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, 2010

[  ]  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 incorporation or organization)	(I.R.S. Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   [   ] No   [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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, 2010, there were 16,659,312 shares of registrant’s Common Stock outstanding.

STATE BANCORP, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 2010

Table of Contents

		Page
	PART I
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) – June 30, 2010 and December 31, 2009	1
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2010 and 2009	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2010 and 2009	3
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited) for the Six Months Ended June 30, 2010 and 2009	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	38
	PART II
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults upon Senior Securities	40
Item 4.	Submission of Matters to a Vote of Security Holders	40
Item 5.	Other Information	40
Item 6.	Exhibits	40
	Signatures	41

PART I

ITEM 1.  - FINANCIAL STATEMENTS

STATE BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2010 and December 31, 2009
(in thousands, except share and per share data)
	June 30, 2010			December 31, 2009
ASSETS:
Cash and due from banks	$	64,593		$	28,624
Securities available for sale - at estimated fair value		369,125			415,985
Federal Home Loan Bank and other restricted stock		5,473			7,361
Loans (net of allowance for loan losses of $31,259 in 2010 and $28,711 in 2009)		1,069,765			1,068,924
Loans held for sale		319			670
Bank premises and equipment - net		6,227			6,338
Bank owned life insurance		30,839			30,593
Net deferred income taxes		25,325			27,486
Receivable - securities sales		23,626			-
Prepaid FDIC assessment		6,486			7,533
Other assets		13,107			14,198
TOTAL ASSETS	$	1,614,885		$	1,607,712
LIABILITIES:
Deposits:
Demand	$	381,434		$	381,066
Savings		566,970			613,894
Time		440,437			354,602
Total deposits		1,388,841			1,349,562
Other temporary borrowings		3,000			48,000
Senior unsecured debt		29,000			29,000
Junior subordinated debentures		20,620			20,620
Payable - securities purchases		7,996			-
Other accrued expenses and liabilities		12,477			12,015
Total liabilities		1,461,934			1,459,197
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized 250,000 shares; 36,842 shares issued and outstanding; liquidation preference of $36,842		36,131			36,016
Common stock, $0.01 par value, authorized 50,000,000 shares; issued 17,479,978 shares in 2010 and 17,297,546 shares in 2009; outstanding 16,656,959 shares in 2010 and 16,331,862 shares in 2009		175			173
Warrant		1,057			1,057
Surplus		178,450			178,673
Retained deficit		(55,442	)		(57,432	)
Treasury stock (823,019 shares in 2010 and 965,684 shares in 2009)		(13,872	)		(16,276	)
Accumulated other comprehensive income (net of taxes of $4,247 in 2010 and $4,150 in 2009)		6,452			6,304
Total stockholders' equity		152,951			148,515
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,614,885		$	1,607,712
See accompanying notes to unaudited condensed consolidated financial statements.

1

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Six Months Ended June 30, 2010 and 2009
(in thousands, except per share data)
	Three Months				Six Months
	2010		2009		2010		2009
INTEREST INCOME:
Interest and fees on loans	$	15,074	$	14,745	$	30,696	$	29,636
Federal funds sold and securities purchased under agreements to resell		2		5		2		6
Securities available for sale - taxable		3,785		4,367		8,155		9,199
Securities available for sale - tax-exempt		27		17		54		51
Dividends on Federal Home Loan Bank and other restricted stock		28		28		63		39
Total interest income		18,916		19,162		38,970		38,931
INTEREST EXPENSE:
Deposits		2,549		3,391		5,130		7,370
Temporary borrowings		16		29		48		64
Senior unsecured debt		281		280		561		283
Subordinated notes		-		231		-		462
Junior subordinated debentures		182		212		358		453
Total interest expense		3,028		4,143		6,097		8,632
Net interest income		15,888		15,019		32,873		30,299
Provision for loan losses		5,450		3,500		7,700		13,500
Net interest income after provision for loan losses		10,438		11,519		25,173		16,799
NON-INTEREST INCOME:
Service charges on deposit accounts		455		596		905		1,186
Other-than-temporary impairment losses on securities		-		-		-		(4,000	)
Net gains on sales of securities		2,525		447		2,781		682
Income from bank owned life insurance		104		264		246		372
Other operating income		302		239		616		603
Total non-interest income		3,386		1,546		4,548		(1,157	)
Income before operating expenses		13,824		13,065		29,721		15,642
OPERATING EXPENSES:
Salaries and other employee  benefits		6,598		5,960		12,594		11,297
Occupancy		1,391		1,448		2,810		2,949
Equipment		269		297		573		602
Marketing and advertising		453		475		906		750
FDIC and NYS assessment		684		1,276		1,356		2,314
Other operating expenses		1,786		2,078		3,938		3,784
Total operating expenses		11,181		11,534		22,177		21,696
INCOME (LOSS) BEFORE INCOME TAXES		2,643		1,531		7,544		(6,054	)
PROVISION (BENEFIT) FOR INCOME TAXES		984		459		2,868		(2,033	)
NET INCOME (LOSS)		1,659		1,072		4,676		(4,021	)
Preferred dividends and accretion		518		514		1,036		1,029
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	1,141	$	558	$	3,640	$	(5,050	)
NET INCOME (LOSS) PER COMMON SHARE - BASIC	$	0.07	$	0.04	$	0.22	$	(0.35	)
NET INCOME (LOSS) PER COMMON SHARE - DILUTED	$	0.07	$	0.04	$	0.22	$	(0.35	)
See accompanying notes to unaudited condensed consolidated financial statements.

2

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2010 and 2009
(in thousands)
	Six Months
	2010			2009
OPERATING ACTIVITIES:
Net income (loss)	$	4,676		$	(4,021	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		7,700			13,500
Depreciation and amortization of bank premises and equipment		784			755
Amortization of net premium on securities		1,197			1,267
Deferred income tax expense (benefit)		2,064			(2,444	)
Other-than-temporary impairment losses on securities recognized in earnings		-			4,000
Net gains on sales of securities		(2,781	)		(682	)
Income from bank owned life insurance		(246	)		(372	)
Change in fair value of derivative contracts		80			473
Stock-based compensation expense		711			426
Directors' stock plan expense		53			68
Net payments and proceeds from sales of loans held for sale		351			1,063
Decrease (increase) in other assets		1,642			(991	)
Decrease in prepaid FDIC assessment		1,047			-
(Decrease) increase in other accrued expenses and other liabilities		(80	)		2,551
Net cash provided by operating activities		17,198			15,593
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		56,751			86,440
Proceeds from prepayments and maturities of securities available for sale		79,711			57,273
Purchases of securities available for sale		(103,405	)		(120,417	)
Decrease (increase) in Federal Home Loan Bank and other restricted stock		1,888			(513	)
Increase in loans - net		(8,541	)		(9,337	)
Purchases of bank premises and equipment - net		(673	)		(569	)
Net cash provided by investing activities		25,731			12,877
FINANCING ACTIVITIES:
Decrease in demand and savings deposits		(46,556	)		(5,803	)
Increase (decrease) in time deposits		85,835			(48,214	)
Decrease in other temporary borrowings		(45,000	)		-
Proceeds from issuance of senior unsecured debt		-			29,000
Decrease in overnight sweep and settlement accounts, net		-			(13,174	)
Cash dividends paid on common stock		(1,650	)		(1,456	)
Cash dividends paid on preferred stock		(921	)		(819	)
Proceeds from reissuance of treasury stock		1,184			-
Proceeds from shares issued under dividend reinvestment plan		148			206
Net cash used in financing activities		(6,960	)		(40,260	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		35,969			(11,790	)
CASH AND CASH EQUIVALENTS - JANUARY 1		28,624			102,988
CASH AND CASH EQUIVALENTS - JUNE 30	$	64,593		$	91,198
SUPPLEMENTAL DATA:
Interest paid	$	6,025		$	8,492
Income taxes paid	$	632		$	219
Loans transferred to held for sale		-		$	7,362
See accompanying notes to unaudited condensed consolidated financial statements.

3

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Six Months Ended June 30, 2010 and 2009
(in thousands, except share and per share data)
	Preferred Stock		Common Stock			Warrant		Surplus			Retained Deficit			Treasury Stock			Accumulated Other Comprehensive Income		Total Stockholders' Equity
Balance, January 1, 2010	$	36,016	$	173		$	1,057	$	178,673		$	(57,432	)	$	(16,276	)	$	6,304	$	148,515
Net income		-		-			-		-			4,676			-			-		4,676
Other comprehensive income, net of tax:
Unrealized gains (1)		-		-			-		-			-			-			-		1,824
Reclassification adjustment (2)		-		-			-		-			-			-			-		(1,676	)
Total other comprehensive income		-		-			-		-			-			-			148		148
Total comprehensive income		-		-			-		-			-			-			-		4,824
Accretion of discount on preferred shares		115		-			-		-			(115	)		-			-		-
Cash dividend on common stock ($.10 per share)		-		-			-		-			(1,650	)		-			-		(1,650	)
Cash dividend on preferred stock (5%)		-		-			-		-			(921	)		-			-		(921	)
Shares issued under the dividend reinvestment plan (19,454 shares at 95% of market value)		-		-			-		148			-			-			-		148
Stock issued under directors' stock plan (13,875 shares)		-		-			-		140			-			-			-		140
Stock-based compensation (149,103 shares)		-		2			-		709			-			-			-		711
Treasury stock reissued (142,665 shares)		-		-			-		(1,220	)		-			2,404			-		1,184
Balance, June 30, 2010	$	36,131	$	175		$	1,057	$	178,450		$	(55,442	)	$	(13,872	)	$	6,452	$	152,951
Balance, January 1, 2009	$	35,800	$	77,455		$	1,057	$	89,984		$	(37,635	)	$	(17,262	)	$	4,520	$	153,919
Adjustment for change in par value of common stock to $0.01 per share from $5.00 per share		-		(77,300	)		-		77,300			-			-			-		-
Net loss		-		-			-		-			(4,021	)		-			-		(4,021	)
Other comprehensive income, net of tax:
Unrealized losses (1)		-		-			-		-			-			-			-		(1,658	)
Reclassification adjustment (2)		-		-			-		-			-			-			-		2,190
Total other comprehensive income		-		-			-		-			-			-			532		532
Total comprehensive loss		-		-			-		-			-			-			-		(3,489	)
Accretion of discount on preferred shares		108		-			-		-			(108	)		-			-		-
Cash dividend on common stock ($.10 per share)		-		-			-		-			(1,456	)		-			-		(1,456	)
Cash dividend on preferred stock (5%)		-		-			-		-			(921	)		-			-		(921	)
Shares issued under the dividend reinvestment plan (32,106 shares at 95% of market value)		-		-			-		205			-			-			-		205
Stock issued under directors' stock plan (10,625 shares, 41,609 treasury shares reissued)		-		-			-		(481	)		-			616			-		135
Stock-based compensation (53,074 shares)		-		1			-		425			-			-			-		426
Balance, June 30, 2009	$	35,908	$	156		$	1,057	$	167,433		$	(44,141	)	$	(16,646	)	$	5,052	$	148,819
(1) Unrealized gains (losses) on securities available for sale, net of taxes of $1,201 and $(779) in 2010 and 2009, respectively. There were no changes in unrealized gains (losses) on securities for which a portion of an other-than-temporary impairment has been recognized in earnings.
(2) Adjustment for (gains) losses included in net income, net of taxes of $1,104 and $(1,128) in 2010 and 2009, respectively.
See accompanying notes to unaudited condensed consolidated financial statements.

4

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements include the accounts of State Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, State Bank of Long Island and its subsidiaries (the “Bank”). State Bancorp, Inc. and subsidiaries are collectively referred to hereafter as the “Company.”  All intercompany accounts and transactions have been eliminated.

