form10q_jun2008.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: JUNE 30, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________.

Commission File No. 001-14783

STATE BANCORP, INC.

(Exact name of registrant as specified in its charter)

NEW YORK 11-2846511

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

TWO JERICHO PLAZA, JERICHO, NEW YORK 11753

(Address of principal executive offices) (Zip Code)

(516) 465-2200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]

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

Yes [ ] No [X]

As of July 23, 2008, there were 14,403,105 shares of registrant’s Common Stock outstanding.

STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2008 and December 31, 2007

	June 30, 2008			December 31, 2007
ASSETS:
Cash and due from banks	$	47,124,991		$	35,380,214
Securities purchased under agreements to resell		-			61,000,000
Total cash and cash equivalents		47,124,991			96,380,214
Securities available for sale - at estimated fair value		386,431,852			401,229,235
Federal Home Loan Bank and other restricted stock		7,358,143			8,053,643
Loans and leases (net of allowance for loan and lease losses
of $17,248,294 in 2008 and $14,704,864 in 2007)		1,043,815,463			1,026,304,532
Bank premises and equipment - net		6,379,076			5,777,493
Bank owned life insurance		29,523,582			29,006,619
Net deferred income taxes		21,005,892			17,494,843
Receivable - current income taxes		11,587,770			14,034,377
Receivable - securities sales/calls		-			14,822,820
Other assets		17,257,675			14,910,638
TOTAL ASSETS	$	1,570,484,444		$	1,628,014,414
LIABILITIES:
Deposits:
Demand	$	316,593,412		$	332,464,460
Savings		566,376,352			566,999,841
Time		363,590,105			430,474,815
Total deposits		1,246,559,869			1,329,939,116
Federal funds purchased		35,000,000			-
Other temporary borrowings		126,000,000			139,031,328
Subordinated notes		10,000,000			10,000,000
Junior subordinated debentures		20,620,000			20,620,000
Payable - securities purchases		10,000,000			-
Other accrued expenses and liabilities		10,296,695			14,786,302
Total liabilities		1,458,476,564			1,514,376,746
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 250,000 shares; 0 shares issued		-			-
Common stock, $5.00 par value, authorized 20,000,000 shares;
issued 15,326,344 shares in 2008 and 14,996,348 shares in 2007;
outstanding 14,338,692 shares in 2008 and 14,008,696 shares in 2007		76,631,720			74,981,740
Surplus		87,677,460			86,654,142
Retained deficit		(32,461,545	)		(32,164,263	)
Treasury stock (987,652 shares in 2008 and 2007)		(16,646,426	)		(16,646,426	)
Accumulated other comprehensive (loss) income
(net of taxes of ($2,102,408) in 2008 and $534,913 in 2007)		(3,193,329	)		812,475
Total stockholders' equity		112,007,880			113,637,668
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,570,484,444		$	1,628,014,414
See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three and Six Months Ended June 30, 2008 and 2007

	Three Months					Six Months
	2008		2007			2008		2007
INTEREST INCOME:
Interest and fees on loans and leases	$	17,347,270	$	20,796,748		$	36,592,190	$	41,138,404
Federal funds sold and securities purchased under agreements to resell		141,204		807,068			963,237		2,067,709
Securities held to maturity - taxable		-		10,614			-		80,541
Securities available for sale - taxable		4,782,884		6,019,071			9,710,467		11,867,008
Securities available for sale - tax-exempt		58,547		130,977			138,245		263,152
Securities available for sale - dividends		9,917		29,750			39,667		59,500
Dividends on Federal Home Loan Bank and other restricted stock		134,350		70,042			320,849		96,654
Total interest income		22,474,172		27,864,270			47,764,655		55,572,968
INTEREST EXPENSE:
Deposits		5,111,449		10,448,516			12,896,157		22,775,299
Temporary borrowings		755,798		1,683,319			2,109,218		1,789,810
Subordinated notes		231,185		228,894			462,370		460,079
Junior subordinated debentures		318,518		459,382			678,855		914,373
Total interest expense		6,416,950		12,820,111			16,146,600		25,939,561
Net interest income		16,057,222		15,044,159			31,618,055		29,633,407
Provision for loan and lease losses		4,907,744		627,000			6,525,744		2,201,000
Net interest income after provision for loan and lease losses		11,149,478		14,417,159			25,092,311		27,432,407
NON-INTEREST INCOME:
Service charges on deposit accounts		552,533		548,284			1,154,970		1,138,605
Net security gains (losses)		51,550		(15,048	)		60,159		(34,449	)
Income from bank owned life insurance		229,352		281,869			516,963		560,005
Other operating income		604,109		615,645			1,224,564		1,123,073
Total non-interest income		1,437,544		1,430,750			2,956,656		2,787,234
Income before operating expenses		12,587,022		15,847,909			28,048,967		30,219,641
OPERATING EXPENSES:
Salaries and other employee benefits		5,769,340		10,081,193			11,738,719		17,587,332
Occupancy		1,396,651		1,324,027			2,774,330		2,641,519
Equipment		294,460		339,877			617,183		652,955
Legal		1,496,097		333,361			2,732,126		480,791
Marketing and advertising		18,827		469,146			286,808		917,897
Audit and assessment		385,005		285,455			653,003		576,842
Other operating expenses		1,859,213		1,733,109			3,546,884		3,523,630
Total operating expenses		11,219,593		14,566,168			22,349,053		26,380,966
INCOME BEFORE INCOME TAXES		1,367,429		1,281,741			5,699,914		3,838,675
PROVISION FOR INCOME TAXES		406,673		351,928			1,738,783		1,162,162
NET INCOME	$	960,756	$	929,813		$	3,961,131	$	2,676,513
BASIC EARNINGS PER COMMON SHARE	$	0.07	$	0.07		$	0.28	$	0.20
DILUTED EARNINGS PER COMMON SHARE	$	0.07	$	0.06		$	0.28	$	0.19
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC		14,105,301		13,693,084			14,041,806		13,620,968
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED		14,156,770		13,866,459			14,084,469		13,911,346

See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2008 and 2007
	2008			2007
OPERATING ACTIVITIES:
Net income	$	3,961,131		$	2,676,513
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan and lease losses		6,525,744			2,201,000
Depreciation and amortization of bank premises and equipment		659,059			612,439
Amortization of net premium on securities		909,316			736,624
Deferred income tax (benefit) expense		(873,728	)		10,605,323
Net security (gains) losses		(60,159	)		34,449
Income from bank owned life insurance		(516,963	)		(560,005	)
Stock-based compensation expense		352,837			316,432
Shares issued under the directors' stock plan		85,765			-
Decrease in receivable - current income taxes		2,446,607			-
Increase in other assets		(2,347,037	)		(2,664,402	)
Increase (decrease) in accrued legal expenses		1,184,516			(65,137,705	)
Decrease in other accrued expenses and other liabilities		(5,674,122	)		(2,899,733	)
Net cash provided by (used in) operating activities		6,652,966			(54,079,065	)
INVESTING ACTIVITIES:
Proceeds from maturities of securities held to maturity		-			6,375,996
Proceeds from sales of securities available for sale		64,573,865			71,640,551
Proceeds from maturities of securities available for sale		138,267,512			129,753,030
Purchases of securities available for sale		(170,713,457	)		(208,046,959	)
Decrease (increase) in Federal Home Loan Bank and other restricted stock		695,500			(5,445,300	)
Increase in loans and leases - net		(24,036,675	)		(10,844,066	)
Purchases of bank premises and equipment - net		(1,260,642	)		(154,611	)
Net cash provided by (used in) investing activities		7,526,103			(16,721,359	)
FINANCING ACTIVITIES:
Decrease in demand and savings deposits		(16,494,537	)		(2,027,024	)
Decrease in time deposits		(66,884,710	)		(222,341,743	)
Increase in federal funds purchased		35,000,000			22,500,000
(Decrease) increase in other temporary borrowings		(13,031,328	)		118,989,377
Cash dividends paid		(4,258,413	)		(2,050,341	)
Private placement expenses		-			(249,917	)
Proceeds from shares issued under dividend reinvestment plan		1,801,413			1,502,091
Proceeds from shares issued pursuant to compensation awards		433,283			1,036,217
Net cash used in financing activities		(63,434,292	)		(82,641,340	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(49,255,223	)		(153,441,764	)
CASH AND CASH EQUIVALENTS - JANUARY 1		96,380,214			206,210,873
CASH AND CASH EQUIVALENTS - JUNE 30	$	47,124,991		$	52,769,109
SUPPLEMENTAL DATA:
Interest paid	$	17,177,010		$	26,282,595
Income taxes paid	$	154,551		$	13,129
See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (UNAUDITED)
For the Six Months Ended June 30, 2008 and 2007
													Accumulated Other			Total
	Common						Retained			Treasury			Comprehensive			Stockholders'			Comprehensive
	Stock			Surplus			Deficit			Stock			Income (Loss)			Equity			Income (Loss)
Balance, January 1, 2008	$	74,981,740		$	86,654,142		$	(32,164,263	)	$	(16,646,426	)	$	812,475		$	113,637,668
Comprehensive loss:
Net income		-			-			3,961,131			-			-			3,961,131		$	3,961,131
Other comprehensive loss,
net of tax:
Unrealized holding losses
arising during the period (1)		-			-			-			-			-						(3,969,526	)
Reclassification
adjustment for gains
included in net income (2)		-			-			-			-			-						(36,278	)
Total other
comprehensive loss		-			-			-			-			(4,005,804	)		(4,005,804	)		(4,005,804	)
Total comprehensive loss		-			-			-			-			-					$	(44,673	)
Cash dividend ($0.30 per share)		-			-			(4,258,413	)		-			-			(4,258,413	)
Shares issued under the dividend
reinvestment plan (149,520 shares
at 95% of market value)		747,600			1,053,813			-			-			-			1,801,413
Shares issued under the
directors' stock plan (6,513 shares)		32,565			53,200			-			-			-			85,765
Stock options exercised
(19,091 shares)		95,455			77,839			-			-			-			173,294
Restricted stock awards
(161,084 shares)		805,420			(545,431	)		-			-			-			259,989
Stock-based compensation
expense		(31,060	)		383,897			-			-			-			352,837
Balance, June 30, 2008	$	76,631,720		$	87,677,460		$	(32,461,545	)	$	(16,646,426	)	$	(3,193,329	)	$	112,007,880
Balance, January 1, 2007	$	73,021,015		$	83,767,505		$	(32,158,439	)	$	(16,646,426	)	$	(3,843,145	)	$	104,140,510
Comprehensive income:
Net income		-			-			2,676,513			-			-			2,676,513		$	2,676,513
Other comprehensive income,
net of tax:
Unrealized holding gains
arising during the period (1)		-			-			-			-			-						153,377
Reclassification
adjustment for losses
included in net income (2)		-			-			-			-			-						20,774
Cash flow hedges (3)		-			-			-			-			-						108,072
Total other
comprehensive income		-			-			-			-			282,223			282,223			282,223
Total comprehensive income		-			-			-			-			-					$	2,958,736
Cash dividend
($0.15 per share)		-			-			(2,050,341	)		-			-			(2,050,341	)
Shares issued under the
dividend reinvestment
plan (81,146 shares at
95% of market value)		405,730			1,096,361			-			-			-			1,502,091
Stock options exercised
(170,279 shares)		851,395			184,822			-			-			-			1,036,217
Stock-based compensation
expense		-			316,432			-			-			-			316,432
Private placement expenses		-			(249,917	)		-			-			-			(249,917	)
Balance, June 30, 2007	$	74,278,140		$	85,115,203		$	(31,532,267	)	$	(16,646,426	)	$	(3,560,922	)	$	107,653,728
(1) Net of taxes of ($2,613,440) and ($312,106) in 2008 and 2007, respectively.
(2) Net of taxes of $23,881 and $13,675 in 2008 and 2007, respectively.
(3) Net of taxes of $71,928 in 2007.
See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated financial statements include the accounts of State Bancorp, Inc. and its wholly owned subsidiary, State Bank of Long Island (the “Bank”). The Bank’s consolidated financial statements include the accounts of its wholly owned subsidiaries, SB Portfolio Management Corp. (“SB Portfolio”), SB Financial Services Corp. (“SB Financial”), SB ORE Corp., SB Equipment Leasing Corp. (“SB Equipment”), formerly known as Studebaker-Worthington Leasing Corp., and New Hyde Park Leasing Corporation and its subsidiaries, P.W.B. Realty, L.L.C. and State Title Agency, LLC. SB Portfolio manages a portfolio of fixed income investments and SB Financial provides balance sheet management services with a focus on interest rate risk management. On June 2, 2008, the Bank completed the previously announced sale of substantially all of the assets of its leasing subsidiary, SB Equipment. State Bancorp, Inc. and subsidiaries are collectively referred to hereafter as the “Company.” All intercompany accounts and transactions have been eliminated.

