)
                    
                    
                    112
                    
                    
                    
                    112Total
      investment securities
                    
                    
                    100,852
                    
                    
                    
                    57,810Federal
      Home Loan Bank Stock
                    
                    
                    15,916
                    
                    
                    
                    15,916Loans
                    
                    
                    1,823,185
                    
                    
                    
                    1,688,700Less:
      allowance for loan losses
                    
                    
                    12,411
                    
                    
                    
                    11,303Loans,
      net
                    
                    
                    1,810,774
                    
                    
                    
                    1,677,397Bank
      premises and equipment
                    
                    
                    34,439
                    
                    
                    
                    32,994Other
      assetsCash
      value of company owned life insurance
                    
                    
                    19,770
                    
                    
                    
                    19,654Goodwill
                    
                    
                    3,923
                    
                    
                    
                    3,923Intangible
      assets
                    
                    
                    866
                    
                    
                    
                    956Other
      real estate owned
                    
                    
                    6,972
                    
                    
                    
                    6,972Other
                    
                    
                    24,013
                    
                    
                    
                    23,292Total
      other assets
                    
                    
                    55,544
                    
                    
                    
                    54,797Total
      assets
                    
                    $
                    2,172,840
                    
                    
                    $
                    1,865,390LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesDeposits:Demand
      (noninterest-bearing)
                    
                    $
                    118,330
                    
                    
                    $
                    123,620Money
      market
                    
                    
                    589,367
                    
                    
                    
                    442,078NOW
                    
                    
                    27,879
                    
                    
                    
                    32,774Savings
                    
                    
                    95,919
                    
                    
                    
                    73,650Time
                    
                    
                    838,512
                    
                    
                    
                    694,815Total
      deposits
                    
                    
                    1,670,007
                    
                    
                    
                    1,366,937Dividends
      payable
                    
                    
                    474
                    
                    
                    
                    472Other
      borrowings
                    
                    
                    326,480
                    
                    
                    
                    326,480Subordinated
      debt
                    
                    
                    38,836
                    
                    
                    
                    38,836Other
      liabilities
                    
                    
                    14,443
                    
                    
                    
                    13,047Total
      liabilities
                    
                    
                    2,050,240
                    
                    
                    
                    1,745,772Stockholders'
      equityPreferred
      stock -$.01 par value ( 100,000 shares authorized at March
      31,  2009 and  December 31, 2008) ; no shares issued
      or outstanding at March 31, 2009
                      and
      December 31, 2008)
                    
                    
                    -
                    
                    
                    
                    -Common
      stock - $.01 par value (20,000,000 shares authorized at March 31, 2009 and
      December 31, 2008; 13,910,386 shares issued, 11,858,522 shares outstanding
      at March  31, 2009;  13,851,341shares issued,
      11,799,477 shares outstanding at December 31, 2008)
                    
                    
                    139
                    
                    
                    
                    139Additional
      paid in capital
                    
                    
                    52,343
                    
                    
                    
                    51,947Retained
      earnings
                    
                    
                    81,444
                    
                    
                    
                    78,302Accumulated
      other comprehensive loss
                    
                    
                    (1,264
                    )
                    
                    
                    (708
                    )132,662
                    
                    
                    
                    129,680Treasury
      stock (2,051,864 shares at cost)
                    
                    
                    (10,062
                    )
                    
                    
                    (10,062
                    )Total
      stockholders' equity
                    
                    
                    122,600
                    
                    
                    
                    119,618Total
      liabilities and stockholders' equity
                    
                    $
                    2,172,840
                    
                    
                    $
                    1,865,390




See notes
to consolidated financial statements.




3




SMITHTOWN
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(unaudited)


(In
thousands, except share and per share data)


For the Three Months Ended
                  March 31,2009
                
                
                2008Interest
      incomeLoans
                
                $
                25,499
                
                
                $
                19,262Federal
      funds sold
                
                
                17
                
                
                
                8Term
      placements
                
                
                69
                
                
                
                -Investment
      securities:Taxable:Obligations
      of U.S. government agencies
                
                
                259
                
                
                
                273Mortgage
      - backed securities
                
                
                450
                
                
                
                238Other
      securities
                
                
                154
                
                
                
                124Subtotal
                
                
                863
                
                
                
                635Exempt
      from federal income taxes:Obligations
      of state & political subdivisions
                
                
                48
                
                
                
                58Other
                
                
                82
                
                
                
                125Total
      interest income
                
                
                26,578
                
                
                
                20,088Interest
      expenseMoney
      market accounts (including savings)
                
                
                3,129
                
                
                
                3,350Time
      deposits of $100,000 or more
                
                
                3,099
                
                
                
                1,796Other
      time deposits
                
                
                4,147
                
                
                
                2,672Other
      borrowings
                
                
                2,224
                
                
                
                889Subordinated
      debt
                
                
                516
                
                
                
                422Total
      interest expense
                
                
                13,115
                
                
                
                9,129Net
      interest income
                
                
                13,463
                
                
                
                10,959Provision
      for loan losses
                
                
                1,200
                
                
                
                800Net
      interest income after provision for loan losses
                
                
                12,263
                
                
                
                10,159Noninterest
      incomeTrust  and
      investment services
                
                
                133
                
                
                
                182Service
      charges on deposit accounts
                
                
                567
                
                
                
                504Revenues
      from insurance agency
                
                
                922
                
                
                
                1,048Net
      gain on sale of investment securities
                
                
                522
                
                
                
                -Increase
      in cash value of company owned life insurance
                
                
                116
                
                
                
                198Other
                
                
                520
                
                
                
                414Total
      noninterest income
                
                
                2,780
                
                
                
                2,346Noninterest
      expenseSalaries
                
                
                3,702
                
                
                
                3,146Pension
      and other employee benefits
                
                
                1,104
                
                
                
                849Net
      occupancy expense of bank premises
                
                
                1,799
                
                
                
                1,135Furniture
      and equipment expense
                
                
                779
                
                
                
                657Amortization
      of intangible assets
                
                
                91
                
                
                
                107Other
                
                
                1,917
                
                
                
                1,078Total
      noninterest expense
                
                
                9,392
                
                
                
                6,972Income
      before income taxes
                
                
                5,651
                
                
                
                5,533Provision
      for income taxes
                
                
                2,035
                
                
                
                1,958Net
      income
                
                $
                3,616
                
                
                $
                3,575Basic
      earnings per share
                
                $
                0.31
                
                
                $
                0.36Diluted
      earnings per share
                
                $
                0.31
                
                
                $
                0.36Cash
      dividends declared
                
                $
                0.04
                
                
                $
                0.04Comprehensive
      income
                
                $
                3,060
                
                
                $
                3,174





See notes
to consolidated financial statements.


4





SMITHTOWN
BANCORP,  INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


(unaudited)


(In
thousands,  except shares outstanding)





Common
                        Shares
                        Outstanding
                      
                      
                      Stock
                        Amount
                      
                      
                      Additional
                        Paid In
                        Capital
                      
                      
                      Retained
                        Earnings
                      
                      
                      Treasury
                        Stock
                      
                      
                      Accumulated
                        Other
                        Comprehensive
                        Income (Loss)
                      
                      
                      Total
                        Stockholders’
                        EquityBalance
      at December 31, 2007
                      
                      
                      9,800,510
                      
                      
                      $
                      119
                      
                      
                      $
                      25,755
                      
                      
                      $
                      64,463
                      
                      
                      $
                      (10,062
                      )
                      
                      $
                      (173
                      )
                      
                      $
                      80,102Comprehensive
      income:Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,575
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,575Change
      in unrealized  gain (loss) on securities available for sale, net
      of reclassification and tax effects
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (414
                      )
                      
                      
                      (414
                      )Changes
      in funded status of retirement plans, net of tax
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13
                      
                      
                      
                      13Total
      comprehensive income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,174Retained  earnings
      reduction due to adoption of  EITF 06-4
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (233
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (233
                      )Cash
      dividends declared
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (393
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (393
                      )Issuance
      of shares for employee stock ownership plan
                      
                      
                      11,967
                      
                      
                      
                      
                      
                      
                      
                      250
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      250Stock
      awards vested
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      65
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      65Stock
      awards granted
                      
                      
                      22,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Balance
      at March 31, 2008
                      
                      
                      9,834,477
                      
                      
                      $
                      119
                      
                      
                      $
                      26,070
                      
                      
                      $
                      67,412
                      
                      
                      $
                      (10,062
                      )
                      
                      $
                      (574
                      )
                      
                      $
                      82,965Balance
      at December 31, 2008
                      
                      
                      11,799,477
                      
                      
                      $
                      139
                      
                      
                      $
                      51,947
                      
                      
                      $
                      78,302
                      
                      
                      $
                      (10,062
                      )
                      
                      $
                      (708
                      )
                      
                      $
                      119,618Comprehensive
      income:Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,616
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,616Change
      in unrealized  gain (loss) on securities available for sale, net
      of reclassification and tax effects
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (433
                      )
                      
                      
                      (433
                      )Changes
      in funded status of retirement plans, net of tax
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (123
                      )
                      
                      
                      (123
                      )Total
      comprehensive income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3,060Cash
      dividends declared
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (474
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (474
                      )Issuance
      of shares for employee stock ownership plan
                      
                      
                      20,920
                      
                      
                      
                      
                      
                      
                      
                      300
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      300Stock
      awards vested
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      96
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      96Stock
      awards granted
                      
                      
                      38,125Balance
      at March 31, 2009
                      
                      
                      11,858,522
                      
                      
                      $
                      139
                      
                      
                      $
                      52,343
                      
                      
                      $
                      81,444
                      
                      
                      $
                      (10,062
                      )
                      
                      $
                      (1,264
                      )
                      
                      $
                      122,600





See notes
to consolidated financial statements.