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 Company has fully and unconditionally guaranteed all obligations of State Bancorp Capital Trust I and State Bancorp Capital Trust 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 2009 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, 2010 and December 31, 2009, its condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009, its condensed consolidated statements of cash flows for the six months ended June 30, 2010 and 2009 and its condensed consolidated statements of stockholders’ equity and comprehensive income (loss) for the six months ended June 30, 2010 and 2009, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The results of operations for the three and six months ended June 30, 2010 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 audited consolidated financial statements and footnotes thereto included in the Company’s 2009 Annual Report on Form 10-K.

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 largely offsetting the corresponding other. 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.

For the three and six months ended June 30, 2010, net credit valuation adjustments (“CVA”) of $64 thousand and $80 thousand, respectively, were recorded as a reduction to other income. The CVA represents the consideration of credit risk of the counterparties to a transaction and the effect of any credit enhancements related to the transaction. For the three and six months ended June 30, 2009, net losses of $140 thousand and $228 thousand, respectively, were recorded as two customer interest rate swap transactions were no longer offset by an institutional dealer due to the event of default under the swap agreements the Bank had with Lehman Brothers Special Financing Inc. (See Note 14 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of the Company’s 2009 Annual Report on Form 10-K.) As all customer interest rate swap transactions are now offset by swap transactions with institutional dealers, we expect that their future impact on the Company’s financial statements will be immaterial. At June 30, 2010 and December 31, 2009, the total gross notional amount of swap transactions outstanding was $36 million and $37 million, respectively.

Information on the Company’s derivative financial instruments at June 30, 2010 and December 31, 2009 follows.

	Fair Values of Derivative Instruments (in thousands)
		June 30, 2010		December 31, 2009
	Balance Sheet Location	Fair Value		Fair Value
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	2,386	$	1,836
Interest rate contracts	Other liabilities	$	2,503	$	1,873

5

Accounting for Bank Owned Life Insurance

The Bank is the beneficiary of a policy that insures the lives of certain current and former 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.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely, while recoveries of previously charged-off loans are credited to the allowance. The balance in the allowance for loan losses is maintained at a level that, in the opinion of management, is sufficient to absorb probable inherent losses. To determine that level, management evaluates problem loans based on the financial condition of the borrower, the value of collateral and/or guarantor support. Based upon the resultant risk categories assigned to each loan and the procedures regarding impairment described below, an appropriate allowance level is determined. Management also evaluates the quality of, and changes in, the portfolio, while taking into consideration the Bank’s historical loss experience, the existing economic climate of the service area in which the Bank operates, examinations by regulatory authorities, internal reviews and other evaluations in determining the appropriate allowance balance. Management utilizes all available information to estimate the adequacy of the allowance for loan losses. However, the ultimate collectibility of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based upon changes in credit and economic conditions and other relevant factors.

Commercial and industrial loans and commercial real estate loans are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all of the principal and interest due under the contractual terms of the loan. Management considers all non-accrual loans and troubled debt restructurings in excess of $250 thousand for impairment. Those with balances less than $250 thousand as well as other groups of smaller-balance homogeneous loans, such as consumer and residential mortgages, are collectively evaluated for impairment. Problem loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are classified as impaired.

The allowance for loan losses related to loans that are impaired includes reserves which are based upon the expected future cash flows, discounted at the effective interest rate, or the fair value of the underlying collateral for collateral-dependent loans, or the observable market price.  This evaluation includes inherently subjective elements as it requires material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change.

Other-Than-Temporary Impairment (“OTTI”) of Investment Securities

Accounting guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the statement of operations.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In estimating OTTI, 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, (3) whether the market decline was affected by macroeconomic conditions and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. 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, industry analysts’ reports and the issuer’s financial statements and related disclosures.

Adoption of New Accounting Guidance

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

6

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

Newly Issued But Not Yet Effective Accounting Guidance

In July 2010, the FASB issued an Accounting Standards Update (“ASU”), “Receivables: Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses.  An entity should provide disclosures on a disaggregated basis on two defined levels: (1) portfolio segment; and (2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses.  For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The Company expects the adoption to be disclosure-related only and have no impact on the results of operations.

2.  STOCKHOLDERS’ EQUITY

The Company has 250,000 shares of preferred stock authorized. In December 2008, the U.S. Department of the Treasury (the “Treasury”) purchased 36,842 shares of the Company’s fixed-rate cumulative perpetual Series A Preferred Stock par value $0.01 per share and liquidation preference $1,000 per share, with a redemption and liquidation value of $37 million and an initial annual dividend of 5% for five years and 9% thereafter. The Treasury also received a warrant to purchase 465,569 shares of the Company’s common stock with an exercise price of $11.87 per share representing an aggregate market price of $6 million or 15% of the preferred stock investment. The warrant is immediately exercisable and expires in ten years. Pursuant to the American Recovery and Reinvestment Act of 2009 (“ARRA”), subject to approval by the Treasury and the Company’s primary federal regulator, the Company may redeem the preferred stock without regard to whether the Company has replaced such funds from any other source or to any waiting period.

Stock held in treasury by the Company is reported as a reduction to total stockholders’ equity. During the first six months of 2010, the Company reissued 142,665 shares of common stock previously held in treasury to be used for contributions under the Company’s Employee Stock Ownership Plan and also issued 182,432 new shares related to dividend reinvestment and equity-based compensation plans. The Company has not repurchased any of its common shares thus far in 2010.

3.  EARNINGS PER COMMON SHARE

Basic earnings per common share is computed based on the weighted-average number of shares outstanding.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options, restricted stock grants and common stock warrants. For periods in which a loss is reported, the impact of stock options, restricted stock grants and common stock warrants is not considered as the result would be antidilutive.

The computation of earnings per common share for the three and six months ended June 30, 2010 and 2009 follows.

7

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
(in thousands, except share and per share data)
Distributed earnings allocated to common stock	$	814		$	718		$	1,619		$	-
Undistributed earnings allocated to common stock		302			(169	)		1,955			-
Net earnings allocated to common stock	$	1,116		$	549		$	3,574		$	-
Net loss	$	-		$	-		$	-		$	(4,021	)
Less:  dividends accrued and accretion of discount on preferred stock		-			-			-			(1,029	)
Loss attributable to common stockholders	$	-		$	-		$	-		$	(5,050	)
Average market price	$	9.29		$	7.91		$	8.37		$	7.45
Weighted average common shares outstanding, including shares considered participating securities		16,639,801			14,589,646			16,511,305			14,559,049
Less:  weighted average participating securities		(351,392	)		(233,039	)		(298,161	)		(212,966	)
Weighted average common shares outstanding		16,288,409			14,356,607			16,213,144			14,346,083
Dilutive effect of stock options, restricted stock grants and common stock warrants		89,756			11,376			63,293			N/A	*
Adjusted common shares outstanding - diluted		16,378,165			14,367,983			16,276,437			14,346,083
Net income (loss) per common share - basic	$	0.07		$	0.04		$	0.22		$	(0.35	)
Net income (loss) per common share - diluted	$	0.07		$	0.04		$	0.22		$	(0.35	)
Antidilutive common stock warrant issued to the Treasury under the CPP and not included in the calculation		465,569			465,569			465,569			465,569
Other antidilutive potential shares not included in the calculation		467,327			628,442			503,923			664,657
* N/A - for periods in which a loss is reported, the impact of stock options, restricted stock grants and common stock warrants is not considered as the result would be antidilutive.

4.  INVESTMENT SECURITIES

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 operations and determined using the adjusted cost of the specific security sold. In the first quarter of 2009, a $4.0 million OTTI charge was recorded on one $10 million par value trust preferred collateralized debt obligation ("CDO").  There were no amounts recorded in other comprehensive income related to this security as management determined that it intended to sell this bond, which it ultimately liquidated in July 2009.

At June 30, 2010 and December 31, 2009, the Company had no securities designated as held to maturity. The amortized cost, gross unrealized gains and losses and estimated fair value of securities available for sale at June 30, 2010 and December 31, 2009 follow. The June 30, 2010 amounts exclude $22 million in principal amount of mortgage-backed securities sold in June 2010 that settle in July 2010. In addition, the June 30, 2010 amounts include $8 million in principal amount of Government Agency securities purchased in June 2010 that settle in July 2010.

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			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
	(in thousands)
June 30, 2010
Securities available for sale:
Obligations of states and political
subdivisions	$	7,503	$	146	$	-		$	7,649
Government Agency securities		62,364		521		(1	)		62,884
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		125,933		6,590		(7	)		132,516
FNMA		102,344		3,266		(411	)		105,199
GNMA		60,283		602		(8	)		60,877
Total securities available for sale	$	358,427	$	11,125	$	(427	)	$	369,125
December 31, 2009
Securities available for sale:
Obligations of states and political
subdivisions	$	12,446	$	61	$	(86	)	$	12,421
Government Agency securities		22,773		326		(189	)		22,910
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		173,324		6,656		(279	)		179,701
FNMA		148,304		4,387		(221	)		152,470
GNMA		48,684		113		(314	)		48,483
Total securities available for sale	$	405,531	$	11,543	$	(1,089	)	$	415,985

The amortized cost and estimated fair value of securities available for sale at June 30, 2010 are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Estimated
	Cost		Fair Value
	(in thousands)
Securities available for sale:
Due in one year or less	$	11,743	$	11,861
Due after one year through five years		13,222		13,390
Due after five years through ten years		27,910		28,226
Due after ten years		16,992		17,056
Subtotal		69,867		70,533
Mortgage-backed securities and
collateralized mortgage obligations - residential		288,560		298,592
Total securities available for sale	$	358,427	$	369,125

The proceeds from sales of securities available for sale and the associated recognized gross gains, gross losses and taxes follows:

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	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
	(in thousands)
Proceeds	$	47,966	$	41,048	$	56,751	$	86,440
Gross gains		2,527		458		2,783		840
Gross losses		2		11		2		158
Tax provision		1,002		138		1,104		232

Information pertaining to securities with gross unrealized losses at June 30, 2010 and December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	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
	(in thousands)
June 30, 2010
Securities available for sale:
Government Agency securities	$	(1	)	$	3,999	$	-	$	-	$	(1	)	$	3,999
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		(7	)		1,647		-		-		(7	)		1,647
FNMA		(411	)		24,377		-		-		(411	)		24,377
GNMA		(8	)		4,565		-		-		(8	)		4,565
Total securities available for sale	$	(427	)	$	34,588	$	-	$	-	$	(427	)	$	34,588
December 31, 2009
Securities available for sale:
Obligations of states and political
subdivisions	$	(86	)	$	4,781	$	-	$	-	$	(86	)	$	4,781
Government Agency securities		(189	)		10,625		-		-		(189	)		10,625
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		(279	)		25,784		-		-		(279	)		25,784
FNMA		(221	)		32,998		-		-		(221	)		32,998
GNMA		(314	)		37,859		-		-		(314	)		37,859
Total securities available for sale	$	(1,089	)	$	112,047	$	-	$	-	$	(1,089	)	$	112,047

Unrealized losses on securities available for sale have not been recognized in the statements of operations because the issuers’ bonds are of high credit quality, management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to recovery, and the decline in fair value has a direct relationship to movements in interest rates.

In the case of adjustable rate securities, the coupon rate resets periodically and is typically comprised of a base market index rate plus a spread.  The market value on these securities is primarily influenced by the length of time remaining before the coupon rate resets to market levels.  As an adjustable rate security approaches that reset date, it is likely that an unrealized loss position would diminish.

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.  As a fixed rate security approaches its maturity date, the market value of the security typically approaches its par value.

