SMITHTOWN BANCORP INC - FORM 10-Q

Attached files

file	filename
EX-32 - SMITHTOWN BANCORP INC	v201184_ex32.htm
EX-31.1 - SMITHTOWN BANCORP INC	v201184_ex31-1.htm
EX-31.2 - SMITHTOWN BANCORP INC	v201184_ex31-2.htm

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, 2010

Commission File Number 0 - 13314

SMITHTOWN BANCORP, INC.

(Exact name of Registrant as specified in its charter)

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

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

(631) 360-9300

(Registrant's telephone number, including area code)

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

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

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 o Accelerated filer x Non-accelerated filer o Smaller reporting company o

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

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

Shares of Common Stock ($.01 Par Value) Outstanding as of November 9, 2010

14,967,508

SMITHTOWN BANCORP, INC.

INDEX

Part I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited)
	September 30, 2010 and December 31, 2009	3

	Consolidated Statements of Income (Unaudited)
`	Three and Nine Months Ended September 30, 2010 and 2009	4

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
	Nine Months Ended September 30, 2010	5

	Consolidated Statements of Cash Flows (Unaudited)
	Nine Months Ended September 30, 2010 and 2009	6

	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	34

Part II - OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Reserved	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

Signatures

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

Item 1. Financial Statements
Consolidated Balance Sheets (unaudited)
(Dollar amounts in thousands except share data)

	September 30, 2010			December 31, 2009
ASSETS
Cash and cash equivalents	$	32,172		$	18,745
Interest earning deposits with banks		69,611			3,409
Total cash and cash equivalents		101,783			22,154
Term placements		507			507
Securities available for sale		199,102			397,274
Securities held to maturity (fair value of $34 and $67, respectively)		33			66
Loans held for sale		-			16,450
Loans		1,912,963			2,090,896
Less: allowance for loan losses		68,682			38,483
Loans, net		1,844,281			2,052,413
Restricted stock, at cost		18,002			18,353
Real estate owned, net		3,511			2,013
Premises and equipment, net		52,892			47,708
Goodwill		3,923			3,923
Intangible assets		433			616
Cash value of company owned life insurance		25,358			24,874
Accrued interest receivable and other assets		28,291			48,579
Total assets	$	2,278,116		$	2,634,930

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits	$	145,355		$	152,306
Saving, NOW and money market deposits		867,661			999,066
Time deposits of $100,000 or more		457,842			508,632
Other time deposits		344,411			415,024
Total deposits		1,815,269			2,075,028
Other borrowings		311,480			352,820
Subordinated debentures		56,595			56,351
Accrued interest payable and other liabilities		19,764			14,976
Total liabilities		2,203,108			2,499,175

Commitments and contingent liabilities (Note 10)		-			-

Stockholders' equity:
Preferred stock, par value $.01 per share: Authorized: 1,000,000 shares at September 30, 2010 and December 31, 2009, respectively; no shares issued or outstanding		-			-
Common stock, par value $.01 per share: Authorized: 35,000,000 shares at September 30, 2010 and December 31, 2009, respectively; 17,019,372 and 16,907,346 shares issued at September 30, 2010 and December 31, 2009, respectively; 14,967,508 and 14,855,482 shares outstanding at September 30, 2010 and December 31, 2009, respectively		170			169
Additional paid-in capital		82,557			82,318
Retained earnings		1,361			64,820
Treasury stock, at cost, 2,051,864 shares		(10,062	)		(10,062	)
		74,026			137,245
Accumulated other comprehensive income (loss)		982			(1,490	)
Total stockholders' equity		75,008			135,755
Total liabilities and stockholders' equity	$	2,278,116		$	2,634,930

See notes to consolidated financial statements.

Consolidated Statements of Income (unaudited)
(Dollar amounts in thousands except share data)

	For the three months ended September 30,						For the nine months ended September 30,
	2010			2009			2010			2009
Interest income:
Loans	$	24,555		$	29,317		$	78,585		$	82,859
Taxable securities		1,464			2,314			4,890			4,020
Tax exempt securities		495			440			1,496			635
Interest earning deposits with banks		21			20			61			146
Other		211			239			645			546
Total interest income		26,746			32,330			85,677			88,206

Interest expense:
Savings, NOW and money market deposits		2,026			3,715			6,689			10,364
Time deposits of $100,000 or more		2,487			3,257			8,025			9,968
Other time deposits		2,250			3,291			7,431			10,559
Other borrowings		2,134			2,287			6,384			6,773
Subordinated debentures		1,041			922			3,067			1,915
Total interest expense		9,938			13,472			31,596			39,579

Net interest income		16,808			18,858			54,081			48,627
Provision for loan losses		25,000			10,000			77,500			13,000
Net interest income (loss) after provision for loan losses		(8,192	)		8,858			(23,419	)		35,627

Noninterest income:
Revenues from insurance agency		843			836			2,560			2,711
Service charges on deposit accounts		653			619			1,913			1,737
Net gain on the sale of investment securities		-			959			518			1,481
Trust and investment services		124			136			473			463
Increase in cash value of company owned life insurance		206			108			484			341
OTTI loss:
Total OTTI losses		(177	)		(69	)		(774	)		(324	)
Portion of loss recognized in other comprehensive income		20			-			37			-
Net impairment losses recognized in earnings		(157	)		(69	)		(737	)		(324	)
Other		894			396			2,150			1,298
Total noninterest income		2,563			2,985			7,361			7,707

Noninterest expense:
Salaries and employee benefits		5,408			5,381			15,968			15,428
Occupancy and equipment		3,976			3,033			11,681			8,391
Federal deposit insurance		1,534			824			4,795			3,171
Amortization of intangible assets		61			85			183			266
Other		4,416			1,664			12,113			4,334
Total noninterest expense		15,395			10,987			44,740			31,590

Income (loss) before income taxes		(21,024	)		856			(60,798	)		11,744
Provision (benefit) for income taxes		(548	)		(42	)		2,661			3,817
Net income (loss)	$	(20,476	)	$	898		$	(63,459	)	$	7,927

Comprehensive income (loss)	$	(20,637	)	$	4,237		$	(60,987	)	$	9,605
Basic earnings (loss) per share	$	(1.38	)	$	0.06		$	(4.27	)	$	0.60
Diluted earnings (loss) per share	$	(1.38	)	$	0.06		$	(4.27	)	$	0.59

See notes to consolidated financial statements.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

(Dollar amounts in thousands except share data)

													Accumulated
	Common Stock				Additional								Other			Total			Total
	Shares Outstanding		Amount		Paid In Capital		Retained Earnings			Treasury Stock			Comprehensive Income (Loss)			Stockholders’ Equity			Comprehensive (Loss)
Balance at January 1, 2010		14,855,482	$	169	$	82,318	$	64,820		$	(10,062	)	$	(1,490	)	$	135,755

Comprehensive loss:
Net loss								(63,459	)								(63,459	)		(63,459	)
Change in unrealized gain on securities available for sale, net of reclassification and tax effects														2,691			2,691			2,691
Change in unrealized gain (loss) on securities available for sale for which a portion of an OTTI has been recognized in earnings, net of reclassification and tax														(39	)		(39	)		(39	)
Changes in funded status of retirement plans, net of tax														(180	)		(180	)		(180	)
Total comprehensive loss																			$	(60,987	)
Issuance of shares for employee stock ownership plan		50,526		1		239											240
Stock awards granted		61,500
Balance at September 30, 2010		14,967,508	$	170	$	82,557	$	1,361		$	(10,062	)	$	982		$	75,008

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows (unaudited)
(Dollar amounts in thousands except share data)

	For the nine months ended September 30,
Cash flows from operating activities	2010			2009
Net income (loss)	$	(63,459	)	$	7,927
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation on premises and equipment		3,588			3,055
Provision for loan losses		77,500			13,000
Deferred tax asset valuation allowance		28,600			-
Net gain on investment securities		(518	)		(1,481	)
Loss on sale of real estate owned		22			-
Loss on sale of loans held for sale		250			-
Other than temporary net impairment loss on securities		737			324
Net increase in other liabilities		7,217			2,628
Net increase other assets		(3,261	)		(4,520	)
Net increase in deferred taxes		(12,078	)		(3,918	)
Amortization of unearned restricted stock awards		287			270
Amortization of ESOP awards		180			225
Increase in cash surrender value of company owned life insurance		(484	)		(338	)
Investment securities amortization of premium/(accretion) of
discount, net		864			1,239
Amortization of intangible assets		183			266
Cash provided by operating activities		39,628			18,677

Cash flows from investing activities
Proceeds from calls, repayments, maturities and sales
of available for sale securities		201,555			118,054
Proceeds from calls, repayments, maturities and sales
of held to maturity securities		33			46
Purchases of available for sale securities		-			(465,622	)
Net redemptions (purchases) of restricted securities		351			(1,252	)
Net decrease (increase) in loans		146,832			(389,161	)
Proceeds from the sale of real estate owned		861			-
Purchases of premises and equipment		(8,772	)		(12,610	)
Cash provided by (used in) investing activities		340,860			(750,545	)

Cash flows from financing activities
Net (decrease) increase in demand, money market, NOW and savings deposits		(138,356	)		480,982
Net (decrease) increase in time deposits		(121,403	)		232,671
Cash dividends paid		-			(1,541	)
Net decrease in other borrowings		(41,340	)		-
Proceeds from subordinated debt and warrant issuance		-			18,990
Net proceeds from common stock issuance		240			28,190
Cash (used in) provided by financing activities		(300,859	)		759,292

Net increase in cash and cash equivalents		79,629			27,424
Cash and cash equivalents, beginning of period		22,154			25,969
Cash and cash equivalents, end of period	$	101,783		$	53,393

Supplemental Information - Cash Flows:
Cash paid for:
Interest	$	31,738		$	39,664
Income taxes (refunded) paid		(11,555	)		7,301

See notes to consolidated financial statements.

Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts in thousands except share data)

Note 1 – Financial Statement Presentation

The consolidated financial statements include the accounts of Smithtown Bancorp, Inc., (“Company”), a New York State-chartered bank holding company with its New York State-chartered commercial bank subsidiary, Bank of Smithtown (“Bank”), and three other subsidiaries, Smithtown Bancorp Capital Trust I, Smithtown Bancorp Capital Trust II and Smithtown Bancorp Capital Trust III, all of which are Delaware Statutory Trusts that were formed to issue trust preferred securities. Bank of Smithtown has six wholly owned subsidiaries, Bank of Smithtown Financial Services, Inc., Bank of Smithtown Insurance Agents and Brokers, Inc., BOS Preferred Funding Corporation, SBRE Realty Corp., SBRE Realty II, LLC, formed to hold other real estate owned property, and Carlyle & Co, a nominee partnership used by the Bank’s trust department to hold securities in a fiduciary capacity. Intercompany transactions and balances are eliminated in consolidation.

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

Interim statements are subject to possible adjustments in connection with the annual audit of the Company for the year ending December 31, 2010. In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly the Company’s financial position and its results of operations for the periods presented. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of those that may be expected for the year ending December 31, 2010.

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

Written Agreement

On June 22, 2010, the Company entered into a Written Agreement with the Federal Reserve Bank of New York (“FRB”). The Written Agreement is in addition to the Consent Agreement with the Federal Deposit Insurance Corporations (“FDIC”) and a parallel Consent Order with the New York State Banking Department (“Banking Department”), hereinafter collectively referred to as the “Consent Agreement,” that the Bank entered into on January 29, 2010. The Written Agreement similarly requires that the Company obtain the approval of the FRB prior to paying a dividend. Certain provisions of the Consent Agreement are described in more detail in Note 11.

Proposed Plan of Merger with People’s United Financial, Inc.

On July 15, 2010, the Company and People’s United Financial, Inc. (“People’s United”) of Bridgeport, Connecticut announced a definitive agreement under which People’s United will acquire the Company in a cash and stock transaction valued at approximately $60 million, or $4.00 per share.

Under the agreement, People’s United will acquire the Company for approximately $30 million in cash and 2.14 million shares of People’s United common stock, valued in the aggregate at approximately $30 million based on the 5-day average closing price of People’s United common stock for the period ended July 14, 2010.

The definitive agreement has been unanimously approved by the respective boards of directors of People’s United and the Company. The Company will merge into People’s United, and the Bank, will simultaneously merge into People’s United Bank, People’s United’s banking subsidiary. The value of the consideration a shareholder of the Company will receive for each share of Company common stock is equivalent in the aggregate to 0.1430 shares of People’s United common stock and $2.00 in cash. A special meeting of the common stockholders of Smithtown Bancorp will be held at the Sheraton Long Island Hotel, 110 Motor Parkway, Hauppauge, New York 11788 on November 19, 2010 at 10:00 a.m. local time. Shareholders of the Company on record as of October 8, 2010, will be entitled to vote on the transaction and to elect for each share held whether to receive shares of People’s United common stock or cash, subject to reallocation if either cash or stock is oversubscribed.

The actual value of the merger consideration to be paid upon closing to each shareholder of the Company will depend on the average People’s United stock price shortly prior to completion of the merger, and the exact amount of cash payable per common share of the Company and the exact number of shares to be issued per common share of the Company will be determined at that time based on the average People’s United stock price, so that each share of the Company receives consideration with approximately the same value. Receipt of People’s United common stock is expected to be tax-free to shareholders of the Company.

The transaction is subject to approval by the Office of Thrift Supervision and by the shareholders of the Company. People’s United shareholder approval is not required. The United States Department of Justice is able to provide input into the approval process of federal banking agencies to challenge the approval on antitrust grounds. Smithtown Bancorp and People’s United have filed all necessary applications and notices with the applicable regulatory authorities. Smithtown Bancorp and People’s United cannot predict, however, whether or when the required regulatory approvals will be obtained.

The merger is the result of an assessment by the Company and its board of directors of the Company’s strategic alternatives in light of the financial challenges facing the Company. The Merger Agreement satisfies the requirement of the Consent Agreement to consider a sale or merger of the Company and the Bank in the event that the required capital ratios are not satisfied by June 30, 2010. If the merger is not consummated, the Company would be required to find an alternative approach to overcoming its challenges and satisfying the relevant regulatory requirements, including meeting the capital ratios required by the Consent Agreement and the Written Agreement. At this time, the Company has no other alternative to raise capital or to enter into another merger agreement if the merger with People’s United is not consummated. In addition, the terms of the Merger Agreement prohibit the Company and the Bank from taking certain actions to facilitate the foregoing.

The unaudited consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. If the People’s United merger is not consummated, the Company may not be able to raise any additional capital and, if it could raise any additional capital, such capital is likely to be extremely dilutive to the Company’s existing shareholders. In addition, the Company may not be able to find another merger partner or acquirer. In such circumstances, a failure to raise such capital or to find another merger partner or acquirer could result in further and more severe regulatory actions against the Company and the Bank thereby giving rise to substantial doubt as to the Company’s ability to continue as a going concern. These financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.

Note 2 – Earnings Per Common Share

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

	For the three months ended September 30,						For the nine months ended September 30,
	2010			2009			2010			2009
Basic
Net (Loss)	$	(20,476	)	$	-		$	(63,459	)	$	-
Distributed earnings allocated to common stock		-		$	591			-		$	1,533
Undistributed earnings allocated to common stock		-			302			-			6,353
Net earnings allocated to common stock	$	-		$	893		$	-		$	7,886

Weighted average common shares outstanding, including shares considered participating securities		14,967,508			14,858,522			14,951,915			13,314,905
Less: weighted average participating securities		(113,170	)		(73,974	)		(104,610	)		(69,226	)
Weighted average shares		14,854,338			14,784,548			14,847,305			13,245,679
Basic earnings (loss) per common share	$	(1.38	)	$	0.06		$	(4.27	)	$	0.60 0.31

Diluted
Net (Loss)	$	(20,476	)	$	-		$	(63,459	)	$	-
Net earnings allocated to common stock	$	-		$	893		$	-		$	7,886
Weighted average common shares outstanding for basic earnings per common share		14,854,338			14,784,548			14,847,305			13,245,679
Add: Dilutive effect of warrants issued to purchase common stock		-			35,172			-			11,942
Weighted average shares and dilutive potential common shares		14,854,338			14,819,720			14,847,305			13,257,621
Diluted earnings (loss) per common share	$	(1.38	)	$	0.06		$	(4.27	)	$	0.59

No dividends were paid on unvested shares with non-forfeitable dividend rights during the nine months ended September 30, 2010. Dividends of $8 were paid on unvested shares with non-forfeitable dividend rights during the nine months ended September 30, 2009, none of which were included in net income as compensation expense as all awards were expected to vest.

Participating securities totaling 113,170, representing shares of restricted common stock, and 475,000 warrants to purchase common stock were not included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2010, because they were not dilutive.

Note 3 – Stock-Based Compensation

The Board of Directors determines restricted stock awarded under the 2007 Stock Compensation Plan (“Stock Compensation Plan”). Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock was determined using the closing price at the date of issuance. Restricted shares vest ratably over five years. The board of directors elected to issue 61,500 and 38,125 shares of non-vested restricted stock under the Stock Compensation Plan for the nine months ended September 30, 2010 and 2009, respectively.

A summary of changes in the Company’s nonvested shares for the nine months ended September 30, 2010 follows:

	Shares		Weighted Average Grant Date Share Value
Nonvested at January 1, 2010		51,670	$	17.51
Granted		61,500		4.75
Non-vested at September 30, 2010		113,170		10.58

As of September 30, 2010, there was $892 of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 4.25 years.

Note 4 – Investment Securities

The following table summarizes the amortized cost and fair value of the available for sale securities and held to maturity investment securities portfolios at September 30, 2010 and December 31, 2009 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
September 30, 2010
Available for sale
U.S. government sponsored entities and agencies	$	5,000	$	523	$	-		$	5,523
Obligations of state and political subdivisions		57,755		2,994		(3	)		60,746
Mortgage-backed securities: residential		119,230		3,329		-			122,559
Collateralized mortgage obligations		4,542		-		(82	)		4,460
Other		9,601		-		(3,787	)		5,814
Total available for sale	$	196,128	$	6,846	$	(3,872	)	$	199,102

Held to maturity
Obligations of state and political subdivisions	$	33	$	1	$	-		$	34

December 31, 2009
Available for sale
U.S. government sponsored entities and agencies	$	5,000	$	-	$	(34	)	$	4,966
Obligations of state and political subdivisions		59,339		761		(114	)		59,986
Mortgage-backed securities: residential		319,543		1,447		(212	)		320,778
Collateralized mortgage obligations		4,545		8		-			4,553
Other		10,338		-		(3,347	)		6,991
Total available for sale	$	398,765	$	2,216	$	(3,707	)	$	397,274

Held to maturity
Obligations of state and political subdivisions	$	66	$	1	$	-		$	67

The proceeds from sales and calls of securities and the associated gains and losses for the three and nine months ended September 30, are listed below:

	For the three months ended September 30,				For the nine months ended September 30,
	2010		2009		2010		2009
Proceeds	$	405	$	33,625	$	163,193	$	80,529
Gross gains		-		-		653		1,572
Gross losses		-		-		135		91

The tax provision related to these realized gains and losses was $181 and $518 for the nine months ended September 30, 2010 and 2009, respectively.

