- Quarterly Report (10-Q)

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: SEPTEMBER 30, 2009

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to____.

Commission File No. 001-14783

STATE BANCORP, INC.

(Exact name of registrant as specified in its charter)

NEW YORK 11-2846511

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

incorporation or organization) Identification No.)

TWO JERICHO PLAZA, JERICHO, NEW YORK 11753

(Address of principal executive offices) (Zip Code)

(516) 465-2200

(Registrant’s telephone number, including area code)

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

Yes [X] No [ ]

Indicate by check mark whether the registrant 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 October 21, 2009, there were 14,640,490 shares of registrant’s Common Stock outstanding.

STATE BANCORP, INC .

Form 10-Q

For the Quarterly Period Ended September 30, 2009

Table of Contents

		Page
	PART I
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) – September 30, 2009 and December 31, 2008	1
	Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2009 and 2008	2
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2009 and 2008	3
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited) for the Nine Months Ended September 30, 2009 and 2008	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	36
Item 4.	Controls and Procedures	37

	PART II
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults upon Senior Securities	39
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. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2009 and December 31, 2008

	September 30, 2009			December 31, 2008
ASSETS:
Cash and due from banks	$	35,992,398		$	101,988,240
Securities purchased under agreements to resell		-			1,000,000
Total cash and cash equivalents		35,992,398			102,988,240
Securities available for sale - at estimated fair value		395,022,468			412,379,205
Federal Home Loan Bank and other restricted stock		8,035,943			4,823,143
Loans and leases (net of allowance for loan and lease losses of $29,401,119 in 2009 and $18,668,451 in 2008)		1,078,793,787			1,098,548,188
Loans held for sale		9,302,360			5,321,577
Bank premises and equipment - net		6,561,981			6,688,432
Bank owned life insurance		30,451,721			29,897,956
Net deferred income taxes		18,452,729			18,142,368
Receivable - current income taxes		-			343,614
Other assets		13,851,019			14,361,779
TOTAL ASSETS	$	1,596,464,406		$	1,693,494,502
LIABILITIES:
Deposits:
Demand	$	363,046,659		$	351,629,362
Savings		536,010,827			612,251,609
Time		408,904,114			517,167,256
Total deposits		1,307,961,600			1,481,048,227
Other temporary borrowings		63,000,000			3,000,000
Senior unsecured debt		29,000,000			-
Subordinated notes		10,000,000			10,000,000
Junior subordinated debentures		20,620,000			20,620,000
Overnight sweep and settlement accounts payable, net		-			13,174,175
Other accrued expenses and liabilities		14,323,811			11,732,765
Total liabilities		1,444,905,411			1,539,575,167
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized 250,000 shares; 36,842 shares issued and outstanding in 2009 and 2008; liquidation preference of $36,842,000 in 2009 and 2008		35,962,325			35,800,172
Common stock, $0.01 par value in 2009 and $5.00 in 2008, authorized 20,000,000 shares; issued 15,615,889 shares in 2009 and 15,490,895 shares in 2008; outstanding 14,632,874 shares in 2009 and 14,461,634 shares in 2008		156,159			77,454,475
Warrant		1,056,842			1,056,842
Surplus		167,690,196			89,984,480
Retained deficit		(43,444,983	)		(37,634,783	)
Treasury stock (983,015 shares in 2009 and 1,029,261 shares in 2008)		(16,568,293	)		(17,262,240	)
Accumulated other comprehensive income (net of taxes of $4,414,817 in 2009 and $2,976,111 in 2008)		6,706,749			4,520,389
Total stockholders' equity		151,558,995			153,919,335
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,596,464,406		$	1,693,494,502

See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three and Nine Months Ended September 30, 2009 and 2008