In addition to the foregoing, the Company has two other subsidiaries, State Bancorp Capital Trust I and II, neither of which are consolidated with the Company for reporting purposes in accordance with Financial Accounting Standards Board revised Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” State Bancorp Capital Trust I and II were formed in 2002 and 2003, respectively, for the purpose of issuing trust preferred securities, the proceeds of which were used to acquire junior subordinated debentures issued by the Company. The Company has fully and unconditionally guaranteed the trust preferred securities along with all obligations of State Bancorp Capital Trust I and II under the trust agreements relating to the respective trust preferred securities. See Note 8 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of the Company’s 2007 Annual Report on Form 10-K.

In the opinion of the Company’s management, the preceding unaudited condensed consolidated financial statements contain all adjustments, consisting of normal accruals, necessary for a fair presentation of its condensed consolidated balance sheets as of June 30, 2008 and December 31, 2007, its condensed consolidated statements of income for the three and six months ended June 30, 2008 and 2007, its condensed consolidated statements of cash flows for the six months ended June 30, 2008 and 2007 and its condensed consolidated statements of stockholders’ equity and comprehensive income for the six months ended June 30, 2008 and 2007, in accordance with accounting principles generally accepted in the United States of America. The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the results of operations to be expected for the remainder of the year. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s 2007 Annual Report on Form 10-K.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation on a modified prospective basis with the cost of any subsequent grants of stock-based compensation to be reflected in the income statement.

Accounting for Derivative Financial Instruments

From time to time, the Bank may execute customer interest rate swap transactions together with offsetting interest rate swap transactions with institutional dealers. Each swap is mutually exclusive, and the swaps are marked to market with changes in fair value recognized as other income, with the fair value for each individual swap offsetting the corresponding other. For the three and six months ended June 30, 2008 and 2007, neither income nor losses associated with these swaps were material to the financial statements. At June 30, 2008 and December 31, 2007, the total gross notional amount of swap transactions outstanding was $43,246,209. The customer swap program provides a customer financing option that can result in longer maturity terms without incurring the associated interest rate risk. The Company does not hold any derivative financial instruments for trading purposes.

The Bank was party to two swap agreements that economically hedged a portion of the interest rate variability in its portfolio of prime rate loans. In 2005, the Bank terminated these two interest rate swap agreements in support of enhancing its interest rate sensitivity position. The entire cost to unwind the swap agreements was fully amortized at December 31, 2007, and thus no expenses were recognized during the six months ended June 30, 2008. For the three and six months ended June 30, 2007, the Company recognized $90,000 and $180,000, respectively, of such expenses.

Accounting for Bank Owned Life Insurance

The Bank is the beneficiary of a policy that insures the lives of certain senior officers of the Bank and its subsidiaries. The Company has recognized the cash surrender value, or the amount that can be realized under the insurance policy, as an asset in the consolidated balance sheets. Changes in the cash surrender value are recorded in other income.

Effect of Recently Issued Accounting Standards on the Financial Statements

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

In November 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB No. 109 provides views on the accounting for written loan commitments recorded at fair value under GAAP. SAB No. 109 supersedes SAB No. 105, “Application of Accounting Principles to Loan Commitments.” Specifically, SAB No. 109 states that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The provisions of SAB No. 109 are applicable on a prospective basis to written loan commitments recorded at fair value under GAAP that are issued or modified in fiscal quarters beginning on or after December 15, 2007. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2008, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards,” which clarifies the accounting for income tax benefits related to the payment of dividends on equity-classified employee share-based payment awards that are charged to retained earnings under revised SFAS No. 123, “Share-Based Payment.” The EITF concluded that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified non-vested equity shares, non-vested equity share units and outstanding equity share options should be recognized as an increase to additional paid-in capital. Our adoption of EITF Issue No. 06-11 did not have a material impact on our financial condition or results of operations.

In December 2007, the FASB issued revised SFAS No. 141, “Business Combination,” or SFAS No. 141(R). SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (formerly the purchase method) be used for all business combinations; that an acquirer be identified for each business combination; and that intangible assets be identified and recognized separately from goodwill. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. Additionally, SFAS No. 141(R) changes the requirements for recognizing assets acquired and liabilities assumed arising from contingencies and recognizing and measuring contingent consideration. SFAS No. 141(R) also enhances the disclosure requirements for business combinations. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and may not be applied before that date. The Company has not yet completed its evaluation of the impact of adopting this standard.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other things, SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS No. 160 also amends SFAS No. 128, “Earnings per Share,” so that earnings per share calculations in consolidated financial statements will continue to be based on amounts attributable to the parent. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 and is applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements which are to be applied retrospectively for all periods presented. The Company has not yet completed its evaluation of the impact of adopting this standard.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for; and (3) how such items affect an entity’s financial position, performance and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 also encourages, but

does not require, disclosures for earlier periods presented for comparative purposes at initial adoption. Since the provisions of SFAS No. 161 are disclosure related, the adoption of SFAS No. 161 will not have an impact on the Company’s financial condition or results of operations.

In June 2008, the FASB issued Staff Position, or FSP, No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP concluded that unvested share-based payment awards that contain nonforfeitable rights to dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. Our restricted stock awards are considered participating securities. FSP No. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. All prior-period EPS data presented shall be adjusted retrospectively to conform with the provisions of the FSP. Early application is not permitted. FSP No. EITF 03-6-1 is not expected to have a material impact on out computation of EPS.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS No. 162 will be effective 60 days following the approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Any effect of applying the provisions of SFAS No. 162 shall be reported as a change in the accounting principle in accordance with No. 154, “Accounting Changes and Error Corrections.” Additionally, the accounting principles that were used before and after the application of SFAS No. 162 and the reason why applying SFAS No. 162 resulted in a change in accounting principles are to be disclosed. SFAS No. 162 is not expected to result in any change in our accounting principles and, therefore, will not have an impact on our financial condition or results of operations.

2. STOCKHOLDERS’ EQUITY

The Company has 250,000 shares of preferred stock authorized. No shares have been issued as of June 30, 2008.

Stock held in treasury by the Company is reported as a reduction to total stockholders’ equity. During the first six months of 2008, the Company did not repurchase any of its common shares.

3. EARNINGS PER SHARE

Basic earnings per common share is computed based on the weighted-average number of shares outstanding. Diluted earnings per share is computed based on the weighted average number of shares outstanding, increased by the number of common shares that are assumed to have been purchased with the proceeds from the exercise of stock options. These purchases were assumed to have been made at the average market price of the common stock. The average market price is based on the average closing price for the common stock.

4. SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE

At the time of purchase of a security, the Company designates the security as either available for sale or held to maturity, depending upon investment objectives, liquidity needs and intent. Securities held to maturity are stated at cost, adjusted for premium amortized or discount accreted, if any. The Company has the positive intent and ability to hold such securities to maturity. Securities available for sale are stated at estimated fair value. Unrealized gains and losses are excluded from income and reported net of tax as accumulated other comprehensive income (loss) as a separate component of stockholders’ equity until realized. Interest earned on investment securities is included in interest income. Realized gains and losses on the sale of securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold.

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company’s management considers whether the securities are issued by the U.S. Government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts’ reports. The Company’s management currently conducts impairment evaluations at least on a quarterly basis and has concluded that, at June 30, 2008, there were no other-than-temporary impairments of the Company’s investment securities.

At June 30, 2008 and December 31, 2007, the Company had no securities held to maturity. The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale at June 30, 2008 and December 31, 2007 are as follows:

The securities, at estimated fair value, that have been in a continuous loss position for 12 months or longer at June 30, 2008 are categorized as: (1) adjustable rate mortgage-backed securities totaling $12,947,174; (2) fixed rate mortgage-backed securities totaling $39,618,972; (3) adjustable rate trust preferred securities totaling $5,000,000; and (4) fixed rate trust preferred securities totaling $1,817,599. The market value and, therefore, the loss position for each type of security respond differently to market conditions. In management’s opinion, those market conditions are temporary in nature and provide the basis for the Company’s belief that the declines are temporary.

In the case of adjustable rate securities, the coupon rate resets periodically and is typically comprised of a base market index rate plus a credit spread. The market value of these securities is primarily influenced by the length of time remaining before the coupon rate resets to market levels, as well as the current levels for credit spreads. As an adjustable rate security approaches a reset date, it is likely that an unrealized loss position would dissipate provided that the market level for credit spreads are the same or lower than the spread imbedded in the security. As credit spreads widen from the level originally imbedded in the price of a security, a security typically will experience price depreciation. Recovery of the decline in market value of a security due to credit spread widening will occur when credit spreads return to the levels when the security was purchased or when the security matures.

The market value for fixed rate securities changes inversely with changes in interest rates. When interest rates are falling, the market value of fixed rate securities will appreciate, whereas in a rising interest rate environment, the market value of fixed rate securities will depreciate. The market value of fixed rate securities is also affected with the passage of time. The closer a fixed rate security approaches its maturity date, the closer the market value of the security approaches par value.

It is important to note that every category of security mentioned above will mature at a specified date and at par value. Any temporary changes in market value due to market rates will have no impact on the security’s ultimate value at maturity. Management believes that the investment securities held by the Company provide an attractive level of interest income and, as the Bank has access to various alternate liquidity sources, management intends to hold these securities for the foreseeable future. However, those classified as “available for sale” could be sold, regardless of their market value, should business conditions or balance sheet management strategies warrant such sale.

