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 September 30, 2009





Commission
File Number 0 - 13314





SMITHTOWN
BANCORP, INC.


(Exact
name of Registrant as specified in its charter)





New
      York
              11-2695037(State
      or other jurisdiction of incorporation or organization)
              (IRS
      Employer Identification No.)





100
      Motor Parkway, Suite 160, Hauppauge, NY
                11788-5138(Address
      of Principal Executive Offices)
                (Zip
      Code)





(631)
360-9300


(Registrant's
telephone number, including area code)





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





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





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





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





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





Shares of
Common Stock ($.01 Par Value) Outstanding as of  November 9,
2009


14,858,522









SMITHTOWN
BANCORP, INC.





INDEX





Part
      I - FINANCIAL INFORMATIONItem
      1.
                      Financial
      StatementsConsolidated
      Balance Sheets (Unaudited)September
      30, 2009 and December 31, 2008
                      3Consolidated
      Statements of Income (Unaudited)`
                      Three
      and Nine Months Ended September 30, 2009 and 2008
                      4Consolidated
      Statements of Changes in Stockholders’ Equity (Unaudited)Nine
      Months Ended September 30, 2009
                      5Consolidated
      Statements of Cash Flows (Unaudited)Nine
      Months Ended  September 30, 2009 and 2008
                      6Notes
      to Unaudited Consolidated Financial Statements
                      7Item
      2.
                      Management’s
      Discussion and Analysis of Financial Condition and Results
      of  Operations
                      16Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      25Item
      4.
                      Controls
      and Procedures
                      26Part
      II - OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      26Item
      1A.
                      Risk
      Factors
                      26Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      26Item
      3.
                      Defaults
      Upon Senior Securities
                      26Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      26Item
      5.
                      Other
      Information
                      26Item
      6.
                      Exhibits
      and Reports on Form 8-K
                      26Signatures





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




2




Item
1.  Financial Statements


SMITHTOWN
BANCORP, INC.


Consolidated
Balance Sheets (unaudited)


(in
thousands, except share and per share amounts)


September30,2009
                        
                        
                        December31,2008ASSETSCash
      and due from banks
                        
                        $
                        24,744
                        
                        
                        $
                        17,205Interest-earning
      deposits with banks
                        
                        
                        28,649
                        
                        
                        
                        8,764Total
      cash and cash equivalents
                        
                        
                        53,393
                        
                        
                        
                        25,969Term
      placements
                        
                        
                        507
                        
                        
                        
                        507Securities
      available for sale, at fair value
                        
                        
                        427,152
                        
                        
                        
                        57,698Securities
      held to maturity (fair value of $67 and $113,
respectively)
                        
                        
                        66
                        
                        
                        
                        112Total
      investment securities
                        
                        
                        427,218
                        
                        
                        
                        57,810Federal
      Home Loan Bank Stock
                        
                        
                        17,168
                        
                        
                        
                        15,916Loans
                        
                        
                        2,090,714
                        
                        
                        
                        1,688,700Less:
      allowance for loan losses
                        
                        
                        23,091
                        
                        
                        
                        11,303Loans,
      net
                        
                        
                        2,067,623
                        
                        
                        
                        1,677,397Premises
      and equipment
                        
                        
                        42,549
                        
                        
                        
                        32,994Cash
      value of company owned life insurance
                        
                        
                        19,992
                        
                        
                        
                        19,654Other
      real estate owned
                        
                        
                        6,972
                        
                        
                        
                        6,972Goodwill
                        
                        
                        3,923
                        
                        
                        
                        3,923Intangible
      assets
                        
                        
                        691
                        
                        
                        
                        956Other
      assets
                        
                        
                        30,221
                        
                        
                        
                        23,292Total
      assets
                        
                        $
                        2,670,257
                        
                        
                        $
                        1,865,390LIABILITIES
      AND STOCKHOLDERS' EQUITYDemand
      deposits
                        
                        $
                        150,466
                        
                        
                        $
                        123,620Saving,
      NOW and money market deposits
                        
                        
                        1,002,638
                        
                        
                        
                        548,502Time
      deposits of $100,000 or more
                        
                        
                        502,968
                        
                        
                        
                        326,073Other
      time deposits
                        
                        
                        424,518
                        
                        
                        
                        368,742Total
      deposits
                        
                        
                        2,080,590
                        
                        
                        
                        1,366,937Other
      borrowings
                        
                        
                        326,480
                        
                        
                        
                        326,480Subordinated
      debt
                        
                        
                        56,270
                        
                        
                        
                        38,836Other
      liabilities
                        
                        
                        49,032
                        
                        
                        
                        13,519Total
      liabilities
                        
                        
                        2,512,372
                        
                        
                        
                        1,745,772Stockholders'
      equity:Preferred
      stock, par value $.01 per share:
                          Authorized:
      1,000,000 and 100,000 shares at September 30, 2009 and December 31, 2008,
      respectively; no shares issued or outstanding
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, par value $.01 per share:
                          Authorized:
      35,000,000 and  20,000,000 shares at September 30, 2009 and
      December 31, 2008, respectively; 16,910,386 and 13,851,341 shares issued
      at September 30, 2009 and December 31, 2008, respectively; 14,858,522 and
      11,799,477 shares outstanding at September 30, 2009 and December 31, 2008,
      respectively
                        
                        
                        169
                        
                        
                        
                        139Additional
      paid in capital
                        
                        
                        82,242
                        
                        
                        
                        51,947Retained
      earnings
                        
                        
                        84,878
                        
                        
                        
                        78,302Less:  Treasury
      stock at cost, 2,051,864 shares
                        
                        
                        (10,062
                        )
                        
                        
                        (10,062
                        )157,227
                        
                        
                        
                        120,326Accumulated
      other comprehensive income (loss)
                        
                        
                        658
                        
                        
                        
                        (708
                        )Total
      stockholders' equity
                        
                        
                        157,885
                        
                        
                        
                        119,618Total
      liabilities and stockholders' equity
                        
                        $
                        2,670,257
                        
                        
                        $
                        1,865,390





See notes
to consolidated financial statements.


3





SMITHTOWN
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME (unaudited)


(in
thousands, except per share amounts)





For the three months ended September 30,
                          
                          
                          For the nine months ended September 30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Interest
      income:Loans
                          
                          $
                          29,317
                          
                          
                          $
                          23,353
                          
                          
                          $
                          82,859
                          
                          
                          $
                          63,318Investment
      securities:Taxable
                          
                          
                          2,314
                          
                          
                          
                          827
                          
                          
                          
                          4,020
                          
                          
                          
                          2,054Non
      taxable
                          
                          
                          440
                          
                          
                          
                          49
                          
                          
                          
                          635
                          
                          
                          
                          160Term
      placements
                          
                          
                          5
                          
                          
                          
                          -
                          
                          
                          
                          101
                          
                          
                          
                          -Interest-earning
      deposits with banks
                          
                          
                          15
                          
                          
                          
                          9
                          
                          
                          
                          45
                          
                          
                          
                          174Other
                          
                          
                          239
                          
                          
                          
                          229
                          
                          
                          
                          546
                          
                          
                          
                          559Total
      interest income
                          
                          
                          32,330
                          
                          
                          
                          24,467
                          
                          
                          
                          88,206
                          
                          
                          
                          66,265Interest
      expense:Savings,
      NOW and money market deposits
                          
                          
                          3,715
                          
                          
                          
                          2,981
                          
                          
                          
                          10,364
                          
                          
                          
                          9,100Time
      deposits of $100,000 or more
                          
                          
                          3,257
                          
                          
                          
                          1,945
                          
                          
                          
                          9,968
                          
                          
                          
                          5,715Other
      time deposits
                          
                          
                          3,291
                          
                          
                          
                          2,809
                          
                          
                          
                          10,559
                          
                          
                          
                          8,234Other
      borrowings
                          
                          
                          2,287
                          
                          
                          
                          2,210
                          
                          
                          
                          6,773
                          
                          
                          
                          4,537Subordinated
      debt
                          
                          
                          922
                          
                          
                          
                          610
                          
                          
                          
                          1,915
                          
                          
                          
                          1,648Total
      interest expense
                          
                          
                          13,472
                          
                          
                          
                          10,555
                          
                          
                          
                          39,579
                          
                          
                          
                          29,234Net
      interest income
                          
                          
                          18,858
                          
                          
                          
                          13,912
                          
                          
                          
                          48,627
                          
                          
                          
                          37,031Provision
      for loan losses
                          
                          
                          10,000
                          
                          
                          
                          500
                          
                          
                          
                          13,000
                          
                          
                          
                          2,000Net
      interest income after provision for loan losses
                          
                          
                          8,858
                          
                          
                          
                          13,412
                          
                          
                          
                          35,627
                          
                          
                          
                          35,031Noninterest
      income:Revenues
      from insurance agency
                          
                          
                          836
                          
                          
                          
                          824
                          
                          
                          
                          2,711
                          
                          
                          
                          2,677Service
      charges on deposit accounts
                          
                          
                          619
                          
                          
                          
                          630
                          
                          
                          
                          1,737
                          
                          
                          
                          1,662Net
      gain on the sale of investment securities
                          
                          
                          959
                          
                          
                          
                          6
                          
                          
                          
                          1,481
                          
                          
                          
                          6Trust  and
      investment services
                          
                          
                          136
                          
                          
                          
                          189
                          
                          
                          
                          463
                          
                          
                          
                          565Increase
      in cash value of company owned life insurance
                          
                          
                          108
                          
                          
                          
                          163
                          
                          
                          
                          341
                          
                          
                          
                          557Other
                          
                          
                          396
                          
                          
                          
                          536
                          
                          
                          
                          1,298
                          
                          
                          
                          1,460Sub-total
                          
                          
                          3,054
                          
                          
                          
                          2,348
                          
                          
                          
                          8,031
                          
                          
                          
                          6,927Other-than-temporary
      impairment (OTTI)  loss:Increase
      in total OTTI
                          
                          
                          (80
                          )
                          
                          
                          -
                          
                          
                          
                          (37
                          )
                          
                          
                          -Increase
      (decrease)  in non-credit portion of OTTIrecorded in
      other comprehensive income
                          
                          
                          11
                          
                          
                          
                          -
                          
                          
                          
                          (287
                          )
                          
                          
                          -Net
      loss on OTTI recognized in earnings
                          
                          
                          (69
                          )
                          
                          
                          -
                          
                          
                          
                          (324
                          )
                          
                          
                          -Total
      noninterest income
                          
                          
                          2,985
                          
                          
                          
                          2,348
                          
                          
                          
                          7,707
                          
                          
                          
                          6,927Noninterest
      expense:Salaries
      and employee benefits
                          
                          
                          5,381
                          
                          
                          
                          4,585
                          
                          
                          
                          15,428
                          
                          
                          
                          12,802Net
      occupancy expense
                          
                          
                          2,098
                          
                          
                          
                          1,588
                          
                          
                          
                          5,878
                          
                          
                          
                          4,032Furniture
      and equipment expense
                          
                          
                          935
                          
                          
                          
                          698
                          
                          
                          
                          2,513
                          
                          
                          
                          2,022Amortization
      of intangible assets
                          
                          
                          85
                          
                          
                          
                          107
                          
                          
                          
                          266
                          
                          
                          
                          320Other
                          
                          
                          2,488
                          
                          
                          
                          1,512
                          
                          
                          
                          7,505
                          
                          
                          
                          4,077Total
      noninterest expense
                          
                          
                          10,987
                          
                          
                          
                          8,490
                          
                          
                          
                          31,590
                          
                          
                          
                          23,253Income
      before income taxes
                          
                          
                          856
                          
                          
                          
                          7,270
                          
                          
                          
                          11,744
                          
                          
                          
                          18,705Provision
      (benefit) for income taxes
                          
                          
                          (42
                          )
                          
                          
                          2,663
                          
                          
                          
                          3,817
                          
                          
                          
                          6,572Net
      income
                          
                          $
                          898
                          
                          
                          $
                          4,607
                          
                          
                          $
                          7,927
                          
                          
                          $
                          12,133Basic
      earnings per share
                          
                          $
                          0.06
                          
                          
                          $
                          0.47
                          
                          
                          $
                          0.60
                          
                          
                          $
                          1.23Diluted
      earnings per share
                          
                          $
                          0.06
                          
                          
                          $
                          0.47
                          
                          
                          $
                          0.59
                          
                          
                          $
                          1.23Cash
      dividends declared
                          
                          $
                          0.04
                          
                          
                          $
                          0.04
                          
                          
                          $
                          0.12
                          
                          
                          $
                          0.12Comprehensive
      income
                          
                          $
                          4,237
                          
                          
                          $
                          3,786
                          
                          
                          $
                          9,605
                          
                          
                          $
                          10,060





See notes
to consolidated financial statements.