	Three Months					Nine Months
	2009		2008			2009			2008
INTEREST INCOME:
Interest and fees on loans and leases	$	15,398,175	$	16,778,178		$	45,034,174		$	53,370,368
Federal funds sold and securities purchased under agreements to resell		-		-			6,272			963,237
Securities available for sale - taxable		4,124,801		4,868,898			13,324,213			14,579,365
Securities available for sale - tax-exempt		15,486		16,401			66,190			154,646
Securities available for sale - dividends		-		-			-			39,667
Dividends on Federal Home Loan Bank and other restricted stock		35,392		91,985			74,373			412,834
Total interest income		19,573,854		21,755,462			58,505,222			69,520,117
INTEREST EXPENSE:
Deposits		3,218,070		4,979,067			10,587,846			17,875,224
Temporary borrowings		24,637		823,943			88,859			2,933,161
Senior unsecured debt		280,477		-			563,168			-
Subordinated notes		231,185		231,186			693,556			693,556
Junior subordinated debentures		212,729		315,734			666,028			994,589
Total interest expense		3,967,098		6,349,930			12,599,457			22,496,530
Net interest income		15,606,756		15,405,532			45,905,765			47,023,587
Provision for loan and lease losses		3,000,000		3,700,000			16,500,000			10,225,744
Net interest income after provision for loan and lease losses		12,606,756		11,705,532			29,405,765			36,797,843
NON-INTEREST INCOME:
Service charges on deposit accounts		504,264		468,370			1,690,301			1,623,340
Net security gains (losses)		485,759		(9,700	)		(2,832,286	)		50,459
Income from bank owned life insurance		181,784		275,554			553,764			792,517
Other operating income		622,789		564,323			1,225,432			1,788,887
Total non-interest income		1,794,596		1,298,547			637,211			4,255,203
Income before operating expenses		14,401,352		13,004,079			30,042,976			41,053,046
OPERATING EXPENSES:
Salaries and other employee benefits		5,925,785		5,631,860			17,223,014			17,370,579
Occupancy		1,391,194		1,425,746			4,340,642			4,200,076
Equipment		306,373		301,563			908,539			918,746
Legal		187,834		(196,510	)		533,290			2,535,616
Marketing and advertising		-		150,000			750,000			436,808
FDIC and NYS assessment		657,000		311,870			2,970,661			565,373
Credit and collection		1,151,370		186,275			1,513,453			545,305
Other operating expenses		1,721,189		2,355,027			4,796,766			5,942,381
Total operating expenses		11,340,745		10,165,831			33,036,365			32,514,884
INCOME (LOSS) BEFORE INCOME TAXES		3,060,607		2,838,248			(2,993,389	)		8,538,162
PROVISION (BENEFIT) FOR INCOME TAXES		1,119,213		849,121			(913,799	)		2,587,904
NET INCOME (LOSS)	$	1,941,394	$	1,989,127		$	(2,079,590	)	$	5,950,258
NET INCOME (LOSS) PER COMMON SHARE - BASIC	$	0.10	$	0.14		$	(0.25	)	$	0.42
NET INCOME (LOSS) PER COMMON SHARE - DILUTED	$	0.10	$	0.14		$	(0.25	)	$	0.42

See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2009 and 2008
	2009			2008
OPERATING ACTIVITIES:
Net (loss) income	$	(2,079,590	)	$	5,950,258
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for loan and lease losses		16,500,000			10,225,744
Write down of loans held for sale to estimated fair value		1,000,000			-
Depreciation and amortization of bank premises and equipment		1,150,473			996,061
Amortization of net premium on securities		2,044,876			1,448,679
Deferred income tax (benefit) expense		(1,749,067	)		1,418,407
Net security losses (gains)		2,832,286			(50,459	)
Net gains on sales of loans held for sale		(83,332	)		-
Income from bank owned life insurance		(553,764	)		(792,517	)
Change in fair value of derivative contracts		542,801			(620,657	)
Stock-based compensation expense		635,621			819,197
Directors' stock plan expense		102,060			248,433
Decrease in receivable - current income taxes		343,614			11,356,169
(Increase) decrease in other assets		(445,965	)		567,194
Increase (decrease) in other accrued expenses and other liabilities		2,935,400			(6,648,890	)
Net cash provided by operating activities		23,175,413			24,917,619
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		101,515,818			84,991,228
Proceeds from maturities of securities available for sale		94,902,608			155,810,357
Purchases of securities available for sale		(180,313,785	)		(226,798,607	)
(Increase) decrease in Federal Home Loan Bank and other restricted stock		(3,212,800	)		1,820,500
Proceeds from sales of loans held for sale		1,439,286			-
Decrease (increase) in loans and leases - net		3,254,401			(65,648,210	)
Increase in loans held for sale - net		(6,336,737	)		(4,500,000	)
Purchases of bank premises and equipment - net		(1,024,021	)		(1,670,818	)
Net cash provided by (used in) investing activities		10,224,770			(55,995,550	)
FINANCING ACTIVITIES:
Decrease in demand and savings deposits		(64,823,485	)		(92,428,380	)
(Decrease) increase in time deposits		(108,263,142	)		97,547,921
Increase in federal funds purchased		-			4,500,000
Increase (decrease) in other temporary borrowings		60,000,000			(38,031,328	)
Proceeds from issuance of senior unsecured debt		29,000,000			-
Decrease in overnight sweep and settlement accounts payable, net		(13,174,175	)		-
Cash dividends paid on common stock		(2,186,882	)		(5,702,488	)
Cash dividends paid on preferred stock		(1,279,236	)		-
Proceeds from reissuance of treasury stock		39,548			-
Proceeds from shares issued under dividend reinvestment plan		291,347			2,737,469
Proceeds from shares issued pursuant to compensation awards		-			552,064
Net cash used in financing activities		(100,396,025	)		(30,824,742	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(66,995,842	)		(61,902,673	)
CASH AND CASH EQUIVALENTS - JANUARY 1		102,988,240			96,380,214
CASH AND CASH EQUIVALENTS - SEPTEMBER 30	$	35,992,398		$	34,477,541
SUPPLEMENTAL DATA:
Interest paid	$	12,860,798		$	23,093,879
Income taxes paid	$	478,513		$	154,551
Loans transferred to held for sale	$	7,361,998		$	4,500,000
Preferred dividends accrued but not paid	$	230,263			-