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

	September 30, 2010
	Amortized		Fair
	Cost		Value
Available for sale
Within one year	$	318	$	315
One to five years		10,368		10,736
Five to ten years		29,697		31,533
Beyond ten years		155,745		156,518
Total	$	196,128	$	199,102

Held to maturity
Within one year	$	33	$	34
Total	$	33	$	34

Securities pledged at September 30, 2010, had a carrying amount of $116,863 and were pledged to secure public deposits, treasury tax and loan deposits and FHLB borrowings.

At September 30, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government and its entities and agencies, in an amount greater than 10% of shareholders’ equity.

The following table summarizes the investment securities with unrealized losses at September 30, 2010 and December 31, 2009 aggregated by major security type and length of time in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss
September 30, 2010
Available for sale
Obligations of state and political subdivisions	$	193	$	(3	)	$	-	$	-		$	193	$	(3	)
Collateralized mortgage obligations		4,460		(82	)		-		-			4,460		(82	)
Other		-		-			3,334		(3,787	)		3,334		(3,787	)
Total	$	4,653	$	(85	)	$	3,334	$	(3,787	)	$	7,987	$	(3,872	)

December 31, 2009
Available for sale
U.S. Government sponsored entities and agencies	$	4,966	$	(34	)	$	-	$	-		$	4,966	$	(34	)
Obligations of state and political subdivisions		13,312		(114	)		-		-			13,312		(114	)
Mortgage-backed securities		82,283		( 212	)		-		-			82,283		(212	)
Other		-		-			4,511		(3,347	)		4,511		(3,347	)
Total	$	100,561	$	(360	)	$	4,511	$	(3,347	)	$	105,072	$	(3,707	)

Other-Than-Temporary-Impairment

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

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

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

At September 30, 2010, the Company’s securities portfolio totaled $199,135, of which $7,987 was in an unrealized loss position. The majority of unrealized losses are related to the Company’s other securities, as discussed below.

Other Securities

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

The following table presents detailed information for each trust preferred security held by the Company at September 30, 2010.

Issuer	Single Issuer or Pooled	Class		Book Value		Gross Unrealized Loss			Estimated Fair Value		Credit Rating	Number of Paying Banks in Issuance		Deferrals and Defaults as % of Collateral			Excess Subordination as a Percent of Paying Collateral
Fairfield County Bank Trust Preferred	Single		-	$	5,000	$	(2,277	)	$	2,723	NA		1	None				-
Trust Preferred Funding III LTD Series 144A	Pooled		B-2		1,128		(857	)		271	Ca/C		23		34.64	%		(35.5	)%
Trust Preferred Funding I	Pooled		B		993		(653	)		340	Caa3/D		11		44.69	%		(46.9	)%
Total				$	7,121	$	(3,787	)	$	3,334

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

Our analysis of two of these investments includes $2,121 book value of pooled trust preferred securities (CDOs). The issuers in these securities are primarily banks. The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and treat all interest payment deferrals as defaults. Upon completion of the September 30, 2010 analysis, our model indicated OTTI on both CDOs, which experienced additional defaults or deferrals during the period. These securities had OTTI losses recognized in earnings of $157 and $737 for the three and nine months ended September 30, 2010, respectively. The two CDOs remained classified as available for sale at September 30, 2010, and together, the two CDOs and one single issuer trust preferred security accounted for all of the unrealized losses in the other securities category at September 30, 2010.

The discount rates used to support the realizable value in trust preferred securities is the actual index and margin on each security. The discount rates used for the estimated fair value of the two CDOs and the one single issuer trust preferred security were 14% and 13%, respectively, at September 30, 2010. Management determined these rates based on discussions with our investment bankers regarding newly issued bank debt. Management also reviewed the current internal risk ratings of the collateral underlying the securities.

Future deferrals and defaults on the two CDOs are estimated based on an analysis of the collateral underlying the security. Particular attention is paid to each bank’s nonperforming assets to total loans, total risk based capital ratio and Texas ratio (nonperforming assets plus restructured loans/tangible capital plus the allowance for loan losses). These three ratios are weighted to calculate a credit risk rating (“CRR”) for each bank. The CRR, based on a scale of 1 being the best and 5 being the worst, is used as the basis for future default assumptions. Banks known to have deferred or defaulted prior, or subsequent, to the reporting date and banks with a CRR of 4 or higher as of the reporting date are considered to default immediately in our discounted cash flow pricing model (“model”). As of September 30, 2010 other future default rates were estimated at 50.00% if the CRR was 3.50 to 3.99, 25.00% if the CRR was 3.00 to 3.49, 12.50% if the CRR was 2.50 to 2.99, 6.25% if the CRR was 2.00 to 2.49 and 3.00% if the CRR was 1.99 or less. These weightings generate an overall estimate of future defaults that are spread over the remaining maturity of the security in our Model.

Trust Preferred Funding I has experienced $30,000 in defaults and $31,000 in deferrals, with $10,000 of the deferrals announced in the first nine months of 2010. Trust Preferred Funding III LTD Series 144A has experienced $51,750 in defaults and $48,000 in deferrals with $20,000 of the deferrals announced in the first nine months of 2010 and $27,500 of deferrals moving to defaults in the first nine months of 2010. Our Model as of September 30, 2010, estimated $24,127 and $23,505 in future defaults in Trust Preferred Funding III LTD Series 144A and Trust Preferred Funding I, respectively. Principal and interest payments on each trust preferred security have been made on a timely basis. Two interest payments on Trust Preferred Funding I have produced a shortfall, but were subsequently made whole.

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

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

The table below presents a roll forward of the credit losses recognized in earnings from December 31, 2009 through September 30, 2010:

Beginning balance, December 31, 2009	$	414
Additions/Subtractions:
Increases to the amount related to the credit loss for which OTTI was previously recognized		737
Ending balance, September 30, 2010	$	1,151

Note 5 – Loans

Loans as of September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,		December 31,
	2010		2009
Commercial and industrial loans	$	38,951	$	48,625
Real estate:
Land and construction		295,382		353,772
Commercial		923,397		997,097
Multifamily		458,046		478,840
Residential		198,323		214,548
Consumer		1,779		2,082
Less: Net deferred loan fees		2,915		4,068
Total loans		1,912,963		2,090,896
Allowance for loan losses		68,682		38,483
Net loans	$	1,844,281	$	2,052,413

Individually impaired loans were as follows:

	September 30,		December 31,
	2010		2009
Loans with no allocated allowance for loan losses	$	144,397	$	133,155
Loans with allocated allowance for loan losses		210,036		79,385
Total	$	354,433	$	212,540

Amount of the allowance for loan losses allocated	$	30,694	$	21,630
Average of individually impaired loans during the year		268,017		44,685
Interest income recognized during impairment		5,147		495

Included in impaired loans above are troubled debt restructurings of $71,169 and $42,633 at September 30, 2010 and December 31, 2009, respectively. As of September 30, 2010 and December 31, 2009, $45,382 and $15,696 of troubled debt restructurings were in nonaccrual status, respectively. The amount of the allowance for loan losses allocated to trouble debt restructurings was $10,108 and $2,571 at September 30, 2010 and December 31, 2009, respectively.

At September 30, 2010, there were no funds committed to customers whose loans were classified as a troubled debt restructuring. At December 31, 2009, $51 was committed to customers whose loans were classified as a troubled debt restructuring.

Recognition of interest income on impaired loans, as for all other loans, is discontinued when reasonable doubt exists as to the full collectability of principal or interest. Any payments received on nonaccrual impaired loans are applied to the recorded investment in the loan. No interest was earned for the nine months ended September 30, 2010 and for 2009 on the cash basis for nonaccrual impaired loans.