5




SMITHTOWN BANCORP,
      INC.CONSOLIDATED STATEMENTS OF CASH
      FLOWS(unaudited)
                      
                      For the Three
      Months(In
    thousands)
                      
                      Ended March
    31,2009
                      
                      
                      2008Cash flows from operating
      activitiesNet
      income
                      
                      $
                      3,616
                      
                      
                      $
                      3,575Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      on premises and equipment
                      
                      
                      971
                      
                      
                      
                      706Provision
      for loan losses
                      
                      
                      1,200
                      
                      
                      
                      800Net
      gain on sale of investment securities
                      
                      
                      (522
                      )
                      
                      
                      -Net
      increase in other liabilities
                      
                      
                      1,396
                      
                      
                      
                      1,083Net
      (increase) decrease in other assets
                      
                      
                      1,547
                      
                      
                      
                      (661
                      )Net
      increase in deferred taxes
                      
                      
                      (1,378
                      )
                      
                      
                      (1,196
                      )Amortization
      of unearned  restricted stock awards
                      
                      
                      107
                      
                      
                      
                      65Increase
      in cash surrender value of company owned life
    insurance
                      
                      
                      (116
                      )
                      
                      
                      (198
                      )Amortization
      of investment security premiums and (accretion) of
      discount
                      
                      
                      (30
                      )
                      
                      
                      26Amortization
      of intangible assets
                      
                      
                      91
                      
                      
                      
                      107Cash
      provided by operating
      activities
                      
                      
                      6,882
                      
                      
                      
                      4,307Cash flows from investing
      activitiesProceeds
      from calls, repayments, maturities and sales of available-for-sale
      securities
                      
                      
                      37,285
                      
                      
                      
                      28,775Proceeds
      from calls, repayments and maturities of held-to-maturity
      securities
                      
                      
                      -
                      
                      
                      
                      5Purchases
      of available-for-sale securities
                      
                      
                      (81,026
                      )
                      
                      
                      (26,134
                      )Net
      increase in term placements
                      
                      
                      (125,000
                      )
                      
                      
                      -Purchases
      of restricted securities
                      
                      
                      -
                      
                      
                      
                      (9,557
                      )Redemptions
      of restricted securities
                      
                      
                      -
                      
                      
                      
                      2,622Loans
      made to customers, net
                      
                      
                      (134,485
                      )
                      
                      
                      (140,115
                      )Purchases
      of premises and equipment
                      
                      
                      (2,415
                      )
                      
                      
                      (1,601
                      )Cash used in investing
      activities
                      
                      
                      (305,641
                      )
                      
                      
                      (146,005
                      )Cash flows from financing
      activitiesNet
      increase (decrease) in demand deposits, money market, NOW and
      savings
                      
                      
                      159,373
                      
                      
                      
                      (21,185
                      )Increase
      in time deposits
                      
                      
                      143,697
                      
                      
                      
                      4,114Cash
      dividends paid
                      
                      
                      (472
                      )
                      
                      
                      (392
                      )Federal
      Home Loan Bank term advances
                      
                      
                      -
                      
                      
                      
                      155,000Net
      decrease in overnight borrowings
                      
                      
                      -
                      
                      
                      
                      ( 900
                      )Proceeds
      from subordinated debt issuance
                      
                      
                      -
                      
                      
                      
                      20,000Cash
      provided by financing activities
                      
                      
                      302,598
                      
                      
                      
                      156,637Net increase in cash and cash
      equivalents
                      
                      
                      3,839
                      
                      
                      
                      14,939Cash and cash equivalents,
      beginning of period
                      
                      
                      25,969
                      
                      
                      
                      17,455Cash and cash equivalents, end of
      period
                      
                      $
                      29,808
                      
                      
                      $
                      32,394Supplemental disclosures of cash
      flow informationCash
      paid during the year for:Interest
                      
                      $
                      11,651
                      
                      
                      $
                      8,619Income
      taxes
                      
                      
                      118
                      
                      
                      
                      1,340Schedule of noncash
      activitiesIssuance
      of common stock to employee stock ownership plan
                      
                      $
                      300
                      
                      
                      $
                      250Issuance
      of common stock to 2007 stock compensation plan
                      
                      
                      547
                      
                      
                      
                      460See notes to consolidated
      financial statements.


6





Notes to Consolidated Financial
Statements


(unaudited)


(In thousands, except share and per
share data)





Note 1  –  Financial
Statement Presentation





The consolidated financial statements
include the accounts of Smithtown Bancorp, Inc. and one wholly-owned subsidiary,
Bank of  Smithtown (the “Bank”) (collectively referred to as the
“Company”).  Smithtown Bancorp, Inc. also owns 100% of the common
securities of the following entities:  Smithtown Bancorp Capital Trust
I, Smithtown Bancorp Capital Trust II and Smithtown Bancorp Capital Trust III,
all of which were formed for the purpose of issuing trust preferred
securities.  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
subsidiary, now known as Bank of Smithtown Financial Services, Inc. for the
purpose of accepting commission payments on tax deferred annuities and mutual
funds.  In August 2004,  the Bank acquired an insurance
agency, now known as Bank of Smithtown Insurance Agents and Brokers, Inc. for
the purpose of selling insurance products and services and offering financial
investment services to the public. As of September 12, 2007,  Bank of
Smithtown Insurance Agents and Brokers, Inc. acquired the assets of Payne &
Palmieri, Inc., a 40 year old independent insurance agency located in East
Setauket, NY.  The acquisition of this agency has
expanded  the current insurance carrier base and customer base of Bank
of Smithtown Insurance Agents and Brokers, Inc.  As of February 2006,
the Bank completed the formation of BOS Preferred Funding Corporation, a real
estate investment trust, formed as a vehicle for capital
enhancement.  The corporation holds a substantial volume
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. The Company’s financial condition and operating results principally
reflect those of the Bank.  All intercompany balances and amounts have
been eliminated, with the exceptions of Smithtown Bancorp Capital Trust I,
Smithtown Bancorp Capital Trust II and Smithtown Bancorp Capital Trust III, in
accordance with FASB Interpretation 46, as revised in December
2003.  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, 2008.





The accompanying unaudited interim
consolidated financial statements have been prepared pursuant to the rules and
regulations for reporting on Form 10-Q.  Accordingly, certain
disclosures required by U.S. generally accepted accounting principles are not
included herein.  These interim statements should be read in
conjunction with the consolidated financial statements and notes included in the
Annual Report on Form 10-K filed by the Company with the Securities and Exchange
Commission (“SEC”).  The December 31, 2008 consolidated balance sheet
was derived from the Company’s December 31, 2008 audited financial statements
included in the Annual Report on Form 10-K.





Interim statements are subject to
possible adjustments in connection with the annual audit of the Company for the
year ending December 31, 2009.  In the opinion of management, the
accompanying unaudited interim consolidated financial statements contain all
adjustments (consisting solely of normal recurring accruals) necessary to
present fairly the Company’s financial position and its results of operations
for the periods presented.  Operating results for the three months
ended March 31, 2009 are not necessarily indicative of those that may be
expected for the year ending December 31, 2009.





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





Note 2 – Earnings Per Common
Share





The Company has stock compensation
awards with non-forfeitable dividend rights which are considered participating
securities.  As such, earnings per share is computed using the
two-class method as required by FASB Staff Position EITF
03-6-1.Basic
earnings per common share iscomputed by dividingnet incomeallocated to common stock by
the weighted average number
of common shares outstanding during the periodwhich excludes the participating
securities.  Diluted earnings per common
share includes the dilutive effect of additional potential common sharesfrom stock-based
compensation plans, but excludes awards considered participating
securities.  Earnings and dividends per
share are restated for all stock splits and stock dividends through the date of
issuance of the financial statements.





March 31,
                  
                  
                  March 31,2009
                  
                  
                  2008BasicDistributed earnings allocated to
      common stock
                  
                  $
                  471
                  
                  
                  $
                  391Undistributed earnings allocated
      to common stock
                  
                  
                  3,127
                  
                  
                  
                  3,170Net earnings allocated to common
      stock
                  
                  $
                  3,598
                  
                  
                  $
                  3,561Weighted average common
      sharesoutstanding, including shares
      consideredparticipating
      securities
                  
                  
                  11,843,018
                  
                  
                  
                  9,824,682Less:  average
      participating securities
                  
                  
                  54,911
                  
                  
                  
                  37,416Weighted average
      shares
                  
                  
                  11,788,107
                  
                  
                  
                  9,787,266Basic earnings per common
      share
                  
                  $
                  0.31
                  
                  
                  $
                  0.36


DilutedNet earnings allocated to common
      stock
                
                $
                3,598
                
                
                $
                3,561Weighted average common shares
      outstanding for basic earnings per common share
                
                
                11,788,107
                
                
                
                9,787,266Add:  Dilutive effects
      of unvested shares not considered participating
      securities
                
                
                -
                
                
                
                -Weighted average shares and
      dilutive potential common shares
                
                
                11,788,107
                
                
                
                9,787,266Diluted earnings per common
      share
                
                $
                0.31
                
                
                $
                0.36


7




Dividends of $3 and $2 were paid on
unvested shares with non-forfeitable dividend rights in 2009 and 2008, none of
which was included in net income as compensation expense as all awards are
expected to vest.Due to the Company’s
adoption of FSP EITF 03-6-1 basic and diluted earnings per common share have
been adjusted for the period ending March 31, 2008.





Note 3 – Stock-Based
Compensation





At the April 19, 2007 Annual Meeting the
shareholders of Smithtown Bancorp approved the adoption of the 2007 Stock
Compensation Plan (“Stock Compensation Plan”). This plan serves as the successor
to the Smithtown Bancorp Restricted Stock Plan (“Predecessor
Plan”).  No further grants may be made under the Predecessor Plan on
or after April 19, 2007.  All awards previously granted under the
Predecessor Plan will remain in full force and effect and shall continue to be
governed by the terms of that plan.  The remaining  number
of shares of common stock that may be delivered pursuant to awards granted under
the Stock Compensation Plan  as of  March 31, 2009 is
814,038.  This amount includes the balance of the shares reserved
under the Predecessor Plan.  The Company established the Stock
Compensation Plan to grant awards to any employee, director or independent
contractor of the Company or any of its subsidiaries or
affiliates.  The purpose of the Plan is to provide the Bank with the
opportunity to offer incentive awards in order to attract and retain high level
officers and directors and to motivate them to continue their relationship with
the Bank and thereby align their interests and compensation with the long term
interests of shareholders.





The Board of Directors
elected  to issue 38,125,  22,000 and 17,160 shares of stock
for the 2009, 2008 and 2007 plan years, respectively.  Shares issued
in 2007 have been adjusted for the 10% stock dividend.   Shares
were issued in 2009, 2008 and 2007 at an average price of $14.34, $20.89 and
$24.13 per share, respectively.





The Bank recognizes compensation
expense for shares of common stock awarded under the Stock Compensation
Plan  and the Predecessor Plan over the vesting period, or remaining
service period, if shorter, based on the fair market value of the shares on the
date they are awarded.  The vesting period is generally five years
with 20% vesting annually on December 31st for each of the first five years
after the award is made.  For the quarters ended  March 31,
2009 and 2008, the Bank recognized  $107 and $65 of compensation
expense related to the shares awarded. The income tax benefits resulting from
this expense were $39 and $22, respectively.





As of March 31, 2009 and 2008, there was
approximately $1,206 and $964 of unrecognized compensation costs related to
nonvested  plan shares.  These costs  are expected
to be recognized over a period of 4.75  years and 3.75 years,
respectively.




A summary of the status of the Company’s
nonvested  plan shares as of March 31, 2009 is as
follows:




For the Three Months Ended March 31,
2009


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





The fair
value of nonvested stock awards at March 31, 2009 was $834.





Note 4– Employee
Benefits





During 2009, 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 month comparative periods were:




For the Three Months
      EndedMarch 31,2009
                    
                    
                    2008401(K) Defined Contribution
      Plan
                    
                    $
                    66
                    
                    
                    $
                    66Employee Stock Ownership
      Plan
                    
                    
                    75
                    
                    
                    
                    62


8




It is expected that the Bank’s costs for
the 401(K) Defined Contribution Plan and  the Employee Stock Ownership
Plan for the twelve months ending December 31, 2009 will be approximately $264
and $300, respectively.