4


SMITHTOWN
BANCORP, INC.


Consolidated
Statements of Changes in Stockholders’ Equity (unaudited)


(in
thousands,  except share amounts)





Common
                      Shares
                      Outstanding
                    
                    
                    Stock
                      Amount
                    
                    
                    Additional
                      Paid In
                      Capital
                    
                    
                    Retained
                      Earnings
                    
                    
                    Treasury
                      Stock
                    
                    
                    Accumulated
                      Other
                      Comprehensive
                      Income(Loss)
                    
                    
                    Total
                      Stockholders’
                      Equity
                    
                    
                    Total
                      Comprehensive
                      Income (Loss)Balance
      at December 31,
                      2008
                    
                    
                    11,799,477
                    
                    
                    $
                    139
                    
                    
                    $
                    51,947
                    
                    
                    $
                    78,302
                    
                    
                    $
                    (10,062
                    )
                    
                    $
                    (708
                    )
                    
                    $
                    119,618Comprehensive
      income:Cumulative
      effect of change in accounting principle,  adoption
      of  ASC 320,  net of tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    312
                    
                    
                    
                    
                    
                    
                    
                    (312
                    )
                    
                    
                    -Net
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,927
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,927
                    
                    
                    
                    7,927Net
      change in unrealized gains (losses) on securities available for sale, net
      of reclassification and tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,393
                    
                    
                    
                    2,393
                    
                    
                    
                    2,393Change
      in unrealized  gains (losses) on securities available for sale
      for which a portion of an other-than-temporary impairment has been
      recognized in earnings, net of reclassification and tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (340
                    )
                    
                    
                    (340
                    )
                    
                    
                    (340
                    )Changes
      in funded  status of retirement plans, net of
tax
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (375
                    )
                    
                    
                    (375
                    )
                    
                    
                    (375
                    )Total
      comprehensive
                      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    9,605Cash
      dividends declared
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,663
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,663
                    )Issuance
      of shares, net of offering costs
                    
                    
                    3,000,000
                    
                    
                    
                    30
                    
                    
                    
                    28,160
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    28,190Warrants
      associated with subordinated debt issuance, net of cost
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,556
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,556Issuance
      of shares for employee stock ownership plan
                    
                    
                    20,920
                    
                    
                    
                    
                    
                    
                    
                    300
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    300Stock
      awards vested
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    279
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    279Stock
      awards granted
                    
                    
                    38,125Balance
      at September 30, 2009
                    
                    
                    14,858,522
                    
                    
                    $
                    169
                    
                    
                    $
                    82,242
                    
                    
                    $
                    84,878
                    
                    
                    $
                    (10,062
                    )
                    
                    $
                    658
                    
                    
                    $
                    157,885





See notes
to consolidated financial statements.


5


SMITHTOWN
BANCORP, INC.


Consolidated
Statements of Cash Flows (unaudited)


(in
thousands)





For
      the nine months ended September 30,
                
                2009
                
                
                2008Cash
      flows from operating activitiesNet
      income
                
                $
                7,927
                
                
                $
                12,133Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      on premises and equipment
                
                
                3,055
                
                
                
                2,201Provision
      for loan losses
                
                
                13,000
                
                
                
                2,000Net
      gain on investment securities
                
                
                (1,481
                )
                
                
                (6
                )Other
      than temporary net impairment loss on securities
                
                
                324
                
                
                
                -Net
      increase in other liabilities
                
                
                2,628
                
                
                
                1,719Net
      increase in other assets
                
                
                (4,295
                )
                
                
                (433
                )Net
      increase in deferred taxes
                
                
                (3,918
                )
                
                
                (3,643
                )Amortization
      of unearned  restricted stock awards
                
                
                270
                
                
                
                196Increase
      in cash surrender value of company owned life insurance
                
                
                (338
                )
                
                
                (557
                )Investment
      securities amortization of premium/(accretion) of discount,
      net
                
                
                1,239
                
                
                
                (34
                )Amortization
      of intangible assets
                
                
                266
                
                
                
                320Cash provided by operating
      activities
                
                
                18,677
                
                
                
                13,896Cash
      flows from investing activitiesProceeds
      from calls, repayments, maturities and sales of available-for-sale
      securities
                
                
                118,054
                
                
                
                41,467Proceeds
      from calls, repayments and maturities of held-to-maturity
      securities
                
                
                46
                
                
                
                99Purchases
      of available-for-sale securities
                
                
                (465,622
                )
                
                
                (53,134
                )Purchases
      of restricted securities
                
                
                (2,770
                )
                
                
                (21,760
                )Redemptions
      of restricted securities
                
                
                1,518
                
                
                
                7,282Loans
      made to customers, net
                
                
                (389,161
                )
                
                
                (509,099
                )Purchases
      of premises and equipment
                
                
                (12,610
                )
                
                
                (7,834
                )Cash
      used in investing activities
                
                
                (750,545
                )
                
                
                (542,979
                )Cash
      flows from financing activitiesNet
      increase in demand, money market, NOW and savings deposits
                
                
                480,982
                
                
                
                51,524Increase
      in time deposits
                
                
                232,671
                
                
                
                141,978Cash
      dividends paid
                
                
                (1,541
                )
                
                
                (1,179
                )Federal
      Home Loan Bank term advances
                
                
                -
                
                
                
                520,000Maturities
      of Federal Home Loan Bank term advances
                
                
                -
                
                
                
                (200,000
                )Net
      increase in overnight borrowings
                
                
                -
                
                
                
                (900
                )Net
      proceeds from subordinated debt and
      warrant  issuance
                
                
                18,990
                
                
                
                20,000Net
      proceeds from common stock issuance
                
                
                28,190
                
                
                
                26,335Cash
      provided by financing activities
                
                
                759,292
                
                
                
                557,758Net
      increase in cash and cash equivalents
                
                
                27,424
                
                
                
                28,675Cash
      and cash equivalents, beginning of period
                
                
                25,969
                
                
                
                17,455Cash
      and cash equivalents, end of period
                
                $
                53,393
                
                
                $
                46,130Supplemental
      Information - Cash Flows:Cash
      paid for:Interest
                
                $
                39,664
                
                
                $
                28,393Income
      taxes
                
                
                7,301
                
                
                
                7,395Schedule
      of noncash activitiesIncrease
      in due to broker
                
                $
                20,032
                
                
                
                -





See notes
to consolidated financial statements.


6


Notes to
Consolidated Financial Statements (unaudited)


(in
thousands, except share and per share data)





Note
1  –  Financial Statement Presentation





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





The
accompanying unaudited interim consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form
10-Q.  Accordingly, certain disclosures required by U.S. generally
accepted accounting principles are not included herein.  These interim
statements should be read in conjunction with the consolidated financial
statements and notes included in the Annual Report on Form 10-K filed by the
Company with the Securities and Exchange Commission (“SEC”).  The
December 31, 2008 consolidated financial statements were 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 nine months ended September 30, 2009 are not necessarily indicative of
those that may be expected for the year ending December 31, 2009.





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





Note 2 –
Earnings Per Common Share





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





ForthethreemonthsendedSeptember30,
                    
                    
                    FortheninemonthsendedSeptember30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008BasicDistributed
      earnings allocated to common stock
                    
                    $
                    591
                    
                    
                    $
                    392
                    
                    
                    $
                    1,533
                    
                    
                    $
                    1,175Undistributed
      earnings allocated to common stock
                    
                    
                    302
                    
                    
                    
                    4,192
                    
                    
                    
                    6,353
                    
                    
                    
                    10,903Net
      earnings allocated to common stock
                    
                    $
                    893
                    
                    
                    $
                    4,584
                    
                    
                    $
                    7,886
                    
                    
                    $
                    12,078Weighted
      average common shares outstanding, including shares considered
      participating securities
                    
                    
                    14,858,522
                    
                    
                    
                    9,884,666
                    
                    
                    
                    13,314,905
                    
                    
                    
                    9,850,278Less:  weighted
      average participating securities
                    
                    
                    (73,974
                    )
                    
                    
                    (48,411
                    )
                    
                    
                    (69,226
                    )
                    
                    
                    (45,520
                    )Weighted
      average shares
                    
                    
                    14,784,548
                    
                    
                    
                    9,836,255
                    
                    
                    
                    13,245,679
                    
                    
                    
                    9,804,758Basic
      earnings per common share
                    
                    $
                    0.06
                    
                    
                    $
                    0.47
                    
                    
                    $
                    0.60
                    
                    
                    $
                    1.23DilutedNet
      earnings allocated to common stock
                    
                    $
                    893
                    
                    
                    $
                    4,584
                    
                    
                    $
                    7,886
                    
                    
                    $
                    12,078Weighted
      average common shares outstanding for basic earnings per common
      share
                    
                    
                    14,784,548
                    
                    
                    
                    9,836,255
                    
                    
                    
                    13,245,679
                    
                    
                    
                    9,804,758Add:  Dilutive
      effect of warrants issued to purchase common stock
                    
                    
                    35,172
                    
                    
                    
                    -
                    
                    
                    
                    11,942
                    
                    
                    
                    -Weighted
      average shares and dilutive potential common shares
                    
                    
                    14,819,720
                    
                    
                    
                    9,836,255
                    
                    
                    
                    13,257,621
                    
                    
                    
                    9,804,758Diluted
      earnings per common share
                    
                    $
                    0.06
                    
                    
                    $
                    0.47
                    
                    
                    $
                    0.59
                    
                    
                    $
                    1.23


7


Dividends
of $8 and $5 were paid on unvested shares with non-forfeitable dividend rights
for the first nine months of 2009 and 2008, respectively, 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 the two class method effective
March 31, 2009, basic and diluted earnings per common share have been adjusted
for the nine month period ending September 30, 2008.





Note 3 –
Stock-Based Compensation





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





The Bank
recognizes compensation expense for restricted stock awards over the vesting
period, or remaining service period, if shorter, based on the fair market value
of the shares on the date they are awarded.  The restricted shares
vest ratably over five years.  Compensation expense attributed to
restricted stock awards was $90 and $270 for the three and nine months ended
September 30, 2009, respectively, and $65 and $196 for the three and nine months
ended September 30, 2008, respectively. The income tax benefits resulting from
this expense for the three and nine months ended September 30, 2009 were $32 and
$95, respectively, and for the three and nine months ended September 30, 2008
were $22 and $67, respectively.