See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Nine Months Ended September 30, 2009 and 2008
	Preferred Stock		Common Stock			Warrant		Surplus			Retained Deficit			Treasury Stock			Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balance, January 1, 2009	$	35,800,172	$	77,454,475		$	1,056,842	$	89,984,480		$	(37,634,783	)	$	(17,262,240	)	$	4,520,389		$	153,919,335
Adjustment for change in par value of common stock to $0.01 per share from $5.00 per share		-		(77,299,566	)		-		77,299,566			-			-			-			-
Net loss		-		-			-		-			(2,079,590	)		-			-			(2,079,590	)
Other comprehensive income, net of tax:
Unrealized gains (1)		-		-			-		-			-			-			-			2,957,051
Reclassification adjustment (2)		-		-			-		-			-			-			-			(770,691	)
Total other comprehensive income		-		-			-		-			-			-			2,186,360			2,186,360
Total comprehensive income		-		-			-		-			-			-			-			106,770
Accretion of discount on preferred shares		162,153		-			-		-			(162,153	)		-			-			-
Cash dividend on common stock ($.15 per share)		-		-			-		-			(2,186,882	)		-			-			(2,186,882	)
Cash dividend on preferred stock (5%)		-		-			-		-			(1,381,575	)		-			-			(1,381,575	)
Shares issued under the dividend reinvestment plan (43,292 shares at 95% of market value)		-		433			-		290,914			-			-			-			291,347
Stock issued under directors' stock plan (10,625 shares)		-		106			-		(481,089	)		-			615,814			-			134,831
Stock-based compensation (71,077 shares)		-		711			-		634,910			-			-			-			635,621
Treasury stock reissued (4,637 shares)		-		-			-		(38,585	)		-			78,133			-			39,548
Balance, September 30, 2009	$	35,962,325	$	156,159		$	1,056,842	$	167,690,196		$	(43,444,983	)	$	(16,568,293	)	$	6,706,749		$	151,558,995
Balance, January 1, 2008	$	-	$	74,981,740		$	-	$	86,654,142		$	(32,164,263	)	$	(16,646,426	)	$	812,475		$	113,637,668
Net income		-		-			-		-			5,950,258			-			-			5,950,258
Other comprehensive loss, net of tax:
Unrealized losses (1)		-		-			-		-			-			-			-			(6,739,771	)
Reclassification adjustment (2)		-		-			-		-			-			-			-			(30,429	)
Total other comprehensive loss		-		-			-		-			-			-			(6,770,200	)		(6,770,200	)
Total comprehensive loss		-		-			-		-			-			-			-			(819,942	)
Cash dividend on common stock ($.40 per share)		-		-			-		-			(5,702,488	)		-			-			(5,702,488	)
Shares issued under the dividend reinvestment plan (226,040 shares at 95% of market value)		-		1,130,200			-		1,607,269			-			-			-			2,737,469
Stock options exercised (60,009 shares)		-		300,045			-		252,019			-			-			-			552,064
Stock-based compensation (159,372 shares)		-		796,860			-		15,326			7,011			-			-			819,197
Stock issued under directors' stock plan (48,122 shares)		-		240,610			-		460,968			-			-			-			701,578
Balance, September 30, 2008	$	-	$	77,449,455		$	-	$	88,989,724		$	(31,909,482	)	$	(16,646,426	)	$	(5,957,725	)	$	111,925,546
(1) Unrealized gains (losses) on securities available for sale, net of taxes of $1,835,728 and $(4,437,299) in 2009 and 2008, respectively.
(2) Adjustment for losses (gains) included in net income, net of taxes of $397,023 and $20,030 in 2009 and 2008, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated financial statements include the accounts of State Bancorp, Inc. and its wholly owned subsidiary, State Bank of Long Island (the “Bank”). The Bank’s consolidated financial statements include the accounts of its wholly owned subsidiaries, SB Portfolio Management Corp. (“SB Portfolio”), SB ORE Corp., and New Hyde Park Leasing Corporation and its subsidiaries, P.W.B. Realty, L.L.C. and State Title Agency, LLC. SB Portfolio is a fixed income portfolio management subsidiary that currently has no investment securities under management. State Bancorp, Inc. and subsidiaries are collectively referred to hereafter as the “Company.” All intercompany accounts and transactions have been eliminated.