The Bank 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 month
periods.




For the Three Months
Ended


Amortization
                        
                        
                        Amortization
                        
                        
                        Total NetInterest
    Cost
                        
                        
                        Cost
                        
                        
                        of Net Gain
                        
                        
                        ExpenseMarch 31,
    2009
                        
                        $
                        3
                        
                        
                        $
                        8
                        
                        
                        $
                        3
                        
                        
                        $
                        8March 31,
    2008
                        
                        
                        3
                        
                        
                        
                        8
                        
                        
                        
                        3
                        
                        
                        
                        8




Since the plans hold no assets, the Bank
did not contribute and does not expect to contribute to the plans during 2009
and 2008, other than to fund the payments for the benefits. The Bank 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 amounts contributed
by the Bank.  The Bank’s expense for these plans for the three month
periods were:




For the Three Months
      EndedMarch 31,2009
            
            
            2008Incentive Retirement
      Plan
            
            $
            96
            
            
            $
            90




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.  In accordance with EITF Issue No. 06-4, the Bank has recorded
a liability representing the cost of maintaining this insurance during the
expected retirement period. This cost is expensed over  the service
period.  An expense of $11 was recorded for the quarter ended March
31, 2009.  At March 31, 2009 and 2008, the combined cash value of
these insurance policies was $15,455 and $15,027.  The Bank has also
established a non-tax qualified Deferred Compensation Plan for certain directors
and executive officers.  This group 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 Agreement for the Chief Executive Officer.  Life insurance
policies were also purchased for the purpose of serving as the primary income
source for the accruals during the service period.  These policies had
a combined cash value at March 31, 2009 and 2008 of $4,315 and
$4,132.  The Bank’s expense for this plan for the comparable three
month periods was:





For
      the Three Months EndedMarch 31,2009
                                
                                
                                2008Supplemental
      Executive Retirement Agreement
                                
                                $
                                162
                                
                                
                                $
                                116





Note 5 – Fair Value





Statement
157 establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:





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





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





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





Except as
discussed below, the fair values of securities available for sale are determined
by obtaining quoted prices on nationally recognized securities exchanges (Level
1 inputs) or matrix pricing, which is a mathematical technique widely used in
the industry to value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on the securities’
relationship to other benchmark quoted securities (Level 2 inputs).





Trust
preferred pooled securities which are issued by financial institutions were
historically priced using Level 2 inputs. The decline in the level of observable
inputs and market activity in this class of investments by the measurement date
has been significant and resulted in unreliable external
pricing.  Broker pricing and bid/ask spreads, when available, has
varied widely.  The once active market has become comparatively
inactive.  As such, these investments are now priced using Level 3
inputs. The Company has developed
an internal model for pricing these securities.


9


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





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





Assets Measured on a
Recurring Basis





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




Fair
      Value Measurements atMarch
      31, 2009 UsingQuoted Prices inActive
                          Markets forIdentical
                          Assets
                        
                        
                        SignificantOther
                          Observable Inputs
                        
                        
                        SignificantUnobservable
                          Inputs(Level 1)
                        
                        
                        (Level 2)
                        
                        
                        (Level 3)Available for sale securities
                        
                        
                        -
                        
                        
                        $
                        92,928
                        
                        
                        $
                        7,812





Fair Value Measurements atDecember 31, 2008 UsingQuoted Prices inActive
                      Markets forIdentical
                      Assets
                    
                    
                    SignificantOther
                      ObservableInputs
                    
                    
                    SignificantUnobservable
                      Inputs(Level 1)
                    
                    
                    (Level 2)
                    
                    
                    (Level 3)Available
      for sale securities
                    
                    
                    -
                    
                    
                    $
                    48,955
                    
                    
                    $
                    8,743





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





Fair
      Value Measurements Using SignificantUnobservable Inputs (Level
    3)Available
      for Sale SecuritiesBeginning
      balance, January 1, 2009
                  
                  $
                  8,743Included
      in earningsOther
      changes in fair value
                  
                  
                  -Included
      in other comprehensive income
                  
                  
                  (925
                  )Principal
      paydown
                  
                  
                  (6
                  )Transfers
      of securities purchased prior to January 1, 2009
                  
                  
                  -Ending
      balance, March 31, 2009
                  
                  $
                  7,812Interest
      income recognized on securities included in  Level 3 above in
      2009
                  
                  $
                  145





The table
below summarizes changes in unrealized gains and losses recorded in earnings for
the period ended March 31, 2009 for Level 3 assets that are still held at March
31, 2009.





Changes
      in Unrealized Gains/Losses Relating toAssets
      Still Held at Reporting DateFor the Period Ended March 31,
      2009Available for Sale
    SecuritiesOther changes in fair value
                    $
                    -




10





Assets
Measured on a Non-Recurring Basis





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





Fair Value Measurements at March
      31, 2009 UsingQuoted Prices in
                            
                            
                            Significant
                            
                            
                            SignificantActive Markets for
                            
                            
                            Other
                            
                            
                            UnobservableIdentical Assets
                            
                            
                            Observable Inputs
                            
                            
                            Inputs(Level 1)
                            
                            
                            (Level 2)
                            
                            
                            (Level 3)Impaired
    Loans
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            3,022Fair Value Measurements at
      December 31, 2008 UsingQuoted Prices in
                            
                            
                            Significant
                            
                            
                            SignificantActive Markets for
                            
                            
                            Other
                            
                            
                            UnobservableIdentical Assets
                            
                            
                            Observable Inputs
                            
                            
                            Inputs(Level 1)
                            
                            
                            (Level 2)
                            
                            
                            (Level 3)Impaired
    Loans
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            $
                            2,334





These impaired loans are collateral
dependent loans, and as such, are measured for impairment using the fair value
of their collateral. These loans had a carrying value of $3,398, with a
valuation allowance of $376 at March 31, 2009 and $2,652 and $318 at December
31, 2008. The specific provision taken for these loans in 2009 and 2008 was $58
and $318, respectively.





Note 6 – Loans





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





March 31,
                  
                  
                  December
31,2009
                  
                  
                  2008Real estate
      loansConstruction
                  
                  $
                  402,616
                  
                  
                  $
                  390,067Commercial
                  
                  
                  815,281
                  
                  
                  
                  760,125Residential
                  
                  
                  554,783
                  
                  
                  
                  488,570Commercial
      and industrial loans
                  
                  
                  52,057
                  
                  
                  
                  51,630Loans
      to individuals for household, family and other personal
      expenditures
                  
                  
                  2,008
                  
                  
                  
                  2,004All
      other loans (including overdrafts)
                  
                  
                  452
                  
                  
                  
                  403Total
      loans, gross
                  
                  
                  1,827,197
                  
                  
                  
                  1,692,799Less:Deferred
      fees
                  
                  
                  4,012
                  
                  
                  
                  4,099Allowance
      for loan losses
                  
                  
                  12,411
                  
                  
                  
                  11,303Loans,
      net
                  
                  $
                  1,810,774
                  
                  
                  $
                  1,677,397




At March
31, 2009 and December 31, 2008, the Company had a total of $506,217 and $495,728
in interest only mortgage loans. These loans pose a potentially higher credit
risk because of the lack of principal amortization.  However,
management believes the risk is mitigated through the Company’s loan terms and
underwriting standards, including its policies on loan-to-value
ratios.





Activity
in the allowance for loan losses was as follows:


2009
                      
                      
                      2008Beginning
      balance
                      
                      $
                      11,303
                      
                      
                      $
                      8,250Add:Recoveries
                      
                      
                      6
                      
                      
                      
                      7Provision
      charged to current expense
                      
                      
                      1,200
                      
                      
                      
                      800Total
                      
                      
                      12,509
                      
                      
                      
                      9,057Less:
      charge-offs
                      
                      
                      98
                      
                      
                      
                      18Balance,
      March 31
                      
                      $
                      12,411
                      
                      
                      $
                      9,039





11





Individually
impaired loans were as follows:


March 31,
                  
                  
                  December
31,2009
                  
                  
                  2008Loans with no allocated allowance
      for loan losses
                  
                  $
                  10,702
                  
                  
                  $
                  799Loans with
      allocated allowance for loan losses
                  
                  
                  3,759
                  
                  
                  
                  1,853Total
                  
                  $
                  14,461
                  
                  
                  $
                  2,652





Impaired
loans at March 31, 2009 and March 31, 2008 were $14,461and $1,583
respectively.  The amount of the allowance for loan losses allocated
to these loans was $974 and $213.  The average recorded investment in
impaired loans during the three months ended March 31, 2009 and 2008 was $8,557
and $1,129, respectively.





Recognition
of interest income on impaired loans, as for all other loans, is discontinued
when reasonable doubt exists as to the full collectibility of
principal or interest.   Any payments received on impaired loans
would first be applied to principal outstanding and then to accrued
interest.





At March
31, 2009 and 2008, loans with unpaid principal balances on which the Bank is no
longer accruing interest were $5,316 and $322, respectively.  At March
31, 2009 and 2008, there were $3,094 and $1,261 of loans past due 90 days or
more and still accruing interest.





A summary
of information concerning interest income on nonaccrual loans at March 31
follows:





2009
                  
                  
                  2008Gross
      interest income which would have been recorded during the year under
      original contract terms
                  
                  $
                  193
                  
                  
                  $
                  37Gross
      interest income recorded during the year
                  
                  
                  54
                  
                  
                  
                  17





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





Note 7 – Securities





The fair
value of available for sale securities and the related gross unrealized gains
and losses recognized in accumulated other comprehensive income (loss) were as
follows:


Gross
                          
                          
                          GrossFair
                          
                          
                          Unrealized
                          
                          
                          UnrealizedValue
                          
                          
                          Gains
                          
                          
                          LossesMarch  31, 2009Obligations
      of U.S. government agencies andsponsored
      enterprises
                          
                          $
                          24,443
                          
                          
                          $
                          89
                          
                          
                          $
                          -Mortgage-backed
      securities
                          
                          
                          61,517
                          
                          
                          
                          288
                          
                          
                          
                          (51
                          )Obligations
      of state and political subdivisions
                          
                          
                          4,488
                          
                          
                          
                          15
                          
                          
                          
                          (50
                          )Other
      securities
                          
                          
                          10,292
                          
                          
                          
                          -
                          
                          
                          
                          (2,097
                          )Total
                          
                          $
                          100,740
                          
                          
                          $
                          392
                          
                          
                          $
                          (2,198
                          )December  31,
2008Obligations
      of U.S. government agencies andsponsored
      enterprises
                          
                          $
                          19,009
                          
                          
                          $
                          112
                          
                          
                          $
                          (117
                          )Mortgage-backed
      securities
                          
                          
                          22,831
                          
                          
                          
                          96
                          
                          
                          
                          (45
                          )Obligations
      of state and political subdivisions
                          
                          
                          4,635
                          
                          
                          
                          22
                          
                          
                          
                          (16
                          )Other
      securities
                          
                          
                          11,223
                          
                          
                          