As of
September 30, 2009 and 2008, there was approximately $1,036 and $833 of
unrecognized compensation costs related to nonvested restricted
shares.  These costs  are expected to be recognized over a
period of 4.25 years and 3.25 years, respectively.





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





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





The fair
value of nonvested restricted stock at September 30, 2009 was $854.





Note 4 –
Post Retirement Benefits





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





For
      the Three Months Ended
                    
                    
                    
                    
                    Amortization
                    
                    
                    Amortization
                    
                    
                    Total NetInterest Cost
                    
                    
                    Cost
                    
                    
                    of Net Gain
                    
                    
                    ExpenseSeptember
      30, 2009
                    
                    $
                    3
                    
                    
                    $
                    8
                    
                    
                    $
                    3
                    
                    
                    $
                    8September
      30, 2008
                    
                    
                    3
                    
                    
                    
                    8
                    
                    
                    
                    3
                    
                    
                    
                    8





For the Nine Months Ended
                    
                    Interest Cost
                    
                    
                    Amortization
                      Cost
                    
                    
                    Amortization
                      of Net Gain
                    
                    
                    Total Net
                      ExpenseSeptember
      30, 2009
                    
                    $
                    9
                    
                    
                    $
                    24
                    
                    
                    $
                    9
                    
                    
                    $
                    24September
      30, 2008
                    
                    
                    9
                    
                    
                    
                    24
                    
                    
                    
                    9
                    
                    
                    
                    24





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





The Bank
adopted  nontax-qualified Executive and Director Incentive Retirement
Plans.  While these plans are funded from the general assets of the
Bank, life insurance policies were acquired for the purpose of serving as the
primary income source for the benefits expense accrued during the service
period.  Benefits under the Incentive Retirement Plans are based
solely on the amounts contributed by the Bank.  The Bank’s expense for
these plans was $94 and $284 for the three and nine month periods ended
September 30, 2009, respectively, and $90 and $270 for the three and nine month
periods ended September 30, 2008, respectively.


8


The Bank
has a supplemental life insurance plan for certain members of management, with
life insurance policies serving as the primary income source for the benefit
expense accrued during the participants’ service periods.  The benefit
provides post-retirement life insurance up to a maximum of two and one-half
times annual salary.  The Bank has recorded a liability representing
the cost of maintaining this insurance during the expected retirement period.
This cost is expensed over the service period.  The Bank’s expense for
these plans was $10 and $32 for the three and nine month periods ended September
30, 2009, respectively, and $12 and $37 for the three and nine month periods
ended September 30, 2008, respectively. At September 30, 2009 and 2008, the
combined cash value of these insurance policies was $7,868 and
$7,676.





During
2004, the Bank adopted a Supplemental Executive Retirement Agreement for the
Chief Executive Officer.  Life insurance policies were purchased for
the purpose of serving as the primary income source for the benefit expense
accrued during the service period.  A liability has been accrued for
the obligation under this plan of $2,793 as of September 30, 2009. The Bank’s
expense for this plan was $193 and $548 for the three and nine month periods
ended September 30, 2009, respectively, and $116 and $349 for the three and nine
month periods ended September 30, 2008, respectively.





Note 5 -
Subordinated Debentures





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





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





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





The
trusts are not consolidated with the Company.  Accordingly, the
Company does not report the securities issued by the trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Company
and held by the trust.





On July
27, 2009 and June 29, 2009, the Bank issued $14,000 and $5,000, respectively, of
fixed rate subordinated notes due July 1, 2019;  the notes bear
interest at 11%.  The Bank, subject to obtaining prior approval of the
Federal Deposit Insurance Corporation (“FDIC”) and the Superintendent of the New
York State Banking Department  (“Superintendent”),  may
redeem the subordinated notes, in whole or in part, on any interest payment date
beginning on July 1, 2014.





Note 6 –
Warrants





On July
27, 2009 and June 29, 2009, the Company issued a Warrant for Common Shares
(“Warrant”) to each purchaser of subordinated notes issued by the Bank on the
same dates.  The Company issued a total of 475,000 Warrants, which may
not be exercised until June 29, 2010 and if not exercised are void after June
29, 2016.  The Warrants are exercisable at $11.50 per
share.  The Warrants were valued using the Black-Scholes model
adjusted to take into account dividends paid on the underlying
securities.  The fair value of the Warrants was recorded as an
increase to additional paid in capital. The issuance and sale of the Warrants
were exempt from registration under the Securities Exchange Act of 1933 by
reason of section 4(2) thereof.  The Warrants and subordinated notes
were sold to a group of accredited investors.





Note 7 –
Fair Value




Three
levels of inputs are used to measure fair values as follows:




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




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




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




The
Company maximizes the use of observable inputs and minimizes the use of
unobservable inputs when measuring fair value. The fair values for investment
securities are determined by quoted market prices, if available (Level 1). For
securities where quoted prices are not available, fair values are calculated
based on market prices of similar securities (Level 2). For securities where
quoted prices or market prices of similar securities are not available, fair
values are calculated using discounted cash flows or other market indicators
(Level 3).  Information such as historical and current performance of
the underlying collateral, deferral/default rates, collateral coverage ratios,
cash flow projections, liquidity and credit premiums required by a market
participant, and financial trend analysis with respect to the individual issuing
financial institutions, are utilized in determining individual security
valuations.  Due to current market conditions as well as the limited
trading activity of these securities, the market value of the securities is
highly sensitive to assumption changes and market volatility.


9




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




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




FairValueMeasurementsUsingCarrying
                            Value
                          
                          
                          Quoted Pricesin
                            ActiveMarkets for
                            IdenticalAssets
                            (Level 1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs
                            (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level 3)Financial
      AssetsAvailable
      for Sale SecuritiesSeptember
      30, 2009
                            U.S.
      government sponsored entities and agencies
                          
                          $
                          8,050
                          
                          
                          $
                          -
                          
                          
                          $
                          8,050
                          
                          
                          $
                          -State
      and political subdivisions
                          
                          
                          57,817
                          
                          
                          
                          -
                          
                          
                          
                          57,817
                          
                          
                          
                          -Mortgage-backed
      securities – residential
                          
                          
                          349,908
                          
                          
                          
                          -
                          
                          
                          
                          349,908
                          
                          
                          
                          -Collateralized  mortgage
      obligations
                          
                          
                          4,581
                          
                          
                          
                          -
                          
                          
                          
                          4,581
                          
                          
                          
                          -Collateralized
      debt obligations
                          
                          
                          1,275
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,275Equity
      securities
                          
                          
                          2,480
                          
                          
                          
                          -
                          
                          
                          
                          2,480
                          
                          
                          
                          -Other
      securities
                          
                          
                          3,041
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,041Total
      available for sale securities
                          
                          $
                          427,152
                          
                          
                          $
                          -
                          
                          
                          $
                          422,836
                          
                          
                          $
                          4,316December
      31, 2008U.S.
      government sponsored entities and agencies
                          
                          $
                          19,009
                          
                          
                          $
                          -
                          
                          
                          $
                          19,009
                          
                          
                          $
                          -State
      and political subdivisions
                          
                          
                          4,635
                          
                          
                          
                          -
                          
                          
                          
                          4,635
                          
                          
                          
                          -Mortgage-backed
      securities – residential
                          
                          
                          22,831
                          
                          
                          
                          -
                          
                          
                          
                          22,831
                          
                          
                          
                          -Collateralized
      debt obligations
                          
                          
                          2,243
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          2,243Equity
      securities
                          
                          
                          2,480
                          
                          
                          
                          -
                          
                          
                          
                          2,480
                          
                          
                          
                          -Other
      securities
                          
                          
                          6,500
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          6,500Total
      available for sale securities
                          
                          $
                          57,698
                          
                          
                          $
                          -
                          
                          
                          $
                          48,955
                          
                          
                          $
                          8,743




The table
below presents a reconciliation of all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the three
and nine month periods ended September 30, 2009:





Investment SecuritiesAvailableforSaleThree
      months ended September 30, 2009Balance
      of recurring Level 3 assets at July 1, 2009
                      
                      $
                      6,290Proceeds
      from sales
                      
                      
                      (2,079
                      )Total
      realized and unrealized gains/( losses):Included
      in earnings – unrealized
                      
                      
                      (69
                      )Included
      in earnings – realized (loss on sale)
                      
                      
                      (77
                      )Included
      in other comprehensive income
                      
                      
                      281Principal
      pay down
                      
                      
                      (30
                      )Balance
      of recurring Level 3 assets at September 30, 2009
                      
                      $
                      4,316Nine
      months ended September 30, 2009Balance
      of recurring Level 3 assets at January 1, 2009
                      
                      $
                      8,743Proceeds
      from sales
                      
                      
                      (2,079
                      )Total
      realized and unrealized gains/( losses):Included
      in earnings - unrealized
                      
                      
                      (324
                      )Included
      in earnings – realized (loss on sale)
                      
                      
                      (77
                      )Included
      in other comprehensive income
                      
                      
                      (1,911
                      )Principal
      pay down
                      
                      
                      (36
                      )Balance
      of recurring Level 3 assets at September 30, 2009
                      
                      $
                      4,316


10


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





Fair Value Measurements UsingCarrying
                    Value
                  
                  
                  Quoted Prices in
                    Active Markets for
                    Identical Assets
                    (Level 1)
                  
                  
                  Significant
                    Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)September
      30, 2009Impaired
      loans
                  
                  $
                  1,130
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,130December
      31, 2008Impaired
      loans
                  
                  $
                  2,334
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,334





Collateral
dependent impaired loans, which are measured for impairment using the fair value
of the collateral, had a carrying amount of  $1,130, with no valuation
allowance, resulting in no additional provision for loan losses  for
the nine month period ended  September 30, 2009.





A loan is
collateral dependent if repayment of the loan is expected to be provided solely
by the underlying collateral and there are no other available and reliable
sources of repayment.  While not considered collateral dependent under
the definition due to the existence of reliable guarantors, we considered
collateral values for $123,707 which resulted in an increase in provisions of
$6,448 and an ending valuation allowance of $6,347 as of September 30,
2009.





The
carrying amounts and estimated fair values of financial instruments at September
30, 2009 and December 31, 2008 are provided in the following table.





September 30, 2009
                  
                  
                  December 31, 2008Carrying Amount
                  
                  
                  Estimated Fair Value
                  
                  
                  Carrying Amount
                  
                  
                  Estimated Fair ValueFinancial
      assetsCash
      and due from banks
                  
                  $
                  24,810
                  
                  
                  $
                  24,810
                  
                  
                  $
                  17,205
                  
                  
                  $
                  17,205Interest
      earning deposits with banks
                  
                  
                  28,583
                  
                  
                  
                  28,583
                  
                  
                  
                  8,764
                  
                  
                  
                  8,764Term
      placements
                  
                  
                  507
                  
                  
                  
                  507
                  
                  
                  
                  507
                  
                  
                  
                  507Securities
      available for sale
                  
                  
                  427,152
                  
                  
                  
                  427,152
                  
                  
                  
                  57,698
                  
                  
                  
                  57,698Securities
      held to maturity
                  
                  
                  66
                  
                  
                  
                  67
                  
                  
                  
                  112
                  
                  
                  
                  113Federal
      Home Loan Bank Stock
                  
                  
                  17,168
                  
                  
                  
                  N/A
                  
                  
                  
                  15,916
                  
                  
                  
                  N/ALoans
                  
                  
                  2,090,714
                  
                  
                  
                  2,041,022
                  
                  
                  
                  1,688,700
                  
                  
                  
                  1,678,539Accrued
      interest receivable
                  
                  
                  12,164
                  
                  
                  
                  12,164
                  
                  
                  
                  8,232
                  
                  
                  
                  8,232Financial
      liabilitiesDeposits
                  
                  
                  2,080,590
                  
                  
                  
                  2,091,563
                  
                  
                  
                  1,366,937
                  
                  
                  
                  1,371,934Other  borrowings
                  
                  
                  326,480
                  
                  
                  
                  346,247
                  
                  
                  
                  326,480
                  
                  
                  
                  351,412Subordinated
      debt
                  
                  
                  56,270
                  
                  
                  
                  38,917
                  
                  
                  
                  38,836
                  
                  
                  
                  38,836Accrued
      interest payable
                  
                  
                  4,428
                  
                  
                  
                  4,428
                  
                  
                  
                  4,205
                  
                  
                  
                  4,205





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





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





Federal
Home Loan Bank Stock: It was not practicable to determine the fair value of
Federal Home Loan Bank Stock due to restrictions placed on its
transferability.