There is no subprime exposure in the Company’s securities portfolio. All of the mortgage-backed securities and collateralized mortgage obligations held in the Company’s portfolio are issued by U.S. Government-sponsored agencies or the underlying mortgage loans are guaranteed by U.S. Government-sponsored agencies. In addition, the portfolio contains only one collateralized debt obligation, which is backed by a portfolio of bank-only pooled trust preferred securities with an amortized cost of $10 million and an estimated fair value of $5 million. This issue is credit enhanced, with over-collateralization of principal and/or excess spread, and is rated A2 by Moody’s Investors Service and A- by Fitch, Inc. Based upon projected cash flows, reviews of the underlying collateral in the pool and the over-collateralization of the pool, the Company believes the decline in market value to be temporary and therefore the security is not other than temporarily impaired. This adjustable rate security has been in a continuous loss position for twelve months or longer at June 30, 2008. In the event that this security's current rating is downgraded or projected cash flows are not adequate to meet contractual obligations, the Company will evaluate it for other than temporary impairment at that time.

5. LOANS AND LEASES

The Company’s loan and lease portfolio is concentrated primarily in commercial and industrial loans and commercial mortgages.

The recorded investment in loans that are considered to be impaired, as of June 30, 2008 and December 31, 2007, is summarized below:

6. LEGAL PROCEEDINGS

Purported Shareholder Derivative Suit

On July 18, 2007, the Company was served with a Summons and Complaint in a purported shareholder derivative lawsuit, filed in the Supreme Court of the State of New York, County of Nassau (Index No. 07-012411) by Ona Guthartz, First Wall Securities, Inc. and Alan Guthartz as custodian for Jason Guthartz, identifying themselves as shareholders of the Company and purporting to act on behalf of the Company, naming the Company as a nominal defendant and certain of the Company’s current and former directors and officers as defendants. The lawsuit alleges, among other things, (1) that the defendant directors and officers breached their fiduciary duty to the Company in connection with the Company’s previously disclosed dealings with Island Mortgage Network, Inc. (“IMN”) and the resulting litigation in the United States District Court for the Eastern District of New York (the “IMN Matter”) and (2) that the directors engaged in corporate waste by awarding bonuses to certain officers who had responsibility for the IMN relationship and by offering a voluntary exit window program to those same officers, each of which have been previously disclosed by the Company. An amount of damages was not specified in the Complaint.

At the Company’s Board of Directors meeting held on July 24, 2007, a Special Litigation Committee of the Board of Directors was established to examine the merits of the allegations made in the lawsuit. The current members of the Special Litigation Committee are Nicos Katsoulis and the Honorable John J. LaFalce.

The Company received an opinion from independent counsel that each of the individual defendants was entitled to be indemnified by the Company for all reasonable expenses, including attorneys’ fees, actually and necessarily incurred by him or her in connection with the defense and settlement of the lawsuit. The parties were seeking approval of the Court for the Company to indemnify the individual defendants for their costs incurred by this litigation.

On June 12, 2008, all parties to the lawsuit executed a non-binding Stipulation of Settlement that would dispose of the lawsuit. On June 16, 2008 the Honorable Ira B. Warshawsky, J.S.C. signed an Order of Preliminary Approval of Settlement and Form of Notice (“Preliminary Order”) with regard to the Stipulation of Settlement among the parties. The Preliminary Order was entered in the County Clerk’s Office, Nassau County on June 17, 2008. A Notice of Pendency and Settlement of Shareholder Derivative Action (the “Notice”) was mailed to all stockholders of record on June 20, 2008.

As announced by the Company on June 18, 2008, the Company has agreed to implement certain corporate governance provisions within 30 days after the effective date of the Stipulation of Settlement. The Stipulation of Settlement includes no admission of liability by the Company, the Bank or any of the defendants named in the lawsuit.

For the six months ended June 30, 2008 and for the twelve months ended December 31, 2007, the Company incurred $2.3 million and $1.9 million, respectively, in legal expenses related to this lawsuit. For the six months ended June 30, 2007, no such expenses were incurred. All costs incurred to date have been recognized in the Company’s financial statements. At June 30, 2008, the Company has established an estimated liability of $1,030,000 for plaintiffs’ attorneys’ fees and expenses and an offsetting estimated receivable for insurance reimbursement.

The Preliminary Order was subject to final determination by the Court as to the fairness, reasonableness and adequacy of the Stipulation of Settlement. A fairness hearing was held August 5, 2008 before Judge Ira B. Warshawsky at the Supreme Court of the State of New York, Nassau County, New York, at which time Judge Warshawsky signed a Final Judgment and Order of Dismissal (“Final Judgment”) with regard to the Stipulation of Settlement among the parties. The Final Judgment was entered in the County Clerk’s Office, Nassau County on August 5, 2008. In addition to issuing final approval of the Stipulation of Settlement, the Final Judgment approved the award to plaintiffs’ counsel of attorneys’ fees in the sum of $1,000,000 and expenses in the sum of $27,839.38. The Court also determined that each of the individual defendants are fairly and reasonably entitled to be indemnified by the Company for their legal fees and expenses incurred in connection with the defense and settlement of the lawsuit. Gulf Insurance Company has agreed to pay an additional $575,000 to the Company (above the $1.2 million agreed to in the Stipulation of Settlement) in final settlement of all insurance claims related to this matter. This amount will help to offset such indemnification costs as well as a portion of the Company’s legal fees incurred in connection with the derivative lawsuit.

Other

The Company and the Bank are subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability, if any, with respect to such matters will not materially affect future operations and will not have a material impact on the Company’s financial statements.

The total remaining unearned compensation cost related to nonvested options and shares of restricted stock awarded to Mr. O’Brien is $1,596,000 to be expensed over the weighted-average remaining period of 3.3 years. For the six months ended June 30, 2008 and 2007, $239,400 was recognized as compensation expense in each period. The non-qualified stock options and the restricted stock awards were not issued as part of any of the Company’s registered stock-based compensation plans.

9. FEDERAL HOME LOAN BANK ADVANCES

The Bank may use a secured line of credit with the Federal Home Loan Bank of New York (“FHLB”) for overnight funding or on a term basis to fund assets. The amount of this line of credit will fluctuate based upon the amount of FHLB stock the Bank owns and the amount of pledged collateral in the form of commercial real estate mortgages and investment securities. Based upon a multiple of the FHLB stock that the Bank currently owns combined with approximately $192,000,000 of collateral, including approximately $167,000,000 in commercial real estate mortgages that the Bank currently has pledged at the FHLB, approximately $124,000,000 of this line may be drawn on a term or overnight basis. The FHLB line is renewed annually.

At June 30, 2008 and December 31, 2007, approximately $123,000,000 and $139,000,000 in advances, respectively, were outstanding under such lines of credit with the FHLB. The average amount of advances outstanding and the weighted-average interest rate on such average amount outstanding for the six months ended June 30, 2008 and the twelve months ended December 31, 2007 were $140,681,000 and $103,093,000, and 2.82% and 5.13%, respectively.

10. FAIR VALUE

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

SFAS No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements - Certain statements contained in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “project,” “is confident that,” and similar expressions are intended to identify these forward looking-statements. These forward-looking statements involve risk and uncertainty and a variety of factors that could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in: market interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, the quality and composition of the loan and lease or investment portfolios, demand for loan and lease products, demand for financial services in the Company’s primary trade area, litigation, tax and other regulatory matters, accounting principles and guidelines, other economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, pricing and services and those risks detailed in the Company’s periodic reports filed with the SEC.

Executive Summary – State Bancorp, Inc. (the “Company”) is a one-bank holding company, which was formed in 1986. The Company operates as the parent for its wholly owned subsidiary, State Bank of Long Island and its subsidiaries (the “Bank”), a New York State chartered commercial bank founded in 1966. The Company also has two unconsolidated subsidiaries, State Bancorp Capital Trust I and State Bancorp Capital Trust II (collectively the “Trusts”), entities formed in 2002 and 2003, respectively, to issue trust preferred securities. The income of the Company is principally derived through the operation of the Bank and its subsidiaries.

The Bank maintains its corporate headquarters in Jericho, New York and serves its customer base through seventeen branches in Nassau, Suffolk, Queens and Manhattan. The Bank offers a full range of banking services to our diverse customer base which includes commercial real estate owners and developers, small to middle market businesses, professional service firms, municipalities and consumers. Retail and commercial products include checking accounts, NOW accounts, money market accounts, savings accounts, certificates of deposit, individual retirement accounts, commercial loans, construction loans, commercial mortgage loans, consumer loans, small business lines of credit, cash management services and telephone and online banking. In addition, the Bank also provides access to residential loans, annuity products, mutual funds and a wide range of wealth management and financial planning services. The Company’s loan and lease portfolio is concentrated in commercial and industrial loans and commercial mortgages. The Bank does not engage in subprime lending and does not offer payment option ARMs or negative amortization loan products.

On June 2, 2008, the Bank completed the previously announced sale of substantially all of the assets of its leasing subsidiary, SB Equipment. We anticipate that the sale will result in a decrease in net interest income on an annualized basis of approximately $4 million, an annual operating expense savings to the Company of approximately $3 million and an improved operating efficiency ratio. The sale proceeds are being used to fund growth in the Company’s commercial loan and commercial mortgage portfolios. Both the sale proceeds and losses related to write-downs of non-performing leases prior to sale were immaterial to the Company’s financial statements.

As of June 30, 2008, the Company, on a consolidated basis, had total assets of approximately $1.6 billion, total deposits of approximately $1.2 billion and stockholders’ equity of approximately $112 million. Unless the context otherwise requires, references herein to the Company include the Company and its subsidiaries on a consolidated basis.

Having successfully completed a senior management transition in 2007, the Company continues to emphasize loan growth and credit oversight, deposit generation, increased market share, improved operational efficiency and enhanced brand building. However, the Company has experienced credit quality pressure as well as deposit and loan pricing pressures that are expected to continue at least throughout the current year. The Company has numerous competitors for its very attractive core niche of small business, middle market commercial and industrial and municipal customers. Some of these competitors have entered the marketplace through de novo branching, acquisitions and strategic alliances. The Company remains focused on expanding its core commercial business relationships, expense reduction initiatives, capital management and strategies to improve non-interest income generation. The Company expects to continue to expand its staff of professional bankers in selected areas to achieve the foregoing objectives. We anticipate that future industry consolidation should provide the Company with the opportunity to add experienced, relationship-oriented bankers to its staff to support future growth and market penetration.