                          -
                          
                          
                          
                          (1,180
                          )Total
                          
                          $
                          57,698
                          
                          
                          $
                          230
                          
                          
                          $
                          (1,358
                          )





The
carrying amount, gross unrecognized gains and losses and fair value of
securities held to maturity were as follows:





Gross
                      
                      
                      GrossCarrying
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      FairAmount
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueMarch 31,
    2009Obligations of state and political
      subdivisions
                      
                      $
                      112
                      
                      
                      $
                      1
                      
                      
                      $
                      -
                      
                      
                      $
                      113Total
                      
                      $
                      112
                      
                      
                      $
                      1
                      
                      
                      $
                      -
                      
                      
                      $
                      113December 31,
      2008Obligations of state and political
      subdivisions
                      
                      $
                      112
                      
                      
                      $
                      1
                      
                      
                      $
                      -
                      
                      
                      $
                      113Total
                      
                      $
                      112
                      
                      
                      $
                      1
                      
                      
                      $
                      -
                      
                      
                      $
                      113




12




The
following table presents the amortized costs of estimated fair values of
securities by contractual maturity at March 31, 2009:





Available
                  
                  
                  Held
      to Maturityfor
      Sale
                  
                  
                  CarryingFair Value
                  
                  
                  Amount
                  
                  
                  Fair ValueType
      and Maturity GroupingObligations
      of U.S. government agencies andsponsored
      enterprisesAfter
      1 year, but within 5 years
                  
                  $
                  2,008
                  
                  
                  $
                  -
                  
                  
                  $
                  -After
      5 years, but within 10 years
                  
                  
                  2,010
                  
                  
                  
                  -
                  
                  
                  
                  -After
      10 years
                  
                  
                  20,425
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      obligations of U.S. government agencies andsponsored
      enterprises
                  
                  $
                  24,443
                  
                  
                  $
                  -
                  
                  
                  $
                  -Mortgage-backed
      securitiesAfter
      10 years
                  
                  $
                  61,517
                  
                  
                  $
                  -
                  
                  
                  $
                  -Total
      mortgage-backed securities
                  
                  $
                  61,517
                  
                  
                  $
                  -
                  
                  
                  $
                  -Obligations
      of state and political subdivisionsWithin
      1 year
                  
                  $
                  902
                  
                  
                  $
                  46
                  
                  
                  $
                  46After
      1 year, but within 5 years
                  
                  
                  2,155
                  
                  
                  
                  66
                  
                  
                  
                  67After
      10 years
                  
                  
                  1,431
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      obligations of state and political subdivisions
                  
                  $
                  4,488
                  
                  
                  $
                  112
                  
                  
                  $
                  113Other
      securitiesAfter
      1 year, but within 5 years
                  
                  $
                  1,900
                  
                  
                  
                  -
                  
                  
                  
                  -After
      10 years
                  
                  
                  8,392
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      other securities
                  
                  $
                  10,292
                  
                  
                  $
                  -
                  
                  
                  $
                  -





Mortgage-backed
securities are classified in the above schedules by their contractual maturity.
Actual maturities can be expected to differ from scheduled maturities due to
prepayment or early call privileges of the issuer.




Obligations
of U.S. government agencies and sponsored enterprises, mortgage-backed
securities and obligations of state and political subdivisions having an
amortized cost of $66,124 and an estimated fair value of $64,964 were pledged to
secure public deposits and treasury tax and loan deposits.





The
following table presents the sales of available for sale
securities:


As of March
    31,2009
                  
                  
                  2008Proceeds
                  
                  $
                  30,432
                  
                  
                  $
                  -Gross
      gains
                  
                  
                  522
                  
                  
                  
                  -Gross
      losses
                  
                  
                  -
                  
                  
                  
                  -





The
income taxes related to the net realized gains were $183.





The Bank
has invested $80 in the Community Building Fund, LLC. This consortium of banks
provides loans to low-income homeowners.  The Bank has also made a
capital contribution of $157 to the New York Bankers Association,
Inc.





At March
31, 2009 and 2008, there were no holdings of securities of any one issuer, other
than U.S. Government agencies and sponsored enterprises, in an amount greater
than 10% of stockholders’ equity.


13




Securities
with unrealized losses at March 31, 2009  and December 31, 2008,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, were as
follows:





As
      of March 31, 2009
                      
                      Less than 12 Months
                      
                      
                      12 Months or
      More
                      
                      
                      TotalFair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      UnrealizedDescription of Securities
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      LossSecurities
      available for sale:Mortgage- backed
      securities
                      
                      $
                      28,271
                      
                      
                      $
                      (51
                      )
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      28,271
                      
                      
                      $
                      (51
                      )Obligations of state andpolitical
      subdivisions
                      
                      
                      1,431
                      
                      
                      
                      (50
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,431
                      
                      
                      
                      (50
                      )Other
      securities
                      
                      
                      5,131
                      
                      
                      
                      (689
                      )
                      
                      
                      2,681
                      
                      
                      
                      (1,408
                      )
                      
                      
                      7,812
                      
                      
                      
                      (2,097
                      )Total temporarily
      impaired
                      
                      $
                      34,833
                      
                      
                      $
                      (790
                      )
                      
                      $
                      2,681
                      
                      
                      $
                      (1,408
                      )
                      
                      $
                      37,514
                      
                      
                      $
                      (2,198
                      )As
      of December 31, 2008
                      
                      Less than 12 Months
                      
                      
                      12 Months or
      More
                      
                      
                      TotalFair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      Unrealized
                      
                      
                      Fair
                      
                      
                      UnrealizedDescription of Securities
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      Loss
                      
                      
                      Value
                      
                      
                      LossSecurities
      available for sale:Obligations
      of U.S. government agencies and sponsored enterprises
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      4,883
                      
                      
                      $
                      (117
                      )
                      
                      $
                      4,883
                      
                      
                      $
                      (117
                      )Mortgage- backed
      securities
                      
                      
                      3,436
                      
                      
                      
                      (26
                      )
                      
                      
                      8,491
                      
                      
                      
                      (19
                      )
                      
                      
                      11,927
                      
                      
                      
                      (45
                      )Obligations of state andpolitical
      subdivisions
                      
                      
                      929
                      
                      
                      
                      (16
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      929
                      
                      
                      
                      (16
                      )Other
      securities
                      
                      
                      4,600
                      
                      
                      
                      (400
                      )
                      
                      
                      3,317
                      
                      
                      
                      (780
                      )
                      
                      
                      7,917
                      
                      
                      
                      (1,180
                      )Total temporarily
      impaired
                      
                      $
                      8,965
                      
                      
                      $
                      (442
                      )
                      
                      $
                      16,691
                      
                      
                      $
                      ( 916
                      )
                      
                      $
                      25,656
                      
                      
                      $
                      (1,358
                      )




There
were unrealized gains on securities held to maturity of $1 at March 31, 2009 and
December 31, 2008.





Unrealized
losses on mortgage backed securities and obligations of state and political
subdivisions were not recognized in income because management has the intent and
ability to hold these securities for the foreseeable future or to maturity. It
is believed the decline in fair value is largely due to the change in market
interest rates and the underlying issuer is of high credit quality. The
occurrence of fair value below cost is deemed to be temporary for these
securities.





Included
among the $10,292 of other securities are $7,812 consisting of two
collateralized debt obligations in the form of pooled trust preferred
securities, one single issuer trust preferred security and one corporate bond,
all of which are issued by banks, which have $2,097 of unrealized losses. These
unrealized losses were not recognized in earnings because based on cash flow
projections management concluded it was probable that full repayment of
principal and interest according to original contractual terms would be received
and because of the Company’s ability and intent to hold these securities to
maturity. Therefore, the decline in fair value below cost for these securities
is deemed to be temporary.





Note 8 –
Other Borrowings





The Bank
has available to it various lines of credit from the Federal Home Loan Bank
of  New York (“FHLBNY”), including an overnight line of credit and
term advances. Each advance is payable at its maturity date and carries a fixed
rate of interest as well as a prepayment penalty. All advances are periodically
callable, with the exception of the $10,000 maturing in 2009 and the $5,000
maturing  in 2010.





Scheduled
repayments and maturities of advances from FHLBNY were as follows
at:




March 31,
    2009
                  
                  
                  December 31,
      2008Weighted
                  
                  
                  
                  
                  
                  WeightedAverage Rate
                  
                  
                  Amount
                  
                  
                  Average Rate
                  
                  
                  AmountMaturing
      in 2009
                  
                  
                  4.17
                  %
                  
                  $
                  10,000
                  
                  
                  
                  4.17
                  %
                  
                  $
                  10,000Maturing
      in 2010
                  
                  
                  3.61
                  
                  
                  
                  5,000
                  
                  
                  
                  3.61
                  
                  
                  
                  5,000Maturing
      in 2011
                  
                  
                  2.58
                  
                  
                  
                  3,000
                  
                  
                  
                  2.58
                  
                  
                  
                  3,000Maturing
      in 2013
                  
                  
                  2.55
                  
                  
                  
                  55,000
                  
                  
                  
                  2.55
                  
                  
                  
                  55,000Maturing
      in 2018
                  
                  
                  2.71
                  
                  
                  
                  252,000
                  
                  
                  
                  2.71
                  
                  
                  
                  252,0002.74
                  %
                  
                  $
                  325,000
                  
                  
                  
                  2.74
                  %
                  
                  $
                  325,000




14





These
borrowings are collateralized by residential and commercial mortgages at March
31, 2009 and at December 31, 2008 under a specific lien arrangement at FHLBNY.
Total collateral was $761,916 and $685,944 at March 31, 2009 and December 31,
2008, respectively. Based on this collateral and the level of FHLB stock
ownership, the Company is eligible to borrow up to $712,227.  Unused
borrowing capacity at FHLBNY at March 31, 2009 and December 31, 2008 was
$387,227 and $332,763. At March 31, 2009 and December 31, 2008 the Company had a
line of credit of $5,000 with an unaffiliated correspondent bank to provide
short-term credit for liquidity requirements.  There were no
outstanding balances at March 31, 2009 or December 31, 2008.





Included
in other borrowings are $1,480 of secured borrowings with a weighted average
rate of 1.79% and maturities ranging from 2010 to 2012. These borrowings
are a financial arrangement with the Senior Housing Crime Prevention program
that is secured by U.S. government agency bonds.  At maturity, the
Company has the option to repay the secured borrowings simultaneous with the
release of the collateral or to renew the borrowings.