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





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


11


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





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





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





Note 8 –
Loans





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





September 30,
                  
                  
                  December 31,2009
                  
                  
                  2008Real
      estate loansConstruction
                  
                  $
                  403,603
                  
                  
                  $
                  390,067Commercial
                  
                  
                  973,764
                  
                  
                  
                  760,125Residential:1-4
      family
                  
                  
                  211,787
                  
                  
                  
                  183,632Multi-family
                  
                  
                  458,367
                  
                  
                  
                  304,938Sub-total
                  
                  
                  670,154
                  
                  
                  
                  488,570Commercial
      and industrial loans
                  
                  
                  45,845
                  
                  
                  
                  51,630Loans
      to individuals for household, family and other personal
      expenditures
                  
                  
                  1,209
                  
                  
                  
                  2,004All
      other loans (including overdrafts)
                  
                  
                  411
                  
                  
                  
                  403Total
      loans, gross
                  
                  
                  2,094,986
                  
                  
                  
                  1,692,799Less:Deferred
      fees
                  
                  
                  4,272
                  
                  
                  
                  4,099Allowance
      for loan losses
                  
                  
                  21,091
                  
                  
                  
                  11,303Loans,
      net
                  
                  $
                  2,069,623
                  
                  
                  $
                  1,677,397





Individually
impaired loans were as follows:


September 30,
                  
                  
                  December 31,2009
                  
                  
                  2008Loans
      with no allocated allowance for loan losses
                  
                  $
                  60,678
                  
                  
                  $
                  799Loans
      with allocated allowance for loan losses
                  
                  
                  64,159
                  
                  
                  
                  1,853Total
                  
                  $
                  124,837
                  
                  
                  $
                  2,652





Impaired
loans at September 30, 2009 and December 31, 2008 were $124,837 and $2,652,
respectively.  The amount of  specific allocations within
the allowance for loan losses for  these loans was $6,347 and
$318.  The average recorded investment in impaired loans during the
nine months ended September 30, 2009 and 2008 was $122,156 and $336,
respectively.





Included
in impaired loans are troubled debt restructurings, which totaled $40,053 at
September 30, 2009.  The amount of  specific allocations
within the allowance for loan losses for  these loans was
$1,354.  The average recorded investment in troubled debt
restructurings during the nine months ended September 30, 2009 was
$36,578.  There were no troubled debt restructurings at December 31,
2008.





Recognition
of interest income on impaired loans, as for all other loans, is discontinued
when reasonable doubt exists as to the full collectability of principal or
interest.  Any payments received on impaired loans are applied to the
recorded investment in the loan.





At
September 30, 2009 and 2008, loans with unpaid principal balances on which the
Bank is no longer accruing interest were $58,337 and $1,648,
respectively.  At September 30, 2009 there were no loans past due 90
days or more and still accruing interest.  At September 30, 2008,
loans past due 90 days or more and still accruing interest totaled
$1,146.





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





2009
                  
                  
                  2008Gross
      interest income which would have been recorded during the year under
      original contract terms
                  
                  $
                  2,309
                  
                  
                  $
                  21Gross
      interest income recorded during the year
                  
                  
                  1,347
                  
                  
                  
                  10


12


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





Note 9 –
Investment Securities




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





EstimatedAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    ValueSeptember 30, 2009Available
      for SaleU.S.
      Government sponsored entities and agencies
                    
                    $
                    7,993
                    
                    
                    $
                    57
                    
                    
                    $
                    -
                    
                    
                    $
                    8,050State
      and political subdivisions
                    
                    
                    55,143
                    
                    
                    
                    2,674
                    
                    
                    
                    -
                    
                    
                    
                    57,817Mortgage-backed
      securities – residential
                    
                    
                    347,189
                    
                    
                    
                    2,922
                    
                    
                    
                    (203
                    )
                    
                    
                    349,908Collateralized  mortgage
      obligations
                    
                    
                    4,546
                    
                    
                    
                    35
                    
                    
                    
                    -
                    
                    
                    
                    4,581Collateralized
      debt obligations
                    
                    
                    2,948
                    
                    
                    
                    -
                    
                    
                    
                    (1,673
                    )
                    
                    
                    1,275Equity
      securities
                    
                    
                    2,480
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,480Other
      securities
                    
                    
                    5,000
                    
                    
                    
                    -
                    
                    
                    
                    (1,959
                    )
                    
                    
                    3,041Total
      available for sale securities
                    
                    $
                    425,299
                    
                    
                    $
                    5,688
                    
                    
                    $
                    (3,835
                    )
                    
                    $
                    427,152Held
      to maturityState
      and political subdivisions
                    
                    $
                    66
                    
                    
                    $
                    1
                    
                    
                    $
                    -
                    
                    
                    $
                    67





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




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




September 30, 2009EstimatedAmortized
                  
                  
                  FairCost
                  
                  
                  ValueAvailable
      for saleWithin
      one year
                  
                  $
                  735
                  
                  
                  $
                  735One
      to five years
                  
                  
                  8,193
                  
                  
                  
                  8,373Five
      to ten years
                  
                  
                  23,323
                  
                  
                  
                  24,143After
      10 years
                  
                  
                  393,048
                  
                  
                  
                  393,901Total
                  
                  $
                  425,299
                  
                  
                  $
                  427,152Held
      to maturityObligations
      of state and political subdivisionsWithin
      one year
                  
                  $
                  33
                  
                  
                  $
                  33One
      to five years
                  
                  
                  33
                  
                  
                  
                  34Total
                  
                  $
                  66
                  
                  
                  $
                  67


13


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





Less than 12 Months
                    
                    
                    12MonthsorMore
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    Loss
                    
                    
                    Value
                    
                    
                    LossSeptember 30, 2009Available
      for sale
                      Mortgage-backed
      securities -residential
                    
                    $
                    84,640
                    
                    
                    $
                    (203
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    84,640
                    
                    
                    $
                    (203
                    )Collateralized
      debt obligations
                    
                    
                    518
                    
                    
                    
                    (632
                    )
                    
                    
                    757
                    
                    
                    
                    (1,041
                    )
                    
                    
                    1,275
                    
                    
                    
                    (1,673
                    )Other
      securities
                    
                    
                    3,041
                    
                    
                    
                    (1,959
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,041
                    
                    
                    
                    (1,959
                    )Total
      available for sale securities
                    
                    $
                    88,199
                    
                    
                    $
                    (2,794
                    )
                    
                    $
                    757
                    
                    
                    $
                    (1,041
                    )
                    
                    $
                    88,956
                    
                    
                    $
                    (3,835
                    )December  31,
2008Available
      for saleU.S.
      Government sponsored entities and agencies
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,883
                    
                    
                    $
                    (117
                    )
                    
                    $
                    4,883
                    
                    
                    $
                    (117
                    )State
      and political subdivisions
                    
                    
                    929
                    
                    
                    
                    (16
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    929
                    
                    
                    
                    (16
                    )Mortgage-backed
      securities - residential
                    
                    
                    3,436
                    
                    
                    
                    (26
                    )
                    
                    
                    8,491
                    
                    
                    
                    (19
                    )
                    
                    
                    11,927
                    
                    
                    
                    (45
                    )Collateralized
      debt obligations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,417
                    
                    
                    
                    (578
                    )
                    
                    
                    1,417
                    
                    
                    
                    (578
                    )Other
      securities
                    
                    
                    4,600
                    
                    
                    
                    (400
                    )
                    
                    
                    1,900
                    
                    
                    
                    (202
                    )
                    
                    
                    6,500
                    
                    
                    
                    (602
                    )Total
      available for sale securities
                    
                    $
                    8,965
                    
                    
                    $
                    (442
                    )
                    
                    $
                    16,691
                    
                    
                    $
                    (916
                    )
                    
                    $
                    25,656
                    
                    
                    $
                    (1,358
                    )





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





Proceeds
from sales and calls of securities available for sale were $80,529 and $2,004
for the nine months ended September 30, 2009 and 2008, respectively. Gross gains
of $1,572 and $6 were realized on sales during the first nine months of 2009 and
2008, respectively.  Gross losses of  $91 were realized on
sales during the first nine months of 2009.  There were no gross
losses in 2008.





Other-Than-Temporary-Impairment




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis. The investment securities portfolio is evaluated for OTTI by
segregating the portfolio into two general segments and applying the appropriate
OTTI model.  The first segment of the portfolio is evaluated for OTTI
by considering many factors, including: (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, (3) whether the market
decline was affected by macroeconomic conditions, and (4) whether the
Company has the intent to sell the debt security or more likely than not will be
required to sell the debt security before its anticipated recovery. The
assessment of whether an other-than-temporary decline exists involves a high
degree of subjectivity and judgment and is based on the information available to
management at a point in time.





A second
segment of the portfolio, that includes purchased beneficial interests that on
the purchase date were rated below AA, is evaluated for OTTI by comparing the
present value of the remaining cash flows as estimated at the preceding
evaluation date to the current expected remaining cash flows. An OTTI is deemed
to have occurred if there has been an adverse change in the remaining expected
future cash flows.





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


14


As of
September 30, 2009, the Company’s investment security portfolio had $88,956 of
securities in an unrealized loss position. $84,640 of unrealized losses
are  related to the Company’s mortgage-backed securities. $4,316 of the
unrealized loss positions are related to the Company’s collateralized debt
obligations and other securities.





At
September 30, 2009, all mortgage-backed securities including CMOs held by the
Company were issued by U.S. government sponsored entities and agencies,
primarily Government National Mortgage Association (Ginnie Mae), Fannie Mae and
Freddie Mac, institutions which the government has affirmed its commitment to
support.  Because the decline in fair value of these mortgage-backed
securities is attributable to changes in interest rates, and not credit quality,
and because the Company does not have the intent to sell these securities and it
is likely that it will not be required to sell these securities before their
anticipated recovery, the Company does not consider these securities to be
other-than-temporarily impaired at September 30, 2009.