In addition to the foregoing, the Company has two other subsidiaries, State Bancorp Capital Trust I and State Bancorp Capital Trust II, neither of which are consolidated with the Company for reporting purposes. State Bancorp Capital Trust I and State Bancorp Capital Trust II were formed in 2002 and 2003, respectively, for the purpose of issuing trust preferred securities, the proceeds of which were used to acquire junior subordinated debentures issued by the Company. The Company has fully and unconditionally guaranteed 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 2008 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 September 30, 2009 and December 31, 2008, its condensed consolidated statements of income for the three and nine months ended September 30, 2009 and 2008, its condensed consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008 and its condensed consolidated statements of stockholders’ equity and comprehensive income (loss) for the nine months ended September 30, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The results of operations for the three and nine months ended September 30, 2009 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 2008 Annual Report on Form 10-K. Subsequent events have been evaluated through October 28, 2009, which is the date the financial statements were issued.

Accounting for Stock-Based Compensation

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

Accounting for Derivative Financial Instruments

The Company does not currently hold any derivative financial instruments for trading purposes. From time to time, the Bank may execute customer interest rate swap transactions together with offsetting interest rate swap transactions with institutional dealers. The customer swap program provides a customer financing option that can result in longer maturity terms without incurring the associated interest rate risk. Each swap is mutually exclusive, and the swaps are marked to market with changes in fair value recognized in other income, with the fair value for each individual swap offsetting the corresponding other.

On September 15, 2008 and October 3, 2008, respectively, Lehman Brothers Holdings, Inc. (“Lehman”) and Lehman Brothers Special Financing Inc. (“Lehman Special Financing”) filed Voluntary Petitions under Chapter 11 of the U.S. Bankruptcy Code, each of which constituted an event of default under the swap agreements the Bank had with Lehman Special Financing. The Bank filed proofs of claim with the United States Bankruptcy Court, Southern District, on January 13, 2009. As a result of the events of default, the Bank terminated the interest rate swap agreements with Lehman Special Financing. The terminations resulted in several customer interest rate swap transactions no longer being offset by that institutional dealer and a loss to the Company on those swap agreements of approximately $584,000 was recorded in the third quarter of 2008. During the third quarter of 2009, the Company recorded a gain of $221,000 on the sale of its claims against Lehman and Lehman Special Financing.

In addition, during the second and third quarters of 2009, the unhedged customer interest rate swap transactions were once again offset by an institutional dealer. As all customer interest rate swap transactions are now hedged, we expect that their future impact on the Company’s financial statements will be immaterial. For the three months ended September 30, 2009, a net gain of $160,000 was recorded, while for the nine months ended September 30, 2009, a net loss of $68,000 was recognized. The 2009 amounts include the gain of $221,000 on the sale of the Bank’s claims against Lehman and Lehman Special Financing. For the three and nine months ended September 30, 2008, a net loss of $584,000 was recognized. At September 30, 2009 and December 31, 2008, the total gross notional amount of swap transactions outstanding was $37,755,235 and $27,828,473, respectively.