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


(In thousands, except share and per
share data)





Private
Securities Litigation Reform Act Safe Harbor Statement





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





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





-
                Our
      ability to continue to increase and manage our commercial and residential
      real estate, multi-family, and commercial and industrial
    loans-
                Local,
      regional, national and international economic conditions and the impact
      they may have on the Company and its customers and the Company’s
      assessment of that impact-
                Changes
      in the level of non-performing assets and charge-offs-
                Changes
      in estimates of future reserve requirements based upon the periodic
      review thereof under relevant regulatory and accounting
      requirements-
                The
      effects of and changes in trade and monetary and fiscal policies and laws,
      including the interest rate policies of the Federal Reserve
      Board-
                Inflation,
      interest rate, securities market and monetary fluctuations, including
      changes in the yield curve-
                Political
      instability-
                Acts
      of war or terrorism-
                The
      level of future deposit premium assessments-
                Possible
      impairments of securities held by us, including those issued by government
      entities and government sponsored enterprises-
                The
      impact of the current financial crisis on our loan portfolio (including
      cash flow and collateral values), investment
      portfolio,  customers and capital market
    activities-
                Our
      ability to raise capital to fund our growth plans-
                The
      impact of the current governmental effort to restructure the U.S.
      financial and regulatory system-
                The
      impact of new consumer and borrower protection
  legislation-
                Our
      ability to recruit new personnel and integrate such persons into our
      operations to support our growth plan-
                The
      timely development and acceptance of new products and services and
      perceived overall value of these products and services by
      users-
                Our
      reliance on a limited number of senior executives, including our Chief
      Executive Officer-
                Changes
      in consumer spending, borrowings and savings habits-
                Changes
      in the financial performance and/or condition of the Company’s
      borrowers-
                Technological
      changes-
                Acquisitions
      and integration of acquired businesses-
                The
      ability to increase market share and control expenses-
                Changes
      in the competitive environment among financial holding companies and other
      financial service providers, including the emergence of new loan and
      deposit competitors-
                The
      quality and composition of the Company’s investment
    portfolio-
                The
      effect of changes in laws and regulations (including laws and regulations
      concerning taxes, banking, securities and insurance) with which the
      Company and its subsidiaries must comply-
                The
      effect of changes in accounting policies and practices, as may be adopted
      by the regulatory agencies, as well as the SEC, Public Company Accounting
      Oversight Board, the Financial Accounting Standards Board and other
      accounting standard setters-
                Changes
      in the Company’s organization, compensation and benefit
    plans




15





-
            The
      costs and effects of legal and regulatory developments, including the
      resolution of legal proceedings or regulatory or other governmental
      inquiries and the results of regulatory examinations or
      reviews-
            Greater
      than expected costs or difficulties related to the opening of new branch
      offices or the integration of new products and lines of business, or
      both-
            The
      impact of developments in the secondary market impacting our loan
      pricing-
            The
      impact of changes in the financial services industry on our local
      marketplace-
            The
      Company’s success at managing the risk involved in the foregoing
      items





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





Summary





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





-Continued growth in the Company’s loans
and deposits totaling $134,485 and $303,070, respectively


-Net income for the quarter of $3,616,
representing growth of 1.15% over the first quarter of 2008 and .74% over the
fourth quarter of 2008


-Net interest margin of 2.76% for the
quarter


-Tier I leverage of 7.76% and total risk
based capital of 10.20% at March 31, 2009





For the first quarter of 2009 we
experienced slight growth in net income and a reduction in basic and diluted EPS
of 13.89%.  This reduction was primarily due to an increased number of
outstanding common shares issued at the end of the third quarter of 2008 as a
result of a private placement in Company stock.  Earnings continued to
be driven by loan growth of 31.86% on an annualized basis, with new loan
originations of $152,360 during the quarter.  The growth within the
portfolio continued to trend similarly to that during 2008, with a majority of
the funding  in multi-family mortgage loans, residential mortgages,
commercial mortgages and first lien home equity lines of
credit.  Although commercial mortgages  may be considered
higher risk loans, the Company maintains an average loan to value ratio on its
portfolio, based on original appraisals, of 53.40%, thereby mitigating loss
potential.  Although the Company experienced a 7.96% increase in loan
balances during the quarter, the average yield on the loan portfolio decreased
by 32 basis points predominantly as a result of the 75 basis point rate
reduction by the Federal Reserve Bank in December 2008.   During
the first quarter of 2009, the average balance of floating prime rate loans was
$477,205 which contributed significantly to the decline in loan yield during the
quarter.  On the retail side of the Bank, deposit growth soared during
the quarter, resulting from a continued rapid inflow of funds to the Company’s
four newest branch offices. The Nesconset office opened in September 2008, the
Huntington office opened in November 2008, and the Port Jefferson and Chelsea,
New York City offices opened in February 2009, adding $91,905 in deposits during
the first quarter.  In addition, the Company’s new internet branch
also increased deposits by $12,738.  These balances in total
represented 34.53% of the total quarterly growth.  In light of the
continued volatility in the stock marketand consumers’ uncertainty regarding the
health of many of the large financial institutions, the Company experienced a
“flight to safety” within all of its service areas.  Confidence in
Bank of Smithtown as a safe and sound repository for deposits heightened this
quarter.   The new deposits that were collected during the
quarter resulted in an increased mix of lower costing money market and savings
accounts.  While time deposit balances grew significantly during the
quarter, the percentage of time deposits to total deposits declined
slightly.  The combination of an increased mix in lower costing
deposits and lower rates reduced the cost of interest bearing liabilities
compared to 2008.  The Bank was unable to deploy the funds into loans
and securities at the same pace deposits grew.  Deposit growth was
largely invested in overnight federal funds sold and term placements with short
maturities yielding 14 and 42 basis points, respectively, for the
quarter.  As a result, for much of the quarter, interest expense grew
much more quickly than interest income, putting downward pressure on the net
interest margin.





The Company remained well capitalized at
the end of the first quarter of 2009 with Tier I Leverage Capital of 7.76%, Tier
I Risk Based Capital of 9.46% and Total Risk Based Capital of
10.20%.  As the second quarter begins, the Company remains committed
to maintaining its well capitalized designation, and has already begun exploring
options for raising additional capital including the sale of additional equity
securities and the issuance of trust preferred securities and/or subordinated
debt (including warrants to purchase common stock
thereon).


16





Comparison of Financial Position at
March 31, 2009 and December 31, 2008





The Company’s balance sheet grew by
$307,450 in total assets.  The largest segment of interest earning
assets remains the loan portfolio, which represented 83.91% and 90.53% of total
assets as of March 31, 2009 and December 31, 2008, respectively.  Loan
growth during the first quarter of 2009 totaled $134,485, or 7.96% over December
31, 2008 as many of the Bank’s competitors, particularly those dependent on loan
securitization or wholesale funding, have dramatically reduced their
activity.  The following table details the composition of the loan
portfolio at March 31, 2009 and December 31, 2008.





March 31,
    2009
                  
                  
                  December 31,
      2008Real estate
      loansConstruction
                  
                  $
                  402,616
                  
                  
                  
                  22.03
                  %
                  
                  $
                  390,067
                  
                  
                  
                  23.04
                  %Residential
                  
                  
                  554,783
                  
                  
                  
                  30.36
                  
                  
                  
                  488,570
                  
                  
                  
                  28.86Commercial
                  
                  
                  815,281
                  
                  
                  
                  44.63
                  
                  
                  
                  760,125
                  
                  
                  
                  44.91Commercial and
      Industrial
                  
                  
                  52,057
                  
                  
                  
                  2.85
                  
                  
                  
                  51,630
                  
                  
                  
                  3.05Consumer
                  
                  
                  2,008
                  
                  
                  
                  0.11
                  
                  
                  
                  2,004
                  
                  
                  
                  0.12Other loans
                  
                  
                  452
                  
                  
                  
                  0.02
                  
                  
                  
                  403
                  
                  
                  
                  0.02Total loans
                  
                  
                  1,827,197
                  
                  
                  
                  100.00
                  %
                  
                  
                  1,692,799
                  
                  
                  
                  100.00
                  %Less:Deferred
    fees
                  
                  
                  4,012
                  
                  
                  
                  
                  
                  
                  
                  4,099Allowance for loan
      losses
                  
                  
                  12,411
                  
                  
                  
                  
                  
                  
                  
                  11,303Loans,
      net
                  
                  $
                  1,810,774
                  
                  
                  
                  
                  
                  
                  $
                  1,677,397





The Company’s primary lending continues
to be focused within the permanent residential and commercial real estate
segments. During the first quarter the residential and commercial real estate
portfolio grew by 13.55% and 7.26%, respectively.  Within the
residential portfolio, the largest amount of growth was within multi-family
loans, which grew by $56,260 or 18.45%, from $304,939 to
$361,199.  The properties that secure these loans are located
primarily within New York City, where demand remains strong, and price
depreciation has not deteriorated as much as has been witnessed in other parts
of the country.  As further protection against declining prices, the
Bank’s loan to value ratios on all multi-family mortgage loans average
62.87%.  The other segment of the residential loan portfolio is single
family homes.  Growth within this segment totaled $9,952 or
5.42%.  The properties securing these loans are located throughout
Long Island and the five boroughs of New York City.   Again, as
insurance against falling prices, the Company maintains low loan to value ratios
on one to four family residential loans, averaging 47.13% as of March 31,
2009.  As growth continues in these loans, the level of the allowance
for possible loan losses as a percent of total loans may trend
downward.  Commercial real estate loan growth during the quarter
totaled $55,156, and was extended primarily for retail purposes.  The
properties securing these mortgages are located primarily within the boroughs of
New York City, and the average loan to value ratio for this entire portfolio of
loans is currently 53.40%. All loan to value ratios are based on original
appraisals with the exception of loans with updated appraisals due to a possible
change in the loan’s credit quality.





The next largest category of earning
assets on the balance sheet as of March 31, 2009 is federal funds sold
and  term  placements.  As discussed above, the
high volume of deposits acquired during the first quarter were
not  immediately deployed into new loans and investment securities.
While the Company did purchase $81,026 in investment securities during the
quarter, sales, prepayments, and called securities resulted in a net increase of
$43,042.  Therefore a portion of the $303,070 in new deposits remained
in overnight federal funds and in term placements within the CDARs
network.





The third largest category of interest
earning assets is the Company’s investment portfolio.  The composition
of the portfolio at March 31, 2009 and December 31, 2008 was as
follows:


March 31,
    2009
                            
                            
                            December 31,
      2008Securities available for
      saleObligations
      of U.S. government agencies and sponsored
    enterprises
                            
                            $
                            24,443
                            
                            
                            $
                            19,009Mortgage-backed
      securities
                            
                            
                            61,517
                            
                            
                            
                            22,831Obligations
      of state and political subdivisions
                            
                            
                            4,488
                            
                            
                            
                            4,635Other
      securities
                            
                            
                            10,292
                            
                            
                            
                            11,223Total
      securities available for sale
                            
                            
                            100,740
                            
                            
                            
                            57,698Securities held to
      maturityObligations
      of state and political subdivisions
                            
                            
                            112
                            
                            
                            
                            112Total
      securities held to maturity
                            
                            
                            112
                            
                            
                            
                            112Total
      investment
      securities
                            
                            $
                            100,852
                            
                            
                            $
                            57,810




Investment securities
increased by 74% from December 31, 2008 to March 31, 2009.This was primarily the result of
purchases of $67,986 of fixed rate pass through mortgage backed securities,
comprised of  $58,451 of Ginnie Mae (“GNMA”), $4,388 of Fannie Mae
(“FNMA”) and $5,147 of Freddie Mac (“FHLMC”) issued
securities.  Collectively, these purchases of mortgage backed
securities, based on an estimated average life of 2.5 years, will yield 4.05%.
Other securities purchases during the first quarter include a callable FNMA
agency bond of $10,000 with a yield of 3.70% if called and 5.80% if held to its
maturity date of February 9, 2026.  One FHLMC agency bond of $5,000
was called late in the first quarter and one municipal bond of $105 matured. A
total of ten mortgage backed securities with a combined book value of $30,052
were sold during the quarter, $23,163 of FNMA and $6,889 of FHLMC issued
securities.  These sales resulted in a gain of
$522.