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5.  LOANS

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

Impaired loans, excluding loans held for sale, before related specifically allocated allowance for loan loss were $12 million and $5 million at June 30, 2010 and December 31, 2009, respectively. Impaired loans net of related specifically allocated allowance for loan loss were $10 million and $4 million at June 30, 2010 and December 31, 2009, respectively. For the three and six months ended June 30, 2010 and June 30, 2009, interest income of $106 thousand and $3 thousand, respectively, was recognized on accruing impaired loans. No interest income was recognized on a cash basis on non-accrual impaired loans during any of the reported periods. The recorded investment in loans that are considered to be impaired, as of June 30, 2010 and December 31, 2009, is summarized below:

	June 30, 2010			December 31, 2009
	(in thousands)
Troubled debt restructurings with related allowances for loss	$	6,500		$	-
Allowance for loan loss specifically allocated to troubled debt restructurings		(482	)		-
Net troubled debt restructurings		6,018			-
Other impaired loans with related allowances for loss		5,331			4,431
Allowance for loan loss specifically allocated to other impaired loans		(993	)		(836	)
		4,338			3,595
Other impaired loans with no related allowance for loan loss		-			600
Net other impaired loans		4,338			4,195
Total net impaired loans	$	10,356		$	4,195
	Second Quarter 2010			Second Quarter 2009
	(in thousands)
Average impaired loan balance	$	11,836		$	21,619

The Company has allocated $482 thousand of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2010. The Company has no commitments to lend any additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

Activity in the allowance for loan losses for the six months ended June 30, 2010 and 2009 is as follows:

	2010			2009
	(in thousands)
Balance, January 1	$	28,711		$	18,668
Provision charged to operations		7,700			13,500
Charge-offs		(6,187	)		(1,770	)
Write-downs incurred on the transfer of loans to loans held for sale		-			(2,586	)
Recoveries		1,035			142
Balance, June 30	$	31,259		$	27,954

Loans with unpaid principal balances on which the Bank is no longer accruing interest income were $7 million at both June 30, 2010 and December 31, 2009. Of the total non-accrual loans at June 30, 2010 and December 31, 2009, $319 thousand and $670 thousand, respectively, were categorized as held for sale. At June 30, 2010 loans 90 days or more past due and still accruing interest totaled $9 thousand. Such loans totaled $4 million at December 31, 2009.

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6.  LEGAL PROCEEDINGS

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.

7.  REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that could have a direct material effect on the Company’s consolidated financial statements.  Under the capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amounts and the Bank’s classification are also subject to qualitative judgments by the federal banking regulators about components of capital, risk weightings of assets and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital and Tier I capital, as defined in the federal banking regulations, to risk-weighted assets and of Tier I capital to average assets as shown in the following table. Each of the Company’s and the Bank’s capital ratios exceeds applicable regulatory capital requirements and the Bank meets the requisite capital ratios to be well-capitalized as of June 30, 2010 and December 31, 2009. There are no subsequent conditions or events that management believes have changed the Company’s or the Bank’s capital adequacy.  The Company’s and the Bank’s capital amounts (in thousands) and ratios are as follows:

						For Capital					To Be Considered
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2010:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	144,927		8.93	%	$	64,893		4.00	%		N/A		N/A
The Bank	$	142,189		8.77	%	$	64,868		4.00	%	$	81,085		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	144,927		12.02	%	$	48,246		4.00	%		N/A		N/A
The Bank	$	142,189		11.79	%	$	48,246		4.00	%	$	72,369		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	160,204		13.28	%	$	96,493		8.00	%		N/A		N/A
The Bank	$	157,465		13.06	%	$	96,492		8.00	%	$	120,615		10.00	%
As of December 31, 2009:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	138,575		8.68	%	$	63,890		4.00	%		N/A		N/A
The Bank	$	135,074		8.46	%	$	63,880		4.00	%	$	79,850		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	138,575		11.26	%	$	49,227		4.00	%		N/A		N/A
The Bank	$	135,074		10.98	%	$	49,227		4.00	%	$	73,840		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	154,123		12.52	%	$	98,454		8.00	%		N/A		N/A
The Bank	$	150,622		12.24	%	$	98,453		8.00	%	$	123,066		10.00	%

12

State banking regulations limit, absent regulatory approval, the Bank’s dividends to the Company 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 of June 30, 2010, no dividends were available to the Company from the Bank according to these limitations without seeking regulatory approval.

The preferred stock, purchased by the Treasury in December 2008, qualifies as Tier I capital for regulatory reporting purposes. The Treasury also received a warrant to purchase 465,569 shares of the Company’s common stock with an exercise price of $11.87 per share representing an aggregate market price of $6 million or 15% of the preferred stock investment.  The warrant is immediately exercisable and expires in ten years.  The Company allocated $1 million of the proceeds from the issuance of the preferred stock to the value of the warrant representing an unamortized discount on preferred stock. The discount is being amortized to preferred stock using an effective yield method over a five-year period. Through June 30, 2010, $346 thousand of the discount has been accreted to preferred stock.

The proceeds from the issuance to the U.S. Treasury were allocated based on the relative fair value of the warrant as compared to the fair value of the preferred stock. The fair value of the warrant was determined using a Black-Scholes valuation model. The assumptions used in the warrant valuation were a dividend yield of 3.8%, stock price volatility of 34% and a risk-free interest rate of 2.7%. The fair value of the preferred stock was determined using a discounted cash flow analysis based on assumptions regarding the market rate for preferred stock, which was estimated to be approximately 9% at the date of issuance.

8.  STOCK-BASED COMPENSATION

Incentive Stock Options

Under the terms of the Company’s incentive stock option plans adopted in February 1999 and February 2002, options have been granted to certain key personnel that entitle each holder to purchase shares of the Company’s common stock. The option price is the higher of the fair market value or the book value of the shares at the date of grant.  Such options were exercisable commencing one year from the date of grant, at the rate of 25% per year, and expire within ten years from the date of grant.  Any optionee-owned stock may be used as full or partial payment of the exercise price and shall be valued at the fair market value of the stock on the date of exercise of the option.

At June 30, 2010, incentive stock options for the purchase of 239,313 shares were outstanding and exercisable.  No options were exercised during the six months ended June 30, 2010 and 2009. The options outstanding and exercisable at June 30, 2010 have no intrinsic value.  A summary of stock option activity for the six months ended June 30, 2010 follows:

				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding - January 1, 2010		254,319		$	15.73
Granted		-			-
Exercised		-			-
Forfeited or expired		(15,006	)	$	8.25
Outstanding - June 30, 2010		239,313		$	16.20

The following summarizes shares subject to purchase from incentive stock options outstanding and exercisable as of June 30, 2010:

		Weighted-Average
	Shares	Remaining	Weighted-Average	Shares	Weighted-Average
Range of Exercise Prices	Outstanding	Contractual Life	Exercise Price	Exercisable	Exercise Price
$10.28 - $13.61	128,700	1.7 years	$12.12	128,700	$12.12
$19.16 - $22.63	110,613	4.2 years	$20.94	110,613	$20.94
	239,313	2.8 years	$16.20	239,313	$16.20

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Restricted Stock Awards

Under the Company’s 2006 Equity Compensation Plan (the “2006 Plan”), the Company can award options, stock appreciation rights (“SARs”), restricted stock, performance units and unrestricted stock. The 2006 Plan also allows the Company to make awards conditional upon attainment of vesting conditions and performance targets. During the second quarter of 2010, the Company awarded 105,549 shares of restricted stock to certain key employees. In addition, during the first quarter of 2010, the Company awarded 27,777 shares of restricted stock to its President and CEO (the “CEO”) representing incentive compensation taken entirely in the form of restricted stock in lieu of cash.

The restricted stock awards currently outstanding primarily vest one-third on each of the third through fifth anniversaries of the award date. Based on an estimated forfeiture rate, of the 310,267 shares currently outstanding, 297,000 shares are expected to vest over the remaining vesting life. The Company recognizes compensation expense over the vesting period at the fair market value of the shares on the award date. If a participant’s service terminates for any reason other than death or disability, then the participant shall forfeit to the Company any shares acquired by the participant pursuant to the restricted stock award which remain subject to vesting conditions. The total remaining unrecognized compensation cost related to nonvested shares of restricted stock is $2.2 million at June 30, 2010 and is expected to be expensed over the weighted average remaining vesting life of 2.7 years. For the six months ended June 30, 2010 and 2009, $442 thousand and $187 thousand, respectively, were recognized as compensation expense, net of estimated forfeitures. The Company recognized tax benefits resulting from the compensation expense for the six months ended June 30, 2010 and 2009 of $150 thousand and $63 thousand, respectively.

A summary of restricted stock activity for the six months ended June 30, 2010 follows:

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2010		215,718		$	10.81
Granted		133,326		$	7.99
Vested		(27,777	)	$	8.10
Forfeited or expired		(11,000	)	$	10.04
Nonvested - June 30, 2010		310,267		$	9.87

At June 30, 2010, 227,488 shares were reserved for possible issuance of awards of options, SARs, restricted stock, performance units and unrestricted stock.

Non-Plan Stock-Based Compensation

In May 2010, the Company granted an award of 26,777 shares of restricted stock at an average price of $10.27 to the newly appointed Chief Lending Officer of the Bank (the “CLO”). The restricted stock will vest over five years, with one third to vest on the third anniversary of the award date, one third to vest on the fourth anniversary of the award date and the remainder to vest on the fifth anniversary of the award date. The restricted stock award was granted to the CLO as an inducement material to employment with the Company.

In November 2006, the Company granted non-qualified stock options and restricted stock awards to the CEO, pursuant to the terms of his employment agreement. The non-qualified stock options to purchase 164,745 shares have an exercise price of $17.84 and are  vesting 20% per year over five years. At June 30, 2010, 98,847 of these options were exercisable, but none have been exercised. The options outstanding and those exercisable at June 30, 2010 have no intrinsic value. The restricted stock awarded to the CEO totaled 83,612 shares and was awarded at an average price of $17.94 to vest in 20 equal quarterly installments over five years. The fair value of restricted stock awards vested during the six months ended June 30, 2010 and 2009 was $73 thousand and $63 thousand, respectively.

A summary of restricted stock activity for the six months ended June 30, 2010 follows:

14

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2010		29,259		$	17.94
Granted		26,777		$	10.27
Vested		(8,362	)	$	17.94
Nonvested - June 30, 2010		47,674		$	13.63

The total remaining unrecognized compensation cost related to nonvested options and shares of restricted stock is $884 thousand at June 30, 2010 and will be expensed over the weighted average remaining vesting life of 1.5 years. For the six months ended June 30, 2010 and 2009, $269 thousand and $239 thousand, respectively, were recognized as compensation expense. 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.  BORROWINGS

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 pledged collateral in the form of real estate mortgage loans and investment securities. At June 30, 2010, the Bank had approximately $233 million of real estate mortgage loan collateral pledged at the FHLB. Based on this collateral, the Bank had approximately $168 million available to borrow overnight or on a term basis. There were no investment securities pledged at June 30, 2010. The FHLB line is renewed annually.

The following table provides information on the Bank’s FHLB line at and for the six months ended June 30, 2010 and year ended December 31, 2009.

	Six months ended			Year ended
	June 30, 2010			December 31, 2009
	(dollars in thousands)
Amount outstanding under line of credit with the FHLB - end of period	$	-		$	45,000
Amount outstanding under line of credit with the FHLB - period average	$	9,122		$	12,805
Weighted-average interest rate on average amount outstanding		0.43	%		0.43	%

At June 30, 2010 and December 31, 2009, the Bank had $3 million outstanding in securities sold under agreements to repurchase at a weighted-average interest rate of 1.88%.

On March 31, 2009, the Bank issued $29 million in senior unsecured debt due March 30, 2012 guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) under the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”). Interest at 2.625% per year is payable semi-annually in arrears on the 30th day of each March and September.

10.  FAIR VALUE

A fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs may be used to measure fair value.