The Company recorded net income of $961 thousand and $930 thousand for the second quarter of 2008 and 2007, respectively. The increase in net income during 2008 primarily reflects an improved net interest margin and a reduction in total operating expenses, despite an increase in legal fees, offset by a significant increase in the provision for loan and lease losses. Diluted earnings per common share of $0.07 were recorded in the second quarter of 2008 compared to $0.06 in the second quarter of 2007. The growth in the Company’s net interest income during the second quarter of 2008 as compared to a year ago resulted from an improved net interest margin. The expanded margin resulted from an improved asset mix, moving from investment securities to higher-yielding loans. This was coupled with a decrease in the Company’s cost of interest-bearing liabilities, as the Company has chosen to use more favorably priced borrowings to fund some loan volume allowing the Bank to strategically price its savings and time deposit offerings. Total operating expenses decreased by 23.0% to $11.2 million during the second quarter of 2008 when compared to the second quarter of 2007. The decrease in total operating expenses primarily reflects the costs incurred in 2007 associated with the 2007 Voluntary Exit Window program and the related benefit of this program which began to be realized in the second half of 2007, along with our ongoing Company-wide expense management focus, a decrease in marketing and advertising expenses, partially offset by an increase in legal expenses. The Company has been a nominal defendant in a purported shareholder derivative lawsuit (see Part II – Item 1 – “Legal Proceedings”). Second quarter 2008 legal expenses include $1.2 million of legal fees and expenses related to this lawsuit.

Total assets of the Company were $1.6 billion at June 30, 2008 and December 31, 2007. At June 30, 2008 and December 31, 2007, total deposits were $1.2 billion and $1.3 billion, respectively. Short-term borrowed funds, primarily Federal Home Loan Bank of New York (“FHLB”) advances and federal funds purchased, totaled $161 million at June 30, 2008, compared to $139 million at December 31, 2007. The increase in borrowings was a replacement for higher-cost maturing retail certificates of deposit and municipal deposits.

Although net income improved 3.3% in the second quarter of 2008 versus the second quarter of 2007, returns on average assets and average stockholders’ equity were not significantly different. The Company’s return on average assets improved to 0.24% in the second quarter of 2008 from 0.22% in the second quarter of 2007, while our return on average stockholders’ equity decreased to 3.35% in the second quarter of 2008 from 3.46% in the second quarter of 2007. Primarily due to the improved asset mix and the decrease in the Company’s cost of interest-bearing liabilities mentioned above, the Company’s net interest margin improved by 47 basis points to 4.29% in the second quarter of 2008 from 3.82% in the second quarter of 2007.

The Company’s primary market area of Nassau, Suffolk, Queens and Manhattan provides opportunity for deposit growth and commercial and industrial lending. Management and staff at the Company continue to closely monitor the overall effects of the decline in the local real estate market and its potential impact on the Company. We do not engage in subprime lending. The primary focus of the Company’s loan and lease portfolio is commercial real estate and commercial and industrial loans with residential lending constituting less than 10% of our total portfolio at June 30, 2008. The Company’s securities portfolio contains no subprime structured debt or exotic structures. At June 30, 2008, the market value of the securities portfolio represented 98.6% of book value. Management of the Company is aware, however, that the significant decline in the residential lending market and deterioration in real estate values and credit markets have contributed to the current downturn in the national economy which has impacted the outlook for interest rates and consumer and business confidence. These factors, along with the uncertain outlook for a sustained return to a more traditionally shaped yield curve and the uncertain long-term outlook for real estate values, may impact near-term economic growth in the Company’s market area and adversely affect the Company’s future performance.

Recognizing the economic uncertainty previously noted, we expect to achieve modest loan growth in our core competencies of commercial and industrial credits and commercial mortgages throughout 2008. We expect that interest rate spreads may tighten due to competitive pressures, resulting in a narrowing of our interest rate margin on most loans. The Company has chosen to use more attractively priced borrowings to fund some loan volume rather than offer high rates to raise additional deposits in a highly competitive environment, but funding costs are expected to rise during 2008 as competitive pressures are expected to push up rates. As a result, management expects that, notwithstanding the improved shape of the yield curve, the Company’s net interest margin may decline modestly during the remainder of 2008 from current levels.

It is management’s intent for the Company’s branch network to provide funding to support anticipated asset growth, supplemented with short-term borrowings as needed. The Company will continue to pursue product delivery and back office expense reductions and operating efficiencies along with revenue-generating sales initiatives to improve net income. Some of these initiatives may result in the recording of initial costs in order to achieve longer term financial benefits.

Critical Accounting Policies, Judgments and Estimates - The discussion and analysis of the financial condition and results of operations of the Company are based on the Unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses. Management evaluates those estimates and assumptions on an ongoing basis, including those related to the allowance for loan and lease losses, income taxes, other-than-temporary impairment of investment securities and recognition of contingent liabilities. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

Allowance for Loan and Lease Losses - In management’s opinion, one of the most critical accounting policies impacting the Company’s financial statements is the evaluation of the allowance for loan and lease losses. Management carefully monitors the credit quality of the portfolio and charges off the amounts of those loans and leases deemed uncollectible. Management evaluates the fair value of collateral supporting any impaired loans and leases using independent appraisals and other measures of fair value. This process involves some subjective judgments and assumptions and is subject to change based on factors that may be outside the control of the Company.

Management of the Company recognizes that, despite its best efforts to minimize risk through its credit review process, losses will inevitably occur. In times of economic slowdown, regional or national, the credit risk inherent in the Company’s loan and lease portfolio will increase. The timing and amount of loan and lease losses that occur are dependent upon several factors, most notably qualitative and quantitative factors about both the micro and macro economic conditions as reflected in the loan and lease portfolio and the economy as a whole. Factors considered in the evaluation of the allowance for loan and lease losses include, but are not limited to, estimated losses from loan and lease and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan and lease loss experience and trends in portfolio volume, maturity, composition, delinquencies and non-accruals. The allowance for loan and lease losses is established to absorb probable loan and lease charge-offs. Additions to the allowance are made through the provision for loan and lease losses, which is a charge to current operating earnings. The adequacy of the provision and the resulting allowance for loan and lease losses is determined by management’s continuing review of the loan and lease portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data, collateral values, regulatory examination results and changes in the size and character of the loan and lease portfolio. Despite such a review, the level of the allowance for loan and lease losses remains an estimate and cannot be precisely determined.

Based on current economic conditions, management has determined that the current level of the allowance for loan and lease losses appears to be adequate in relation to the probable losses present in the portfolio. Management considers many factors in this analysis, among them credit risk grades assigned to commercial loans, delinquency trends, concentrations within segments of the loan and lease portfolio, recent charge-off experience and local economic conditions. Commercial loans are assigned credit risk grades using a scale of one to ten with allocations for probable losses made for pools of similar risk-graded loans. Loans that have indications of some weakness, generally in grade seven, that require close monitoring by senior management, are termed “criticized” loans in accordance with regulatory guidelines. Loans with signs of credit deterioration, generally in grades eight through ten, are termed “classified” loans in accordance with guidelines established by the Company’s regulators. Management assigns allocation factors ranging from 24% to 100% of the outstanding classified loan balance, which are based on the Company’s historic loss experience, and uses these amounts when analyzing the adequacy of the allowance for loan and lease losses. Criticized loans are assigned an allocation factor of 4% based on historic loss experience. Non-accrual loans and leases in excess of $250 thousand are individually evaluated for impairment and are not included in these risk grade pools. A loan is considered “impaired” when, based on current information and events, it is probable that both the principal and interest due under the original contractual terms will not be collected. The Company measures impairment of collateralized loans based on the estimated fair value of the collateral, less estimated costs to sell. For loans that are not collateral-dependent, impairment is measured by using the present value of expected cash flows, discounted at the loan’s effective interest rate. Allocations for loans which are performing satisfactorily, generally in grades one through six, are based on historic experience for other performing loans and leases and are currently assigned an allocation factor of 0.50% of the loan balance. An allowance allocation factor for portfolio macro factors ranging from 1-20 basis points is calculated to cover potential losses from a number of variables, not the least of which is the current economic uncertainty. There have been no adjustments to the allowance allocation factors or the underlying methodology used in the analysis of the allowance for loan and lease losses in the past quarter.

Management monitors the level of the allowance for loan and lease losses in order to properly reflect its estimate of the loss, if any, represented by fluctuations in the local real estate market and the underlying value that market provides as collateral to certain segments of the loan and lease portfolio. The provision is continually evaluated relative to portfolio risk and regulatory guidelines and will continue to be closely reviewed. In addition, various bank regulatory agencies, as an integral part of their examination process, closely review the allowance for loan and lease losses. Such agencies may require the Company to recognize additions to the allowance based on their judgment of information available to them at the time of their examinations.

Accounting for Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109 and FIN 48, which require the recording of deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are periodically updated based upon changes in business factors and the tax laws.

Other-Than-Temporary Impairment of Investment Securities – If the Company deems any investment security’s decline in market value to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. The determination of whether a decline in market value is other-than-temporary is necessarily a matter of subjective judgment. The timing and amount of any realized losses reported in the Company’s financial statements could vary if management’s conclusions were to change as to whether an other-than-temporary impairment exists. Consideration is given to (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 and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company’s management considers whether the securities are issued by the U.S. Government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts’ reports. The Company’s management currently conducts impairment evaluations at least on a quarterly basis and has concluded that, at June 30, 2008, there were no other-than-temporary impairments of the Company’s investment securities.

Recognition of Contingent Liabilities – The Company and the Bank are subject to proceedings and claims that arise in the normal course of business. Management assesses the likelihood of any adverse outcomes to these matters as well as potential ranges of probable losses. There can be no assurance that actual outcomes will not differ from those assessments. A liability is recognized in the Company’s consolidated balance sheets if such liability is both probable and estimable.

Material Changes in Financial Condition - Total assets of the Company were $1.6 billion at June 30, 2008. When compared to December 31, 2007, total assets decreased by $58 million or 4%. This was primarily attributable to declines in securities and securities purchased under agreements to resell of $15 million and $61 million, respectively, partially offset by growth in net loans of $18 million, which is consistent with the Company’s overall goal of shifting its asset mix towards higher yielding loans. The decrease in the investment portfolio reflects declines in U.S. government agencies and municipal securities of $131 million and $16 million, respectively, offset by an increase in mortgage-backed securities of $139 million. The net loan and lease portfolio grew by 2% since year-end 2007, resulting primarily from increases in commercial and industrial loans and commercial mortgages of $61 million and $25 million, respectively, partially offset by a $66 million decrease in leases outstanding, as substantially all of the assets of SB Equipment were sold in June of 2008.

At June 30, 2008, total deposits were $1.2 billion, a decrease of $83 million or 6% when compared to December 31, 2007. This was largely attributable to decreases in demand deposits of $16 million and jumbo and retail certificates of deposit totaling $67 million. The decline in certificates of deposit primarily reflects the Company’s decision to use more attractively priced borrowings to fund some loan volume rather than offer high rates to raise deposits in a highly competitive environment. Core deposit balances represented approximately 71% of total deposits at June 30, 2008 compared to 68% at year-end 2007. Short-term borrowed funds, primarily FHLB advances and federal funds purchased, totaled $161 million at June 30, 2008, compared to $139 million at December 31, 2007.

Capital Resources - Total stockholders’ equity amounted to $112 million at June 30, 2008, representing a decrease of $2 million from December 31, 2007. The decrease from year-end 2007 largely reflects changes in other comprehensive income. Management anticipates that internal capital generation, defined as earnings less cash dividends paid on common stock, will be the primary catalyst supporting the Company’s future growth of assets and stockholder value. Management continually evaluates the Company’s capital position in light of current and future growth objectives and regulatory guidelines.