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





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





Issuer
                              
                              Single
                                Issuer
                                or
                                Pooled
                              
                              Class
                              
                              
                              Book
                                Value
                              
                              
                              Gross
                                Unrealized
                                Loss
                              
                              
                              Estimated
                                Fair Value
                              
                              Credit
                                Rating
                              
                              Number
                                of Paying
                                Banks in
                                Issuance
                              
                              
                              Deferrals
                                and
                                Defaults
                                as % of
                                Collateral
                              
                              
                              Excess
                                Subordination
                                as a Percent
                                of Paying
                                CollateralFairfield
      County Bank Trust Preferred
                              
                              Single
                              
                              
                              -
                              
                              
                              
                              5,000
                              
                              
                              
                              (1,959
                              )
                              
                              
                              3,041
                              
                              NA
                              
                              
                              1
                              
                              
                              None
                              
                              
                              
                              -Trust
      Preferred Funding III LTD Series 144A
                              
                              Pooled
                              
                              
                              B-2
                              
                              
                              
                              1,798
                              
                              
                              
                              (1,041
                              )
                              
                              
                              757
                              
                              Ca/CC
                              
                              
                              25
                              
                              
                              
                              26.32%
                              
                              
                              
                              (21.5)%Trust
      Preferred Funding I
                              
                              Pooled
                              
                              
                              B
                              
                              
                              
                              1,150
                              
                              
                              
                              (632
                              )
                              
                              
                              518
                              
                              Caa3/CCC
                              
                              
                              14
                              
                              
                              
                              37.36%
                              
                              
                              
                              (29.8)%Total
                              
                              
                              
                              
                              
                              
                              
                              
                              7,948
                              
                              
                              
                              (3,632
                              )
                              
                              
                              4,316





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





Our
analysis of two pooled trust preferred securities falls within the scope of EITF
99-20 and uses a discounted cash flow model to determine the total OTTI
loss.  The model considers the structure and term and the financial
condition of the underlying issuers. Specifically, the model details interest
rates, principal balances of note classes and underlying issuers, the timing and
amount of interest and principal payments of the underlying issuers and the
allocation of the payments to the note classes. The current estimate of expected
cash flows is based on the most recent trustee reports and any other relevant
market information including announcements of interest payment deferrals or
defaults of underlying trust preferred securities. Assumptions used in the model
include expected future default rates and prepayments. We assume no recoveries
on defaults and treat all interest payment deferrals as defaults.





Upon
completion of the September 30, 2009 analysis, these two investments had a total
decrease in fair value of $37 for the period from April 1, 2009 through
September 30, 2009.  At the same time the two investments had a $324
increase in credit loss due to deterioration in the credit portion of our
discounted cash flow analysis resulting in a net loss on OTTI recognized in
earnings.  All other components of our fair value measurement produced
an increase in other comprehensive income (OCI) of $287.  As reported
on our statement of income, the decrease in fair value of $37 less the reduction
in OCI of $287 produced the net credit impairment loss of $324.





For the
quarter ended September 30, 2009, these two investments had a total decrease in
fair value of $80.  At the same time the two investments had a $69
increase in credit loss due to deterioration in the credit portion of our
discounted cash flow analysis resulting in a net loss on OTTI recognized in
earnings.  All other components of our fair value measurement produced
a decrease in other comprehensive income (OCI) of $11.  As reported on
our statement of income, the decrease in fair value of $80 offset by the
increase in OCI of $11 produced the net credit impairment loss of
$69.


15





The table
below presents a roll forward of the credit losses recognized in earnings for
the three month and year to date periods ended September 30, 2009:





Three
      Months Ended
                        
                        
                        Year
      to DateBeginning
      balance
                        
                        $
                        255
                        
                        
                        $
                        -Amounts
      related to credit loss for which an other-than-temporary impairment was
      not previously recognized
                        
                        
                        
                        
                        
                        
                        127Additions/SubtractionsReductions
      for increase in cash flows expected to be collected that are recognized
      over the remaining life of the security
                        
                        
                        -Increases
      to the amount related to the credit loss for which other-than-temporary
      impairment was previously recognized
                        
                        
                        69
                        
                        
                        
                        197Ending
      balance, September 30, 2009
                        
                        $
                        324
                        
                        
                        $
                        $ 324





Through
the period ended March 31, 2009, the Company recognized cumulative
other-than-temporary impairment charges of $865 for various securities. The
Company adopted the changes to FASB ASC 320-10-35 in accordance with FASB ASC
320-10-65-1,effective April 1, 2009
and reversed $312, net of tax of $175, for the non-credit portion of the
cumulative OTTI charge. The adoption was recognized as a cumulative effect
adjustment that increased retained earnings and decreased accumulated other
comprehensive income $312, net of tax of $175, as of April 1,
2009.   As a result of implementing the new standard, the amount
of OTTI recognized in income for the period from April 1, 2009 through September
30, 2009 was $324, gross of tax.





Note 10 –
Subsequent Events





These
financial statements consider events that occurred through November 9, 2009, the
date the financial statements were issued.





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


(in
thousands, except share and per share data)





Private
Securities Litigation Reform Act Safe Harbor Statement





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





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





-
            Our
      ability to continue to increase and manage our commercial, residential and
      multi-family real estate loans and commercial and industrial
      loans-
            Local,
      regional, national and international economic conditions and the impact
      they may have on the Company and its customers and the Company’s
      assessment of that impact-
            Changes
      in the level of non-performing assets and charge-offs-
            Changes
      in estimates of future reserve requirements based upon the periodic
      review thereof under relevant regulatory and accounting
      requirements-
            The
      effects of and changes in trade and monetary and fiscal policies and laws,
      including the interest rate policies of the Federal Reserve
      Board-
            Inflation,
      interest rate, securities market and monetary fluctuations, including
      changes in the interest rate yield curve-
            Political
      instability-
            Acts
      of war or terrorism-
            The
      level of future deposit premium assessments-
            Possible
      impairments of securities held by us, including those issued by government
      entities and agencies-
            The
      impact of the current financial crisis on our loan portfolio (including
      cash flow and collateral values), investment
      portfolio,  customers and capital market
    activities-
            Our
      ability to raise capital to fund our growth
  plans




16





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





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





Overview





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





-Continued
growth in the Company’s loans and deposits totaling $120,187 and $297,251,
respectively


-Net
income for the quarter and the year to date of $898 and
$7,927,  respectively


-Net
interest margin of 3.26% for the quarter, up 20 basis points from 3.06% in the
second quarter of 2009


-The
issuance of $14,000 in subordinated notes by the Bank and the related issuance
of 350 thousand warrants to purchase Company common stock


- A
provision for loan losses of $10,000





Net
income for the third quarter of 2009 was 73.69% lower than that of the prior
quarter.  Basic and diluted earnings per share (EPS) decreased to $.06
per share during the third quarter of 2009 compared to $.26 for the second
quarter of 2009.  Gross revenues increased during the third quarter by
13.03% as average earning assets grew by 10.07% fueled by $175,534 of average
deposit growth.  Growth within the loan portfolio totaled 6.10% for
the third quarter of 2009, with a majority of the growth in commercial mortgages
and multi-family mortgages.  Investment securities increased 74.27%
during the quarter mainly the result of purchases in government sponsored entity
and agency mortgage-backed securities.  Deposit growth was strong
during the third quarter as the Company opened 3 new branches during the period,
as well as continuing strong growth at its existing 21 branches. The growth in
total deposits for the quarter totaled $297,251, an increase of 16.67% over the
prior quarter.  Deposit growth continues to benefit from changes in
the competitive landscape in our market area.  The strongest category
of deposit growth during the quarter was in core deposits including savings, NOW
and money market accounts, continuing the trend from the prior two
quarters.  This segment of deposits grew by $162,513 or
16.4%.  The Company’s cost of deposits improved during the third
quarter to 2.14%, down 25 basis points from the second quarter.





On June
29 and July 27, 2009 the Bank issued  a total of $19,000 of
subordinated notes and the Company issued 475 thousand related warrants to
purchase common shares.  The net proceeds of the subordinated notes
after estimated offering expenses totaled $18,164.  The warrants had a
net estimated value of $1,556 reflected as an increase to additional paid in
capital.  The net proceeds from the equity and debt offerings will be
used to support our continued deposit and loan growth.





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





Total
assets at September 30, 2009 were $2,670,257,  an  increase
of $804,867 or 43.15% from the prior year end.  The loan portfolio
increased to $2,090,714 at September 30, 2009 from $1,688,700 at December 31,
2008.  The ratio of loans to assets was reduced to 78.3% as of
September 30, 2009 from the year end 2008 level of 90.52%.  The major
categories of loan growth for the first nine months of 2009 were permanent
multi-family, residential and commercial mortgages.  Construction
loans continue to trend lower as a percentage of the portfolio representing
19.30% at September 30, 2009 as compared to 23.04 % at December 31,
2008.  Total residential loans, including 1-4 family and multi-family
homes totaled32.05% of the loan
portfolio at September 30, 2009 compared to 28.86% at year end
2008.  Total commercial real estate loans are 46.57% of the loan
portfolio at the end of the third quarter as compared to 44.91% at December 31,
2008.




17




Investment securities
totaled  $427,218 at September 30, 2009 up 639.00% from $57,810 at
December 31, 2008.  Purchases included a combination of government
sponsored entity and agencymortgage-backed securities and New York State
municipal securities.  Mortgage related and municipal security
purchases for the third quarter totaled $233,282 and $5,965,
respectively.





Interest-earning
deposits with banks and term placements totaled $29,090 at September 30, 2009
and $9,271 at December 31, 2008.  Average interest-earning deposits
with banks and term placements and other short term investments were reduced
from $96,470 during the second quarter to $47,545 during the third
quarter.  This was a result of channeling these funds into higher
yielding investment securities. With yields on overnight and short term
investments near zero, reducing the average balance in these assets has provided
a significant increase to the net interest margin.





Bank
premises and equipment increased 28.96% from December 31, 2008 to September 30,
2009.  To date in 2009 the Bank has opened six branches and currently
has four locations under construction with planned openings in
2009.  Several additional locations are under consideration as the
Bank plans to continue to expand its branch network.  Management
constantly strives to obtain low cost, stable sources of funding which it has
achieved through its branches, and for that reason continues to explore all
viable opportunities.  However, opportunities for good branch
locations are not always available.





Increased
deposits continue to drive asset growth.  For the nine months ended
September 30, 2009 deposits grew by $713,653 or 52.20%.  Savings, NOW
and money market deposits are up 82.79% for the year to date and now represent
48.19% of  total deposits.  Certificates of deposit
increased $232,671 from the prior year end and make up 44.57% of total deposits.
Demand deposits total $150,466 at September 30, 2009, an increase of $26,846
from December 31, 2008.  Other borrowings at September 30, 2009
remained at the December 31, 2008 level of $326,480.  Subordinated
debt increased to $56,270 at September 30, 2009 from $38,836 at the prior year
end as the result of the Bank issuing $19,000 in fixed rate subordinated
notes.  Other
liabilities increased from $13,519  to $49,032 primarily due to an
increase in a payable due to the Company’s broker for investment security
purchases settling in October 2009.





Stockholders’
equity increased by $38,267, or 31.99%, mainly the result of the net proceeds of
the equity offering of $28,160 and net income of $7,927.





The
Company and the Bank are subject to the risk based capital guidelines
administered by bank regulatory agencies.  The guidelines require all
banks and bank holding companies to maintain a minimum ratio of total risk based
capital to total risk weighted assets of 8%, including Tier I capital to total
risk weighted assets of 4% and a Tier I capital to average assets ratio of at
least 4%.  As of September 30, 2009, the most recent notification from
the corresponding regulatory agency has categorized the Company as well
capitalized under the regulatory framework for prompt corrective
action.  As of September 30, 2009, the Company’s total risk weighted
capital to risk weighted assets, Tier I capital to risk weighted assets and Tier
I capital to average assets capital ratios were 11.34%, 9.36% and 7.79%,
respectively, well above these minimum guidelines.  The Company’s year
to date return on average equity was 7.62% and year to date return on average
assets was .47%.