Nonaccrual loans, loans past due 90 days and still accruing and troubled debt restructurings not included in nonaccrual loans and loans past due 90 days and still accruing were as follows:

	September 30,		December 31,
	2010		2009
Nonaccrual loans	$	279,755	$	130,172
Loans past due 90 days and still accruing		-		-
Troubled debt restructurings not included in nonaccrual loans and loans past due 90 days and still accruing		25,787		26,937

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

Note 6 - Fair Value

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

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

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

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

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

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

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

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

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

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

			Fair Value Measurements at
			September 30, 2010 Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Other Unobservable Inputs
	Carrying Value		(Level 1)		(Level 2)		(Level 3)
Assets:
Available for sale securities
U.S. government sponsored entities and agencies	$	5,523	$	-	$	5,523	$	-
Obligations of state and political subdivisions		60,746		-		60,746		-
Mortgage-backed securities: residential		122,559		-		122,559		-
Collateralized mortgage obligations		4,460		-		4,460		-
Other		5,814		-		2,480		3,334

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

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period ended September 30, 2010 and the year ended December 31, 2009:

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Available for Sale Securities
Balance of recurring Level 3 assets at January 1, 2010	$	4,511
Total gains or losses (realized/unrealized):
Included in earnings – realized
Included in earnings – unrealized		(737	)
Included in other comprehensive income		(440	)
Purchases, sales, issuances and settlements, net		-
Transfers in and/or out of Level 3		-
Balance of recurring Level 3 assets at September 30, 2010	$	3,334

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

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

Fair Value Measurements at

September 30, 2010 Using

Quoted Prices

Significant

in Active

Other

Markets for

Observable

Unobservable

Carrying

Identical Assets

Inputs

Value

(Level 1)

( Level 2)

( Level 3)

Assets:

Impaired loans

210,036

179,342

Other real estate owned, net

3,511

			Fair Value Measurements at December 31, 2009 Using
			Quoted Prices		Significant		Significant
			in Active		Other		Other
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		( Level 2)		( Level 3)
Assets:
Impaired loans	$	79,385	$	-	$	-	$	57,755
Other real estate owned, net		2,013		-		-		2,013
Loans held for sale		16,450		-		16,450		-

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $210,036, with a valuation allowance of $30,694 at September 30, 2010, resulting in an additional provision for loan losses of $9,064 for the nine months ended September 30, 2010. At December 31, 2009, impaired loans had a carrying amount of $79,385, with a valuation allowance of $21,630, resulting in an additional provision for loan losses of $21,305 for the year ending December 31, 2009. Appraisals less than 12-months old were used to measure impairment on $197,781, or 94.17%, and $50,252, or 63.30%, of collateral dependent impaired loans at September 30, 2010 and December 31, 2009, respectively. Internal valuations were used to measure impairment on the remaining collateral dependent impaired loans at the end of each period.

Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $3,511, with no valuation allowance at September 30, 2010. Proceeds from sales of other real estate owned were $861 for the nine months ended September 30, 2010. Gross losses of $22 were realized on sales during the first nine months of 2010. The Bank’s leasehold tenancy on a building on Madison Avenue in New York City was terminated during the third quarter of 2010 and other real estate owned and the valuation allowance on other real estate owned were both reduced by $6,972. At December 31, 2009, other real estate owned had a net carrying amount of $2,013, which was made up of the outstanding balance of $8,985, net of a valuation allowance of $6,972. A write-down of $6,872 was recorded for the year ending December 31, 2009. There were no sales of other real estate owned during 2009.

There were no loans held for sale, which are carried at the lower of cost or fair value, at September 30, 2010. Charge offs of $1,864 were recognized during the first nine months of 2010 on the loans held for sale before they were classified as held for sale. Proceeds from sales of loans held for sale were $19,400 for the nine months ended September 30, 2010. Losses on sales totaled $250 during the first nine months of 2010. Loans held for sale at December 31, 2009 totaled $16,450. Charge offs of $9,883 were recognized in 2009 on the loans held for sale at December 31, 2009 before they were classified as held for sale. There were no sales of loans held for sale in 2009.

The carrying amounts and estimated fair values of financial instruments at September 30, 2010 and December 31, 2009 were as follows:

	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	32,172	$	32,172	$	18,745	$	18,745
Interest earning deposits with banks		69,611		69,611		3,409		3,409
Term placements		507		507		507		507
Securities available for sale		199,102		199,102		397,274		397,274
Securities held to maturity		33		34		66		67
Restricted stock		18,002	NA			18,353	NA
Loans held for sale		-		-		16,450		16,450
Loans, net		1,844,281		1,717,472		2,090,896		1,975,640
Other real estate owned		3,511		3,511		2,013		2,013
Accrued interest receivable		8,184		8,184		10,152		10,152

Financial liabilities:
Deposits		1,815,269		1,823,658		2,075,028		2,086,245
FHLB advances and other
Borrowings		311,480		287,233		352,820		303,354
Subordinated debt		56,595		33,626		56,351		28,480
Accrued interest payable		4,455		4,455		4,597		4,597

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

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

Note 7 – Other Borrowings and Subordinated Debentures

Advances from the FHLB were as follows:

September 30, 2010:
Maturities from January 2011 through September 2018, fixed rate at rates from 2.18% to 3.15%, averaging 2.68%		310,000

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

Each term advance is payable at its maturity date with a prepayment penalty if paid before the maturity date. All advances are periodically callable. The advances were collateralized by $779,352 and $884,328 of first mortgage loans at September 30, 2010 and December 31, 2009, respectively. The collateral at September 30, 2010 has been delivered to the FHLB and at December 31, 2009 was under a blanket lien arrangement. Based on this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to an additional $29,328 at September 30, 2010.

In 2003, a trust formed by the Company issued $11,000 of floating rate trust preferred securities as part of a pooled offering of such securities due October 8, 2033. The securities bear interest at 3 month London Interbank Offered Rate (“LIBOR”) plus 2.99% with a rate of 3.52% as of September 30, 2010. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering. The debentures and related debt issuance costs represent the sole assets of the trust. The Company may redeem the subordinated debentures, in whole or in part, on any interest payment date.

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

In 2008, a third trust formed by the Company issued $20,000 of floating rate trust preferred securities due September 1, 2038. The securities bear interest at 3 month LIBOR plus 3.75% with a rate of 4.05% as of September 30, 2010. The Company issued subordinated debentures to the trust in exchange for the proceeds of the offering. The debentures and related debt issuance costs represent the sole assets of the trust. The Company may redeem the subordinated debentures, in whole or in part, at a premium declining ratably to par on September 1, 2013.

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

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

Note 8 – Post Retirement Benefits

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

A nontax-qualified executive and director incentive retirement plan covers certain directors and executive officers. Under the plan, the Company can award up to 10% of the executive officer’s salary for the prior fiscal year and up to 25% of a director’s fees for the prior fiscal year. The Company pays each participant the amount awarded plus interest either over 15 years or in a lump sum at normal retirement age. The Bank’s expense for these plans was $(3) and $112 for the three and nine months ended September 30, 2010, respectively. The Bank’s expense for these plans was $94 and $284 for the three and nine months ended September 30, 2009, respectively.

A nontax-qualified deferred compensation plan covers all directors and executive officers. Under the plan, directors may elect to defer a portion of their fees and executive officers may elect to defer a portion of their compensation. Upon retirement or termination of service, the Company pays each participant the amount of their deferrals plus interest over 5 years, 10 years or in a lump sum payment. A liability is accrued for the obligation under this plan. The Bank’s expense for these plans was $8 and $24 for the three and nine months ended September 30, 2010, respectively. The Bank’s expense for these plans was $8 and $23 for the three and nine months ended September 30, 2009, respectively.

Certain members of management are covered by group term replacement life insurance. The benefit provides postretirement life insurance up to a maximum of two and one half times final annual base salary. The Bank’s expense for these plans was $35 and $81 for the three and nine months ended September 30, 2010, respectively. The Bank’s expense for these plans was $10 and $32 for the three and nine months ended September 30, 2009, respectively.

The Chief Executive Officer (“CEO”) has a Supplemental Executive Retirement Agreement (“SERA”). Under the plan, the CEO receives a lifetime benefit at retirement, with a guaranteed 15 years, based on seventy percent of his final three-year average base salary reduced by various offsets including employer contributions under the 401(k) Plan, the Executive Incentive Retirement Plan, as well as 50% of his Social Security benefit. The Bank’s expense for this plan was $351 and $1,054 for the three and nine months ended September 30, 2010, respectively. The Bank’s expense for this plan was $185 and $556 for the three and nine months ended September 30, 2009, respectively.

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

Three months ended September 30,	SERA Benefits				Postretirement Medical and Life Benefits
	2010		2009		2010			2009
Service cost	$	179	$	133	$	-		$	-
Interest cost		61		37		4			3
Amortization of net (gain)/loss		111		15		(1	)		(3	)
Amortization of unrecognized transition obligation		-		-		8			8
Net periodic benefit cost	$	351	$	185	$	11		$	8

Nine months ended September 30,	SERA Benefits				Postretirement Medical and Life Benefits
	2010		2009		2010			2009
Service cost	$	537	$	398	$	-		$	-
Interest cost		183		112		12			9
Amortization of net (gain)/loss		334		46		(3	)		(9	)
Amortization of unrecognized transition obligation		-		-		24			24
Net periodic benefit cost	$	1,054	$	556	$	33		$	24

Note 9 – Income Taxes

The Company had an income tax benefit for the three months ended September 30, 2010 of $548. Due to an operating loss before taxes for the quarter of $21,024, there was a gross income tax benefit of $9,348 offset by a valuation allowance on the Company’s deferred tax asset of $8,800. For the nine months ended September 30, 2010, the Company had income tax expense of $2,661. Due to an operating loss before taxes of $60,798, there was a gross income tax benefit was $25,939 offset by a valuation allowance on the Company’s deferred tax asset of $28,600. An assessment of the Company’s deferred tax asset before valuation allowance at September 30, 2010 of $33,993, led to the decision to record the additional valuation allowance. Based on the Company’s operating losses over the past four quarters, the ability to realize the full benefits of the deferred tax asset has become further impaired. In determining the need for and the amount of a valuation allowance Management considered the Company’s ability to realize carry back benefits of the current losses as well as the ability to realize future tax benefits based on tax planning strategies that are feasible and could be implemented. The Company evaluates the need for a valuation allowance for its deferred tax asset on a quarterly basis.