	Fair Values of Derivative Instruments

		September 30, 2009		December 31, 2008
	Balance Sheet Location	Fair Value		Fair Value
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	2,175,586	$	3,132,311
Interest rate contracts	Other liabilities	$	2,242,184	$	1,500,858

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 and Lease Losses

The allowance for loan and lease losses is established through a provision for loan and lease losses charged to expense. Loans and leases are charged against the allowance when management believes that the collectibility of the principal is unlikely, while recoveries of previously charged-off loans and leases are credited to the allowance. The balance in the allowance for loan and lease losses is maintained at a level that, in the opinion of management, is sufficient to absorb probable incurred losses. To determine that level, management evaluates problem loans and leases 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 lease 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. While management utilizes all available information to estimate the adequacy of the allowance for loan and lease losses, the ultimate collectibility of a substantial portion of the loan and lease portfolio and the need for future additions to the allowance will be based upon changes in economic conditions and other relevant factors.

Commercial 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 in excess of $250 thousand for impairment. Those with balances less than $250 thousand as well as other groups of smaller-balance homogeneous loans and leases, such as consumer and residential mortgages, are collectively evaluated for impairment.

The allowance for loan and lease losses related to loans and leases 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 leases, or the observable market price. This evaluation is inherently subjective as it requires material estimates, including the amount and timing of future cash flows expected to be received on impaired loans and leases, which may be susceptible to significant change.

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

One recent significant change in practice relates to management’s assertion regarding recovery of declines in fair value, moving from an assertion about “intent and ability to hold to recovery” to a “do not intend to sell” or “it is more likely than not that it will not be required to sell” prior to recovery assertion. In instances where the Company will not be required to sell the bond or doesn’t intend to sell the bond, the components of the impairment charge would be bifurcated. The credit loss component would be recognized in earnings, and the other components would be recognized in other comprehensive income. In instances where the Company intends to sell or is more likely than not to be required to sell prior to recovery the full OTTI charge is to be recognized in earnings. (See also Note 4 – Investment Securities.)

Adoption of New Accounting Guidance

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” Effective for financial statements issued for interim and annual periods ending after September 15, 2009, the FASB Accounting Standards Codification TM (“ASC”) is now the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The ASC superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. Following this Statement, the Board will not issue new standards in the form of Statements, FASB Staff Positions (“FSP”) or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The Board will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to update the ASC, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the ASC. The impact of adoption on September 30, 2009 was not material.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was codified into ASC 855. SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, SFAS No. 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The impact of adoption on June 30, 2009 was not material.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which were codified into ASC 825. This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends Accounting Principles Board (“APB”) Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The impact of adoption on June 30, 2009 was not material as it required only disclosures which are included in Note 10 – Fair Value.

In April 2009, the FASB issued FSP FAS 115-2 and FSP FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which were codified into ASC 320. This FSP amends the OTTI guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to OTTI of equity securities. The impact of adoption on June 30, 2009 was not material.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” which was codified into ASC 820. This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The impact of adoption on June 30, 2009 was not material.

In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” which was codified into ASC 260. This FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing EPS under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP concluded that unvested share-based payment awards that contain nonforfeitable rights to dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method. Our restricted stock awards are considered participating securities. The impact of adoption on January 1, 2009 was not material.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” which was codified into ASC 815. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments; (2) how derivative instruments and related hedged items are accounted for; and (3) how such items affect an entity’s financial position, performance and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivative instruments, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The impact of adoption on January 1, 2009 was not material.

In December 2007, the FASB issued revised SFAS No. 141, “Business Combination,” or SFAS No. 141(R), which was codified into ASC 805. SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (formerly the purchase method) be used for all business combinations; that an acquirer be identified for each business combination; and that intangible assets be identified and recognized separately from goodwill. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. Additionally, SFAS No. 141(R) changes the requirements for recognizing assets acquired and liabilities assumed arising from contingencies and recognizing and measuring contingent consideration. SFAS No. 141(R) also enhances the disclosure requirements for business combinations. The impact of adoption on January 1, 2009 was not material. In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP amends and clarifies SFAS No. 141(R), “Business Combinations,” to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The impact of adoption on January 1, 2009 was not material.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51,” which was codified into ASC 810. SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Among other things, SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements and requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. SFAS No. 160 also amends SFAS No. 128, “Earnings per Share,” so that earnings per share calculations in consolidated financial statements will continue to be based on amounts attributable to the parent. The impact of adoption on January 1, 2009 was not material.