Asset
Quality





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





2009
                    
                    
                    2008Beginning
      balance
                    
                    $
                    11,303
                    
                    
                    $
                    8,250Less
      charge-offs:Construction
      and land loans
                    
                    
                    220Commercial
      and industrial loans
                    
                    
                    1,014
                    
                    
                    
                    59Loans
      to individuals for household, family and other personal
      expenditures
                    
                    
                    42
                    
                    
                    
                    15All
      other loans (including overdrafts)
                    
                    
                    92
                    
                    
                    
                    71Total
      charge-offs
                    
                    
                    1,368
                    
                    
                    
                    145Recoveries
                    
                    
                    156
                    
                    
                    
                    53Net
      charge-offs
                    
                    
                    1,212
                    
                    
                    
                    92Provision
      charged to current expense
                    
                    
                    13,000
                    
                    
                    
                    2,000Balance
      at September 30
                    
                    $
                    23,091
                    
                    
                    $
                    10,158Allowance
      for loan losses to loans
                    
                    
                    1.10
                    %
                    
                    
                    .68
                    %Net
      charge-offs to average loans
                    
                    
                    .06
                    %
                    
                    
                    .01
                    %





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,
specific reserves that need to be maintained for internally classified loans,
and other factors. As of September 30, 2009, based upon current known
information, management believes the allowance for loan losses is adequate to
absorb probable incurred losses inherent in the Bank’s loan
portfolio.





The
Company’s methodology for assessing the adequacy of the allowance for loan
losses incorporates changes during the past several quarters.  The
total portfolio has been segregated into twelve smaller individual portfolios
with similar characteristics, and each individual portfolio is risk
rated.  Within the individual portfolios, specific allocations are
provided against any impaired loans, if deemed necessary, based upon the most current
analysis.  All classified and special mention loans within the
individual portfolios are provided with a reserve allocation based upon various
weighted factors.  These factors are reviewed and adjusted as
warranted and are bench-marked against each other to ensure directional consistency.  Where
possible, these factors and allocations are also compared  to peer
groups, taking into consideration the mix of assets in the Company’s overall
loan portfolio as well as delinquency, nonperforming and charge-off
trends.  A general allocation is then provided against each individual
portfolio based upon the homogeneous characteristics of that
portfolio.  This calculation of an indicated level of reserves is then
stress tested.   As a result of this in depth analysis, an
unallocated level of reserves is also derived which provides for inherent losses
in the portfolio that exist, but have yet to be identified.


18


With
respect to the general allocation that is provided against each of the
individual portfolios, various factors are considered such as historical loss
data, economic conditions, growth rates within the portfolio, concentrations,
loan to value ratios, error rates and loan officer experience
levels.  When reviewing historical loss data, ratios
from  the past twelve quarters including nonperforming loans, loans 30
- 89 days past due, charge offs and recoveries by portfolio type, and the
allowance as a percentage of total capital and total loans are all
analyzed.  A detailed review of economic conditions is provided
including a summary of interest rates for the past quarter and indicated trends
in interest rates for the coming quarters.  An in depth analysis of
factors such as unemployment data, consumer price indicators, real estate sales
activities, and consumer spending data is also presented and utilized for
weighting reserve allocation factors.   Another indicator used to
arrive at the economic condition factor weighting is real estate sales activity
and housing price depreciation statistics for the current quarter.





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





2009Amount
                  
                  
                  % of Total
                    LoansCommercial
                  
                  $
                  1,388
                  
                  
                  
                  2.19
                  %Real
      estate
                  
                  
                  17,992
                  
                  
                  
                  97.74Consumer
      and other
                  
                  
                  91
                  
                  
                  
                  .07Unallocated
                  
                  
                  3,620
                  
                  
                  
                  -Total
      at September 30,
                  
                  $
                  23,091
                  
                  
                  
                  100.00
                  %





The table
below sets forth the amounts and categories of our non-performing assets at the
dates indicated.





At
      September 30,
                                        
                                        
                                        At
      December 31,2009
                                        
                                        
                                        2008Non-accrual
      loans:Real
      estate loans, construction
                                        
                                        $
                                        30,149
                                        
                                        
                                        $
                                        1,341Real
      estate loans, other:Commercial
                                        
                                        
                                        17,656
                                        
                                        
                                        
                                        -Residential
                                        
                                        
                                        9,935
                                        
                                        
                                        
                                        328Commercial
      and industrial loans
                                        
                                        
                                        597
                                        
                                        
                                        
                                        178All
      other loans (including
      overdrafts)
                                        
                                        
                                        -
                                        
                                        
                                        
                                        6Total
      non-accrual loans
                                        
                                        $
                                        58,337
                                        
                                        
                                        $
                                        1,853Loans
      greater than 90 days delinquent and still accruing:Real
      estate loans, construction
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        2,261Real
      estate loans, other:Commercial
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,131Residential
                                        
                                        
                                        -
                                        
                                        
                                        
                                        15Commercial
      and industrial
      loans
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
      loans greater than 90 days delinquent and still accruing
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        3,407Total
      nonperforming loans
                                        
                                        $
                                        58,337
                                        
                                        
                                        $
                                        5,260Other
      nonperforming assets:Other
      real estate owned
                                        
                                        $
                                        6,972
                                        
                                        
                                        $
                                        6,972Total
      nonperforming assets
                                        
                                        $
                                        65,309
                                        
                                        
                                        $
                                        12,232Total
      nonperforming loans to total loans
                                        
                                        
                                        2.79
                                        %
                                        
                                        
                                        .31
                                        %Total
      nonperforming assets to total assets
                                        
                                        
                                        2.45
                                        %
                                        
                                        
                                        .66
                                        %Allowance
      for loan losses to total nonperforming loans
                                        
                                        
                                        39.58
                                        %
                                        
                                        
                                        214.89
                                        %





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


19


Nonperforming
loans total $58,337 or 2.79% of total loans as of September 30, 2009, as
compared to $29,584 as of June 30, 2009, a 97.19% increase. Acquisition,
development and construction loans comprise $30,149 or 51.68% of this
total.  The second largest component of nonperforming loans by loan
type is commercial mortgages, which total $17,656 or 30.26% of the total.
 Of the total nonperforming loans, all but $755 of acquisition, development
and construction loans are currently in foreclosure, as are all the commercial
mortgages.  Over 89% of the Company’s nonperforming loans are to
eleven borrowers.  One of the largest loans in the nonperforming
category is a first lien land loan on a 195 acre parcel in New Windsor,
NY.  The borrower is seeking municipal approvals for a large
residential development on the site.  The loan is currently in
foreclosure, with a personal guarantee of the borrower.  Another of
these large loans is a land loan with approved plans and permits for future
development of an eleven story, twenty one unit residential complex in downtown
White Plains, Westchester County, NY.  This loan is currently in
foreclosure, again with a personal guarantee of the borrower.  One
of  the larger nonperforming loans is a building loan on a recently
constructed single family house in Sands Point, Nassau County,
NY.  This property is currently in the process of a contract of sale,
and based upon this sale price, no loss to the Company is
expected.  An additional building loan on another recently constructed
single family home in Suffolk County, NY is also in the process of a contract of
sale, with the purchaser approved for funding.  A foreclosure action
is continuing, although a closing is anticipated before year end, with no
expected loss to the Company.  A third building loan is on a partially
completed single family home in Nissequogue, Suffolk County, NY that was to be
the primary residence of a currently bankrupt contractor.  A
foreclosure sale is scheduled for November.  Two other properties in
Suffolk County, NY are included in the largest loans within the nonperforming
category.  The first of these two properties is a first mortgage on a
seven lot subdivision in St. James, NY.  Most improvements have been
completed on the property, but there is currently a dispute between the partners
causing a payment problem.  The property is in foreclosure with strong
guarantees.  The second of the two additional Suffolk County loans is
a commercial mortgage on a multi-unit commercial building in Selden,
NY.  The borrower is deceased and the property is in
foreclosure.  There are current active negotiations for the sale
of the property.  Three additional loans in the nonperforming category
are secured by properties in New York City.  The first loan is a
mortgage on six residential and one retail condominium unit that was completed
within the past twelve to fifteen months located in midtown
Manhattan.  Three units have been sold, and the balance are being
rented.  The property is in foreclosure and may be a candidate for a
restructure.  The next New York City loan is a conventional mortgage
on a recently acquired single family townhouse in a prime Manhattan Upper East
Side area.  The property was acquired in 2008 by a hedge fund manager
who is currently experiencing financial difficulty.  The property is
in good condition and is currently in foreclosure.  The third New York
City loan is a first mortgage on a partially constructed single family
brownstone that was to be converted into a three unit luxury condominium
building located in Harlem, NY.  Construction is approximately
55% complete.  As of September 30, 2009, no foreclosure action
has been commenced on this property.  The last of the eleven largest
loans within the nonperforming category is a first mortgage on a two story
commercial office and warehouse building in a commercial and industrial section
of Brooklyn, NY.  The property is occupied by the borrower, with a
substantial net worth.  The loan is currently in
foreclosure.  The total amount of reserves set aside for these eleven
largest loans as of September 30 was $2,136 .





The 30-89
day past due category of loans increased to $51,241 at September 30, 2009 from
$19,941 at June 30, 2009.  As of September 30, these loans represented
2.45% of total loans, as compared to 1.01% as of June 30.  Within the
30-89 day past due category, acquisition, development and construction loans
comprise 50.19% or $25,717.  The remaining balance is composed of
$12,247 of commercial mortgages, $8,044 of multi-family mortgages, $1,697 of
residential mortgages and home equity lines of credit, and $3,521 of commercial
loans.




The ratio
of the allowance for loan losses to total nonperforming loans as of September
30, 2009 and December 31, 2008 was 39.58% and 214.89% due to an increase in
nonperforming loans of $53,077.   The balance in the allowance
for loan loss account also increased from $11,303 to $23,091 or
$11,788.  For the nine month period ending September 30, 2009, the
Company has made provisions for loan losses of $13,000 as compared to $2,000 for
the same period in 2008.





The
following table sets forth certain types of loans which management believes to
be considered higher risk loans.  The table quantifies their
respective percentage of the Company’s total loans, the total allowance for loan
losses balance allocated to these loans and the level of nonperforming loans
within these categories.




20




Higher
Risk Loans





September
      30,
                                          2009
                                        
                                        
                                        %
      of
                                          Loan
                                          Portfolio
                                        
                                        
                                        Total
      Reserve
                                          Allocation
                                        
                                        
                                        Non-performing
                                          LoansInterest
      Only Acquisition, Development and Construction Loans
                                        
                                        $
                                        403,604
                                        
                                        
                                        
                                        19.30
                                        %
                                        
                                        $
                                        10,459
                                        
                                        
                                        $
                                        30,149Home
      Equity Lines/Loans - 1st Liens
                                        
                                        
                                        18,943
                                        
                                        
                                        
                                        0.91
                                        
                                        
                                        
                                        85Home
      Equity Lines/ Loans - 2nd Liens
                                        
                                        
                                        9,658
                                        
                                        
                                        
                                        0.46
                                        
                                        
                                        
                                        100Interest
      Only Commercial Loans
                                        
                                        
                                        27,795
                                        
                                        
                                        
                                        1.33
                                        
                                        
                                        
                                        744
                                        
                                        
                                        
                                        250Interest
      Only Consumer Loans
                                        
                                        
                                        552
                                        
                                        
                                        
                                        0.02
                                        
                                        
                                        
                                        37Total
                                        
                                        $
                                        460,552
                                        
                                        
                                        
                                        22.02
                                        %
                                        
                                        $
                                        11,425
                                        
                                        
                                        $
                                        30,399


The
categories of loans listed above pose a potentially higher credit risk because
of the lack of principal amortization, a collateral position subordinate to
another creditor, or increased defaults due to slowdowns in the construction and
real estate sales sector during an economic recession.  However,
management believes these risks are mitigated through the Company’s loan terms
and underwriting standards.