Note 10 - Loan Commitments and Other Related Activities

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

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

	September 30, 2010				December 31, 2009
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Commitments to make loans	$	-	$	4,760	$	2,742	$	16,971
Unused lines of credit		1,099		61,308		1,108		107,456
Standby letters of credit		-		18,526		-		18,281

Note 11 – Regulatory Capital Matters

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

Quantitative measures established by regulations to ensure capital adequacy require us to maintain minimum amounts and ratios (set forth below in the table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations). Pursuant to the Consent Agreement, the Bank must maintain Tier 1 Capital at least equal to 7% of total assets, Tier 1 Risk-Based Capital at least equal to 9% of Total Risk-Weighted Assets and Total Risk-Based Capital at least equal to 11% of Total Risk-Weighted Assets.

The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2010 and December 31, 2009 are in the following table. The Bank is categorized as adequately capitalized for regulatory capital purposes.

	Actual					Required For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2010
Total capital to risk weighted assets:
Consolidated	$	148,353		8.63	%	$	137,569		8.00	%	$ NA		NA%
Bank		147,629		8.59			137,423		8.00			171,779		10.00
Tier 1 capital to risk weighted assets:
Consolidated		92,893		5.40			68,785		4.00		NA		NA
Bank		107,804		6.28			68,712		4.00			103,068		6.00
Tier 1 capital to average assets:
Consolidated		92,893		4.06			91,366		4.00		NA		NA
Bank		107,804		4.72			91,409		4.00			114,261		5.00

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

Based on the Bank’s September 30, 2010 total risk weighted assets of $1,717,793 and total month end assets used for leverage of $2,271,957, the Bank would have needed total capital of $188,957 and Tier 1 capital $159,037 to meet the capital requirements of the Consent Agreement.

The merger agreement satisfies the requirement of the Consent Agreement to consider a sale or merger of the Bank in the event that the required capital ratios were not satisfied by June 30, 2010. All other efforts to raise capital or find another partner have been discontinued as the merger agreement prohibits the Company and the Bank from taking certain actions to facilitate raising capital or soliciting other merger partners. As such, the Bank will not be able to meet the required capital ratios in the Consent Agreement prior to the consummation of the merger.

Banking regulators solely determine the Bank’s progress toward compliance with provisions of the Consent Agreement. Accordingly, it is possible banking regulators in the future could impose further and more stringent conditions or take other actions whose impact could be material.

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

(Dollar amounts in thousands except share data)

About Forward-Looking Statements

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

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

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

Proposed Plan of Merger with People’s United Financial, Inc.

The merger is the result of an assessment by the Company and its board of directors of the Company’s strategic alternatives in light of the financial challenges facing the Company. The Merger Agreement satisfies the requirement of the Consent Agreement to sell or merge the Company and the Bank in the event that the required capital ratios are not satisfied by June 30, 2010. If the merger is not consummated, the Company would be required to find an alternative approach to overcoming its challenges and satisfying the relevant regulatory requirements, including meeting the capital ratios required by the Consent Agreement and the Written Agreement. At this time, the Company has no other alternative to raise capital or to enter into another merger agreement if the merger with People’s United is not consummated. In addition, the terms of the Merger Agreement prohibit the Company and the Bank from taking certain actions to facilitate the foregoing.

If the People’s merger is not consummated, the Company may not be able to raise any additional capital and, if it could raise any additional capital, such capital is likely to be extremely dilutive to the Company’s existing shareholders. In addition, the Company may not be able to find another merger partner or acquirer. In such circumstances, a failure to raise such capital or to find another merger partner or acquirer could result in further and more severe regulatory actions against the Company and the Bank thereby giving rise to substantial doubt as to the Company’s ability to continue as a going concern.

Overview

The Company recorded a net loss for the third quarter of 2010 of $20,476, or $1.38 per fully diluted share. The net loss for the first nine months of 2010 was $63,459, or $4.27 per fully diluted share. Net charge offs and additional specific allocations added to the allowance for loan losses on impaired loans, especially in the Bank’s land and construction portfolio, led to a provisions for loan losses of $25,000 and $77,500 for the three and nine month periods ended September 30, 2010. After net charge offs of $14,317 and $47,301 during the quarter and nine months ended September 30, 2010, the allowance for loan losses at September 30, 2010 totaled $68,682, or 3.59%, of total loans. Nonperforming loans at September 30, 2010 were $279,755, or 14.62% of total loans. At December 31, 2009, nonperforming loans were $130,172, or 6.23%, of total loans.

On June 22, 2010, the Company entered into a Written Agreement with the FRB. The Written Agreement is in addition to the Consent Agreement and similarly requires that the Company obtain the approval of the FRB prior to paying a dividend.

During the first nine months of 2010, the Bank made the following progress in complying with the Consent Agreement and Written Agreement provisions:

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

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

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

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

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

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

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

viii.

The Company provided a Capital Plan and Cash Flow Projections based on the known information at the time to the FRB.

ix.	The Company and Bank entered into a merger agreement with People’s United, a very well capitalized $22 billion financial institution.

The Bank was not successful meeting the capital ratios in the Consent Agreement of Tier 1 Capital at least equal to 7% of total assets, Tier 1 Risk-Based Capital at least equal to 9% of Total Risk-Weighted Assets and Total Risk-Based Capital at least equal to 11% of Total Risk-Weighted Assets by June 30, 2010 and did not meet the ratios at September 30, 2010. The merger agreement satisfies the requirement of the Consent Agreement to consider a sale or merger of the Bank in the event that the required capital ratios were not satisfied by June 30, 2010. All other efforts to raise capital or find another partner have been discontinued as the merger agreement prohibits the Company and the Bank from taking certain actions to facilitate raising capital or soliciting other merger partners. As such, the Bank will not be able to meet the required capital ratios in the Consent Agreement prior to the consummation of the merger.

The Merger Agreement with People’s, described above, imposes significant restrictions on the Company’s operations until the consummation of the merger.

Cash dividends will remain suspended and the Company will continue to defer interest payments on its trust preferred securities. Dividends cannot be paid to common shareholders until all deferred interest payments on the trust preferred securities are brought current.

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

Net Income (Loss)

The net loss for the quarter ended September 30, 2010 totaled $20,476, or $1.38 per diluted share, while net income for the quarter ended September 30, 2009 totaled $898, or $0.06 per diluted share. Significant trends for the third quarter of 2010 include: (i) a $15,000, or 150.00%, increase in the provision for loan losses; (ii) a $2,050, or 10.87%, decrease in net interest income; (iii) a $422, or 14.14%, decrease in total noninterest income; (iv) a $4,408, or 40.12%, increase in total noninterest expense and (v) a $506, or 1,204.76%, increase in the benefit for income taxes.

The net loss for the nine months ended September 30, 2010 totaled $63,459, or $4.27 per diluted share, while net income for the same period in 2009 totaled $7,927, or $0.59 per diluted share. Significant trends for the first nine months of 2010 include: (i) a $64,500, or 496.15%, increase in the provision for loan losses; (ii) a $5,454, or 11.22%, increase in net interest income; (iii) a $346, or 4.49%, decrease in total noninterest income; (iv) a $13,150, or 41.63%, increase in total noninterest expense and (v) a $1,156, or 30.29%, decrease in the provision for income taxes.

Net Interest Income

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

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

	For the three months ended September 30, 2010							For the three months ended September 30, 2009
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
ASSETS
Interest earning assets:
Investment securities:
Taxable	$	144,347	$	1,464		4.06	%	$	234,121	$	2,314		3.95	%
Nontaxable		60,611		762		5.03			52,320		678		5.18
Total investment securities		204,958		2,226		4.34			286,441		2,992		4.18
Loans		1,952,637		24,555		5.03			2,044,654		29,317		5.73
Interest earning deposits with banks		32,584		21		0.26			26,594		19		0.29
Other interest earning assets		18,093		211		4.66			17,471		239		5.47
Total interest earning assets		2,208,272		27,013		4.89			2,375,160		32,567		5.48
Noninterest earning assets:
Cash and cash equivalents		19,514							40,281
Other assets		63,593							66,902
Total assets	$	2,291,379						$	2,482,343

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest bearing liabilities:
Savings, NOW and money market deposits	$	857,504	$	2,026		0.94	%	$	934,085	$	3,715		1.58	%
Time deposits of $100,000 or more		437,044		2,487		2.26			441,887		3,257		2.92
Other time deposits		363,187		2,250		2.46			411,016		3,291		3.18
Other borrowings		313,517		2,134		2.72			330,340		2,287		2.77
Subordinated debt		56,551		1,041		7.36			53,580		922		6.88
Total interest bearing liabilities		2,027,803		9,938		1.95			2,170,908		13,472		2.47

Noninterest bearing liabilities:
Demand deposits		145,507							133,709
Other liabilities		18,150							21,157
Total liabilities		2,191,460							2,325,774
Stockholders' equity		99,919							156,569
Total liabilities and stockholders' equity	$	2,291,379						$	2,482,343

Net interest income (TE)/interest rate spread			$	17,075		2.94	%			$	19,095		3.01	%
Net interest earning assets/net interest margin	$	180,469				3.10	%	$	204,252				3.23	%
Less: tax equivalent adjustment				267							237
Net interest income			$	16,808						$	18,858