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

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

15

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

For the Company’s securities available for sale, the estimated fair value equals quoted market price, if available (Level 1 inputs). If a quoted market price is not available, fair value is estimated using a quoted market price for similar securities (Level 2 inputs). Our derivative instruments consist of interest rate swap transactions with customers on loans.  As such, significant fair value inputs can generally be verified and do not typically involve significant management judgments (Level 2 inputs).  The market value adjustment of the derivatives considers the credit risk of the counterparties to the transaction and the effect of any credit enhancements related to the transaction.  The fair value of loans held for sale and impaired loans with specific allocations of the allowance for loan losses are generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Unobservable inputs are typically significant and result in a Level 3 classification for determining fair value of loans held for sale and impaired loans.

Assets and Liabilities Measured on a Recurring Basis

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

	Carrying Amount at June 30, 2010		Fair Value Measurements at June 30, 2010 Using Significant Other Observable Inputs (Level 2)
	(in thousands)
Assets:
Securities Available for Sale:
Obligations of states and political subdivisions	$	7,649	$	7,649
Government Agency securities		62,884		62,884
Mortgage-backed securities and collateralized mortgage obligations - residential:
FHLMC		132,516		132,516
FNMA		105,199		105,199
GNMA		60,877		60,877
Total Securities Available for Sale	$	369,125	$	369,125
Derivatives	$	2,386	$	2,386
Liabilities:
Derivatives	$	2,503	$	2,503

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	Carrying Amount at December 31, 2009		Fair Value Measurements at December 31, 2009 Using Significant Other Observable Inputs (Level 2)
	(in thousands)
Assets:
Securities Available for Sale:
Obligations of states and political subdivisions	$	12,421	$	12,421
Government Agency securities		22,910		22,910
Mortgage-backed securities and collateralized mortgage obligations - residential:
FHLMC		179,701		179,701
FNMA		152,470		152,470
GNMA		48,483		48,483
Total Securities Available for Sale	$	415,985	$	415,985
Derivatives	$	1,836	$	1,836
Liabilities:
Derivatives	$	1,873	$	1,873

The table below presents a reconciliation and statement of operations classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Available for Sale Securities
	Six months ended		Year ended
	June 30, 2010		December 31, 2009
	(in thousands)
Beginning balance	$	-	$	5,865
Other-than-temporary impairment		-		(4,000	)
Included in other comprehensive income		-		-
Transfers out of Level 3		-		(1,865	)
Ending balance	$	-	$	-

Due to credit deterioration noted in the financial institution industry in general and the change in the Company’s intent for the security to an intent to sell, the Company incurred a first quarter 2009 charge to write down to the fair value a CDO classified as a Level 3 asset as of December 31, 2008. This valuation was based upon comparable prices of similar instruments obtained from an outside broker. The asset was classified as a Level 2 asset from March 31, 2009 until its liquidation in July 2009.

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized as follows:

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	Carrying Amount at June 30, 2010		Fair Value Measurements at June 30, 2010 Using Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Impaired loans	$	10,356	$	10,356
Loans held for sale	$	319	$	319

	Carrying Amount at December 31, 2009		Fair Value Measurements at December 31, 2009 Using Significant Unobservable Inputs (Level 3)
	(in thousands)
Assets:
Impaired loans	$	3,595	$	3,595
Loans held for sale	$	670	$	670

Impaired loans with specific allocations had a principal amount of $12 million and $4 million, with a valuation allowance of $1 million and $836 thousand at June 30, 2010 and December 31, 2009, respectively. The provision for losses on impaired loans was $965 thousand and $5.7 million for the six months ended June 30, 2010 and 2009, respectively. No loans were transferred to loans held for sale in 2010. Net sales and payments received on loans held for sale totaled $350 thousand in the first half of 2010. Charge-offs of $3 million were incurred on loans transfered to loans held for sale in the first half of 2009. (See also Note 5 – Loans.)

The carrying amounts and estimated fair values of the Company’s financial instruments, not previously disclosed, are as follows (in thousands):

	June 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	64,593	$	64,593	$	28,624	$	28,624
Accrued interest receivable		5,850		5,850		6,137		6,137
Federal Home Loan Bank and other restricted stock		5,473		N/A		7,361		N/A
Loans - net of the allowance for loan losses		1,069,765		1,093,641		1,068,924		1,077,999
Receivable - securities sales		23,626		23,626		-		-
Financial liabilities:
Deposits	$	1,388,841	$	1,253,217	$	1,349,562	$	1,163,127
Senior unsecured debt		29,000		28,729		29,000		28,848
Junior subordinated debentures		20,620		12,346		20,620		12,585
Accrued interest payable		758		758		686		686
Temporary borrowings		3,000		3,000		48,000		48,000
Payable - securities purchases		7,996		7,996		-		-

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The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and Cash Equivalents - For cash and cash equivalents (due from banks, federal funds sold and securities purchased under agreements to resell), the carrying amount is a reasonable estimate of fair value.

Accrued Interest Receivable - For accrued interest receivable, the carrying amount is a reasonable estimate of fair value.

Federal Home Loan Bank and Other Restricted Stock – Determining the fair value of Federal Home Loan Bank stock is not practicable due to restrictions placed on its transferability.  For other restricted stock, the carrying amount is a reasonable estimate of fair value.

Loans - For certain homogeneous categories of loans, such as some residential mortgages and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.  The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Receivable – Securities Sales - For receivable – securities sales, the carrying amount is a reasonable estimate of fair value.

Deposits - The fair value of demand deposits, savings accounts and time deposits is the amount payable on demand at the reporting date.  The fair value of fixed-maturity certificates of deposit is estimated using the interest rate swap rates of similar term points.

Senior Unsecured Debt and Junior Subordinated Debentures - The fair value of senior unsecured debt and junior subordinated debentures is estimated using the interest rate swap rates of similar term and repricing points and spreads of equivalent new issues.

Temporary Borrowings and Accrued Interest Payable – Temporary borrowings (FHLB overnight and term advances, federal funds purchased and securities sold under agreements to repurchase) and accrued interest payable are considered to have fair values equal to their carrying amounts due to their short-term nature.

Payable – Securities Purchases - For payable – securities purchases, the carrying amount is a reasonable estimate of fair value.

Commitments to Extend Credit, Standby Letters of Credit and Commercial Letters of Credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit and commercial letters of credit is based on fees currently charged for similar agreements, which are not material to the financial statements.

11.  INCOME TAXES

Income tax expense of $2.9 million and an income tax benefit of $2.0 million were recorded during the six months ended June 30, 2010 and 2009, respectively. The Company is currently subject to a statutory Federal tax rate of 34%, a New York State (“NYS”) tax rate of 7.1% plus a 17% surcharge and a New York City (“NYC”) tax rate of 9%. The Company’s overall effective tax rate was an expense of 38% for the six months ended June 30, 2010, compared to a benefit of 34% for the same period in the prior year. The 2010 effective tax rate was higher primarily due to a greater percentage of pretax income subject to the Company’s marginal tax rate in 2010 compared to 2009. The Company is no longer subject to examination by NYS and NYC taxing authorities for years before January 1, 2007, and by Federal taxing authorities for years before January 1, 2005.

On a quarterly basis, the Company performs an evaluation of its tax positions and has concluded that as of June 30, 2010 there were no significant uncertain tax positions requiring additional recognition in its consolidated financial statements and we do not believe that there will be any material changes in its unrecognized tax positions over the next 12 months.

The Tax Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The alternative minimum tax is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credit against regular tax liabilities in future years. At June 30, 2010, the Company has an AMT credit carryforward of approximately $797 thousand. The AMT credit can be carried forward indefinitely.

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The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. During the six months ended June 30, 2010, there were no material accruals for interest and/or penalties.

The Company has net operating loss carryforwards of approximately $34 million for Federal income tax and $54 million for NYS tax purposes which may be applied against future taxable income. Both the Federal and NYS unused net operating loss carryforwards are expected to expire between the years 2027 and 2029. It is anticipated that these carryforwards, both Federal and NYS, will be utilized prior to their expiration based on the Company’s future years’ projected earnings and therefore no valuation allowance has been recorded against the deferred tax assets.

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 or investment portfolios, demand for loan 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.

Non-GAAP Disclosures - This discussion includes a non-GAAP financial measure of our tangible common equity ratio. A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed by GAAP. The Company believes that these non-GAAP financial measures provide both management and investors a more complete understanding of the underlying operational results and trends and the Company’s marketplace performance. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with GAAP.

Executive Summary – State Bancorp, Inc. (the “Company”) is a one-bank holding company formed in 1985. 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. Unless the context otherwise requires, references herein to the Company include the Company and its subsidiaries on a consolidated basis.

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, commercial mortgage loans, small business lines of credit, cash management services and telephone and online banking. In addition, the Bank also provides access to annuity products and mutual funds. The Company’s loan portfolio is concentrated in commercial and industrial loans and commercial mortgage loans. The Bank does not engage in subprime lending and does not offer payment option ARMs or negative amortization loan products.

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Financial performance of State Bancorp, Inc.
(dollars in thousands, except per share data)
As of or for the quarters and six months ended June 30, 2010 and 2009
	Quarters ended June 30,						Six months ended June 30,
					Over/						Over/
					(under)						(under)
	2010		2009		2009		2010		2009		2009
Revenue (1)	$19,274		$16,565		16.4	%	$37,421		$29,142		28.4	%
Operating expenses	$11,181		$11,534		(3.1)	%	$22,177		$21,696		2.2	%
Provision for loan losses	$5,450		$3,500		55.7	%	$7,700		$13,500		(43.0)	%
Net income (loss)	$1,659		$1,072		54.8	%	$4,676		$(4,021)		N/M	(2)
Net income (loss) per common share - diluted	$0.07		$0.04		75.0	%	$0.22		$(0.35)		N/M	(2)
Return on average total assets	0.40	%	0.26	%	14	bp	0.58	%	(0.49)	%	107	bp
Return on average common stockholders' equity	3.96	%	2.00	%	196	bp	6.39	%	(8.91)	%	1,530	bp
Tier I leverage ratio	8.93	%	8.98	%	(5)	bp	8.93	%	8.98	%	(5)	bp
Tier I risk-based capital ratio	12.02	%	11.48	%	54	bp	12.02	%	11.48	%	54	bp
Total risk-based capital ratio	13.28	%	13.52	%	(24)	bp	13.28	%	13.52	%	(24)	bp
Tangible common equity ratio (non-GAAP)	7.17	%	6.75	%	42	bp	7.17	%	6.75	%	42	bp
bp - denotes basis points; 100 bp equals 1%.
(1) Represents net interest income plus total non-interest income.
(2) N/M - denotes % variance not meaningful for statistical purposes.

As of June 30, 2010, the Company, on a consolidated basis, had total assets of $1.6 billion, total deposits of $1.4 billion and stockholders’ equity of $153 million.

The Company recorded net income of $1.7 million, or $0.07 per diluted common share, for the second quarter of 2010 compared to $1.1 million, or $0.04 per diluted common share, for the second quarter of 2009. The 2010 second quarter earnings improvement versus the comparable 2009 period primarily resulted from a $2.1 million increase in net gains on sales of securities, an $869 thousand increase in net interest income as a result of an improved margin and a $353 thousand reduction in operating expenses. These improvements were offset, in part, by a $2.0 million increase in the provision for loan losses and a $238 thousand decline in non-interest income excluding net gains on sales of securities in the current year.