17





Bank premises and equipment increased by
$1,445 or 4.38% from December 31, 2008 to March 31, 2009.  This
was a result of the completion and opening of 2 new branches, in Port Jefferson,
Long Island  and Chelsea, New York City.  Currently there
are eleven new branch projects under development,  including four new
branch offices under construction expected to open during the later part of the
third quarter with the potential for an additional four new offices to be added
for 2009 opening.   Management constantly strives to obtain low
cost, stable sources of funding which it has achieved through an expanding
branch network, and for that reason continues to explore all viable
opportunities. However, opportunities for good branch locations are not always
available.





On the liability side of the balance
sheet, deposits grew by $303,070 or 22.17% for the quarter.  The
composition of the deposit portfolio at March 31, 2009 and December 31, 2008 was
as follows:


March 31,
    2009
                  
                  
                  December 31,
      2008Demand (non interest
      bearing)
                  
                  $
                  118,330
                  
                  
                  $
                  123,620Money
market
                  
                  
                  589,367
                  
                  
                  
                  442,078NOW
                  
                  
                  27,879
                  
                  
                  
                  32,774Savings
                  
                  
                  95,919
                  
                  
                  
                  73,650Time
                  
                  
                  838,512
                  
                  
                  
                  694,815Total
    deposits
                  
                  $
                  1,670,007
                  
                  
                  $
                  1,366,937





The segmentation of deposits within the
portfolio changed slightly during the quarter, with lower cost money market
balances increasing from 32.34% of the total portfolio to
35.29%.  Demand deposits decreased to a 7.09% level from 9.04%, and
savings accounts increased by 30.24% to now represent 5.74% of total
balances.  Certificates of deposit remained approximately 50% of total
deposits.  The cost of interest bearing deposits remained flat
from  the fourth quarter of 2008 to the first quarter of 2009 at
2.95%.    Other borrowings remained at the December 31, 2008
level of $326,480, as did the Company’s outstanding issuance of subordinated
debt of $38,836.   Other liabilities increased from $13,047 to
$14,443 primarily due to an increase in federal and state taxes payable and an
increase in a reserve for supplemental executive retirement
benefits.





Stockholders’ equity increased by 2.49%
in large part a result of net income of $3,616, other comprehensive income
of ($556) due primarily to the increase in temporary impairment of certain
investment securities, and dividends paid to shareholders of
$474.





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 March
31, 2009, 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 notification that management believes have changed this
classification.  As of March 31, 2009, the Company’s risk weighted
capital to risk weighted assets, Tier I capital to risk weighted assets and Tier
I capital to average assets capital ratios were 10.20%, 9.46% and 7.76%, well above
these minimum guidelines.  The Company’s year to date return on
average equity was 11.93% and year to date return on average assets was
..71%.




18




The table below sets forth the amounts
and categories of our non-performing assets at the dates indicated. For each of
the dates indicated we have no troubled debt restructurings.





At March
31,
                      
                      
                      At December
    31,2009
                      
                      
                      2008Non-accrual
      loans:Real estate loans,
      construction
                      
                      $
                      4,881
                      
                      
                      $
                      1,341Real estate loans,
      other:Residential
                      
                      
                      328
                      
                      
                      
                      328Commercial and industrial
      loans
                      
                      
                      103
                      
                      
                      
                      178All other loans (including
      overdrafts)
                      
                      
                      4
                      
                      
                      
                      6Total
      non-accrual loans
                      
                      $
                      5,316
                      
                      
                      $
                      1,853Loans greater than 90 days
      delinquentand
      still accruing:Real
      estate loans, construction
                      
                      $
                      484
                      
                      
                      $
                      2,261Real
      estate loans, other:Commercial
                      
                      
                      1,131
                      
                      
                      
                      1,131Residential
                      
                      
                      1,388
                      
                      
                      
                      15Commercial and industrial
      loans
                      
                      
                      91
                      
                      
                      
                      —Total accruing loans past due 90
      days ormore
                      
                      $
                      3,094
                      
                      
                      $
                      3,407Total nonperforming
      loans
                      
                      $
                      8,410
                      
                      
                      $
                      5,260Other nonperforming
      assets:Real estate
      owned:Commercial
                      
                      $
                      6,972
                      
                      
                      $
                      6,972Total other nonperforming
      assets
                      
                      $
                      6,972
                      
                      
                      $
                      6,972Total
      nonperforming assets
                      
                      $
                      15,382
                      
                      
                      $
                      12,232Total nonperforming loans to total
      loans
                      
                      
                      .46
                      %
                      
                      
                      .31
                      %Total nonperforming assets to
      total assets
                      
                      
                      .71
                      %
                      
                      
                      .66
                      %




We cease accruing interest on our loans
when contractual payments of principal or interest have become 90 days or more
past due or management has serious doubts about further collectibility of
principal or interest, even though the loan is currently performing. A loan may
remain on accrual status if it is in the process of collection and is either
guaranteed or well secured.  When a loan is placed on nonaccrual
status, unpaid interest credited to income is reversed.  Interest
received on nonaccrual loans generally is applied against
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in
doubt.





At March 31, 2009, there were $11,561 of
other loans that were not included on the nonperforming asset table above where
known information about the possible credit problems of borrowers caused us to
have serious doubts as to the ability of the borrowers to comply with present
loan repayment terms and which may result in disclosure of such loans as
nonperforming loans in the future.  These loans are included in the
description of loans in the 30-89 day past due category set forth
below.  Management believes that approximately $11,311 of these loans
are well secured by real estate and will result in no significant losses to the
Bank.





Asset quality ratios continue to be
better than peer group banks, but no financial institution can be totally immune
to the economic impact of this deep recession.  Nonperforming loans
increased during the first quarter of 2009 from $5,260 to $8,410 and now
represent .46% of total loans as compared to .31% at December 31,
2008.  This ratio compares  to 2.40%  representing
the December 31, 2008 peer group ratio of 293 banks in the nation with assets
from $1 billion to $3 billion. The change in nonperforming loans was primarily
attributable to the movement of three loans within the portfolio.  Two
single family loans that were less than  90 days past due at December
31, 2008 migrated into the past due 90 days or more category.  One is
a $3,540 loan with a current offer to purchase for an amount exceeding its
balance.  The other is a $1,341 loan, with a current appraisal of over
$4 million,  for a home in an upscale Long Island
community.  The Company has begun a foreclosure action on both of
these loans.  The final movement within this category of nonperforming
loans was the sale of four of the five units of a commercial real estate loan in
Brooklyn, NY that were nonperforming at December 31, 2008.  This sale
resulted in a reduction of $1,776 from the prior nonperforming loan
total.





Our30-89 day past due category of loans
also increasedthis quarter over December 31, 2008 by
$8,632, to
$13,859.  This
category iscomprised of two construction and
development loans totaling $3,369, a commercial mortgage loan of $1,432,
a multi-family building loan for $829,a residential mortgage for a single
family townhouse in Manhattantotaling $7,951with a current appraised value of over
$10,000, a small business
loan of $250 and several consumer loans
totalling  $28.





There are many  factors
considered in determining the Company’s level of reserves, including specific
reserves that need to be maintained for internally classified loans, historical
loss experience and current economic conditions.   As of March
31, 2009, the Company maintained a reserve ratio (the allowance for loan losses
as a percentage of end of period loans) of .68%, as compared to .67% as of
December 31, 2008.  Management believes the allowance for loan losses
is adequate to absorb probable incurred losses inherent in the Bank’s loan
portfolio.  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 other factors.  The portion of the loan loss
allowance allocated to each 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.




19





Comparison of Operating Results for the
Three Months Ended March 31, 2009 and 2008





Net income for the three months ended
March 31, 2009 and 2008 was $3,616 and $3,575, an increase of 1.15%. The primary
driver of increased net income was higher net interest income.  Net
interest income grew by 22.85% resulting primarily from the increase of $673,845
or 63.32% in average loan balances offset by significantly reduced rates. The
average yield on the Bank’s loan portfolio declined by 137 basis points or
18.90% from the first quarter of 2008 to the same period in
2009.  Over the period from January 1, 2008 to December 31, 2008, the
Federal Reserve Bank reduced the target federal funds rate by 400 basis points
with a corresponding drop in the prime rate. With an average balance of $440,996
in floating prime rate loans during 2008, the interest income for the first
quarter of 2009 was greatly reduced.





Interest income also increased on the
Company’s investment portfolio by $213 for the first quarter of 2009 over the
comparable period in 2008 due to an  increased average balance of
$20,477.  The average yield earned on the portfolio during the three
month period in 2009 was 5.00% as compared to 5.32% for the same period last
year.  The average yield on federal funds sold declined from 2.29% in
the first quarter of 2008 to .14% for the same period in 2009.  The
greatly increased volume of these funds only increased income by
$9.  The average balance of term investments in the CDARs network
increased by $65,618, but based on an average interest rate of .42%, income was
only increased by $69.  Other interest earning assets including
Federal Home Loan Bank (FHLB) stock and balances held at the FHLB increased in
volume by $9,050. Interest and dividends earned on these balances was reduced
due to current market rates.





Interest expense on interest bearing
deposits increased by 32.71% for the first quarter of 2009 over the same period
in 2008.  This increase was due almost entirely to increased volumes
of interest bearing deposits, as the average rate paid on these deposits
decreased by 70 basis points from the period in 2008 to that in
2009.  Interest expense on savings balances and time deposits
increased in amounts of $70 and $2,778 on average balances that increased by
$22,180 and $416,219, respectively, mainly as a result of recent branch
expansion.  The rates paid on these deposits remained the same for
savings accounts at 1.39%, but decreased on time deposit balances from 4.57% in
the first quarter of 2008 to 3.64% during the first quarter of
2009.  In contrast, the actual interest expense on money market
accounts declined by $291, as the decline in interest rate of 102 basis points
was only partially offset by the increase in average balance of
$129,628.  The average balance of FHLB borrowings was significantly
higher during the first quarter of 2009 as a result of the advances taken during
early 2008 when funding for new loan originations was not  available
through deposits and often was less expensive through FHLB
borrowings.  The higher average balance ($201,870) at a slightly
reduced average rate (11 basis points) resulted in increased expense to the
Company of $1,335 for the first quarter of 2009.   The Company’s
average balance of subordinated debt increased from $24,192 from the end of the
first quarter of 2008 to $38,836 at the end of the first quarter of
2009.  The average rate paid on this debt decreased by 158 basis
points, as two of the three issuances are based on the London Interbank Offering
Rate (LIBOR), which declined during the first quarter of 2009.  The
increase in average balances for the  subordinated debt offset by the
decrease in rate resulted in increased interest expense of $94. The net interest
margin for the first quarter of 2009 was compressed by 114 basis points from the
first quarter of 2008 as the greatly increased balances of interest earning
assets were offset by much lower yields while the cost of interest bearing
liabilities did not decrease at the same pace.