	For the nine months ended September 30, 2010							For the nine months ended September 30, 2009
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
ASSETS
Interest earning assets:
Investment securities:
Taxable	$	164,920	$	4,890		3.95	%	$	142,282	$	4,020		3.77	%
Nontaxable		60,359		2,304		5.09			24,509		978		5.32
Total investment securities		225,279		7,194		4.26			166,791		4,998		4.00
Loans		2,022,556		78,585		5.18			1,888,596		82,859		5.85
Interest earning deposits with banks		31,712		61		0.26			67,896		146		0.29
Other interest earning assets		18,195		645		4.73			21,920		546		3.32
Total interest earning assets		2,297,742		86,485		5.02			2,145,203		88,549		5.51
Noninterest earning assets:
Cash and cash equivalents		20,474							27,073
Other assets		72,198							73,074
Total assets	$	2,390,414						$	2,245,350

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest bearing liabilities:
Savings, NOW and money market deposits	$	904,780	$	6,689		0.99	%	$	781,101	$	10,364		1.77	%
Time deposits of $100,000 or more		446,979		8,025		2.40			411,880		9,968		3.24
Other time deposits		371,153		7,431		2.68			406,190		10,559		3.48
Other borrowings		326,948		6,384		2.60			326,818		6,773		2.76
Subordinated debt		56,474		3,067		7.24			43,643		1,915		5.85
Total interest bearing liabilities		2,106,334		31,596		2.00			1,969,632		39,579		2.69

Noninterest bearing liabilities:
Demand deposits		148,067							121,191
Other liabilities		13,775							15,873
Total liabilities		2,268,177							2,106,696
Stockholders' equity		122,237							138,654
Total liabilities and stockholders' equity	$	2,390,414						$	2,245,350

Net interest income (TE)/interest rate spread			$	54,889		3.02	%			$	48,970		2.82	%
Net interest earning assets/net interest margin	$	191,408				3.18	%	$	175,571				3.04	%
Less: tax equivalent adjustment				808							343
Net interest income			$	54,081						$	48,627

The Bank’s net interest margin decreased 13 basis points during the quarter ended September 30, 2010 compared to the same period last year. Loan yields decreased 70 basis points, primarily the result of nonperforming loans, causing a decrease in the average yield on total interest earning assets of 59 basis points, or 10.77%. The lower yields on interest earning assets were partially offset by lower interest expense on interest bearing liabilities. The average rate on interest bearing liabilities decreased 52 basis points in the third quarter of 2010 from the third quarter of 2009, a 21.05% drop. Net interest income decreased $2,050, or 10.87%, to 16,808 in the third quarter of 2010 compared to $18,858 in third quarter of 2009.

The Bank’s net interest margin increased 14 basis points during the nine months ended September 30, 2010 compared to the same period last year. Asset yields were lower by 49 basis points resulting largely from loans yields being down 67 basis due to the continued high level of nonperforming loans. All deposit categories benefited from a lower cost of funds due to the continued low rate environment. The average rate on interest bearing liabilities decreased 69 basis points in the first nine months of 2010 from the first nine months of 2009, a 25.65% drop. Net interest income increased $5,454, or 11.22%, in the nine-month period of 2010 compared to the same period of 2009.

Asset Quality

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

	At September 30,			At December 31,
	2010			2009
Nonaccrual loans:
Real estate loans:
Land and construction	$	130,747		$	52,590
Commercial		103,984			57,026
Multifamily		29,038			7,870
Residential		12,937			9,575
Commercial and industrial loans		3,038			3,097
All other loans (including overdrafts)		11			14
Total nonaccrual loans	$	279,755		$	130,172

Loans past due 90 days and still accruing		-			-

Total nonperforming loans	$	279,755		$	130,172

Other nonperforming assets:
Other real estate owned	$	3,511		$	2,013

Total nonperforming assets	$	283,266		$	132,185

Total nonperforming loans to total loans		14.62	%		6.23	%
Total nonperforming assets to total assets		12.44	%		5.02	%
Allowance for loan losses to total nonperforming loans		24.55	%		29.56	%

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

September 30, 2010	Amount		Percentage of Loan Portfolio			Total Specific Allocation		Nonperforming Loans

Interest only land and construction loans	$	277,686		14.52	%	$	7,323	$	121,122
Interest only commercial mortgages		36,515		1.91			1,527		4,329
Interest only residential mortgages and home equity lines		28,233		1.47			-		1,078
Interest only commercial loans		21,393		1.12			-		2,560
Interest only consumer loans		551		0.03			-		-
Total	$	364,378		19.05	%	$	8,850	$	129,089

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

	For the nine months ended September 30, 2010			For the nine months ended September 30, 2009

Allowance for loan losses at beginning of period	$	38,483		$	11,303
Charge offs:
Commercial		4,501			1,014
Real estate:
Land and construction		29,621			220
Commercial		9,001			-
Multifamily		4,030			-
Residential		208
Consumer		74			134
Total		47,435			1,368
Recoveries:
Commercial		6			122
Real estate:
Land and construction		5			-
Commercial		36			-
Multifamily		52			-
Consumer		35			34
Total		134			156

Net charge offs		(47,301	)		(1,212	)
Provision for loan losses		77,500			13,000
Allowance for loan losses at end of period	$	68,682		$	23,091

Ratio of net charge offs during period to average loans outstanding (annualized)		3.12	%		0.06	%

Allocation of Allowance for Loan Losses

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

	September 30, 2010					December 31, 2009
	Amount		Percentage of Loans to Total Loans			Amount		Percentage of Loans to Total Loans

Commercial	$	2,526		2.0	%	$	1,883		3.1	%
Real estate		57,631		97.9			35,802		96.8
Consumer and other		161		0.1			138		0.1
Unallocated		8,364		-			660		-
Total	$	68,682		100.0	%	$	38,483		100.0	%

The Company made a $77,500 provision for loan losses for the nine-month period ended September 30, 2010. The Company received a number of updated appraisals on impaired loans during the first nine months of 2010 that demonstrated a continued trend of declining values from the original appraisals. Net loan charge offs totaled $47,301 during the first nine months of 2010, a significant increase from $1,212 during the same period last year. The general allocation portion of the allowance for loan losses has been adjusted to account for the higher historical charge offs. For example, the general allocation for commercial mortgages has increased to 118 basis points at September 30, 2010 from 52 basis points at December 31, 2009 and the general allocation on multifamily mortgages has increased to 144 basis points from 40 basis points over the same period. The general allocation on the loan and construction portfolio increased to 836 basis points at September 30, 2010 from 350 basis points at December 31, 2009.

Nonperforming loans totaled $279,755, or 14.62%, of total loans as of September 30, 2010, as compared to $130,172, or 6.23%, as of December 31, 2009. Nonperforming loans include $45,381 of restructured loans that are in nonaccrual status. In addition, delinquent loans increased as loans 30-89 days past due totaled $43,821, or 2.29%, of total loans at September 30, 2010 compared to $20,756, or .99%, of total loans at December 31, 2009.

The ratio of the allowance for loan losses to total nonperforming loans as of September 30, 2010 and December 31, 2009 was 24.55% and 29.56%, respectively. The ratio of the allowance for loan losses to total loans increased to 3.59% at September 30, 2010 from 1.84% at December 31, 2009. Annualized net charge offs for the first nine months of 2010 totaled 3.12% of average total loans. Net charge offs for 2009 were 1.22% of average total loans.

Noninterest Income

Noninterest income decreased $422, or 14.14%, and $346, or 4.49%, for the three and nine months ended September 30, 2010, respectively, over the comparable periods in 2009. Total noninterest income was reduced $157 due to the net loss on OTTI recognized in earnings during the quarter and $737 for the first nine months of 2010. Gross revenues from the Company’s insurance subsidiary increased $7, or 0.84%, for three months ended September 30, 2010, and decreased $151, or 5.57%, for nine months ended September 30, 2010, as premiums and corresponding commissions are down as a result of the soft insurance market. Service charge income increased $34, or 5.49%, for the quarter and $176, or 10.13%, for the first nine months ended September 30, 2010, due to an increased volume of transaction accounts resulting from branch expansion efforts during 2009. Income from trust and investment management services have been relatively flat for the quarter and nine months ended September 30, 2010, due to efforts to move deposit relationships off the balance sheet and into alternative investment products to meet the requirements of the Consent Agreement, offset by efforts to reduce assets under management as the Bank moves toward offering limited trust services. Other noninterest income increased $498, or 125.76%, and $852, or 65.64%, for the three and nine month periods ended September 30, 2010, respectively, mainly the result of ATM and debit card transaction fees, loan fees generated from renewals and gross rental income on other real estate owned.

Noninterest Expense

Noninterest expense increased $4,408, or 40.12%, and $13,150, or 41.63%, for the three and nine months ended September 30, 2010, respectively, as compared to the same periods in 2009. The Company’s Federal deposit insurance increased $710, or 86.17%, and $1,624, or 51.21%, during the third quarter of 2010 and year to date, respectively, as the higher risk based insurance premiums during 2010 have outpaced both the regular premiums and special assessment expensed in the same periods in 2009. Occupancy and equipment expense increased $943, or 31.09%, and $3,290, or 39.21%, for the quarter and year to date, consistent with the increase in branch locations during 2009. Salary and employee benefits increased $27, or 0.50%, and $540, or 3.50%, for the three and nine months ended September 30, 2010, respectively, mainly the result of the new branch locations offset by no accruals for incentive compensation due to net losses. Other noninterest expenses increased $2,752, or 165.38%, and $7,779, or 179.49%, due to costs attributed to the impaired loan portfolio such as legal fees, collection expenses, real estate taxes and insurance for properties in foreclosure. Other added costs in other noninterest expenses include expenses attributed to meeting the terms of the Consent Agreement and legal fees associated with defending various lawsuits.