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Revenue of State Bancorp, Inc.
(dollars in thousands)
For the quarters and six months ended June 30, 2010 and 2009
	Quarters ended June 30,				Six months ended June 30,
			Over/				Over/
			(under)				(under)
	2010	2009	2009		2010	2009	2009
Net interest income	$15,888	$15,019	5.8	%	$32,873	$30,299	8.5	%
Service charges on deposit accounts	455	596	(23.7)	%	905	1,186	(23.7)	%
Other-than-temporary impairment losses on securities	-	-	-	%	-	(4,000)	(100.0)	%
Net gains on sales of securities	2,525	447	464.9	%	2,781	682	307.8	%
Income from bank owned life insurance	104	264	(60.6)	%	246	372	(33.9)	%
Other operating income	302	239	26.4	%	616	603	2.2	%
Total revenue	$19,274	$16,565	16.4	%	$37,421	$29,142	28.4	%

The Company’s return on average total assets improved to 0.40% in the second quarter of 2010 from 0.26% in the second quarter of 2009, while return on average common stockholders’ equity increased to 3.96% in the second quarter of 2010 from 2.00% in the second quarter of 2009. Primarily due to a 35 basis point decrease in the Company’s average cost of interest-bearing liabilities, the Company’s net interest margin increased by 28 basis points to 4.16% in the second quarter of 2010 from 3.88% in the second quarter of 2009.

The Company’s current market area, consisting primarily of Nassau and Suffolk Counties in New York and New York City, provides ample opportunity for growth in deposits and commercial lending. The Company believes that there is a significant number of small to mid-size businesses in its current market area that seek a locally-based commercial bank that can offer a broad array of financial products and services. Given the variety of financial products and services offered by the Company, its focus on client service, and its local management, the Company believes that it can well serve the growing needs of both new and existing clients in its current market areas.

Commercial and residential real estate values in our market appear to have stabilized at lower levels. Locally, however, properties are burdened by high maintenance costs including an ever increasing state and local tax burden. Business conditions remain subdued, marked by high unemployment, and that uncertainty is serving to limit both consumer and corporate spending. Accordingly, the Company expects that weakness will continue in the equity, credit and real estate markets. Although we, like many other financial services firms, continue to witness the unfolding of very difficult and challenging market conditions, the Company is diligently managing its business interests, particularly in the area of maintaining strengthened underwriting standards and risk management practices.

The provision for loan losses was $5.5 million in the second quarter of 2010 compared to $3.5 million in the second quarter of 2009. The increase in provision reflects the change in ratings classifications of several commercial real estate related loans in the second quarter of 2010, also taking into account the current status of watch list loans. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.) The allowance for loan losses was $31 million at June 30, 2010 and $29 million at December 31, 2009. When appropriate, we continue to pursue opportunities to proactively liquidate and dispose of certain problem loans by selling such loans in the market even on a discounted basis. Market liquidity for the disposition of problem credits continues to show signs of improvement. Total loans held for sale amounted to $319 thousand at June 30, 2010 compared to $670 thousand at December 31, 2009.

The primary focus of the Company’s loan portfolio is commercial real estate and commercial and industrial loans. We expect to achieve modest loan growth this year in our core competencies of commercial and industrial credits and commercial mortgage loans. We remain cautious, however, on credit conditions and the inherent risk in lending portfolios. The Company’s securities portfolio contains no subprime exposure, structured debt or exotic structures. At June 30, 2010, the fair value of the securities portfolio represented 103% of book value.

22

The Company has participated in the Capital Purchase Program (“CPP”) through its December 2008 issuance of Series A Preferred Stock and a warrant to purchase common stock to the Treasury. As a participant in the Treasury CPP, the Company is subject to certain restrictions regarding dividend payments, stock repurchases and executive compensation. The Treasury’s consent is required for any increase in common dividends per share that is greater than the amount of the last quarterly cash dividend declared prior to October 14, 2008, and any repurchases of common stock until the earlier of a redemption or December 5, 2011.  Furthermore, the ARRA and Interim Final Regulations issued on June 15, 2009 prohibit the payment or accrual of any bonus, retention award or incentive compensation to, in the Company’s case, the five (5) most highly-compensated employees. This prohibition does not apply to the granting of restricted stock, provided that (a) the stock is subject to a minimum 2-year service-based vesting requirement, (b) the stock, once vested, cannot be sold or otherwise transferred, with certain exceptions, until designated portions of  the financial assistance received under the CPP have been repaid and (c) the amount of restricted stock granted, in any year, does not have a value greater than one-third of the total annual compensation of the recipient. In addition, this prohibition does not apply to any bonus, retention award or incentive compensation required to be paid under a valid employment agreement entered into on or before February 11, 2009. The ARRA also prohibits the payment of any severance or payment to any named executive officer (“NEO”) or any of the next five (5) most highly-compensated employees for departure from the Company for any reason, or, with certain exceptions, due to a change in control, except for payments relating to services already performed or benefits previously accrued. In addition, under ARRA, any bonus payment made to the twenty (20) most highly compensated employees of the Company is subject to recovery by the Company if the bonus payment was based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. Further, as a participant in the CPP, the Company has agreed not to claim a federal deduction in excess of $500 thousand per person per year for the compensation it pays to its NEOs for any fiscal year in which it has financial assistance outstanding.  For these purposes, financial assistance includes the Series A Preferred Stock but does not include common stock warrants. The Treasury has the ability to make unilateral, retroactive changes to the Securities Purchase Agreement which governs the sale of the Series A Preferred Stock to the Treasury.

The Company is continuing to participate in the Transaction Account Guarantee Program of the FDIC’s TLGP. This provides non-interest bearing transaction accounts and interest bearing transaction accounts with interest rates no higher than 0.25% at the Bank with unlimited FDIC insurance coverage beyond the current limit of $250 thousand. The unlimited coverage will be in effect through December 31, 2010. Management anticipates that the cost of participating in the TLGP will be immaterial to the Company’s financial statements. The Company also participated in the Debt Guarantee Program of the TLGP in March 2009 allowing the Bank to issue $29 million in FDIC-guaranteed senior unsecured debt at a fixed interest rate of 2.625% per year and a maturity of March 30, 2012. The FDIC guarantee will be in effect through the March 2012 maturity date.

On July 21, 2010, the Wall Street Reform and Consumer Protection Act (the “Reform Act”) was signed into law by the President. The legislation is intended to address perceived weaknesses in the U.S. financial regulatory system and prevent future economic and financial crises. Certain aspects of the Reform Act will have an impact on us, as described in more detail below in Part II, Item 1A, Risk Factors.

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 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 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 losses. Management carefully monitors the credit quality of the portfolio and charges off the amounts of those loans deemed uncollectible. Management evaluates the fair value of collateral supporting any impaired loans using independent appraisals and other measures of fair value.  This process involves subjective judgments and assumptions that are always subject to substantial change based on factors outside the control of the Company.

23

 

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 portfolio will increase. The timing and amount of loan losses that occur are dependent upon several factors, most notably qualitative and quantitative factors about the financial conditions as reflected in the loan portfolio and the economy as a whole. Factors considered in the evaluation of the allowance for loan losses include, but are not limited to, estimated probable inherent losses from loan and other credit arrangements, general economic conditions, credit risk grades assigned to commercial and industrial and commercial real estate loans, changes in credit concentrations or pledged collateral, historical loan loss experience and trends in portfolio volume, maturity, composition, delinquencies and non-accruals. The allowance for loan losses is established to absorb probable inherent loan charge-offs. Additions to the allowance are made through the provision for loan losses, which is a charge to current operating earnings. The adequacy of the provision and the resulting allowance for loan losses is determined by management’s continuing review of the loan 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 and changes in the size and character of the loan portfolio.  Despite such a review, the level of the allowance for loan losses remains an estimate, cannot be precisely determined and may be subject to significant changes from quarter to quarter.  Based on current economic conditions, management believes that the current level of the allowance for loan losses is adequate in relation to the probable inherent losses present in the portfolio.

Commercial loans are assigned credit risk grades using a scale of one to ten with allocations for probable inherent losses made for pools of similar risk-graded loans. 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. When management analyzes the allowance for loan losses, classified loans are assigned allocation factors ranging from 20% to 100% of the outstanding loan balance and are based on the Company’s historic loss experience. Non-accrual loans 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 in full. The Company measures impairment of collateralized loans based on the 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. An allowance allocation factor for portfolio macro factors currently ranging from 1-35 basis points is calculated to cover potential losses from a number of variables, not the least of which is the current economic uncertainty.

24

Management monitors the level of the allowance for loan losses in order to properly reflect its estimate of the exposure, 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 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 losses. Such agencies may require the Company to recognize additions to the allowance based on their independent judgment of information available to them at the time of their examinations.  Frequently, such additional information generally becomes available only after management has conducted its quarterly calculation of the provision.

Accounting for Income Taxes - Deferred tax assets and liabilities are recognized to reflect the temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. 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 this evaluation are periodically updated based upon changes in business factors and the tax laws and regulations.

On a quarterly basis, management determines whether a valuation allowance is necessary for our deferred tax asset. In performing this analysis, management considers all evidence currently available, both positive and negative, in determining whether, based on the weight of that evidence, the deferred tax asset will be realized. A valuation allowance is established when it is more likely than not that a recorded tax benefit is not expected to be realized. The expense to create the tax valuation allowance is recorded as additional income tax expense in the period the tax valuation allowance is established. The valuation allowance estimate is highly dependent on projections of future levels of taxable income. Should the actual amount of taxable income be less than what has been projected, it may be necessary to record a valuation allowance in a future period.

Other-Than-Temporary Impairment (“OTTI”) of Investment Securities – Current guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the statement of operations. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

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, 2010. When compared to December 31, 2009, total assets increased by $7 million. This change primarily reflects increases in cash and due from banks and the receivable for securities sales of $36 million and $24 million, respectively, partially offset by a decrease in securities available for sale of $47 million. Loans (net of unearned income, principal paydowns and other dispositions and before allowance for loan losses) were $1.1 billion at March 31, 2010 and December 31, 2009. Quality loan demand remains modest in our markets currently resulting in limited growth opportunities. The Company has ample capital and liquidity to lend and continues to actively seek new credit opportunities of an acceptable quality. We are well positioned to grow our core business going forward once economic conditions improve to a level which fosters meaningful commercial loan demand.

The increase in cash and due from banks resulted from short-term seasonal inflows of municipal deposits. The receivable for securities sales consists of proceeds from the sales of mortgage-backed securities settling in July 2010. The decrease in the investment portfolio largely reflects sales of mortgage-backed and U.S. Government agency securities totaling $74 million, of which $22 million settled in July 2010 and cash had not yet been received. In addition, principal paydowns on mortgage-backed securities were $80 million. These were partially offset by purchases of mortgage-backed securities of U.S. Government-sponsored enterprises and U.S. Government agency securities of $55 million and $48 million, respectively.

At June 30, 2010, total deposits were $1.4 billion, an increase of $39 million when compared to December 31, 2009. This was largely attributable to an $86 million increase in certificates of deposit, primarily short-term certificates of deposit with balances greater than $100 thousand. This was partially offset by a decrease in savings deposits of $47 million, primarily reflecting the seasonality of municipal deposits. Core deposit balances represented approximately 68% of total deposits at June 30, 2010 compared to 74% at year-end 2009. Short-term borrowed funds, consisting primarily of FHLB advances, totaled $3 million at June 30, 2010 and $48 million at December 31, 2009.

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Capital Resources - Total stockholders’ equity amounted to $153 million at June 30, 2010, representing an increase of $4 million from December 31, 2009. The increase from year-end 2009 largely reflects the net income recorded in the first half of 2010. Management continually evaluates the Company’s capital position in light of current and future growth objectives and regulatory guidelines.