The provision for loan losses was $800
for the first quarter of 2008 and $1,200 for the first quarter of 2009. The
increase in the provision expense was mainly the result of continued growth in
total loans from $1,124,033 at March 31, 2008 to $1,823,185at March 31, 2009, a 62.20% increase, coupled with theeconomicrecession.Nonperforming loans to total
loans increased from .14% at March 31, 2008 to .46% at March 31,
2009. Loans 30-89 days past due increased to $13,859at the end of the first quarter of
2009compared to $1,583 at
the end of the first quarterof 2008. Offsetting these trends has been
a shift in the mix of the loan portfolio to permanent residential and commercial
mortgages from construction lending. Residential and commercialmortgages made up 75.15% of total loans
at March 31, 2009 compared to 66.73% at March 31, 2008. Construction loans
made up 22.08% of total loans at March 31, 2009 compared to 28.83% at March 31,
2008. Based on our continuing review of the overall loan portfolio, a 50%
increase in the provision from the first
quarter of2008
comparedto the first
quarter of2009adequately addressed the measured
risksin the portfolio.In view of the adverse conditions in the
local and national economy as well as the growth in our loan portfolio, there
can be no assurance that our provision for loan losses will not be higher in
future periods.





Noninterest income increased by 18.50%
due almost entirely to the net gain on sale of investment securities. The
Company opted to realize gains in the mortgage backed securities portfolio in
anticipation of accelerating prepayments as well as the desire to shift a
portion of the portfolio into lower risk  securities.  The gain
of $522 was recorded from the sale of $30,052 of FNMA
and FHLMC mortgage backed securities with an average weighted coupon
of 5.87%.   Income from trust and investment management services
decreased by 26.92% due to reduced net asset values.  Service charge
income increased by 12.50% due to a new overdraft program entered into during
2008, which has been quite successful in collecting fee income in return for
payment of low level overdrafts.  Gross revenues from the Company’s
insurance subsidiary declined by 12.02% due to softened insurance markets as
well as reduced premiums.  The income on the cash surrender value of
company owned life insurance decreased 41.41%, indicative of overall reduced
rates of return. Finally, other noninterest income increased by
25.60%.  Within this category of noninterest income, the primary
driver of the increase is loan fees generated from short term loans, which
increased by 65.60%.





Noninterest expense increased by
34.71%.  A majority of the increases in noninterest expense relate to
the growth in assets from the first quarter of 2008 to the first quarter of
2009.  At March 31, 2008, the Company had fifteen branch
offices.  As of March 31, 2009 the Company had twenty one branch
offices with four additional offices under construction.  The
increases in salary, benefits, occupancy and equipment, business development and
other overhead expenses relate in large part to the costs associated with these
additional locations as well as usual increases associated with the costs of
doing business.  The number of full time equivalent employees at March
31, 2008 was 205.  That same statistic for March 31, 2009 was 251. The
Company’s health insurance premiums increased by 20% for
2009.  Although some of this health insurance expense has been passed
along to the employees, a majority of the increase is paid by the
Company.  Office rental expense has climbed by 76.21%, maintenance and
repair on buildings has increased by 89.73% and utility expense has grown by
47.27%.  Depreciation expense on leasehold improvements and computer
equipment has increased by 51.48% and 45.91%, respectively.  Service
contracts on equipment has grown by 43.29% and business development expense
which includes advertising and marketing costs has grown by
167.78%.  The cost of FDIC insurance increased dramatically during the
first quarter of 2009, and is expected to continue at higher levels in the
future with both increases in regular assessment levels and special assesments
possible.  The expense for this insurance during the first quarter of
2008 was $153 as compared to $508 for the first quarter of 2009. Part of this
increase was the result of the Company’s deposit growth, but the majority
of the increase was from increasing assessment rates.  The FDIC has
issued an interim rule which may result in a one-time special assessment for all
depository institutions to help replenish the insurance fund due to recent bank
failures.  This special assessment, if enacted, would be assessed June
30, 2009 and paid September 30, 2009.  Finally, although tax dollars
accrued have increased for the three month period in 2009 as compared to the
same period in 2008, the combined effective tax rate of the Company remains near
the 36% level due to the 60% exclusion from New York State taxable income of
dividends received from BOS Preferred Funding Corp., as well as the Company’s
holdings of bank owned life insurance and tax-exempt municipal
securities.


20





The following table details certain
information relating to the Company’s average consolidated statements of
financial condition and its consolidated statements of income for the periods
indicated and reflects the average yield on assets and average cost of
liabilities for the periods indicated.  Interest income on investment
securities is shown on a tax-equivalent basis.  Yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown.  Average balances
are derived from daily average balances and include non-performing loans, if
any.  The yields and costs include fees, which are considered
adjustments to yields.  Non-accrual loans are included in average loan
balances.  Interest income on these loans has not been recorded and
therefore is not included.





AVERAGE  BALANCE SHEET AND
YIELD ANALYSIS





For the Three Months
      Ended
                            
                            
                            For the Three Months
      EndedMarch 31,
    2009
                            
                            
                            March 31,
    2008Average
                            
                            
                            
                            
                            
                            Average
                            
                            
                            Average
                            
                            
                            
                            
                            
                            AverageBalance
                            
                            
                            Interest
                            
                            
                            Rate
                            
                            
                            Balance
                            
                            
                            Interest
                            
                            
                            RateASSETSInterest-earning
      assets:Investment
      securities:Taxable
                            
                            $
                            70,291
                            
                            
                            $
                            864
                            
                            
                            
                            4.91
                            %
                            
                            $
                            48,410
                            
                            
                            $
                            635
                            
                            
                            
                            5.32
                            %Nontaxable
                            
                            
                            4,660
                            
                            
                            
                            74
                            
                            
                            
                            6.38
                            
                            
                            
                            6,064
                            
                            
                            
                            90
                            
                            
                            
                            5.90Total investment
      securities
                            
                            
                            74,951
                            
                            
                            
                            938
                            
                            
                            
                            5.00
                            
                            
                            
                            54,474
                            
                            
                            
                            725
                            
                            
                            
                            5.32Loans
                            
                            
                            1,738,104
                            
                            
                            
                            25,499
                            
                            
                            
                            5.88
                            
                            
                            
                            1,064,259
                            
                            
                            
                            19,262
                            
                            
                            
                            7.25Federal funds
      sold
                            
                            
                            48,730
                            
                            
                            
                            17
                            
                            
                            
                            0.14
                            
                            
                            
                            1,428
                            
                            
                            
                            8
                            
                            
                            
                            2.29Term
    placements
                            
                            
                            65,618
                            
                            
                            
                            69
                            
                            
                            
                            0.42
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            0.00Other interest-earning
      assets
                            
                            
                            15,997
                            
                            
                            
                            81
                            
                            
                            
                            0.02
                            
                            
                            
                            6,947
                            
                            
                            
                            124
                            
                            
                            
                            7.35Total interest-earning
      assets
                            
                            
                            1,943,400
                            
                            
                            
                            26,604
                            
                            
                            
                            5.49
                            
                            
                            
                            1,127,108
                            
                            
                            
                            20,119
                            
                            
                            
                            7.15Noninterest-earning
      assets
                            
                            
                            94,446
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            77,542Total
assets
                            
                            $
                            2,037,846
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            1,204,650LIABILITIES AND STOCKHOLDERS'
      EQUITYLiabilitiesInterest-bearing
      liabilities:Savings deposits (including
      NOW)
                            
                            $
                            110,553
                            
                            
                            $
                            378
                            
                            
                            
                            1.39
                            %
                            
                            $
                            88,373
                            
                            
                            $
                            308
                            
                            
                            
                            1.39
                            %Money
market
                            
                            
                            510,560
                            
                            
                            
                            2,751
                            
                            
                            
                            2.19
                            
                            
                            
                            380,932
                            
                            
                            
                            3,042
                            
                            
                            
                            3.21Time
    deposits
                            
                            
                            807,271
                            
                            
                            
                            7,246
                            
                            
                            
                            3.64
                            
                            
                            
                            391,052
                            
                            
                            
                            4,468
                            
                            
                            
                            4.57Total interest-bearing
      deposits
                            
                            
                            1,428,384
                            
                            
                            
                            10,375
                            
                            
                            
                            2.95
                            
                            
                            
                            860,357
                            
                            
                            
                            7,818
                            
                            
                            
                            3.65Federal Home Loan Bank
      borrowings
                            
                            
                            326,480
                            
                            
                            
                            2,224
                            
                            
                            
                            2.76
                            
                            
                            
                            124,610
                            
                            
                            
                            889
                            
                            
                            
                            2.87Subordinated
      debt
                            
                            
                            38,836
                            
                            
                            
                            516
                            
                            
                            
                            5.31
                            
                            
                            
                            24,192
                            
                            
                            
                            422
                            
                            
                            
                            6.89Total interest-bearing
      liabilities
                            
                            
                            1,793,700
                            
                            
                            
                            13,115
                            
                            
                            
                            2.96
                            
                            
                            
                            1,009,159
                            
                            
                            
                            9,129
                            
                            
                            
                            3.64Noninterest-bearing
      liabilities:Demand
    deposits
                            
                            
                            109,620
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            102,235Other
      liabilities
                            
                            
                            13,283
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            11,828Total
      liabilities
                            
                            
                            1,916,603
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,123,222Stockholders'
      equity
                            
                            
                            121,243
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            81,428Total liabilities &
      stockholders equity
                            
                            $
                            2,037,846
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            1,204,650Net interest income/interest rate
      spread
                            
                            
                            
                            
                            
                            $
                            13,489
                            
                            
                            
                            2.53
                            %
                            
                            
                            
                            
                            
                            $
                            10,990
                            
                            
                            
                            3.51
                            %Net
      earning assets/net yield on averageinterest earning
      assets
                            
                            $
                            149,700
                            
                            
                            
                            
                            
                            
                            
                            2.76
                            %
                            
                            $
                            117,949
                            
                            
                            
                            
                            
                            
                            
                            3.90
                            %





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.    Management believes that the Bank’s liquidity
level is sufficient to meet funding needs for anticipated loan growth and
potential deposit outflows.