Income Tax Expense/Benefit

Financial Condition

Total assets were $2,278,116 at September 30, 2010, a decrease of $356,814, or 13.54%, from the previous year-end. This decrease in assets was driven predominantly by a decrease in loans, including loans held for sale, of $194,383, or 9.22%, and investments of $198,205, or 49.88%. The shrinking of the balance sheet was in reaction to the no growth provision and capital requirements of the Consent Agreement. Deposits have decreased by $259,759, or 12.52%, mainly through pricing to retain multiple service customers and let go single service CD customers.

The decrease in loans during the first nine months of 2010 included the sale, or pay off, of $97,901 of problem real estate loans. In the course of these resolutions, the Bank recovered $72,842 of principal and charged off $25,059, representing a loss rate of approximately 25.60%. These resolutions continue to be more than offset by the movement of additional loans into classified loans or potential problem loans.

Loans

The Company’s loan portfolio consists mainly of real estate loans secured by commercial and residential properties located primarily within the Bank’s market area of Long Island, the five boroughs of New York City and the greater metropolitan area. Most classifications of loans had decreases from the prior year-end. Land and construction loans decreased by $58,390, or 16.50%, as the Bank continued to look to reduce its exposure in this loan category. Commercial real estate loans declined by $94,494, or 6.40%, and combined with the decrease on land and construction loans represents the bulk of the Company’s progress in reducing its CRE loan exposure as per the terms of the Consent Agreement.

With 97.87% of the Bank’s loan portfolio secured by real estate, the portfolio is subject to additional risk of significant additional losses due to the downturn in the real estate market. The effects of the economic recession, especially commercial real estate difficulties, took, and will continue to take, a significant toll on our portfolio. The land and construction portfolio, in particular speculative construction, was impacted to the greatest degree resulting in charge offs well above historical rates.

The following table sets forth the major classifications of loans:

	September 30, 2010		December 31, 2009
Real estate:
Land and construction	$	295,382	$	353,772
Commercial		923,397		997,097
Multifamily		458,046		478,840
Residential		198,323		214,548
Agricultural		-		-
Commercial and industrial loans		38,951		48,625
Loans to individuals for household,
family and other personal expenditures		1,212		1,740
All other loans (including overdrafts)		567		342
Less: Net deferred loan fees		2,915		4,068
Total loans	$	1,912,963	$	2,090,896

Nonaccrual, Past Due and Restructured Loans

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

	September 30, 2010		December 31, 2009

Nonaccrual loans	$	279,755	$	130,172
Trouble Debt Restructured loans		71,169		47,633

The amount of gross interest income that would have been recorded in 2010 on nonaccrual and restructured loans if the loans had been current in accordance with their original terms was $15,210. The amount of interest income that was recorded in 2010 on nonaccrual and restructured loans was $5,204.

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

Impaired loans of $354,433 less nonaccrual loans of $279,755, represents $74,678 of impaired loans that are still performing, which management believes it is probable the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. In addition to loans identified as impaired that are still performing, there is a total of $74,822 of loans that are not considered impaired, where management has serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. Potential problem loans are the sum of the $74,678 and $74,822 above, or $149,500.

Securities

Securities totaled $199,135 at September 30, 2010, down 49.88% from $397,340 at December 31, 2009. Sales and principal payments of government sponsored entity and agency mortgage-backed securities used to offset the decrease in deposits caused the reduction.

The following schedule presents the estimated fair value for securities available for sale and the amortized cost for securities held to maturity as detailed in the Company's balance sheets as of September 30, 2010 and December 31, 2009.

	September 30, 2010		December 31, 2009
Available for sale
U.S. government sponsored entities and agencies	$	5,523	$	4,966
Obligations of state and political subdivisions		60,746		59,986
Mortgage-backed securities: residential		122,559		320,778
Collateralized mortgage obligations		4,460		4,553
Other securities		5,814		6,991
Total available for sale	$	199,102	$	397,274

Held to maturity
Obligations of state and political subdivisions	$	33	$	66

The following table presents the amortized costs and estimated fair values of securities by contractual maturity at September 30, 2010:

	Within One Year							After One But Within Five Years							After Five But Within Ten Years							After Ten Years							Total
	Amortized Cost		Estimated Fair Value		Yield			Amortized Cost		Estimated Fair Value		Yield			Amortized Cost		Estimated Fair Value		Yield			Amortized Cost		Estimated Fair Value		Yield			Amortized Cost		Estimated Fair Value
Available for sale
U.S. government sponsored entities and agencies	$	-	$	-		-	%	$	-	$	-		-	%	$	5,000	$	5,523		4.00	%	$	-	$	-		-	%	$	5,000	$	5,523
Obligations of state and political subdivisions		318		315		2.90			10,471		10,843		3.38			22,114		23,422		3.47			24,852		26,166		4.00			57,755		60,746
Mortgage-backed securities		-		-		-			-		-		-			-		-		-			119,230		122,559		5.42			119,230		122,559
Collateralized mortgage obligations		-		-		-			-		-		-			-		-		-			4,542		4,460		5.00			4,542		4,460
Other securities		7,121		3,334		3.71			-		-		-			1,480		1,480		3.25			1,000		1,000		3.67			9,601		5,814
Total available for sale	$	7,439	$	3,649		3.68	%	$	10,471	$	10,843		3.38	%	$	28,594	$	30,425		3.55	%	$	149,624	$	154,185		5.15	%	$	196,128	$	199,102

Held to maturity
Obligations of state and political subdivisions	$	33	$	34		4.34	%	$	-	$	-		-	%	$	-	$	-		-	%	$	-	$	-		-	%	$	33	$	34

Deposits & Other Borrowings

Total deposits decreased $259,457, or 12.50%, for the period ended September 30, 2010 from December 31, 2009. The largest segment of the portfolio was savings, NOW and money market deposits, which decreased $131,405, or 13.15%, in the first nine months of 2010. Time deposits decreased $121,404, or 13.14%. Strategies implemented to attempt to meet the terms of the Consent Agreement led to the shrinkage in total deposits.

At September 30, 2010, the remaining maturities of the Bank's time deposits in amounts of $100,000 or more were as follows:

3 months or less	$	140,767
Over 3 through 6 months		65,286
Over 6 through 12 months		52,784
Over 12 months		199,005
Total	$	457,842

Other borrowings decreased to $311,480 at September 30, 2010 from $352,820 at December 31, 2009. Included in other borrowings are $1,480 of secured borrowings that are a financial arrangement with the Senior Housing Crime Prevention program that are secured by U.S. government agency bonds. At maturity, the Company has the option to repay the secured borrowings simultaneous with the release of the collateral or to renew the borrowings.

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

	September 30, 2010			December 31, 2009

FHLBNY OLOC:
Maximum month end balance during the period	$	14,800		$	36,340
Average balance during the period		4,735			1,801
Weighted average interest rate during the period		0.26	%		0.38	%
Weighted average interest rate at period end		-			0.34

Term advances from FHLBNY:
Maximum month end balance during the period	$	310,000		$	325,000
Average balance during the period		310,000			324,247
Weighted average interest rate during the period		2.68	%		2.77	%
Weighted average interest rate at period end		2.68			2.70

Senior Housing Crime Prevention:
Maximum month end balance during the period	$	1,480		$	1,480
Average balance during the period		1,480			1,480
Weighted average interest rate during the period		1.79	%		1.79	%
Weighted average interest rate at period end		1.79			1.79

Liquidity

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

The Bank has the ability, as a member of the FHLB system, to borrow against residential and commercial mortgages owned by the Bank and pledged to FHLB. As a result of entering into the Consent Agreement, the FHLB has required the Bank to physically deliver the pledged loan collateral during 2010. At December 31, 2009, the collateral pledged to the FHLB was under a blanket lien arrangement and delivered electronically. At September 30, 2010, the unused available credit totaled $29,328, which represents a decrease of $455,901 from the December 31, 2009 amount of $485,229. The Bank has the ability to deliver additional collateral should the need arise. As of September 30, 2010, the Bank had no collateralized overnight borrowings, which was down from $36,340 at December 31, 2009. The Bank had $310,000 and $315,000 in collateralized term advances outstanding with the FHLB as of September 30, 2010 and December 31, 2009, respectively. At September 30, 2010, the Company has $101,783 in cash and cash equivalents, a 359.43% increase from the December level of $22,154, as additional interest earning deposits are being maintained by the Bank at the Federal Reserve Bank of New York for increased liquidity while under the Consent Agreement.

The Company’s principal source of liquidity is dividends from the Bank. Cash available to service Company trust preferred debt obligations, to pay expenses and for distribution of dividends to shareholders is primarily derived from dividends paid by the Bank to the Company. Under the Consent Agreement, the Bank’s payment of dividends requires prior approval of the FDIC and Banking Department. Under the Written Agreement, the Bank’s payment of dividends requires prior approval of the FRB. Such prior approval of the FDIC, Banking Department and FRB is unlikely to be received. As of September 30, 2010, the Company had $96 in cash to pay its expenses. Interest payments on trust preferred securities were made during the first quarter of 2010, but the Company deferred interest payments on its trust preferred securities during the second and third quarters of 2010 to preserve cash for operating expenses due to the dividend restrictions. In the event the Company subsequently needs additional funds and the FDIC, Banking Department and FRB are unwilling to approve a dividend from the Bank, the Company will need to raise additional capital or borrow funds to meet liquidity needs.