Partially
a result of the economic downturn and partially as a means of reducing risk,
beginning in the fourth quarter of 2007 the Company began to make a shift in the
mix of its loan portfolio from higher risk construction lending into lower risk
permanent single family and  multi-family residential mortgages and
commercial mortgages. This shift in originations was evidenced by a net growth
in commercial mortgages and multi-family mortgages as a percentage of the total
net growth for the quarter of 57.82% and 48.94%, respectively, as compared to
only 7.94% for construction loans.  Residential and commercial
mortgages comprised 78.62% of total loans at September 30, 2009 compared to
73.77% at December 31, 2008.  Construction loans made up
19.30%  of total loans at September 30, 2009 as compared to 23.04% at
December 31, 2008.  Land and construction financing continues to
increase but at a much slower pace than that of past quarters and mainly as a
result of advances on existing loans that date back to 2007 and
2008.  Construction financing remains a necessity as it allows for the
repayment of land, site and soft costs from the sale of homes or condominium
units in a given project.




Comparison
of Operating Results for the Three Months Ended September 30, 2009 and
2008





Net
income for the three months ended September 30, 2009 and 2008 was $898 and
$4,607, a decrease of 80.5% and was due primarily to an increase in the
provision for loan losses of $9,500. Net interest income increased by $4,946 or
35.6% due in large part to an increase in the quarterly average balance of loans
to $2,022,629 at September 30, 2009 from $1,424,086 at September 30, 2008, an
increase of 42.02%, along with a corresponding 25.5% increase in interest on
loans. Loan yields declined to 5.79% during the third quarter of 2009 from 6.55%
during the third quarter of 2008, mainly the result of lower rates on floating
rate construction loans due to the drop in the prime rate of 400 basis points
from the third quarter of 2008 to the third quarter of 2009.  As such,
the increase in interest income on loans for the quarter is attributable to the
increased volume. Interest income on investment securities increased by 214.4%
for the quarter ended September 30, 2009 as compared to the same period in 2008.
This was due to the increase in average balance to $283,310 for the third
quarter of 2009 as compared to $67,943 for the third quarter of
2008.  Total interest expense for the third quarter of 2009 was 27.6%
higher than that for the same period in 2008.  The average balance of
these interest-bearing liabilities for the three month period in 2009 and 2008
was $2,147,312 and $1,387,081, respectively.  For the three month
period ended September 30, 2009 the Company’s cost of funds was 2.50% as
compared to 3.02% for the comparable three month period in 2008.  The
increased expense is largely the result of increased volume partially offset by
the decreased cost of funds.





Noninterest
income for the three month period ended September 30, 2009 increased by 27.1%,
the result of net gains on the sale of investment securities during the
quarter.  Noninterest expense increased by 29.4% from the third
quarter of 2008 to the third quarter of 2009 predominantly due to the net
occupancy, salary and employee benefit expenses related to the Company’s branch
expansion efforts.





The
provision for loan losses was $10,000 for the three month period ended September
30, 2009 compared to $500 for the same period in 2008.  The increase
in the provision expense was mainly the result of additional impaired loans due
to the economic recession coupled with the continued growth in total
loans.  Based on our continuing review of the overall loan portfolio,
as of September 30, 2009 management believes this increase in the provision for
the third quarter of 2009 to be adequate.  In view of the continued
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.


21


Comparison
of Operating Results for the Nine Months Ended September 30, 2009 and
2008





Net
income for the nine months ended September 30, 2009 was $7,927 as compared to
$12,133 for the comparable period in 2008, a decrease of 34.67%.  The
primary reason for the decline in net income was the increase in the provision
for loan losses.  The other contributing factor was the increased
expense for the FDIC assessments including the five basis points special
assessment collected on September 30, 2009.  This special assessment
of $1,076 plus the Company’s increased quarterly assessments totaled $3,171 for
the nine month period ending September 30, 2009, an increase over the same
period last year of $2,700 or 573.44 %.  The provision for loan losses
for the first nine months of 2009 totaled $13,000 as compared to $2,000 for the
same period in 2008.  This increased provision was the result of
increased impaired and past due loans resulting from the
economic downturn as well as the overall growth in the loan
portfolio.





The
Company’s primary driver of net income remains net interest
income.  While the net interest margin for the first nine months of
2009 is down to 3.04% from 3.73% for the first nine months of 2008, net interest
income is up by $11,596 or 31.31% due to growth in interest earning
assets.  Although down from 2008, the net interest margin continues to
trend higher since a low of 2.76% during the first quarter of 2009.





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 Nine Months EndedSeptember 30, 2009
                
                
                September 30, 2008Average
                
                
                
                
                
                Average
                
                
                Average
                
                
                
                
                
                AverageBalance
                
                
                Interest
                
                
                Rate
                
                
                Balance
                
                
                Interest
                
                
                RateASSETSInterest-earning
      assets:Investment
      securities:Taxable
                
                $
                142,282
                
                
                $
                4,020
                
                
                
                3.76
                %
                
                $
                53,701
                
                
                $
                2,054
                
                
                
                5.10
                %Nontaxable
                
                
                24,509
                
                
                
                978
                
                
                
                5.32
                
                
                
                5,497
                
                
                
                246
                
                
                
                5.97Total
      investment securities
                
                
                166,791
                
                
                
                4,998
                
                
                
                4.00
                
                
                
                59,198
                
                
                
                2,300
                
                
                
                5.18Loans
                
                
                1,888,596
                
                
                
                82,859
                
                
                
                5.85
                
                
                
                1,244,040
                
                
                
                63,318
                
                
                
                6.79Interest-earning
      deposits with banks
                
                
                34,568
                
                
                
                45
                
                
                
                0.17
                
                
                
                11,395
                
                
                
                174
                
                
                
                2.00Term
      placements
                
                
                33,328
                
                
                
                101
                
                
                
                0.41
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      interest-earning assets
                
                
                21,920
                
                
                
                546
                
                
                
                3.50
                
                
                
                11,445
                
                
                
                559
                
                
                
                6.53Total
      interest-earning assets
                
                
                2,145,203
                
                
                
                88,549
                
                
                
                5.51
                
                
                
                1,326,078
                
                
                
                66,351
                
                
                
                6.67Noninterest-earning
      assets:Cash
      and due from banks
                
                
                27,073
                
                
                
                
                
                
                
                
                
                
                
                15,167Other
      assets
                
                
                73,074
                
                
                
                
                
                
                
                
                
                
                
                67,580Total
      assets
                
                $
                2,245,350
                
                
                
                
                
                
                
                
                
                
                $
                1,408,825LIABILITIES
      AND STOCKHOLDERS’ EQUITYInterest-bearing
      liabilities:Savings,
      NOW and money market deposits
                
                $
                781,101
                
                
                $
                10,364
                
                
                
                1.77
                %
                
                $
                487,593
                
                
                $
                9,100
                
                
                
                2.50
                %Time
      deposits
                
                
                818,070
                
                
                
                20,527
                
                
                
                3.35
                
                
                
                460,229
                
                
                
                13,949
                
                
                
                4.05Other
      borrowings
                
                
                326,818
                
                
                
                6,773
                
                
                
                2.77
                
                
                
                223,289
                
                
                
                4,537
                
                
                
                2.71Subordinated
      debt
                
                
                43,643
                
                
                
                1,915
                
                
                
                5.83
                
                
                
                33,972
                
                
                
                1,648
                
                
                
                6.37Total
      interest-bearing liabilities
                
                
                1,969,632
                
                
                
                39,579
                
                
                
                2.69
                
                
                
                1,205,083
                
                
                
                29,234
                
                
                
                3.24Noninterest-bearing
      liabilities:Demand
      deposits
                
                
                121,191
                
                
                
                
                
                
                
                
                
                
                
                107,789Other
      liabilities
                
                
                15,873
                
                
                
                
                
                
                
                
                
                
                
                8,987Total
      liabilities
                
                
                2,106,696
                
                
                
                
                
                
                
                
                
                
                
                1,321,859Stockholders’
      equity
                
                
                138,654
                
                
                
                
                
                
                
                
                
                
                
                86,966Total
      liabilities and stockholders’ equity
                
                $
                2,245,350
                
                
                
                
                
                
                
                
                
                
                $
                1,408,825Net
      interest income/interest rate spread
                
                
                
                
                
                $
                48,970
                
                
                
                2.82
                %
                
                
                
                
                
                $
                37,117
                
                
                
                3.43
                %Net
      interest-earning assets/net interest margin
                
                $
                175,571
                
                
                
                
                
                
                
                3.04
                %
                
                $
                120,995
                
                
                
                
                
                
                
                3.73
                %Less:  tax
      equivalent adjustment
                
                
                
                
                
                
                343
                
                
                
                
                
                
                
                
                
                
                
                86Net
      interest income
                
                
                
                
                
                $
                48,627
                
                
                
                
                
                
                
                
                
                
                $
                37,031





The net
interest margin was negatively impacted during the first quarter of 2009 as
deposits flowed into the Company’s newest branches at a very rapid pace and loan
closings did not occur as quickly as anticipated.  Consequently, the
Company held excess cash that was earning a minimal level of interest in
overnight investments and short-term placements awaiting these
closings.  During the second quarter, the excess liquidity was
redirected into significantly higher earning loans and investment
securities.





22




Interest-bearing
liabilities, mainly deposits, have increased
significantly.  Throughout the first nine months of 2009, savings, NOW
and money market deposits have gradually increased as a percentage of total
deposits.  In addition, time deposits have been repricing at lower
current market rates.  The combination of a larger mix of lower cost
non-maturity deposits and lower rate time deposits has reduced the average cost
of interest bearing liabilities.  The average balance of FHLB
borrowings has been significantly higher during 2009 because of the advances
taken during 2008 when the funding for new loan originations was outpacing
deposit growth.  With the strong 2009 deposit growth, the Company has
not increased its FHLB borrowings position during the first nine months of the
year.  The average rate paid on the Company’s trust preferred securities
during the first nine months of 2009 was 4.90%.  It has decreased from
6.37%, the average rate paid during the first nine months of 2008, as two of the
three issuances are variable rates based on 3 month LIBOR, which has declined
over 200 basis points from September 30, 2008.





The
provision for loan losses was $13,000 for the first nine months of 2009 and
$2,000 for the same period in 2008.  The increase in the provision
expense was mainly the result of additional impaired loans due to the economic
recession coupled with the continued growth in total loans.  Based on
our continuing review of the overall loan portfolio, as of September 30, 2009
management believes this increase in the provision for the first nine months of
2009 to be adequate.  In view of the continued 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 before the OTTI impairment loss increased to $8,031 or by 15.93% for the
first nine months of 2009 over the comparable period in 2008.  Net
gains on the sale of investment securities totaled $1,481.  Income
from trust and investment management services decreased by18.05% due to reduced
net asset values.  Service charge income increased by 4.51% due to an
increased volume of transaction accounts as well as the overdraft program
entered into during 2008, which collects fee income in return for payment of
low-level overdrafts.  Gross revenues from the Company’s insurance
subsidiary increased slightly, by 1.27%.  The increase was minimal due
to softened insurance markets causing reduced premiums.  The gain in
cash surrender value of company owned life insurance decreased by 38.77%,
indicative of overall reduced rates of return.  Other noninterest
income decreased by 11.09%, mainly the result of decreased loan fees generated
from short-term loans and reduced service fee income generated through the
branch system.