The Company’s tangible common equity to tangible assets ratio was 7.17% at June 30, 2010 compared to 6.93% at December 31, 2009 and 6.75% at June 30, 2009. The ratio of tangible common equity to tangible assets, or TCE ratio, is calculated by dividing total common stockholders’ equity by total assets, after reducing both amounts by intangible assets. The TCE ratio is not required by GAAP or by applicable bank regulatory requirements, but is a metric used by management to evaluate the adequacy of our capital levels. Since there is no authoritative requirement to calculate the TCE ratio, our TCE ratio is not necessarily comparable to similar capital measures disclosed or used by other companies in the financial services industry. Tangible common equity and tangible assets are non-GAAP financial measures and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Set forth below are the reconciliations of tangible common equity to GAAP total common stockholders’ equity and tangible assets to GAAP total assets at June 30, 2010 (in thousands):

Total stockholders' equity	$	152,951
Less: preferred stock		(36,131	)
Less: warrant		(1,057	)
Total common stockholders' equity		115,763
Less: intangible assets		-
Tangible common equity	$	115,763
Total assets	$	1,614,885
Less: intangible assets		-
Tangible assets	$	1,614,885

At June 30, 2010, the Bank’s Tier I leverage ratio was 8.77% while its risk-based capital ratios were 11.79% for Tier I capital and 13.06% for total capital. These ratios exceed the minimum regulatory guidelines for a well-capitalized institution, or 5.00%, 6.00% and 10.00%, respectively. Table 2-1 summarizes the Company’s capital ratios as of June 30, 2010 and compares them to current minimum regulatory guidelines and December 31 and June 30, 2009 actual results.

TABLE 2-1	Tier I Leverage	Tier I Capital/Risk-Weighted Assets	Total Capital/Risk-Weighted Assets
Regulatory Minimum	3.00% - 4.00%	4.00%	8.00%
Ratios as of:
June 30, 2010	8.93%	12.02%	13.28%
December 31, 2009	8.68%	11.26%	12.52%
June 30, 2009	8.98%	11.48%	13.52%

Additionally, under the CPP the Company must receive consent from the Treasury in order to increase its dividend on common stock to an amount that is greater than the amount of the last quarterly cash dividend declared prior to October 14, 2008. The Company’s Board declared a cash dividend of $0.05 per share at its July 27, 2010 meeting. The cash dividend will be paid on September 16, 2010 to stockholders of record on August 20, 2010.

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The Company did not repurchase any shares of its common stock during the first six months of 2010 under the existing stock repurchase plan. Under the Company’s current stock repurchase authorization, management may repurchase up to 512,348 additional shares if market conditions warrant. This action will occur only 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 Treasury’s consent is also required for any repurchases of common stock until the earlier of a redemption of the Series A Preferred Stock or December 5, 2011.

The Company’s two unconsolidated 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. Under the Reform Act, the trust preferred securities will continue to qualify as Tier I capital. The securities each bear an interest rate tied to three-month LIBOR and are each redeemable by the Company in whole or in part. The Company has the right to redeem the debentures related to Trust I, which bear a coupon rate of three-month LIBOR plus 345 basis points, on any interest payment date prior to the maturity date of November 7, 2032 at par. The Company has the right to redeem the debentures related to Trust II, which bear a coupon rate of three-month LIBOR plus 285 basis points, on any interest payment date prior to the maturity date of January 23, 2034 at par. However, under the CPP, the Company must get approval from the Treasury before it can redeem any capital securities. This requirement will remain in place as long as the Series A Preferred Stock is outstanding. The weighted average cost of all trust preferred securities outstanding was 3.50% and 4.43% for the first half of 2010 and 2009, respectively.

Under the New York Business Corporation Law, the Company can pay dividends only out of surplus or in case there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The dividends may be declared and paid by the Company at any time except when the Company is then insolvent or would thereby be made insolvent.

The Company’s (parent only) primary funding sources are dividends from the Bank, the issuance of common stock and proceeds from the Dividend Reinvestment and Stock Purchase Plan (the “DRP”). Dividend payments from the Bank are subject to regulatory limitations, generally based on capital levels and current and retained earnings, imposed by regulatory agencies with authority over the Bank. As of June 30, 2010, no dividends were available to the Company from the Bank according to these limitations without seeking regulatory approval.

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, funding new and existing loan commitments and the ability to take advantage of business opportunities as they arise. Asset liquidity is provided by short-term investments and the marketability of securities available for sale. The Company may also leave excess reserve balances at the Federal Reserve Bank (“FRB”) if the rate being paid is higher than would be available from other short-term investments. Liquid assets declined to $390 million at June 30, 2010 compared to $419 million at December 31, 2009. These liquid assets may include assets that have been pledged against municipal deposits or other short-term borrowings. Liquidity is also provided 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. The increase in cash and due from banks to $65 million at June 30, 2010 compared to $29 million at December 31, 2009 resulted from short-term seasonal inflows of municipal deposits.

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. Deposit flows and securities prepayments are somewhat less predictable as they are often subject to external factors. 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. At June 30, 2010, total deposits were $1.4 billion, an increase of $39 million when compared to December 31, 2009. Of the total time deposits at June 30, 2010, $351 million are scheduled to mature within the next 12 months. Based on historical experience, the Company expects to be able to replace a substantial portion of those maturing deposits.During the first half of 2010 and 2009, proceeds from sales and maturities of securities available for sale totaled $136 million and $144 million, respectively.

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The Company’s primary uses of funds are for the origination of loans and the purchase of investment securities.  During the first half of 2010 and 2009, the Company had an increase in loans (net of unearned income, principal paydowns and other dispositions, and before allowance for loan losses) totaling $8 million and $9 million, respectively. The Company did not purchase any loans during the first half of 2010 or 2009.  The Company purchased securities available for sale totaling $103 million and $120 million during the first half of 2010 and 2009, respectively.

The Asset/Liability Committee of the Board of Directors (the “ALCO”) is responsible for oversight of the liquidity position and the asset/liability structure. The Board has delegated authority to management to establish specific policies and operating procedures governing liquidity levels and develop plans to address future and current liquidity needs.  Management monitors the rates and cash flows from 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, 2010, access to approximately $168 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 pledged collateral in the form of real estate mortgage loans and investment securities. At June 30, 2010, approximately $73 million and $5 million in unsecured and secured lines of credit, respectively, extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. At June 30, 2010, no advances were outstanding under lines of credit with the FHLB and no funds were drawn on correspondent bank lines of credit.

To supplement its short-term borrowed funds, the Company also utilized the Certificate of Deposit Account Registry Service (“CDARS”) for $37 million and $53 million in short-term certificates of deposit outstanding at June 30, 2010 and December 31, 2009, respectively. CDARS is a network of financial institutions that exchanges deposits with one another to maximize FDIC coverage of their depositors. CDARS deposits, even though they are sourced from Bank customers, are considered, for regulatory purposes, to be brokered deposits. 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, management may also access the traditional brokered deposit market for funding.  At both June 30, 2010 and December 31, 2009, $30 million in such brokered deposits were outstanding. None of these brokered deposits is maturing in 2010. The Bank, currently a well-capitalized depository institution, is allowed to solicit and accept, renew or roll over any brokered deposit without restriction. Should the Bank become adequately capitalized, it may accept, renew or roll over any brokered deposit only after it has applied for and been granted a waiver by the FDIC. Should the Bank become undercapitalized, it may not accept, renew, or roll over any brokered deposit. As the Company’s liquidity remains satisfactory due to its deposit base, 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, 2010 and 2009, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $202 million and $244 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 facilities to customers. Most letters of credit expire within one year. At June 30, 2010 and 2009, letters of credit outstanding were approximately $13 million and $16 million, respectively. At June 30, 2010 and 2009, the uncollateralized portion was approximately $3 million in each period.

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The use of derivative financial instruments, e.g. interest rate swaps, is an exposure to credit risk. This credit exposure relates to possible losses that would be recognized if the counterparties fail to perform their obligations under the contracts.  To mitigate this credit exposure, only counterparties of good credit standing are utilized and the exchange of collateral over a certain credit threshold is required.From time to time, customer interest rate swap transactions together with offsetting interest rate swap transactions with institutional dealers may be executed. At June 30, 2010 and 2009, the total gross notional amount of swap transactions outstanding was $36 million and $35 million, respectively.

Material Changes in Results of Operations for the Quarter Ended June 30, 2010 versus the Quarter Ended June 30, 2009 - The Company recorded net income of $1.7 million for the second quarter of 2010 compared to $1.1 million for the second quarter of 2009. The 2010 second quarter net income improvement versus the comparable 2009 period primarily resulted from a $2.1 million increase in net gains on sales of securities, an $869 thousand increase in net interest income as a result of an improved margin and a $353 thousand reduction in operating expenses. These improvements were offset, in part, by a $2.0 million increase in the provision for loan losses and a $238 thousand decline in non-interest income excluding net gains on sales of securities in the current year.

As shown in Table 2-2 (A) following this discussion, net interest income increased by 5.8% to $15.9 million due to an improvement in the Company’s net interest margin to 4.16% during the second quarter of 2010 from 3.88% a year ago. The improved net interest margin primarily resulted from a 35 basis point decrease in the cost of total average interest-bearing liabilities to 1.10% in 2010, due principally to lower rates paid on savings and time deposits.

Even though overall market index rates declined, the average yield on the Company’s loans improved to 5.44% in the second quarter of 2010 from 5.30% in the second quarter of 2009. This resulted from the impact of the significant reduction in non-accrual loans and the disposition of lower quality credits throughout 2009 and the first half of 2010. The average balance of the Company’s loan portfolio declined $4 million for the second quarter of 2010 as compared to the same period in 2009.

The average yield on the Company’s securities declined to 3.85% in the second quarter of 2010 from 4.49% in the second quarter of 2009. This is largely a result of principal paydowns, maturities and sales of mortgage-backed securities of U.S. Government-sponsored enterprises and U.S. Government Agency securities since the second quarter of 2009. These securities had higher yields than those of the securities subsequently purchased. The lower yields reflect the lower rate environment. The average balance of the Company’s securities portfolio increased $7 million for the second quarter of 2010 as compared to the same period in 2009 primarily due to an increase in U.S. Government Agency securities, partially offset by a decrease in mortgage-backed securities.

The reduction in the cost of average interest-bearing liabilities in 2010 resulted largely from an increase of $23 million in average core deposits, as well as the Company’s ongoing management of deposit rates as deposit pricing has continued to ease in our local markets. The average cost of time and savings deposits declined by 52 basis points and 15 basis points, respectively, in the second quarter of 2010 versus 2009. The Company also experienced a $3 million decrease in average higher-cost time deposits during the second quarter of 2010 versus 2009. Additionally, in the fourth quarter of 2009 the Company exchanged its high-cost $10 million 8.25% subordinated notes, which were due to mature in 2013, for newly issued common stock. At June 30, 2010 and 2009, the Company had $30 million and $45 million, respectively, in traditional brokered deposits, which does not include CDARS deposits. These brokered deposits had a weighted-average cost of 2.81% at June 30, 2010 as compared to 3.11% at June 30, 2009.

The provision for loan losses was $5.5 million in the second quarter of 2010, representing an increase of $2.0 million versus the comparable 2009 period. The adequacy of the provision and the resulting allowance for loan losses, which increased by $3 million from June 30, 2009 to $31 million at June 30, 2010, is determined by management’s continuing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data including the current status of watch list loans, collateral values and changes in the size and mix of the loan portfolio. In particular, there were three large commercial real estate loan relationships totaling $48 million newly criticized, classified or more severely classified at June 30, 2010 compared to March 31, 2010. As a result, the calculated reserves on these relationships increased by $7 million at June 30, 2010 from March 31, 2010. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.)

Net gains on sales of securities were $2.5 million in the second quarter of 2010 compared to $447 thousand for the same period last year as the Company realized gains on bonds in its securities portfolio which were beginning to experience faster prepayment speeds with market prices in the 106 to 108 range. We determined that the attractive pricing was not sustainable as the underlying bonds were prepaying at par. Proceeds from sales of securities available for sale were $48 million in the second quarter of 2010 as compared to $41 million in the second quarter of 2009. An additional $22 million in sales proceeds were received upon settlement in July 2010. Non-interest income excluding net gains on sales of securities declined $238 thousand in the second quarter of 2010 compared to the second quarter of 2009 as deposit return item fees decreased and income from bank owned life insurance reflected a lower rate of return.