Newly Issued But Not Yet Effective Accounting Standards

The following two standards shall remain authoritative until such time that each is integrated into the ASC:

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 166 seeks to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 addresses (1) practices that have developed since the issuance of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” that are not consistent with the original intent and key requirements of that Statement 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. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. This Statement must be applied to transfers occurring on or after the effective date. The impact of adoption is not expected to be material.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 seeks to improve financial reporting by enterprises involved with variable interest entities by addressing (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” as a result of the elimination of the qualifying special-purpose entity concept in SFAS No. 166, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The impact of adoption is not expected to be material.

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 cumulative Series A Preferred Stock par value $1,000 per share, with a redemption and liquidation value of $36,842,000 and an initial annual dividend of 5% for five years and 9% thereafter. When originally issued, the preferred stock could not be redeemed for a period of three years from the date of the investment, except with the proceeds from a qualified equity offering (the sale by the Company of common or preferred stock for cash). After the third anniversary of the date of this investment, the preferred stock could be redeemed, in whole or in part, at any time, at the option of the Company. However, 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. On June 15, 2009, the Treasury issued an Interim Final Rule under the ARRA, which did not impose any other conditions in connection with any such approval. However, the Interim Final Rule is subject to comments, and, therefore, may change.

Stock held in treasury by the Company is reported as a reduction to total stockholders’ equity. During the first nine months of 2009, the Company did not repurchase any of its common shares.

The par value of the Company’s common stock was changed to $0.01 per share from $5.00 per share in the second quarter of 2009, resulting in both a decrease in common stock and an increase in surplus of $77,299,566.

3. EARNINGS PER 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.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008		2009			2008
Net income (loss)	$	1,941,394		$	1,989,127	$	(2,079,590	)	$	5,950,258
Less: dividends and accretion of discount on
preferred stock		(514,576	)		-		(1,543,728	)		-
Income (loss) attributable to common stockholders	$	1,426,818		$	1,989,127	$	(3,623,318	)	$	5,950,258
Weighted average common shares outstanding		14,375,032			14,207,743		14,355,838			14,097,522
Dilutive effect of stock options, restricted stock grants
and common stock warrants		11,538			59,767		N/A	*		39,173
Adjusted common shares outstanding - diluted		14,386,570			14,267,510		14,355,838			14,136,695
Net income (loss) per common share - basic	$	0.10		$	0.14	$	(0.25	)	$	0.42
Net income (loss) per common share - diluted	$	0.10		$	0.14	$	(0.25	)	$	0.42
Antidilutive common stock warrant issued to the
Treasury under the Capital Purchase Program (“CPP”)
and not included in the calculation		465,569			-		465,569			-
Other antidilutive potential shares not included
in the calculation		559,959			366,514		629,757			430,784

* 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 income 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 CDO that had previously incurred a non-cash OTTI write down of $5.2 million in the fourth quarter of 2008. Management determined that it intended to sell this bond and continued to review developments and other considerations with respect to this trust preferred CDO, including the limited prospects for its ultimate price recovery, the expected time involved and the downside risks involved in continuing to hold this investment. As a result of this review and with some limited liquidity appearing in the trust preferred CDO market, management determined that an immediate liquidation was appropriate. As a result, the bond was liquidated in July 2009 at a price of 13.45% of par representing a gain of 5.2% of par or $520,000 which was recognized in the Company’s third quarter 2009 financial statements.

At September 30, 2009 and December 31, 2008, 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 September 30, 2009 and December 31, 2008 are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
September 30, 2009
Securities available for sale:
Obligations of states and political
subdivisions	$	11,198,064	$	85,498	$	(6,183	)	$	11,277,379
Government Agency securities		12,044,358		420,017		-			12,464,375
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		174,092,198		6,713,595		(100,482	)		180,705,311
FNMA		140,227,438		4,029,271		(15,464	)		144,241,245
GNMA		46,338,845		106,265		(110,952	)		46,334,158
Total securities available for sale	$	383,900,903	$	11,354,646	$	(233,081	)	$	395,022,468

December 31, 2008
Securities available for sale:
Obligations of states and political
subdivisions	$	5,327,088	$	33,926	$	(704	)	$	5,360,310
Government Agency securities		22,538,511		835,036		-			23,373,547
Collateralized debt obligations		5,864,999		-		-			5,864,999
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		229,014,250		4,391,402		(47,275	)		233,358,377
FNMA		126,282,702		2,198,936		(23,012	)		128,458,626
GNMA		15,855,155		128,321		(20,130	)		15,963,346
Total securities available for sale	$	404,882,705	$	7,587,621	$	(91,121	)	$	412,379,205