At June 30, 2008, the Bank’s Tier I leverage ratio was 8.00% while its risk-based capital ratios were 10.70% for Tier I capital and 11.95% for total capital. These ratios exceed the minimum regulatory guidelines for a well-capitalized institution.

Table 2-1 summarizes the Company’s capital ratios as of June 30, 2008 and compares them to current minimum regulatory guidelines and December 31 and June 30, 2007 actual results.

The Company’s (parent only) primary funding sources are dividends from the Bank and proceeds from the Dividend Reinvestment and Stock Purchase Plan (the “DRP”). In 2008, the Company’s Board declared a quarterly cash dividend of $0.15 per share at its January and April meetings and $0.10 per share at its July meeting. The July dividend is payable on September 15, 2008 to shareholders of record as of August 22, 2008.

The Company did not repurchase any shares of its common stock during the first six months of 2008 under the existing stock repurchase plan. Under the Board of Directors’ current stock repurchase authorization, management may repurchase up to 512,348 additional shares if market conditions warrant. This action will only occur if management believes that the purchase will be at prices that are accretive to earnings per share and is the most efficient use of Company capital. The Company does not presently anticipate repurchasing any of its shares in the immediate future.

The Company’s two unconsolidated Delaware trust subsidiaries currently have outstanding a total of $20 million in trust preferred securities which presently qualify as Tier I capital of the Company for regulatory capital purposes. The securities each bear an interest rate tied to three-month LIBOR and are each redeemable by the Company in whole or in part after five years or earlier under certain circumstances. The Company has the right to optionally redeem the debentures of Trust I, which bear a coupon rate of three-month LIBOR plus 345 basis points, prior to the maturity date of November 7, 2032, on or after November 7, 2007 at par. As of June 30, 2008, the Company has chosen not to redeem the debentures of Trust I, but will continue to evaluate the cost effectiveness of this borrowing. The Company has the right to optionally redeem the debentures of Trust II, which bear a coupon rate of three-month LIBOR plus 285 basis points, prior to the maturity date of January 23, 2034, on or after January 23, 2009 at par. Under the occurrence of certain events, the Company may redeem the debentures in whole or in part prior to January 23, 2009. The weighted average rate on all trust preferred securities outstanding was 6.06% and 8.51% for the second quarter of 2008 and 2007, respectively, and 6.47% and 8.51% for the first six months of 2008 and 2007, respectively.

During the second quarter of 2006, the Company issued $10 million of 8.25% subordinated notes due June 15, 2013. The notes were sold in a private placement and qualify as Tier II capital for the Company.

Liquidity - Liquidity management is defined as both the Company’s and the Bank’s ability to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, the ability to fund new and existing loan commitments and to take advantage of business opportunities as they arise. Asset liquidity is provided by cash, short-term investments and the marketability of securities available for sale. Such liquid assets declined to $433 million at June 30, 2008 from $497 million at December 31, 2007, primarily due to the maturities of securities purchased under agreements to resell. Liquidity is affected by the maintenance of a strong base of core deposits, maturing short-term assets including cash and due from banks, the ability to sell or pledge marketable assets and access to lines of credit and the capital markets.

Liquidity is measured and monitored daily, thereby allowing management to better understand and react to emerging balance sheet trends, including temporary mismatches with regard to sources and uses of funds. After assessing actual and projected cash flow needs, management seeks to obtain funding at the most economical cost. These funds can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served, loan demand, its asset/liability mix, its reputation and credit standing in its markets and general economic conditions. Borrowings and the scheduled amortization of investment securities and loans are more predictable funding sources, while deposit flows and securities prepayments are somewhat less predictable in nature, as they are often subject to external factors beyond the control of management. Among these are changes in the local and national economies, competition from other financial institutions and changes in market interest rates.

The Company’s primary sources of funds are cash provided by deposits, proceeds from maturities and sales of securities available for sale and cash provided by operating activities. During the first six months of 2008 and 2007, proceeds from sales and maturities of securities available for sale totaled $203 million and $201 million, respectively. During the first six months of 2008, $103 million of the Company’s available for sale securities, mostly U.S. Government agency issues, either matured or were redeemed at par value by the issuer at preset redemption dates.

The Company’s primary uses of funds are for the origination of loans and the purchase of investment securities. During the first six months of 2008 and 2007, the Company had a net increase in loans totaling $24 million and $11 million, respectively, net of the sale of SB Equipment leases in 2008, principal paydowns and other dispositions. The Company did not purchase any loans during the first six months of 2008 or 2007. The Company purchased securities available for sale totaling $171 million and $208 million during the first six months of 2008 and 2007, respectively. The Company’s outstanding FHLB borrowings as of June 30, 2008 were primarily used to support the funding of these assets. At June 30, 2008, total deposits were $1.2 billion, a decrease of $83 million or 6% when compared to December 31, 2007. The decline in deposits primarily reflects the Company’s decision to use more attractively priced borrowings to fund asset growth rather than offer high rates to raise deposits in a highly competitive environment.

The Asset/Liability Management Committee (the “ALCO”) is responsible for oversight of the liquidity position and management of the asset/liability structure. The ALCO establishes specific policies and operating procedures governing liquidity levels and develops plans to address future and current liquidity needs. The ALCO monitors the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. At June 30, 2008, access to approximately $124 million in FHLB lines of credit for overnight or term borrowings with maturities of up to thirty years was available. The amount of the FHLB lines of credit will fluctuate based upon the amount of FHLB stock the Bank owns and the amount of pledged collateral in the form of commercial real estate mortgages and investment securities. At June 30, 2008, approximately $75 million in informal lines of credit extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. At June 30, 2008, approximately $123 million and $35 million were outstanding under such lines of credit with the FHLB and correspondent banks, respectively. To supplement its short-term borrowed funds, the Company also utilized the Certificate of Deposit Account Registry Service (“CDARS”) for $49 million in short-term certificates of deposit outstanding at June 30, 2008. CDARS is a network of financial institutions that exchanges deposits with one another to maximize FDIC coverage of their depositors. These deposits were generally available at rates lower than the competitive market rates on local certificates of deposit, offered us greater flexibility and were more efficient to obtain. Notwithstanding the CDARS deposits, and pursuant to authorization limits set by the Board, management may also access the broker-dealer deposit market for funding. As of June 30, 2008, no such broker-dealer deposits were outstanding. As the Company’s liquidity remains satisfactory due to its deposit base, ample borrowing capacity secured by liquid assets and other funding sources, management believes that existing funding sources will be adequate to meet future liquidity requirements.

Off-Balance Sheet Arrangements - The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and documentary letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At June 30, 2008 and 2007, commitments to originate loans and leases and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $286 million and $353 million, respectively.

Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan and lease facilities to customers. Most letters of credit expire within one year. At June 30, 2008 and 2007, letters of credit outstanding were approximately $18 million and $17 million, respectively. At June 30, 2008 and 2007, the uncollateralized portion was approximately $3 million.

Material Changes in Results of Operations for the Three Months Ended June 30, 2008 versus the Three Months Ended June 30, 2007 - Net income for the three months ended June 30, 2008 was $961 thousand, an increase of $31 thousand or 3.3%, when compared to the same 2007 period, principally as a result of an increase in net interest income and lower total operating expenses, partially offset by an increase in the provision for loan and lease losses.

As shown in Table 2-2 (A) following this discussion, net interest income increased by 6.7% to $16.1 million as the result of a 47 basis point rise in the Company’s net interest margin to 4.29% in 2008. Partially offsetting the improved margin was a 5% decrease in average interest-earning assets, primarily securities. The average investment portfolio contracted by 23% to $399 million during the second quarter of 2008 versus the comparable period in 2007, principally due to government agency securities sold and matured. Growth in commercial and industrial loans, and commercial mortgages resulted in a 7% increase in average loans and leases outstanding to $1.1 billion during the second quarter of 2008 versus the comparable period in 2007. Average borrowings, consisting primarily of FHLB overnight and short-term advances, were $134 million and helped to fund interest-earning assets. This funding partially offset the $101 million decrease in average interest-bearing deposits that resulted primarily from outflows of savings and retail CD balances as the Company has chosen to strategically price such deposits. The average cost of interest-bearing deposits declined to 2.06% in the second quarter of 2008 from 3.81% in the second quarter of 2007.

The improvement in the Company’s net interest margin to 4.29% during the second quarter of 2008 from 3.82% a year ago primarily resulted from a 189 basis point decrease in the Company’s cost of total interest-bearing liabilities, as the Company has chosen to use more attractively priced borrowings to fund some loan volume rather than offer high rates to raise deposits in a highly competitive environment. This lower cost was offset somewhat by a 106 basis point decrease in the Company’s earning asset yield to a weighted average rate of 6.01%. The lower asset yield resulted from the impact of a 183 basis point reduction in yield on loans and leases, offset in part by a six basis point increase in yield on securities as well as the $72 million increase in the average balance of our loans and leases, which carry a significantly higher yield than our securities portfolio.

Due in part to the decrease in total operating expenses, the Company’s operating efficiency ratio (total operating expenses divided by the sum of fully taxable equivalent net interest income and non-interest income, excluding net securities gains and losses) decreased to 63.7% in the second quarter of 2008 versus 87.1% in the second quarter of 2007. The Company’s other measure of expense control, the ratio of total operating expenses to average total assets, was 2.80% for the second quarter of 2008 as compared to 3.44% in 2007, reflecting the decrease in total operating expenses.

Income tax expense increased by $55 thousand in the second quarter of 2008 as compared to 2007. The Company’s effective tax rate was 29.7% in 2008 and 27.5% in 2007.

Material Changes in Results of Operations for the Six Months Ended June 30, 2008 versus the Six Months Ended June 30, 2007 - Net income for the six months ended June 30, 2008 was $4.0 million, an increase of $1.3 million when compared to the same 2007 period. The factors contributing to the growth in earnings were a 6.7% increase in net interest income and lower total operating expenses, partially offset by an increase in the provision for loan and lease losses.

As shown in Table 2-2 (B) following this narrative, the increase of $2.0 million in net interest income for the first six months of 2008 versus the comparable period in 2007 resulted from a 143 basis point drop in the Company’s cost of interest-bearing liabilities, partially offset by a 4% or $62 million decrease in average interest-earning assets, primarily investment securities, and a 77 basis point decline in the Company’s earning asset yield to a weighted average rate of 6.25%. The Company’s net interest margin of 4.15% for the first six months of 2008 represents an increase of 40 basis points from 3.75% one year ago and reflects the impact of the strategic use of more favorably priced borrowings, instead of higher-cost deposits, to fund some loan volume. Average borrowings, consisting primarily of FHLB overnight and short-term advances, increased $85 million for the six months ended June 30, 2008 when compared to the same 2007 period.

The provision for loan and lease losses increased for the first six months of 2008 as compared to 2007 due to several factors, including internal risk rating downgrades of several commercial relationships, an increase in non-accrual loans and leases and growth in total loans outstanding. The Company recorded net loan and lease charge-offs of $2.0 million and $2.2 million for the first six months of 2008 and 2007, respectively.