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Operating expenses of State Bancorp, Inc.
(dollars in thousands)
For the quarters and six months ended June 30, 2010 and 2009
	Quarters ended June 30,				Six months ended June 30,
			Over/				Over/
			(under)				(under)
	2010	2009	2009		2010	2009	2009
Salaries and other employee benefits	$6,598	$5,960	10.7	%	$12,594	$11,297	11.5	%
Occupancy	1,391	1,448	(3.9)	%	2,810	2,949	(4.7)	%
Equipment	269	297	(9.4)	%	573	602	(4.8)	%
Marketing and advertising	453	475	(4.6)	%	906	750	20.8	%
FDIC and NYS assessment	684	1,276	(46.4)	%	1,356	2,314	(41.4)	%
Other operating expenses	1,786	2,078	(14.1)	%	3,938	3,784	4.1	%
Total operating expenses	$11,181	$11,534	(3.1)	%	$22,177	$21,696	2.2	%

Total operating expenses decreased $353 thousand or 3.1% to $11.2 million during the second quarter of 2010 when compared to the second quarter of 2009.This decline was primarily due to a $592 thousand reduction in FDIC and NYS assessment expenses in 2010 resulting from a special FDIC insurance fund one-time assessment fee of $730 thousand recorded in the second quarter of 2009. This special assessment was imposed on all FDIC-insured depository institutions based upon the institution’s total assets and Tier 1 capital. Excluding this special one-time assessment fee, FDIC and NYS assessment fees increased by $138 thousand from $546 thousand in the second quarter of 2009 reflecting an increase in the assessment rates. Other operating expenses decreased by $292 thousand due in part to lower outsourced audit expenses. Partially offsetting the foregoing expense reductions was a $638 thousand increase in salaries and other employee benefits in the second quarter of 2010 versus the comparable 2009 period. This resulted primarily from increased accruals of long-term, performance-based equity and incentive compensation, employee insurance costs and 401(k) and employee stock ownership contribution costs. Furthermore, it also reflects additions to the internal audit staff to further strengthen the monitoring of internal controls.

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 66.5% in the second quarter of 2010 versus 70.9% in the second quarter of 2009. The Company’s other measure of expense control, the ratio of total operating expenses to average total assets, was 2.71% for the second quarter of 2010 versus 2.80% for the second quarter of 2009.

The Company’s income tax expense was $984 thousand in the second quarter of 2010 as compared to $459 thousand in the second quarter of 2009. The Company’s overall effective tax rate was 37% for the second quarter of 2010 compared to 30% for the same period in the prior year. The 2010 effective tax rate was higher primarily due to a greater percentage of pretax income subject to the Company’s marginal tax rate in 2010 compared to 2009. The Company has performed an evaluation of its tax positions and concluded that there were no significant uncertain tax positions that required recognition in its financial statements.

Material Changes in Results of Operations for the Six Months Ended June 30, 2010 versus the Six Months Ended June 30, 2009 - For the six months ended June 30, 2010 the Company recorded net income of $4.7 million compared to a net loss of $4.0 million in the same 2009 period. The factors contributing to the increase in net income were an increase in net interest income of $2.6 million, a decrease in the provision for loan losses of $5.8 million and an increase in non-interest income of $5.7 million, partially offset by an increase in total operating expenses of $481 thousand.

As shown in Table 2-2 (B) following this discussion, the increase of $2.6 million in net interest income for the first six months of 2010 versus the comparable period in 2009 resulted from a 37 basis point widening of the Company’s net interest margin to 4.33% in 2010 from 3.96% a year ago. The higher margin was primarily due to a 41 basis point reduction in the Company’s cost of total average interest-bearing liabilities to 1.12% in 2010. Also impacting the margin favorably was a five basis point increase in the Company’s yield on total average interest-earning assets to 5.13% in 2010.

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The lower cost of average interest-bearing liabilities in 2010 resulted largely from a $39 million decrease in average higher-cost time deposits, a $40 million increase in average demand deposits and lower rates paid on savings and time deposits for the first six months of 2010 versus 2009. In addition, in the fourth quarter of 2009 the Company exchanged its high-cost $10 million 8.25% subordinated notes, which were due to mature in 2013, for newly issued common stock.

The average yield on the Company’s loans improved to 5.60% for the first half of 2010 from 5.36% in the first half of 2009. This resulted from the impact of the significant reduction in non-accrual loans and the disposition of lower quality credits throughout 2009 and the first half of 2010, although the average balance of the Company’s loan portfolio declined $10 million for the first half of 2010 as compared to the same period in 2009.

The average yield on the Company’s securities declined to 4.08% in the first six months of 2010 from 4.74% in the comparable 2009 period. This is largely a result of principal paydowns, maturities and sales of mortgage-backed securities of U.S. Government-sponsored enterprises and U.S. Government Agency securities. These securities had higher yields than those of the securities subsequently purchased reflecting the current interest rate environment. The average balance of the Company’s securities portfolio increased $13 million for the first six months of 2010 as compared to the same period in 2009 primarily due to an increase in U.S. Government Agency securities, partially offset by a decrease in mortgage-backed securities.

The provision for loan losses decreased by $5.8 million for the first six months of 2010 as compared to 2009 due to several factors, most significantly a decrease in non-accrual loans.  (See also Asset Quality contained herein.)

The increase in total non-interest income resulted largely from an increase of $2.1 million in net gains on sales of securities for the first six months of 2010 as compared to 2009, coupled with a $4.0 million decrease in non-cash OTTI losses on securities. These were partially offset by decreased deposit return item fees and lower income from bank owned life insurance.

Total operating expenses increased by $481 thousand or 2.2% to $22.2 million for the first half of 2010, primarily due to a $1.3 million increase in salaries and other employee benefits expenses resulting from increases in performance-based compensation accruals. These increases were partly offset by a $1.0 million decrease in FDIC and NYS assessment expenses in 2010 resulting primarily from the special FDIC insurance fund one-time assessment fee recorded in the second quarter of 2009 discussed in Material Changes in Results of Operations for the Quarter Ended June 30, 2010 versus the Quarter Ended June 30, 2009 contained herein.

The Company’s operating efficiency ratio was 63.7% for the first half of 2010 and 66.3% for the first half of 2009.  The Company’s ratio of total operating expenses to average total assets was 2.73% for the first six months of 2010 and 2.67% for the first six months of 2009.

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 agency and sponsored enterprises.  (See also Note 4 to the Unaudited Condensed Consolidated Financial Statements – Investment Securities.)

Non-accrual loans totaled $7 million (which includes $319 thousand in loans held for sale that were previously written down to their estimated fair value) at June 30, 2010, $7 million (which includes $670 thousand in loans held for sale) at December 31, 2009 and $35 million (which includes $12 million in loans held for sale) at June 30, 2009. At June 30, 2010, December 31, 2009 and June 30, 2009, the Company held no OREO. Loans 90 days or more past due and still accruing interest at June 30, 2010 and December 31, 2009 totaled $9 thousand and $4 million, respectively. There were no such loans at June 30, 2009.

At June 30, 2010, net impaired loans totaled $10 million compared to $4 million at December 31, 2009 largely due to a $7 million secured, performing land loan in Roslyn, New York considered to be a troubled debt restructuring and classified at June 30, 2010. The borrower requested and was granted an interest rate concession. This impaired credit is fully advanced. At December 31, 2009 and June 30, 2009, loans restructured and still accruing interest were not material.

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 Company’s 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 residential construction, commercial real estate or 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.

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Management continues to be vigilant in the timely identification of potential problem loans and the assigning of them to our watch list. At June 30, 2010, the Bank had 100 relationships on its watch list totaling $172 million as compared to 84 relationships and $143 million at December 31, 2009. Included in these watch list totals at June 30, 2010, are 30 relationships with a total amount outstanding per relationship of at least $1 million and an aggregate amount outstanding of $153 million. At December 31, 2009, there were 28 such relationships totaling $126 million in aggregate. At both periods, those relationships with a total amount outstanding per relationship of at least $1 million are primarily commercial real estate in nature.

Watch list loans consist of criticized loans, classified loans, and those loans requiring special attention but not warranting categorization as either criticized or classified. Criticized loans, i.e. special mention loans, have potential weaknesses, often temporary in nature, requiring management’s extra vigilance. Classified loans, i.e. substandard, doubtful and loss loans, exhibit more serious weaknesses and generally carry a higher risk of loss. Such loans require more intensive oversight, remediation plans and, if problems remain unresolved, a workout strategy is developed.

Watch List Summary by Category (1)
			Increase/
	June 30, 2010	December 31, 2009	(decrease)
Loans requiring special attention but neither criticized nor classified	$21 million	$20 million	$1 million
Criticized loans (special mention)	$81 million	$42 million	$39 million
Classified loans (substandard, doubtful and loss)	$70 million	$81 million	($11 million)
Total	$172 million	$143 million	$29 million
(1)  Excluding loans held for sale.

As a result of management’s ongoing review and assessment of the Bank’s policies and procedures, the Company has pursued an aggressive workout and disposition posture for troubled relationships over the past two years. The Company has workout specialists who are directly responsible for managing this process and exiting such relationships in an expedited and cost effective manner. Line officers generally do not maintain control over troubled relationships. It is anticipated that management will continue to 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 current credit market conditions. Accordingly, it is possible that some or all of the troubled loans may, at some point in the future, warrant being placed on non-accrual status, which may result in additional provisions for loan losses.

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The allowance for loan losses amounted to $31 million or 2.8% of loans at June 30, 2010, $29 million or 2.6% of loans at December 31, 2009, and $28 million or 2.5% of loans at June 30, 2009. The allowance for loan losses as a percentage of total non-accrual loans, excluding loans held for sale, was 444% at June 30, 2010, 474% at December 31, 2009 and 122% one year ago. Loans held for sale have been previously written down to their estimated fair value and any future losses on such loans would not impact the allowance for loan losses. Management has determined that the current level of the allowance for loan losses is adequate in relation to the probable inherent losses present in the portfolio. Management considers many factors in this analysis, among them credit risk grades assigned to commercial and industrial and commercial real estate loans, delinquency trends, concentrations within segments of the loan portfolio, recent charge-off experience, local and national economic conditions, current real estate market conditions in geographic areas where the Company’s loans are located, changes in the trend of non-performing loans, changes in interest rates and loan portfolio growth. Changes in one or a combination of these factors may adversely affect the Company’s loan portfolio resulting in increased delinquencies, loan losses and future levels of loan loss provisions. Due to these uncertainties, management expects to record loan charge-offs in future periods. (See also Critical Accounting Policies, Judgments and Estimates contained herein.)

The provision for loan losses is continually evaluated relative to portfolio risk and regulatory guidelines considering all economic factors that affect the loan loss allowance, such as fluctuations in the Long Island and New York City real estate markets and interest rates, economic slowdowns in industries and other uncertainties. All of the factors mentioned above will continue to be closely monitored.  A further review of the Company’s non-performing assets may be found in Table 2-3 following this analysis.