Noninterest
expense increased by $8,337, or 35.85%, for the nine month period ending
September 30, 2009 as compared to the same period in 2008.  The
Company’s FDIC assessment expense, that included a five basis point special
assessment during the second quarter of 2009 paid on September 30, accounted for
$2,700, or 32.38%, of the growth in this category.  Other increases in
noninterest expense relate to the costs associated with the growth in new
branches from September 30, 2008 to September 30, 2009 as well as thenumber of full time
equivalent employees increasing from 230 to 286.   A majority of
the increases in salary, benefits, occupancy and equipment, business development
and other overhead expenses relate in large part to the costs associated with
these additional locations and additional staff.  Other increases in
these categories are the result of the usual increases associated with the costs
of doing business.





Provision
for income taxes decreased by 41.92% for the nine month period ended September
30, 2009 mainly the result of lower income before taxes.





Liquidity
and Commitments





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





The
Company’s principal source of liquidity is dividends from the
Bank.  Cash available to service Company subordinated debentures and
for distribution of dividends to shareholders is primarily derived from
dividends paid by the Bank to the Company.  During 2009, the Bank paid
$1,541 in cash dividends to the Company. At September 30, 2009, the Bank
had $13,183 of retained net income available for dividends to the Company. Prior
regulatory approval is required if the total of all dividends declared by the
Bank in any calendar year exceeds the total of the Bank’s net income of that
year combined with its retained net income of the preceding two years. In the
event that the Company subsequently expands its current operations, in addition
to dividends from the Bank, it will need to rely on its own earnings, additional
capital raised and other borrowings to meet liquidity needs.





The
Bank’s Liquidity and Funds Management Policy allows for wholesale borrowings. At
September 30, 2009, the Bank had a line of credit of $15,000 with an
unaffiliated correspondent bank to provide short term credit for liquidity
requirements. Of this line of credit, $7,000 is available on an unsecured
basis.  The Bank also has the ability, as a member of the Federal Home
Loan Bank (“FHLB”) system, to borrow against unencumbered residential and
commercial mortgages owned by the Bank. The amount of unused available credit
from the FHLB at September 30, 2009 was $454,711. As of
September 30, 2009 and December 31, 2008 the Bank had no overnight
borrowings outstanding.  The Bank had $325 million in
collateralized advances outstanding with the FHLB as of September 30, 2009 and
December 31, 2008.





23




On
September 30, 2009 total loan commitments outstanding were $245,647, of which
$133,298 represented available lines on funded loans, $93,364 represented
available lines on unfunded loans and $18,985 represented outstanding letters of
credit.  At September 30, 2008, these commitments totaled $513,137, of
which $206,552 represented available lines on funded loans, $289,441 represented
available lines on unfunded loans and $17,144 represented letters of credit
outstanding.  As of September 30, 2009, $555,419 of certificates of
deposit were scheduled to mature in the next twelve months.  Based on
historical experience, management believes that most of such certificates of
deposit will remain with the Bank.  However, if these maturing
deposits do not remain with us, we will be required to seek other sources of
funds.  Depending on market conditions, we may be required to pay
higher rates on such deposits or borrowings than we currently pay on these
funds.





Recent
Regulatory and Accounting Developments




In April
2009, the FASB issued pending content to FASB ASC 320-10-35, Investments – Debt and Equity
Securities, Overall, Subsequent Measurement,which amends existing
guidance for determining whether impairment is other-than-temporary (“OTTI”) for
debt securities.  The pending content 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 pending
content expands and increases the frequency of existing disclosures about
other-than-temporary impairments for debt and equity securities.  This
pending content was effective for interim and annual reporting periods ending
after June 15, 2009.  Through the period ended March 31, 2009, the
Company recognized cumulative other -than-temporary impairment charges of $865
for various securities.  The  Company adopted the pending
content effective April 1, 2009 and reversed $312, net of tax of $175, for the
non-credit portion of the cumulative OTTI charge.  The adoption was
recognized as a cumulative effect adjustment that increased retained earnings
and decreased accumulated other comprehensive income $312, net of tax of $175,
as of April 1, 2009.  As a result of implementing the new accounting
standard, the amount of OTTI recognized in income for the period was $255, gross
of tax.  Had the new accounting standard not been issued, the amount
of OTTI that would have been recognized in income for the period would have been
$900, gross of tax.




In April
2009, the FASB issued pending content to FASB ASC 820-10-35, Fair Value Measurements and
Disclosures, Overall, Subsequent Measurement.  The pending
content 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 pending content 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 pending content required increased disclosures and was
effective for interim and annual reporting periods ending after June 15, 2009,
and shall be applied prospectively.  Early adoption is permitted for
periods ending after March 15, 2009.  The adoption of the pending
content at June 30, 2009 did not have a material impact on the results of
operations or financial position.




In
April 2009, the FASB issued pending content to FASB ASC 820-10-50-2, Fair Value Measurements and
Disclosures, Overall, Disclosure.  The pending content amends
FASB ASC 825-10-50,Financial Instruments,
Overall, Disclosure, 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.  The pending
content was effective for interim reporting periods ending after June 15,
2009.  The adoption of the pending content at June 30, 2009 did not
have a material impact on the results of operations or financial position as it
only required disclosures, which are included in Note 7.





In
September 2006, the FASB issued ASC 820, Fair Value Measurements and
Disclosures.  This content defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  ASC 820 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
content is effective for fiscal years beginning after November 15,
2007.  In February 2008, the FASB issued ASC 820-10-65-1, Fair Value Measurements and
Disclosures, Overall, Transition and Open Effective Date
Information.  This content delayed the effective date of ASC
820 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 ASC 820 did not
have a material impact on the Company’s consolidated financial position or
results of operations.





In June
2008, the FASB issued pending content to FASB ASC 260-10-45, Earnings Per Share, Overall, Other
Presentation Matters.  The pending content 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 ASC 260-10-45.  The pending
content was 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 to the provisions of the pending
content.  Adoption of the pending content in 2009 did not have a
material impact to the Company’s financial statements or earnings per share
calculation.





In May
2009, the FASB issued updated content to FASB ASC 855-10-50, Subsequent Events, Overall,
Disclosure.  The objective of the content is to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statement are issued or available to be
issued.  The content was effective for interim and annual financial
periods ending after June 15, 2009.  The adoption resulted in
additional disclosure, but no material impact to the results over operations or
financial position.


24





On June
12, 2009, the FASB issued pending content to FASB ASC 860-10, Transfers and Servicing.The
pending content will require more information about transfers of financial
assets, including securitization transactions, and where entities have
continuing exposure to the risks related to transferred financial
assets.  It eliminates the concept of a “qualifying special-purpose
entity,” changes the requirements for derecognizing financial assets, and
requires additional disclosures.  The pending content replaces the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with a qualitative approach focused on identifying which enterprise has
the power to direct the activities of a variable interest entity (VIE) that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity.   The pending content requires ongoing reconsideration of
whether (1) an entity is a VIE and (2) an enterprise is the primary beneficiary
of a VIE.  The pending
content is effective at the start of the first fiscal year beginning after
November 15, 2009.  The adoption of the pending content is not
expected to impact the Company’s consolidated financial statements.




On June
29, 2009, theFASB Accounting Standards
CodificationTM
(Codification) became the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities.  Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants.  The
Codification superseded all then-existing non-SEC accounting and reporting
standards.  All other nongrandfathered non-SEC accounting literature
not included in the Codification became nonauthoritative.  The
issuance of the Codification is not intended to change GAAP.  The
Codification is effective for financial statements issued for interim and annual
periods ending after September 15, 2009.  The adoption of the
Codification did not have a material impact on the Company’s consolidated
financial statements.




The SEC's
Office of the Chief Accountant published Staff Accounting Bulletin (SAB) No.
112.  SAB 112, which was effective June 10, 2009 and amends or
rescinds portions of the interpretive guidance included in the Staff Accounting
Bulletin Series to make the relevant interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations.  Specifically, SAB 112 aims to bring
existing guidance into conformity with recent accounting standards updates by
the FASB, including FASB ASC 805, Business Combinations, and
FASB ASC 810, Consolidation.The adoption of
this bulletin did not impact the Company’s consolidated financial
statements.




In
August, 2009, the FASB issued Accounting Standards Update (ASU) 2009-05,
“Measuring Liabilities at Fair Value”, as subset of Topic 820 – “Fair Value
Measurements and Disclosure”.  Among other clarifying points, ASU
2009-05 provides clarification that in circumstance in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
techniques:  (1) The quoted price of the identical liability when
traded as an asset, (2) Quoted prices for similar liabilities or similar
liabilities when traded as assets, or (3) Another valuation technique that is
consistent with the principles of Topic 820 such as an income approach or market
approach.  The ASU is effective as of September 30,
2009.  The adoption of the ASU did not have a material impact on the
Company’s consolidated financial statements.





Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





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





This
simulation modeling is done on a quarterly basis, most recently as of August 31,
2009.  A 100, 200 and 300 parallel and pro rata basis point upward and
downward shift in rates was assumed over a twelve month planning
horizon.  The following table reflects the Company’s income
sensitivity analysis over a one year time frame as of August 31,
2009.  The Company’s change in net interest income that would result
from the respective potential interest rate shocks was within policy
limits.  The results of this simulation have been reviewed with the
President, the Board of Directors and senior management.





Change
      in Interest Rates
                      
                      As
      of August 31, 2009In
      Basis Points
                      
                      Potential
      Change(Rate Shock)
                      
                      In Net Interest Income$ Change
                      
                      
                      % ChangeUp
      300 basis points
                      
                      
                      5,565
                      
                      
                      
                      5.82Up
      200 basis points
                      
                      
                      3,897
                      
                      
                      
                      4.08Up
      100 basis points
                      
                      
                      2,068
                      
                      
                      
                      2.16Static
                      
                      
                      -
                      
                      
                      
                      -Down
      100 basis points
                      
                      
                      (2,273
                      )
                      
                      
                      (2.38
                      )Down
      200 basis points
                      
                      
                      (4,840
                      )
                      
                      
                      (5.06
                      )Down
      300 basis points
                      
                      
                      (7,620
                      )
                      
                      
                      (7.97
                      )




25





Item 4.
Controls and Procedures





An
evaluation was performed under the supervision and with the participation of the
Company’s management, including the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 131-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of
September 30, 2009.  Based on that evaluation, the Company’s
management, including the Principal Executive Officer and Principal Financial
Officer, concluded that the Company’s disclosure controls and procedures were
effective. There has been no change in the Company’s internal controls over
financial reporting during the quarter that has materially affected, or is
reasonably likely to affect, the Company’s internal control over financial
reporting.





Part
II - Other Information





Item
      1.
            Legal
      Proceedings -None





Item
      1A.
            Risk
      Factors - None





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds - Issuer Purchases of
      Equity Securities – Reference is made to Footnotes 5 and 6 to the
      financial statements included in this Form 10-Q as to the private issuance
      of subordinated debt and related Warrants to purchase common stock. The
      issuer did not repurchase any of its shares during the nine month
      period ended September 30, 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
      and Reports on Form 8-K








Exhibit
                            
                            Description
  Exhibit
      31.1
                  Certification
      of Principal Executive Officer pursuant to Rule
  13a-14(a)





Exhibit
      31.2
                Certification
      of Principal Financial Officer pursuant to Rule
  13a-14(a)





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


26


SIGNATURES





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





SMITHTOWN
      BANCORP, INC.November
      9, 2009/s/
      BRADLEY E. ROCKBradley
      E. Rock, Chairman, Presidentand
      Chief Executive Officer(Principal
      Executive Officer)/s/
      ANITA M. FLOREKAnita
      M. Florek, Executive Vice Presidentand
      Chief Financial Officer(Principal
      Financial and Accounting
Officer)




27