Total operating expenses decreased by $4.0 million in the first six months of 2008 compared with 2007 mainly due to a $5.8 million decrease in salaries and other employee benefits expenses, $3.1 million of which was the result of the 2007 Voluntary Exit Window Program, partially offset by an increase of $2.3 million in legal expenses in 2008. The Company has been a nominal defendant in a purported shareholder derivative lawsuit (see Part II – Item 1. – “Legal Proceedings”). First half 2008 legal expenses include $2.3 million of legal fees and expenses related to this lawsuit. The Company’s operating efficiency ratio (total operating expenses divided by the sum of fully taxable equivalent net interest income and non-interest income, excluding net securities gains and losses) was 64.0% for the first six months of 2008 and 80.2% for the first six months of 2007. The Company’s ratio of total operating expenses to average total assets was 2.73% for the first six months of 2008 and 3.10% for the first six months of 2007.

Asset Quality – There is no subprime exposure in the Company’s securities portfolio. All of the mortgage-backed securities and collateralized mortgage obligations held in the Company’s portfolio are issued by U.S. Government-sponsored agencies or the underlying mortgage loans are guaranteed by U.S. Government-sponsored agencies. In addition, the portfolio contains only one collateralized debt obligation, which is backed by a portfolio of bank-only pooled trust preferred securities with an amortized cost of $10 million and an estimated fair value of $5 million. This issue is credit enhanced, with over-collateralization of principal and/or excess spread, and is rated A2 by Moody’s Investors Service and A- by Fitch, Inc. Based upon projected cash flows, reviews of the underlying collateral in the pool and the over-collateralization of the pool, the Company believes the decline in market value to be temporary and therefore the security is not other than temporarily impaired. In the event that this security's current rating is downgraded or projected cash flows are not adequate to meet contractual obligations, the Company will evaluate it for other than temporary impairment at that time. The Company’s loan and lease portfolio is concentrated in commercial and industrial loans and commercial mortgages. The Bank does not engage in subprime lending and the Bank’s adjustable-rate mortgage (ARM) exposure is less than 1% of the total loan and lease portfolio. The Bank does not offer payment option ARM or negative amortization loan products.

Non-performing assets, defined by the Company as non-accrual loans and leases and other real estate owned (“OREO”), totaled $11 million at June 30, 2008, $6 million at December 31, 2007 and $9 million at June 30, 2007. The increase in non-accrual loans and leases at June 30, 2008 resulted primarily from the addition of two commercial relationships to non-accrual status during the first half of 2008. Both of these relationships had been on the Bank’s internal watch list. One relationship is a $2.3 million commercial real estate loan adequately secured by land and personally guaranteed. Payment delinquencies resulted from insufficient cash flow due to slowness in developing and selling the property. The other relationship represents a $2.9 million total of land and construction loans secured by real estate property and personally guaranteed. During July 2008, the Company agreed to a settlement which resulted in a $2.0 million payment and a charge-off of the remaining amount of this relationship. At June 30, 2008, December 31, 2007 and June 30, 2007, the Company held no OREO and there were no restructured accruing loans and leases. Loans and leases 90 days or more past due and still accruing interest totaled $1 thousand at June 30, 2008, $28 thousand at December 31, 2007 and $1 thousand at June 30, 2007.

The allowance for loan and lease losses amounted to $17 million or 1.6% of total loans and leases at June 30, 2008, $15 million or 1.4% of total loans and leases at December 31, 2007, and $16 million or 1.7% of total loans and leases at June 30, 2007. The increase in the allowance as a percentage of the total loan and lease portfolio at June 30, 2008 as compared to December 31, 2007 is due to the impact of the provision for loan and lease losses in the first half of 2008. The decrease in the allowance as a percentage of the total loan and lease portfolio at June 30, 2008 as compared to June 30, 2007 is principally due to a $2.0 million reduction in the allowance due to the sale of the Company’s former leasing operations and an increase in total loans outstanding in 2008. The allowance for loan and lease losses as a percentage of total non-performing assets decreased to 158% at June 30, 2008 from 254% at December 31, 2007 and 192% one year ago, caused primarily by the movement to non-accrual status of the two commercial relationships cited in the immediately preceding paragraph. Management has determined that the current level of the allowance for loan and lease losses appears to be adequate in relation to the probable losses present in the portfolio. Management considers many factors in this analysis, among them credit risk grades assigned to commercial, industrial and commercial real estate loans, delinquency trends, concentrations within segments of the loan and lease portfolio, recent charge-off experience, local and national economic conditions, current real estate market conditions in geographic areas where the Company’s loans and leases are located, changes in the trend of non-performing loans and leases, changes in interest rates, and loan and lease portfolio growth. Changes in one or a combination of these factors may adversely affect the Company’s loan and lease portfolio resulting in increased delinquencies, loan and lease losses and future levels of loan and lease loss provisions. See also “Critical Accounting Policies, Judgments and Estimates” contained herein.

Loans to borrowers which the Bank has identified as requiring special attention (such as a result of changes affecting the borrower’s industry, management, financial condition or other concerns) will be added to the watch list as well as loans which are criticized or classified by bank regulators or loan review auditors. The majority of such watch list loans were originated as commercial and industrial loans. In some cases, additional collateral in the form of commercial real estate was taken based on current valuations. Thus, there exists a broad base of collateral with a mix of various types of corporate assets including inventory, receivables and equipment, and commercial real estate, with no particular concentration in any one type of collateral. At June 30, 2008 there were only three residential relationships on the watch list, representing less than 1% of total watch list loans. As a result of management’s ongoing review and assessment of the Bank’s policies and procedures, the Company has adopted a more aggressive workout and disposition posture for watch list relationships. The Company has retained workout specialists who will be responsible for managing this process and exiting such relationships in an expedited and cost effective manner. Line officers will no longer maintain control over such relationships. As of June 30, 2008, the Bank had 56 relationships on its watch list, including non-accrual loans and leases, with an aggregate value of $77.6 million, compared to 45 relationships, including non-accrual loans and leases, with an aggregate value of $84.5 million at December 31, 2007. It is anticipated that management will use a variety of strategies, depending on individual case circumstances, to exit relationships where the fundamental credit quality shows indications of more than temporary or seasonal deterioration. We cannot give any assurance that such strategies will enable us to exit such relationships especially in light of recent credit market conditions.

TABLE 2 - 2 (A)
NET INTEREST INCOME ANALYSIS
For the Three Months Ended June 30, 2008 and 2007 (unaudited)
(dollars in thousands)

	2008								2007
	Average					Average			Average					Average
	Balance (1)		Interest			Yield/Cost			Balance (1)		Interest			Yield/Cost
ASSETS:
Interest-earning assets:
Securities (2)	$	398,618	$	4,860			4.90	%	$	515,824	$	6,224			4.84	%
Federal Home Loan Bank and other restricted stock		7,406		135			7.33			6,839		70			4.11
Federal funds sold		-		-			-			142		2			4.94
Securities purchased under agreements to
resell		26,538		141			2.14			60,901		805			5.30
Interest-bearing deposits		3,493		19			2.19			1,538		19			4.96
Loans and leases (3)		1,072,781		17,373			6.51			1,001,232		20,827			8.34
Total interest-earning assets		1,508,836	$	22,528			6.01	%		1,586,476	$	27,947			7.07	%
Non-interest-earning assets		103,400								113,016
Total Assets	$	1,612,236							$	1,699,492

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits	$	576,154	$	1,826			1.27	%	$	638,714	$	4,848			3.04	%
Time deposits		422,210		3,285			3.13			460,628		5,600			4.88
Total savings and time deposits		998,364		5,111			2.06			1,099,342		10,448			3.81
Federal funds purchased		8,107		47			2.33			10,176		140			5.52
Other temporary borrowings		126,115		709			2.26			112,164		1,544			5.52
Subordinated notes		10,000		231			9.29			10,000		229			9.19
Junior subordinated debentures		20,620		319			6.22			20,620		459			8.93
Total interest-bearing liabilities		1,163,206		6,417			2.22			1,252,302		12,820			4.11
Demand deposits		320,684								322,307
Other liabilities		12,885								17,199
Total Liabilities		1,496,775								1,591,808
Stockholders' Equity		115,461								107,684
Total Liabilities and Stockholders' Equity	$	1,612,236							$	1,699,492
Net interest income/margin				16,111			4.29	%				15,127			3.82	%
Less tax-equivalent basis adjustment				(54	)							(83	)
Net interest income			$	16,057							$	15,044

(1) Weighted daily average balance for period noted.
(2) Interest on securities includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent
basis adjustments were $27 and $53 in 2008 and 2007, respectively.
(3) Interest on loans and leases includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent
basis adjustments were $27 and $30 in 2008 and 2007, respectively.

TABLE 2 - 2 (B)
NET INTEREST INCOME ANALYSIS
For the Six Months Ended June 30, 2008 and 2007 (unaudited)
(dollars in thousands)

	2008								2007
	Average					Average			Average					Average
	Balance (1)		Interest			Yield/Cost			Balance (1)		Interest			Yield/Cost
ASSETS:
Interest-earning assets:
Securities (2)	$	403,226	$	9,909			4.94	%	$	518,647	$	12,342			4.80	%
Federal Home Loan Bank and other restricted stock		8,141		321			7.93			4,420		97			4.43
Federal funds sold		-		-			0.00			12,372		318			5.18
Securities purchased under agreements to
resell		59,654		963			3.25			66,519		1,750			5.31
Interest-bearing deposits		3,238		44			2.73			1,485		36			4.89
Loans and leases (3)		1,065,390		36,645			6.92			997,989		41,199			8.32
Total interest-earning assets		1,539,649	$	47,882			6.25	%		1,601,432	$	55,742			7.02	%
Non-interest-earning assets		107,213								114,794
Total Assets	$	1,646,862							$	1,716,226

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits	$	564,627	$	4,688			1.67	%	$	631,657	$	9,601			3.07	%
Time deposits		451,208		8,208			3.66			535,127		13,174			4.96
Total savings and time deposits		1,015,835		12,896			2.55			1,166,784		22,775			3.94
Federal funds purchased		8,376		122			2.93			5,801		159			5.53
Other temporary borrowings		141,710		1,987			2.82			59,359		1,632			5.54
Subordinated notes		10,000		463			9.31			10,000		460			9.28
Junior subordinated debentures		20,620		679			6.62			20,620		914			8.94
Total interest-bearing liabilities		1,196,541	$	16,147			2.71			1,262,564	$	25,940			4.14
Demand deposits		318,614								318,665
Other liabilities		16,214								27,973
Total Liabilities		1,531,369								1,609,202
Stockholders' Equity		115,493								107,024
Total Liabilities and Stockholders' Equity	$	1,646,862							$	1,716,226
Net interest income/margin			$	31,735			4.15	%			$	29,802			3.75	%
Less tax-equivalent basis adjustment				(117	)							(169	)
Net interest income			$	31,618							$	29,633

(1) Weighted daily average balance for period noted.
(2) Interest on securities includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent
basis adjustments were $64 and $108 in 2008 and 2007, respectively.
(3) Interest on loans and leases includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent
basis adjustments were $53 and $61 in 2008 and 2007, respectively.

ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk are presented at December 31, 2007 in the Company’s Form 10-K. There has been no material change in the Company’s market risk or interest rate risk at June 30, 2008 compared to December 31, 2007.

Asset/Liability Management and Market Risk - The process by which financial institutions manage interest-earning assets and funding sources under different assumed interest rate environments is called asset/liability management. The primary goal of asset/liability management is to increase net interest income within an acceptable range of overall risk tolerance. Management must ensure that liquidity, capital, interest rate and market risk are prudently managed. Asset/liability and interest rate risk management are governed by policies reviewed and approved annually by the Company’s Board of Directors. The Board has delegated responsibility for asset/liability and interest rate risk management to the ALCO. The ALCO meets quarterly and sets strategic directives that guide the day to day asset/liability management activities of the Company as well as reviewing and approving all major funding, capital and market risk management programs. The ALCO also focuses on current market conditions, balance sheet management strategies, deposit and loan pricing issues and interest rate risk measurement and mitigation.

Interest Rate Risk – Interest rate risk is the potential adverse change to earnings or capital arising from movements in interest rates. This risk can be quantified by measuring the change in net interest margin relative to changes in market rates. Reviewing re-pricing characteristics of interest-earning assets and interest-bearing liabilities identifies risk. The Company’s ALCO sets forth policy guidelines that limit the level of interest rate risk within specified tolerance ranges. Management must determine the appropriate level of risk, under policy guidelines, which will enable the Company to achieve its performance objectives within the confines imposed by its business objectives and the external environment within which it operates.

Interest rate risk arises from re-pricing risk, basis risk, yield curve risk and options risk, and is measured using financial modeling techniques including interest rate ramp and shock simulations to measure the impact of changes in interest rates on earnings for periods of up to two years. These simulations are used to determine whether corrective action may be warranted or required in order to adjust the overall interest rate risk profile of the Company. Asset and liability management strategies may also involve the use of instruments such as interest rate swaps to hedge interest rate risk. Management performs simulation analysis to assess the Company’s asset/liability position on a dynamic re-pricing basis using software developed by a well known industry vendor. Simulation modeling applies alternative interest rate scenarios to the Company’s balance sheet to estimate the related impact on net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings stability in a variety of interest rate environments.

The Company’s asset/liability and interest rate risk management policy limits interest rate risk exposure to -12% and -15% of the base case net interest income for net earnings at risk at the 12-month and 24-month time horizons, respectively. Net earnings at risk is the potential adverse change in net interest income arising from up to +/- 200 basis point change in interest rates ramped over a 12 month period, and measured over a 24 month time horizon. The Company’s balance sheet is held flat over the 24 month time horizon with all principal cash flows assumed to be reinvested in similar products and term points at the simulated market interest rates.

Management also monitors equity value at risk as a percentage of market value of portfolio equity (“MVPE”). The Company’s MVPE is the difference between the market value of its interest-sensitive assets and the market value of its interest-sensitive liabilities. MVPE at risk is the potential adverse change in the present value (market value) of total equity arising from an immediate hypothetical shock in interest rates. Management uses scenario analysis on a static basis to assess its equity value at risk by modeling MVPE under various interest rate shock scenarios. When modeling MVPE at risk, management recognizes the high degree of subjectivity when projecting long-term cash flows and reinvestment rates, and therefore uses MVPE at risk as a relative indicator of interest rate risk. Accordingly, the Company does not set policy limits over MVPE at risk.

Simulation and scenario techniques in asset/liability modeling are influenced by a number of estimates and assumptions with regard to embedded options, prepayment behaviors, pricing strategies and cash flows. Such assumptions and estimates are inherently uncertain and, as a consequence, simulation and scenario output will neither precisely estimate the level of, or the changes in, net interest income and MVPE, respectively.

ITEM 4. – CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic reports filed with the SEC. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

There were no changes to the Company’s internal control over financial reporting as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that occurred in the second quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. - LEGAL PROCEEDINGS

Purported Shareholder Derivative Suit

Other

ITEM 1A. – RISK FACTORS

There are no other material changes from the risks disclosed in the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2007, except as described below.

Banking laws and regulations could limit our access to funds from the Bank, one of our primary sources of liquidity.

As a bank holding company, one of our principal sources of funds is dividends from our subsidiaries. These funds are used to service our debt as well as to pay expenses and dividends on our common stock. Our non-consolidated interest expense on our debt obligations was $1.1 million and $1.4 million and our non-consolidated operating expenses were $19,000 and $11,000 for the six months ended June 30, 2008 and 2007, respectively. State banking regulations limit, absent regulatory approval, the Bank’s dividends to us to the lesser of the Bank’s undivided profits and the Bank’s retained net income for the current year plus its retained net income for the preceding two years (less any required transfers to capital surplus) up to the date of any dividend declaration in the current calendar year. As a result of the net operating loss we incurred in 2005, from 2005 through 2007 the Bank was required to obtain advance regulatory approval from the Banking Department to pay dividends to the Company. As of January 1, 2008 the Bank is no longer required to seek regulatory approval from the Banking Department to declare dividends. As of January 1, 2008, a maximum of approximately $14 million was available to the Company from the Bank according to these limitations.

Federal bank regulatory agencies have the authority to prohibit the Bank from engaging in unsafe or unsound practices in conducting its business. The payment of dividends or other transfers of funds to us, depending on the financial condition of the Bank, could be deemed an unsafe or unsound practice.

Dividend payments from the Bank would also be prohibited under the “prompt corrective action” regulations of the federal bank regulators if the Bank is, or after payment of such dividends would be, undercapitalized under such regulations. In addition, the Bank is subject to restrictions under federal law that limit its ability to transfer funds or other items of value to us and our nonbanking subsidiaries, including affiliates, whether in the form of loans and other extensions of credit, investments and asset purchases, or other transactions involving the transfer of value. Unless an exemption applies, these transactions by the Bank with us are limited to 10% of the Bank’s capital and surplus and, with respect to all such transactions with affiliates in the aggregate, to 20% of the Bank’s capital and surplus. As of June 30, 2008, a maximum of approximately $28 million was available to us from the Bank according to these limitations. Moreover, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. A bank’s transactions with its non-bank affiliates also are required generally to be on arm’s-length terms. We do not have any borrowings from the Bank and do not anticipate borrowing from the Bank in the future.

Accordingly, we can provide no assurance that we will receive dividends or other distributions from the Bank and our other subsidiaries.

Our other primary source of funding is our DRP, which allows existing stockholders to reinvest cash dividends in our common stock and/or to purchase additional shares through optional cash investments on a quarterly basis. Shares are purchased at up to a 5% discount from the current market price under the dividend reinvestment option. Shares purchased with additional cash payments are not discounted under the DRP. No assurance can be given that we will continue the DRP or that stockholders will make purchases in the future.

The downgrade of the investment rating or insufficient cash flows of a pool of trust preferred securities serving as collateral for a collateralized debt obligation held in our portfolio may result in other than temporary impairment.

Our investment securities portfolio currently contains one collateralized debt obligation, which is backed by a portfolio of bank-only pooled trust preferred securities with an amortized cost of $10 million and an estimated fair value of $5 million. Based upon the projected cash flows, reviews of the underlying collateral in the pool and the over-collateralization of the pool, we believe the decline in the market value to be temporary. This adjustable rate security has been in a continuous loss position for twelve months or longer at June 30, 2008. In the event that this security's current rating is downgraded or projected cash flows are not adequate to meet contractual obligations, it may be necessary to realize an other than temporary impairment charge with respect to this security which would be reflected as a charge to earnings in the period in which the impairment charge is recognized.

ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In 1998, the Board authorized a stock repurchase program that now enables the Company to buy back up to a cumulative total of 1.5 million shares of its common stock. The repurchases may be made from time to time as market conditions permit, at prevailing prices on the open market or in privately negotiated transactions. The program may be discontinued at any time. The Company did not repurchase any of its common stock during the first six months of 2008. At June 30, 2008, 512,348 shares were still available for repurchase under the existing plan. The Company does not presently anticipate repurchasing any of its shares in the immediate future.

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On April 29, 2008, the Company held its Annual Stockholders’ Meeting. Three proposals were voted on and the results were reported at this meeting.

First Proposal - Election of Directors

The following directors were elected:

		Page
	PART I
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) – June 30, 2008 and December 31, 2007	1
	Condensed Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2008 and 2007	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2008 and 2007	3
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) for the Six Months Ended June 30, 2008 and 2007	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

	PART II
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 5.	Other Information	34
Item 6.	Exhibits	34

Signatures		36

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
June 30, 2008
Securities available for sale:
Obligations of states and political
subdivisions	$	1,980,556	$	1,701	$	-		$	1,982,257
Government Agency securities		18,578,760		475,281		(26,022	)		19,028,019
Corporate debt securities		3,000,000		-		-			3,000,000
Trust preferred securities		12,071,991		-		(5,254,392	)		6,817,599
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		206,984,967		1,201,485		(920,325	)		207,266,127
FNMA		131,958,398		452,578		(1,006,976	)		131,404,000
GNMA		17,152,917		48,498		(267,565	)		16,933,850
Total securities available for sale	$	391,727,589	$	2,179,543	$	(7,475,280	)	$	386,431,852

December 31, 2007
Securities available for sale:
Obligations of states and political
subdivisions	$	18,140,263	$	4,528	$	(49,634	)	$	18,095,157
Government Agency securities		149,638,982		930,453		(35,148	)		150,534,287
Corporate debt securities		3,009,980		-		(9,981	)		2,999,999
Trust preferred securities		12,076,760		-		(576,760	)		11,500,000
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		135,674,183		1,502,606		(403,665	)		136,773,124
FNMA		72,766,460		581,887		(538,432	)		72,809,915
GNMA		7,361,553		14,123		(38,856	)		7,336,820
Other		1,213,666		-		(33,733	)		1,179,933
Total securities available for sale	$	399,881,847	$	3,033,597	$	(1,686,209	)	$	401,229,235

	Less than 12 Months					12 Months or Longer					Total
	Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value
June 30, 2008
Securities available for sale:
Government Agency securities	$	(26,022	)	$	3,554,133	$	-		$	-	$	(26,022	)	$	3,554,133
Trust preferred securities		-			-		(5,254,392	)		6,817,599		(5,254,392	)		6,817,599
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		(684,704	)		76,191,937		(235,621	)		21,279,468		(920,325	)		97,471,405
FNMA		(465,122	)		51,260,268		(541,854	)		30,829,531		(1,006,976	)		82,089,799
GNMA		(266,993	)		10,743,203		(572	)		457,147		(267,565	)		11,200,350
Total securities available for sale	$	(1,442,841	)	$	141,749,541	$	(6,032,439	)	$	59,383,745	$	(7,475,280	)	$	201,133,286