33

TABLE 2 - 2 (A)
NET INTEREST INCOME ANALYSIS
For the Three Months Ended June 30, 2010 and 2009 (unaudited)
(dollars in thousands)
	2010								2009
	Average					Average			Average					Average
	Balance (1)		Interest			Yield/Cost			Balance (1)		Interest			Yield/Cost
Assets:
Interest-earning assets:
Securities (2)	$	397,547	$	3,818			3.85	%	$	390,919	$	4,379			4.49	%
Federal Home Loan Bank and other restricted stock		5,552		28			2.02			5,952		28			1.89
Securities purchased under agreements to resell		3,549		2			0.23			13,077		5			0.15
Interest-bearing deposits		14,936		6			0.16			28,930		15			0.21
Loans (3)		1,112,155		15,084			5.44			1,116,045		14,756			5.30
Total interest-earning assets		1,533,739	$	18,938			4.95	%		1,554,923	$	19,183			4.95	%
Non-interest-earning assets		122,156								98,915
Total Assets	$	1,655,895							$	1,653,838
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits	$	607,217	$	942			0.62	%	$	622,900	$	1,199			0.77	%
Time deposits		442,458		1,607			1.46			445,114		2,192			1.98
Total savings and time deposits		1,049,675		2,549			0.97			1,068,014		3,391			1.27
Federal funds purchased		-		-			-			-		-			-
Securities sold under agreements to repurchase		-		-			-			1,099		1			0.36
Other temporary borrowings		4,791		16			1.34			16,945		28			0.66
Senior unsecured debt		29,000		281			3.89			29,000		280			3.87
Subordinated notes		-		-			-			10,000		231			9.27
Junior subordinated debentures		20,620		182			3.54			20,620		212			4.12
Total interest-bearing liabilities		1,104,086		3,028			1.10			1,145,678		4,143			1.45
Demand deposits		378,415								339,753
Other liabilities		20,539								19,478
Total Liabilities		1,503,040								1,504,909
Stockholders' Equity		152,855								148,929
Total Liabilities and Stockholders' Equity	$	1,655,895							$	1,653,838
Net interest income/margin				15,910			4.16	%				15,040			3.88	%
Less tax-equivalent basis adjustment				(22	)							(21	)
Net interest income			$	15,888							$	15,019
(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 $12 and $10 in 2010 and 2009, respectively.
(3) Interest on loans includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent basis adjustments were $10 and $11 in 2010 and 2009, respectively.

34

TABLE 2 - 2 (B)
NET INTEREST INCOME ANALYSIS
For the Six Months Ended June 30, 2010 and 2009 (unaudited)
(dollars in thousands)
	2010								2009
	Average					Average			Average					Average
	Balance (1)		Interest			Yield/Cost			Balance (1)		Interest			Yield/Cost
Assets:
Interest-earning assets:
Securities (2)	$	406,072	$	8,223			4.08	%	$	393,228	$	9,252			4.74	%
Federal Home Loan Bank and other restricted stock		5,817		63			2.18			5,716		39			1.38
Securities purchased under agreements to resell		1,785		2			0.23			9,862		6			0.12
Interest-bearing deposits		13,038		10			0.15			21,905		21			0.19
Loans (3)		1,106,830		30,716			5.60			1,116,980		29,671			5.36
Total interest-earning assets		1,533,542	$	39,014			5.13	%		1,547,691	$	38,989			5.08	%
Non-interest-earning assets		103,837								90,878
Total Assets	$	1,637,379							$	1,638,569
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Savings deposits	$	600,592	$	1,921			0.65	%	$	600,589	$	2,433			0.82	%
Time deposits		433,562		3,209			1.49			472,896		4,937			2.11
Total savings and time deposits		1,034,154		5,130			1.00			1,073,485		7,370			1.38
Federal funds purchased		88		-			-			453		1			0.45
Securities sold under agreements to repurchase		-		-			-			1,740		4			0.46
Other temporary borrowings		12,122		48			0.80			17,232		59			0.69
Senior unsecured debt		29,000		561			3.90			14,740		283			3.87
Subordinated notes		-		-			-			10,000		462			9.32
Junior subordinated debentures		20,620		358			3.50			20,620		453			4.43
Total interest-bearing liabilities		1,095,984		6,097			1.12			1,138,270		8,632			1.53
Demand deposits		372,841								333,102
Other liabilities		16,527								16,056
Total Liabilities		1,485,352								1,487,428
Stockholders' Equity		152,027								151,141
Total Liabilities and Stockholders' Equity	$	1,637,379							$	1,638,569
Net interest income/margin				32,917			4.33	%				30,357			3.96	%
Less tax-equivalent basis adjustment				(44	)							(58	)
Net interest income			$	32,873							$	30,299
(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 $24 and $23 in 2010 and 2009, respectively.
(3) Interest on loans includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent basis adjustments were $20 and $35 in 2010 and 2009, respectively.

35

TABLE 2 - 3
ANALYSIS OF NON-PERFORMING ASSETS
AND THE ALLOWANCE FOR LOAN LOSSES
June 30, 2010 versus December 31, 2009 and June 30, 2009
(dollars in thousands)
NON-PERFORMING ASSETS BY TYPE:
	At
	6/30/2010			12/31/2009			6/30/2009
Non-accrual Loans (1)	$	7,048		$	6,063		$	23,006
Non-accrual Loans Held for Sale		319			670			11,596
Loans 90 Days or More Past Due and Still Accruing (1)		9			3,800			-
Total Non-performing Loans		7,376			10,533			34,602
Other Real Estate Owned ("OREO")		-			-			-
Total Non-performing Assets	$	7,376		$	10,533		$	34,602
Gross Loans Outstanding (1)	$	1,101,024		$	1,097,635		$	1,114,978
Total Loans Held for Sale	$	319		$	670		$	11,620
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES:
	Quarter Ended
	6/30/2010			12/31/2009			6/30/2009
Beginning Balance	$	25,531		$	29,401		$	25,897
Provision		5,450			23,000			3,500
Charge-offs		(151	)		(23,880	)		(1,504	)
Recoveries		429			190			61
Ending Balance	$	31,259		$	28,711		$	27,954
KEY RATIOS:
	At
	6/30/2010			12/31/2009			6/30/2009
Allowance as a % of Total Loans (1)		2.8	%		2.6	%		2.5	%
Non-accrual Loans as a % of Total Loans		0.7	%		0.6	%		3.1	%
Non-performing Assets as a % of Total Loans and OREO		0.7	%		1.0	%		3.1	%
Allowance for Loan Losses as a % of Non-accrual Loans (1)		444	%		474	%		122	%
Allowance for Loan Losses as a % of Non-accrual Loans and Loans 90 days or More Past Due and Still Accruing (1)		443	%		291	%		122	%
(1)  Excluding loans held for sale.

36

ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 repricing 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 repricing risk, basis risk, yield curve risk and option 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 repricing 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 +300 and -100 basis point changes in interest rates 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.

The Company may be considered “asset sensitive” when net interest income increases in a rising interest rate environment or decreases in a falling interest rate environment. Similarly, the Company may be considered “liability sensitive” when net interest income increases in a falling interest rate environment or decreases in a rising interest rate environment.

As of June 30, 2010, the Company’s balance sheet was considered slightly asset sensitive over the first twelve month period as a hypothetical decrease in interest rates would have a minimal negative impact on the percentage change in the Company’s net interest income; whereas, a hypothetical increase in interest rates would have a relatively small positive impact on the Company’s net interest income.  During the second year of the modeling period the balance sheet begins to take a turn towards a slight liability sensitive position.

% Change in Net Interest Income
12 Month Interest Rate Changes
Basis Points
	June 30, 2010
Time Horizon	Down 100			Base Flat			Up 100			Up 200			Up 300
Year One		(1.2	)%		0.0	%		0.5	%		0.6	%		0.2	%
Year Two		(3.0	)%		0.4	%		1.0	%		0.7	%		(0.2	)%

37

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.

As of June 30, 2010, the variability in the Company’s MVPE after an immediate hypothetical shock in interest rates of + 300 and -100 basis points was low. The small changes in the percentage change in MVPE and the MVPE Ratio were attributable to the low interest rate environment and its hypothetical impact on the market value of the Company’s investment assets and lower cost core deposits.

MVPE Variability
Immediate Interest Rate Shocks
Basis Points
	June 30, 2010
	Down 100			Base Flat			Up 100			Up 200			Up 300
% Change in MVPE (1)		(1.1	)%		0.0	%		(0.3	)%		(1.4	)%		(3.2	)%
MVPE Ratio		18.9	%		19.6	%		19.9	%		19.9	%		19.8	%
(1) Assumes 40% marginal tax rate.

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 2010 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

38

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.

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, 2009, except as described below.

The recent adoption of regulatory reform legislation may have a material effect on our operations and capital requirements.

On July 21, 2010, the Reform Act was signed into law by the President of the United States.  The Reform Act is intended to address perceived weaknesses in the U.S. financial regulatory system and prevent future economic and financial crises.  There are many provisions of the Reform Act which are to be implemented through regulations to be adopted by the federal bank regulatory agencies within specified time frames following the effective date of the Reform Act, which creates a risk of uncertainty as to the effect that such provisions will ultimately have.  We believe the following provisions of the Reform Act will have an impact on us, though it is not possible for us to determine at this time whether and to what extent the Reform Act will have a material effect on our business, financial condition or results of operations:

·   Certain Changes in Regulatory Regime.  The Reform Act provides for the creation of the Bureau of Consumer Financial Protection (the “CFPB”). The CFPB will have the authority to implement and enforce a variety of existing consumer protection statutes and to issue new regulations.

·   Consolidated Holding Company Capital Requirements.  The Reform Act requires the federal bank regulatory agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies.  These requirements must be no less than those to which insured depository institutions are currently subject.  Thus, it is likely that we will become subject to capital requirements that are higher than those to which we are currently subject, although it is unknown at this time what these requirements will be.  The new requirements will also eliminate the use of trust preferred securities issued after May 19, 2010 as a component of Tier 1 capital for depository institution holding companies of our size, although because we had less than $15 billion of consolidated assets as of December 31, 2009, we will continue to be permitted to include any trust preferred securities issued before May 19, 2010 as an element of Tier 1 capital.

·   Deposit Insurance Assessments.  The Reform Act increases the minimum designated reserve ratio for the Deposit Insurance Fund of the FDIC from 1.15% to 1.35% of insured deposits, which much be reached by September 30, 2020, and provides that in setting the assessments necessary to meet the new requirement, the FDIC shall offset the effect of this provision on insured depository institutions with total consolidated assets of less than $10 billion, such as us, so that more of the cost of raising the reserve ratio will be borne by the institutions with more than $10 billion in assets.  It is unknown at this time what portion of the cost of raising the reserve ratio will be borne by institutions with less than $10 billion in assets such as us.  Further, until the FDIC issues new regulations implementing these provisions we will not know the extent we will be affected by these provisions though it appears likely that our deposit insurance premiums will increase to some extent.  In addition, deposit insurance assessments will now be based on our average consolidated total assets minus our average tangible equity, rather than on our deposit base.

The Reform Act also includes provisions, subject to further rulemaking by the federal bank regulatory agencies, that may affect our future operations, including provisions that create minimum standards for the origination of mortgages, restrict proprietary trading by banking entities and restrict the sponsorship of and investment in hedge funds and private equity funds by banking entities.  We will not be able to determine the impact of these provisions until final rules are promulgated to implement these provisions and other regulatory guidance is provided interpreting these provisions.

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

Not applicable.

39

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

For information on the results of the Company’s Annual Stockholders’ Meeting held on April 27, 2010, please see our current report on Form 8-K dated April 28, 2010 incorporated by reference herein.

ITEM 5. – OTHER INFORMATION

Not applicable.

ITEM 6. - EXHIBITS

10.30 Restricted stock award agreement dated as of May 13, 2010 by and between State Bancorp, Inc. and Thomas Iadanza

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 Exchange Act or otherwise subject to the liability of that section)

40

SIGNATURES

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

STATE BANCORP, INC.

8/5/10	/s/ Thomas M. O'Brien
Date	Thomas M. O'Brien,
	President and Chief Executive Officer

8/5/10	/s/ Brian K. Finneran
Date	Brian K. Finneran,
	Chief Financial Officer (principal accounting officer)

41

EXHIBIT INDEX

Exhibit Number	Description
10.30	Restricted stock award agreement dated as of May 13, 2010 by and between State Bancorp, Inc. and Thomas Iadanza
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)