Capital Resources

Total stockholders’ equity was $75,008 at September 30, 2010, a decrease of $60,747, or 44.75%, from December 31, 2009, primarily due the net loss of $63,459 offset by an increase in other comprehensive income of $2,472.

Initial efforts to meet the capital requirements of the Consent Agreement focused upon shrinking the balance sheet. The success in shrinking the balance sheet has been more than offset by the loss for the first nine months resulting largely from the $77,500 provision for loan losses and a valuation allowance of $28,600 against the Company’s deferred tax asset. As a result, efforts were focused on assessing the Company’s strategic initiatives, which resulted in the Company entering into the Merger Agreement with People’s United Financial, Inc. on July 15, 2010.

The Company had returns on average equity of (69.22%) and 7.62%, and returns on average assets of (3.54%) and 0.47% for the nine months ended September 30, 2010 and 2009, respectively. The equity to assets ratio was 3.29% and 5.15% at September 30, 2010 and December 31, 2009, respectively. No dividends were paid for the nine months ended September 30, 2010. The Company paid dividends of $1,541 for the nine months ended September 30, 2009.

Recent Regulatory and Accounting Developments

Adoption of New Accounting Guidance

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

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

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

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

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

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

Newly Issued But Not Yet Effective Accounting Guidance

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

On July 21, 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosures will require significantly more information about credit quality within the Company’s portfolio. Although this statement addresses only disclosures and does not seek to change recognition or measurement, the disclosures represent a meaningful change in practice. The amendments that require period-end disclosures are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity during a period are effective for periods beginning on or after December 15, 2010. Management is currently evaluating the impact of ASU 2010-20 on the Company’s disclosures.

Recent Legislative Developments

On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that implements far-reaching changes to the regulation of the financial services industry, including provisions that, among other things will:

·	Centralize responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws.


·	Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies.


·	Require the FDIC to seek to make its capital requirements for banks such as the Bank of Smithtown countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction.


·	Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital.


·	Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions.


·	Make permanent the $250 thousand limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100 thousand to $250 thousand, and provide unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all insured depository institutions.


·	Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.


·	Increase the authority of the Federal Reserve to examine the Company and its non-bank subsidiaries.

Many aspects of the act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

The Company utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure to net interest income to sustained interest rate changes. Management routinely monitors simulated net interest income sensitivity over a rolling two-year horizon. The simulation model captures the seasonality of the Company’s deposit flows and the impact of changing interest rates on the interest income received and the interest expense paid on all assets and liabilities reflected on the Company’s balance sheet. This sensitivity analysis is compared to the asset and liability policy limits that specify a maximum tolerance level for net interest income exposure over a one-year horizon. A 100, 200 and 300 basis point upward and downward shift in interest rates over a one-year time horizon was considered at September 30, 2010 and December 31, 2009. A parallel and pro rata shift in rates over a twelve-month period is assumed.

The following table reflects the Bank’s income sensitivity analysis as of September 30, 2010 and December 31, 2009:

Change In Interest Rates In Basis Points	As of September 30, 2010 Potential Change In						As of December 31, 2009 Potential Change In
(Rate Shock)	Net Interest Income						Net Interest Income
	$ Change			% Change			$ Change			% Change

Up 300 basis points		1,999			2.67			1,048			1.18
Up 200 basis points		1,365			1.82			880			0.99
Up 100 basis points		702			0.94			542			0.61
Static		-			-			-			-
Down 100 basis points		(676	)		(0.90	)		(667	)		(0.75	)
Down 200 basis points		(1,276	)		(1.71	)		(1,541	)		(1.74	)
Down 300 basis points		(1,863	)		(2.49	)		(2,603	)		(2.94	)

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

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

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 131-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2010. Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective. There has been no change in the Company’s internal controls over financial reporting during the quarter that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

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

On April 26, 2010, the Plaintiffs in the February 25, 2010 action moved to consolidate their action with the action filed on March 29, 2010, to have itself appointed lead plaintiff in the consolidated action and to obtain approval of its selection of lead counsel. The motion is currently pending.

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

On May 12, 2010, the defendants removed the April 22, 2010 action to the United States District Court for the Eastern District of New York. The defendants notified the court that the action was related to the February 25, 2010 and March 29, 2010 actions. On June 1, 2010, the plaintiff moved to remand the action back to State court. The defendants filed an opposition to the plaintiff’s remand motion on June 15, 2010, and the plaintiff filed his reply on June 22, 2010. The plaintiff’s remand motion has been assigned to a magistrate judge and is currently pending.

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

Five cases have been filed in the New York State Supreme Court, Suffolk County, and one in the United States District Court, Eastern District of New York, on behalf of a putative class of Smithtown Bancorp stockholders against Smithtown Bancorp, Smithtown Bancorp’s directors and certain of its officers and People’s United challenging People’s United’s proposed acquisition of Smithtown Bancorp.

The complaints allege that the individual defendants breached their fiduciary duties of loyalty, good faith, fair dealing, due care, candor, and full and fair disclosure in connection with the proposed acquisition by People’s United. The complaints allege that Smithtown Bancorp and People’s United aided and abetted the alleged fiduciary breaches by the individual defendants. The complaint filed in the Eastern District of New York, which was voluntarily dismissed without prejudice by the plaintiff on October 19, 2010, alleged, in addition to the foregoing, violations of the federal securities laws.

In an order dated September 22, 2010, and pursuant to the parties’ agreement, the New York State Supreme Court, Suffolk County among other things, consolidated the cases filed in that court. The consolidated action is captioned In re Smithtown Bancorp Shareholder Litigation (No. 026751/2010) (“In re Smithtown Bancorp”).

On October 6, 2010, the plaintiffs in In re Smithtown Bancorp filed a Consolidated Class Action Complaint. The Consolidated Class Action Complaint alleges, among other things, that the individual defendants did not maximize shareholder value and agreed to deal protection devices that impermissibly limit their ability to pursue and accept any competing offer for Smithtown Bancorp. The Consolidated Class Action Complaint also alleges that the amended proxy statement/prospectus contains material omissions which, if not cured, would prevent Smithtown Bancorp shareholders from casting an informed vote in connection with the proposed merger.

The complaints seek, among other things, an order enjoining the defendants from proceeding with or consummating the transaction, other equitable relief, damages and attorneys’ fees.

On October 12, 2010, the parties in In re Smithtown Bancorp entered into an agreement in principle to settle the action. The agreement is set forth in a Memorandum of Understanding between the parties (“MOU”).

The defendants believe that no further disclosure than what was set forth in the previous filing of the amended proxy statement/prospectus is required under applicable laws, but to avoid the costs, distraction and disruption of further litigation, the defendants in In re Smithtown Bancorp have agreed, as part of the MOU and without admitting to the validity of any allegations made in the action, to make certain additional disclosure requested by the plaintiffs in this proxy statement/prospectus. The proposed settlement is subject to, among other things, court approval, plaintiffs conducting confirmatory discovery to confirm the fairness and adequacy of the terms of the settlement and the disclosures relating to the proposed merger and the closing of the proposed merger.

Smithtown Bancorp, People’s United and the individual defendants deny any wrongdoing in connection with the proposed merger.

On October 21, 2010, the Company received a subpoena from the U.S. Securities and Exchange Commission seeking documents concerning, among other things, the Federal Deposit Insurance Corporation's most recent annual examination of the Bank and the Company’s financial results, loan portfolio, loan losses and reserves reported during the second half of 2009. The Company intends to respond to the subpoena and cooperate fully in the inquiry.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Items 1A: Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and the additional risk factor below, as such factors could materially affect the Company’s business, financial condition, or future results. The risks described below and in the Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company, or that the Company currently deems to be immaterial, also may have a material impact on the Company’s business, financial condition, or results.

The proposed merger of the Company with People’s United described above under “Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations—Proposed Plan of Merger with People’s United Financial, Inc.” might not be consummated. The merger is subject to approval by bank regulatory authorities and by the shareholders of the Company and to the satisfaction of various closing conditions. The merger is the result of an assessment by the Company and its board of directors of the Company’s strategic alternatives in light of the financial challenges facing the Company. The Merger Agreement satisfies the requirement of the Consent Agreement to sell or merge the Company and the Bank in the event that the required capital ratios are not satisfied by June 30, 2010. If the merger is not consummated, the Company would be required to find an alternative approach to overcoming its challenges and satisfying the relevant regulatory requirements, including meeting the capital ratios required by the Consent Agreement and the Written Agreement. At this time, the Company has no other alternative to raise capital or to enter into another merger agreement if the merger with People’s United is not consummated. In addition, the terms of the Merger Agreement prohibit the Company and the Bank from taking certain actions to facilitate the foregoing.

If the People’s United merger is not consummated, the Company may not be able to raise any additional capital and, if it could raise any additional capital, such capital is likely to be extremely dilutive to the Company’s existing shareholders. In addition, the Company may not be able to find another merger partner or acquirer. In such circumstances, a failure to raise such capital or to find another merger partner or acquirer could result in further and more severe regulatory actions against the Company and the Bank.

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

None

Item 3. Defaults upon Senior Securities

None

Item 4. Reserved

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

Exhibit	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

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, 2010

	/s/ BRADLEY E. ROCK
	Bradley E. Rock, Chairman and Chief Executive Officer (Principal Executive Officer)

	/s/ CHRISTOPHER BECKER
	Christopher Becker, Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Attached files

SMITHTOWN BANCORP INC Reports

Also read