December 31, 2007
Securities available for sale:
Obligations of states and political
subdivisions	$	(48,137	)	$	4,770,745	$	(1,497	)	$	124,943	$	(49,634	)	$	4,895,688
Government Agency securities		(11,748	)		11,987,830		(23,400	)		14,976,600		(35,148	)		26,964,430
Corporate debt securities		(9,981	)		2,999,999		-			-		(9,981	)		2,999,999
Trust preferred securities		-			-		(576,760	)		11,500,000		(576,760	)		11,500,000
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		(752	)		721,991		(402,913	)		30,873,800		(403,665	)		31,595,791
FNMA		(16,645	)		1,437,042		(521,787	)		38,756,472		(538,432	)		40,193,514
GNMA		(1,718	)		341,934		(37,138	)		5,261,228		(38,856	)		5,603,162
Other		-			-		(33,733	)		1,179,933		(33,733	)		1,179,933
Total securities available for sale	$	(88,981	)	$	22,259,541	$	(1,597,228	)	$	102,672,976	$	(1,686,209	)	$	124,932,517

	June 30, 2008			December 31, 2007
Impaired loans with related allowances for loss	$	6,264,315		$	3,734,156
Allowance for loss on impaired loans		(3,264,390	)		(1,537,256	)
		2,999,925			2,196,900
Impaired loans with no related allowances for loss		3,641,010			287,778
Net impaired loans	$	6,640,935		$	2,484,678

	Second Quarter 2008			Full Year 2007
Average impaired loans	$	11,955,524		$	5,746,758

	2008			2007
Balance, January 1	$	14,704,864		$	16,411,925
Adjustment due to sale of SB Equipment assets		(2,002,155	)		-
Provision charged to income		6,525,744			2,201,000
Charge-offs		(2,149,499	)		(2,374,251	)
Recoveries		169,340			197,383
Balance, June 30	$	17,248,294		$	16,436,057

For the Six Months Ended June 30,	2008		2007
Net income	$	3,961,131	$	2,676,513
Average market price	$	13.09	$	19.44
Weighted average common shares outstanding		14,041,806		13,620,968
Dilutive effect of stock options and restricted stock grants		42,663		290,378
Adjusted common shares outstanding - diluted		14,084,469		13,911,346
Net income per share – basic	$	0.28	$	0.20
Net income per share – diluted	$	0.28	$	0.19
Antidilutive potential shares not included in the calculation		458,291		133,355

						For Capital					To Be Considered
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2008:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	122,126		7.64	%	$	63,931		4.00	%		N/A		N/A
The Bank	$	127,848		8.00	%	$	63,900		4.00	%	$	79,875		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	122,126		10.20	%	$	47,910		4.00	%		N/A		N/A
The Bank	$	127,848		10.70	%	$	47,794		4.00	%	$	71,691		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	147,126		12.28	%	$	95,820		8.00	%		N/A		N/A
The Bank	$	142,812		11.95	%	$	95,588		8.00	%	$	119,485		10.00	%
As of December 31, 2007:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	119,900		7.03	%	$	68,210		4.00	%		N/A		N/A
The Bank	$	126,575		7.43	%	$	68,168		4.00	%	$	85,209		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	119,900		10.04	%	$	47,775		4.00	%		N/A		N/A
The Bank	$	126,575		10.62	%	$	47,673		4.00	%	$	71,510		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	144,605		12.11	%	$	95,551		8.00	%		N/A		N/A
The Bank	$	141,280		11.85	%	$	95,347		8.00	%	$	119,183		10.00	%


				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding -
January 1, 2008		593,137		$	14.89
Granted		-			-
Exercised		(28,936	)	$	10.38
Cancelled or forfeited		(126,040	)	$	15.47
Outstanding -
June 30, 2008		438,161		$	15.02

		Weighted-Average
	Shares	Remaining	Weighted-Average	Shares	Weighted-Average
Range of Exercise Prices	Outstanding	Contractual Life	Exercise Price	Exercisable	Exercise Price
$8.25 - $10.33	135,498	2.0 years	$9.86	135,498	$9.86
$12.45 - $13.61	139,310	4.2 years	$13.06	139,310	$13.06
$19.16	77,913	5.7 years	$19.16	77,913	$19.16
$22.63	85,440	6.6 years	$22.63	85,440	$22.63
	438,161	4.3 years	$15.02	438,161	$15.02

	June 30, 2008	Fair Value Measurements at June 30, 2008 Using Significant Other Observable Inputs (Level 2)
Assets:
Available for sale securities	$386,431,852	$386,431,852

Financial performance of State Bancorp, Inc.
(dollars in thousands, except per share data)
As of or for the three and six months ended June 30, 2008 and 2007

	Three months				Six months
			Over/				Over/
			(under)				(under)
	2008	2007	2007		2008	2007	2007
Revenue (1)	$17,495	$16,475	6.2	%	$34,575	$32,421	6.6	%
Operating expenses	$11,220	$14,566	(23.0)	%	$22,349	$26,381	(15.3)	%
Provision for loan and lease losses	$4,908	$627	682.8	%	$6,526	$2,201	196.5	%
Net income	$961	$930	3.3	%	$3,961	$2,677	48.0	%
Net income per share - diluted	$0.07	$0.06	16.7	%	$0.28	$0.19	47.4	%
Return on average total stockholders' equity	3.35%	3.46%	(11)	bp	6.90%	5.04%	186	bp
Tier I leverage ratio	7.64%	7.06%	58	bp	7.64%	7.06%	58	bp
Tier I risk-based capital ratio	10.20%	10.20%	0	bp	10.20%	10.20%	0	bp
Total risk-based capital ratio	12.28%	12.30%	(2)	bp	12.28%	12.30%	(2)	bp

bp - denotes basis points; 100 bp equals 1%.
(1) Represents net interest income plus total non-interest income.

TABLE 2-1		Tier I Capital/	Total Capital/
	Tier I	Risk-Weighted	Risk-Weighted
	Leverage	Assets	Assets

Regulatory Minimum	3.00%-4.00%	4.00%	8.00%

Ratios as of:
June 30, 2008	7.64%	10.20%	12.28%
December 31, 2007	7.03%	10.04%	12.11%
June 30, 2007	7.06%	10.20%	12.30%

	Payments due by period (in thousands)
Contractual obligations	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Leases covering various equipment, branches, office space and land	$	14,795	$	3,188	$	7,450	$	3,597	$	560
Time deposits		363,590		328,352		30,266		4,972		-
Federal funds purchased		35,000		35,000		-		-		-
FHLB borrowings		123,000		123,000		-		-		-
Securities sold under agreements to repurchase		3,000		-		2,000		1,000		-
Subordinated notes		10,000		-		-		10,000		-
Junior subordinated debentures		20,620		-		-		-		20,620
	$	570,005	$	489,540	$	39,716	$	19,569	$	21,180

Revenue of State Bancorp, Inc.
(dollars in thousands)
For the three and six months ended June 30, 2008 and 2007

	Three months				Six months
			Over/				Over/
			(under)				(under)
	2008	2007	2007		2008	2007	2007
Net interest income	$16,057	$15,044	6.7	%	$31,618	$29,633	6.7	%
Service charges on deposit accounts	553	548	0.9	%	1,155	1,139	1.4	%
Net security gains (losses)	52	(15)	N/M	(1)	60	(34)	N/M	(1)
Income from bank owned life insurance	229	282	(18.8)	%	517	560	(7.7)	%
Other operating income	604	616	(1.9)	%	1,225	1,123	9.1	%
Total revenue	$17,495	$16,475	6.2	%	$34,575	$32,421	6.6	%

(1) N/M - denotes % variance not meaningful for statistical purposes

Operating expenses of State Bancorp, Inc.
(dollars in thousands)
For the three and six months ended June 30, 2008 and 2007

	Three months				Six months
			Over/				Over/
			(under)				(under)
	2008	2007	2007		2008	2007	2007
Salaries and other employee benefits	$5,769	$10,081	(42.8)	%	$11,739	$17,587	(33.3)	%
Occupancy	1,397	1,324	5.5	%	2,774	2,641	5.0	%
Equipment	295	340	(13.2)	%	617	653	(5.5)	%
Legal	1,496	333	349.2	%	2,732	481	468.0	%
Marketing and advertising	19	469	(95.9)	%	287	918	(68.7)	%
Audit and assessment	385	285	35.1	%	653	577	13.2	%
Other operating expenses	1,859	1,734	7.2	%	3,547	3,524	0.7	%
Total operating expenses	$11,220	$14,566	(23.0)	%	$22,349	$26,381	(15.3)	%

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2008		19,670		$	19.95
Granted		161,084		$	13.01
Vested		(20,123	)	$	12.92
Cancelled or forfeited		(6,212	)	$	19.95
Nonvested - June 30, 2008		154,419		$	13.63

Nominee	Term	For	Withheld
John J. LaFalce	3 years	11,407,367	600,260
John F. Picciano	3 years	10,851,766	1,155,861
Suzanne H. Rueck	3 years	10,822,492	1,185,135
Jeffrey S. Wilks	3 years	10,407,586	1,600,041
Nicos Katsoulis	1 year	11,457,102	550,525

8/11/08	/s/ Thomas M. O'Brien
Date	Thomas M. O’Brien,
	President and Chief Executive Officer

8/11/08	/s/ Brian K. Finneran
Date	Brian K. Finneran,
	Chief Financial Officer

TABLE 2 - 3

ANALYSIS OF NON-PERFORMING ASSETS
AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
June 30, 2008 versus December 31, 2007 and June 30, 2007
(dollars in thousands)


NON-PERFORMING ASSETS BY TYPE:
	Period Ended
	6/30/2008			12/31/2007			6/30/2007
Non-accrual Loans and Leases	$	10,916		$	5,792		$	8,565
Other Real Estate Owned ("OREO")		-			-			-
Total Non-performing Assets	$	10,916		$	5,792		$	8,565

Loans and Leases 90 Days or More Past Due and Still Accruing	$	1		$	28		$	1
Gross Loans and Leases Outstanding	$	1,061,064		$	1,041,009		$	992,392


ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES:
	Quarter Ended
	6/30/2008			12/31/2007			6/30/2007
Beginning Balance	$	16,423		$	14,659		$	16,038
Adjustment due to sale of SB Equipment assets		(2,002	)		-			-
Provision		4,908			1,610			627
Net Charge-Offs		(2,081	)		(1,564	)		(229	)
Ending Balance	$	17,248		$	14,705		$	16,436


KEY RATIOS:
	Period Ended
	6/30/2008			12/31/2007			6/30/2007
Allowance as a % of Total Loans and Leases		1.6	%		1.4	%		1.7	%

Non-accrual Loans and Leases as a % of Total Loans and Leases		1.0	%		0.6	%		0.9	%

Non-performing Assets as a % of Total Loans and Leases and OREO (1)		1.0	%		0.6	%		0.9	%

Allowance for Loan and Lease Losses as a % of Non-accrual Loans and Leases		158	%		254	%		192	%

Allowance for Loan and Lease Losses as a % of Non-accrual Loans and
Leases, and Loans and Leases 90 days or More Past Due and Still Accruing		158	%		253	%		192	%


(1) For purposes of calculating this ratio, non-performing assets excludes loans and leases 90 days or more past due and still accruing interest.

Exhibit Number	Description
3.1	Certificate of change of certificate of incorporation dated July 25, 2007
31.1	Certification of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (this exhibit will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section)