21





On March 31, 2009 total loan commitments
outstanding were $407,026, of which $159,883 represented available lines on
funded loans, $229,501 represented available lines on unfunded loans and $17,642
represented letters of credit.  At March 31, 2008 these commitments
totaled $498,792, of which $194,860 represented available lines on funded loans,
$289,156 represented available lines on unfunded loans and $14,776 represented
letters of credit.  As of March 31, 2009, $619,696 of certificates of
deposit were scheduled to mature in the next twelve months.  Based on
historical analysis, management believes that a majority of such certificates of
deposit will remain with the Bank. However, if these maturing deposits do not
remain with us, we will be required to seek other sources of
funds.  Depending on market conditions, we may be required to pay
higher rates on such deposits or borrowings than we currently pay on these
funds.





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





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





In April 2009, the FASB issued Staff
Position (FSP) No.115-2 and No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, which amends existing guidance for determining
whether impairment is other-than-temporary for debt securities.  The
FSP requires an entity to assess whether it intends to sell, or it is more
likely than not that it will be required to sell a security in an unrealized
loss position before recovery of its amortized cost basis.  If either
of these criteria is met, the entire difference between amortized cost and fair
value is recognized in earnings.  For securities that do not meet the
aforementioned criteria, the amount of impairment recognized in earnings is
limited to the amount related to credit losses, while impairment related to
other factors is recognized in other comprehensive
income.  Additionally, the FSP expands and increases the frequency of
existing disclosures about other-than-temporary impairments for debt and equity
securities.  This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009.  The Company plans to adopt this FSP in
the second quarter, however, does not expect the adoption to have a material
effect on the results of operations or financial position.





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





In April 2009, the FASB issued Staff
Position (FSP) No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments.  This FSP amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies that were previously only required in annual financial
statements.  This FSP is effective for interim reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009.  The Company plans to adopt this FSP in the
second quarter.





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


22





In February 2007, the FASB issued
Statement No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities”. This statement provides companies with an option to report
selected financial assets and liabilities at fair value and establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities.  The new standard is effective for the
Company on January 1, 2008.  The Company did not elect the fair value
option for any financial assets or financial liabilities as of January 1,
2008.





In September 2006, the FASB Emerging
Issues Task Force finalized Issue No. 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements.”  This Issue requires that a liability be
recorded during the service period when a split-dollar life insurance agreement
continues after participants’ employment or retirement.  The required
accrued liability will be based on either the post-employment benefit cost for
the continuing life insurance or based on the future death benefit depending on
the contractual terms of the underlying agreement.  This Issue is
effective for fiscal years beginning after December 15, 2007.  The
impact to the Company was a reduction to retained earnings of $233 in the first
quarter of 2008.





In November 2007, the SEC issued Staff
Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value
through Earnings” (“SAB 109”). Previously, SAB 105, “Application of Accounting
Principles to Loan Commitments”, stated that in measuring the fair value of a
derivative loan commitment, a company should not incorporate the expected net
future cash flows related to the associated servicing of the loan. SAB 109
supersedes SAB 105 and indicates that the expected net future cash flows related
to the associated servicing of the loan should be included in measuring fair
value for all written loan commitments that are accounted for at fair value
through earnings.  SAB 105 also indicated that internally-developed
intangible assets should not be recorded as part of the fair value of a
derivative loan commitment, and SAB 109 retains that view.  SAB 109 is
effective for derivative loan commitments issued or modified in fiscal quarters
beginning after December 15, 2007.The adoption of SAB 109 did not have a
material impact on the Company’s consolidated financial position or results of
operations.





Item 3.- Quantitative and Qualitative
Disclosures About Market Risk





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





This simulation  modeling is
done on a quarterly basis, most recently as of  February 28, 2009.
Only a 100 and 200 parallel and pro rata basis point upward shift in rates was
assumed over a twenty four month planning horizon.  As short-term
interest rates continued to fall during 2008, it could not be assumed in
projections that further reductions in rates would produce meaningful results
The following table reflects the Company’s income sensitivity analysis over a
one year time frame as of February 28, 2009  and November 30,
2008.As of February 28, 2009, the Company’s
change in net interest income that would result from the respective potential
interest rate shocks was within policy limits. The results of this simulation
have been reviewed with the President, the Board of Directors and senior
management.





AsofFebruary28,2009
                  
                  
                  AsofNovember30,2008ChangeInInterestRates
                  
                  PotentialChangeInNet
                  
                  
                  PotentialChangeInNetInBasisPoints
                  
                  InterestIncome
                  
                  
                  InterestIncome(RateShock)
                  
                  $Change
                  
                  
                  %Change
                  
                  
                  $Change
                  
                  
                  %ChangeUp 200 basis
      points
                  
                  
                  (2,963
                  )
                  
                  
                  (3.85
                  )
                  
                  
                  194
                  
                  
                  
                  6.27Up 100 basis
      points
                  
                  
                  (1,451
                  )
                  
                  
                  (1.89
                  )
                  
                  
                  188
                  
                  
                  
                  3.61Static
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Down 100 basis
      points
                  
                  NM
                  
                  
                  NM
                  
                  
                  
                  175
                  
                  
                  
                  (4.01
                  )


23


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 March 31, 2009.  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.





Part  II- Other
Information





Item
    1.
            Legal Proceedings -
      None





Item
      1A.
            Risk Factors – No change in
      factors as reported in Registrant’s Annual Report on Form
      10-K





Item
    2.
            Unregistered Sales of Equity
      Securities and Use of Proceeds –Issuer Purchases of Equity
      Securities – The issuer did not repurchase any of its shares during the
      quarterly period ended March 31,
  2009.





Item
    3.
            Defaults upon Senior Securities –
      None





Item
    4.
            Submission of Matters to a Vote of
      Security Holders – None





Item
    5.
            Other Information –
      None





Item
    6.
            Exhibits





Exhibit
                  No.
                
                Description3.1
                
                Articles
      of Incorporation, as amended (incorporated herein by reference and filed
      as part of the Registrant’s Registration Statement on Form S-14
      Registration Statement under the Securities Act of 1933, Reg #2-91511
      filed on June 6, 1984, with amendments filed as part of the Registrant’s
      Proxy Statements filed on February 22, 1996, February 19, 1998, February
      23, 2001, March 16, 2004, and March 17, 2005, all of which are
      incorporated herein by reference)3.2
                
                By-Laws,
      as amended and restated as of October 29, 2008 (filed as Exhibit 3.2 to
      the Registrant’s Quarterly Report on Form 10-Q on November 7,
      2008)4.1
                
                Shareholder
      Protection Rights Agreement, dated as of September 23, 1997, between the
      Registrant and Mellon Investor Services LLC as Rights Agent, as amended
      (filed as Exhibit 1 to the Registrant’s Registration Statement on Form
      8-A, filed on October 8, 1997, with amendments filed as Exhibit 1 to the
      Registrant’s Registration Statements on Form 8-A/A filed on January 26,
      1998, April 26, 2002, January 22, 2004, February 5, 2004, August 24, 2004,
      and March 14, 2008, all of which are incorporated herein by
      reference)




10.1*
                
                Smithtown
      Bancorp Supplemental Executive Retirement Agreement (filed as Exhibit 3 to
      the Registrant’s Current Report on Form 8-K/A filed on April 3, 2009 and
      incorporated herein by reference)10.2*
                
                Bank
      of Smithtown Bankwide Annual Cash Incentive Plan (filed as Exhibit 2 to
      the Registrant’s Current Report on Form 8-K filed on April 25, 2007 and
      incorporated herein by reference)10.3*
                
                Smithtown
      Bancorp, Inc. 2007 Stock Compensation Plan (filed as Exhibit 3 to the
      Registrant’s Current Report on Form 8-K filed on April 25, 2007 and
      incorporated herein by reference)10.4*
                
                Amended
      and Restated Change in Control Agreement by and between the Registrant,
      Bank of Smithtown and Bradley E. Rock (filed as Exhibit 1 to the
      Registrant’s Current Report on Form 8-K filed on December 28, 2006 and
      incorporated herein by reference)10.5*
                
                Amended
      and Restated Change in Control Agreement by and between the Registrant,
      Bank of Smithtown and Anita Florek (filed as Exhibit 2 to the Registrant’s
      Current Report on Form 8-K filed on December 28, 2006 and incorporated
      herein by reference)




24




10.6*
              
              Amended
      and Restated Change in Control Agreement by and between the Registrant,
      Bank of Smithtown and Robert J. Anrig (filed as Exhibit 3 to the
      Registrant’s Current Report on Form 8-K filed on December 28, 2006 and
      incorporated herein by reference)10.7*
              
              Amended
      and Restated Change in Control Agreement by and between the Registrant,
      Bank of Smithtown and Thomas J. Stevens (filed as Exhibit 4 to the
      Registrant’s Current Report on Form 8-K filed on December 28, 2006 and
      incorporated herein by reference)10.8*
              
              Amended
      and Restated Change in Control Agreement by and between the Registrant,
      Bank of Smithtown and John A. Romano (filed as Exhibit 5 to the
      Registrant’s Current Report on Form 8-K filed on December 28, 2006 and
      incorporated herein by reference)10.9*
              
              Bank
      of Smithtown Executive Incentive Retirement Agreement, as amended (filed
      as Exhibit 1 to the Registrant’s Current Report on Form 8-K/A filed
      on April 3, 2009 and incorporated herein by reference)10.10*
              
              Smithtown
      Bancorp, Inc. Restricted Stock Plan, as amended (filed as Exhibit 10.14
      to the Registrant’s Quarterly Report on Form 10-Q filed on August 8,
      2008 and incorporated herein by reference)10.11*
              
              Bank
      of Smithtown Directors’ Deferred Fee Plan (filed as Exhibit 5 to the
      Registrant’s Current Report on Form 8-K/A filed on April 3, 2009 and
      incorporated herein by reference)10.12*
              
              Bank
      of Smithtown Executive Deferred Compensation Plan (filed as Exhibit 2
      to the Registrant’s Current Report on Form 8-K/A  filed on
      April 3, 2009 and incorporated herein by reference)10.13*
              
              Bank
      of Smithtown Director Incentive Retirement Agreement (filed as Exhibit 4
      to the Registrant’s Current Report on Form 8-K/A filed on April 3, 2009
      and incorporated herein by reference)10.14*
              
              Bank
      of Smithtown Amended and Restated Employee Stock Ownership Plan (filed as
      Exhibit 10.18 to the Registrant’s Quarterly Report on Form 10-Q filed
      on August 8, 2008 and incorporated herein by reference)




*    Management contract or compensatory
plan or arrangement





SIGNATURES





Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.





SMITHTOWN BANCORP,
      INC.May 8,
  2009/s/ Bradley E.
      RockBradley E. Rock, Chairman,
      President andChief Executive
      Officer/s/ Anita M.
      FlorekAnita M. Florek, Executive Vice
      President andChief Financial
      Officer


25





INDEX TO EXHIBITS





31.1
                
                Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) (filed
      herewith)31.2
                
                Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) (filed
      herewith)32.1
                
                Certification
      of Chief Executive Officer pursuant to Rule 13a-14(b) and 18 U.S.C.
      Section 1350 (filed herewith)32.2
                
                Certification
      of Chief Financial Officer pursuant to Rule 13a-14(b) and 18 U.S.C.
      Section 1350 (filed
herewith)


26