The amortized cost and estimated fair value of securities available for sale at September 30, 2009 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
Securities available for sale:
Due in one year or less	$	12,044,358	$	12,464,375
Due after one year through five years		6,151,796		6,203,268
Due after five years through ten years		5,046,268		5,074,111
Subtotal		23,242,422		23,741,754
Mortgage-backed securities and
collateralized mortgage obligations		360,658,481		371,280,714
Total securities available for sale	$	383,900,903	$	395,022,468

For the three months ended September 30, 2009 and 2008, gross gains of $520,000 and $1,415 and gross losses of $34,241 and $11,115, respectively, were recognized on the sale of securities available for sale. For the nine months ended September 30, 2009 and 2008, gross gains of $1,359,632 and $302,134 and gross losses of $4,191,918 (inclusive of a $4.0 million OTTI charge previously mentioned) and $251,675, respectively, were recognized on the sale of securities available for sale.

Information pertaining to securities with gross unrealized losses at September 30, 2009 and December 31, 2008, 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
September 30, 2009
Securities available for sale:
Obligations of states and political
subdivisions	$	(5,547	)	$	1,207,575	$	(636	)	$	124,515	$	(6,183	)	$	1,332,090
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		(100,482	)		15,318,763		-			-		(100,482	)		15,318,763
FNMA		(15,464	)		8,630,384		-			-		(15,464	)		8,630,384
GNMA		(110,952	)		20,072,848		-			-		(110,952	)		20,072,848
Total securities available for sale	$	(232,445	)	$	45,229,570	$	(636	)	$	124,515	$	(233,081	)	$	45,354,085

December 31, 2008
Securities available for sale:
Obligations of states and political
subdivisions	$	(704	)	$	125,000	$	-		$	-	$	(704	)	$	125,000
Mortgage-backed securities and
collateralized mortgage obligations:
FHLMC		(33,540	)		10,705,583		(13,735	)		3,265,727		(47,275	)		13,971,310
FNMA		(1,999	)		504,953		(21,013	)		3,106,042		(23,012	)		3,610,995
GNMA		(20,130	)		2,976,562		-			-		(20,130	)		2,976,562
Total securities available for sale	$	(56,373	)	$	14,312,098	$	(34,748	)	$	6,371,769	$	(91,121	)	$	20,683,867

There was one fixed rate municipal obligation in a continuous loss position for 12 months or longer at September 30, 2009. The market value, and therefore the loss position, for each type of security respond differently to market conditions. In management’s opinion, those market conditions are temporary in nature and provide the basis for the Company’s belief that the declines are temporary.

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

5. LOANS AND LEASES

The Company’s loan and lease portfolio is concentrated primarily in commercial and industrial loans and commercial mortgage loans. At September 30, 2009 and December 31, 2008, loans held for sale were $9.3 million and $5.3 million, respectively. Charge-offs of $2.5 million were incurred on the transfer of $7.4 million in loans to loans held for sale in the first nine months of 2009. During the third quarter of 2009 and subsequent to their transfer to loans held for sale, an additional $1.0 million charge was recorded to write down the carrying value of these loans held for sale to their estimated fair value.

In addition to the loans held for sale, impaired loans before related specifically allocated allowance for loan losses were $24.4 million and $11.9 million at September 30, 2009 and December 31, 2008, respectively. The increase in such impaired loans was primarily due to additional non-accrual residential construction loans, commercial real estate loans and commercial and industrial loans of $10.1 million, $2.2 million and $1.3 million, respectively. These were partially offset by a $0.6 million non-accrual loan that was transferred to loans held for sale and subsequently sold in the second quarter of 2009 and $0.5 million in charge-offs and principal repayments. Impaired loans net of related specifically allocated allowance for loan loss were $16.8 million and $10.0 million at September 30, 2009 and December 31, 2008, respectively.

The recorded investment in loans that are considered to be impaired, as of September 30, 2009 and December 31, 2008, is summarized below:

	September 30, 2009			December 31, 2008
Impaired loans with related allowance for loan loss	$	22,991,856		$	11,908,500
Allowance for loan loss specifically allocated to impaired loans		(7,600,640	)		(1,954,590	)
		15,391,216			9,953,910
Impaired loans with no related allowance for loan loss		1,379,789			-
Net impaired loans	$	16,771,005		$	9,953,910

	Third Quarter 2009			Third Quarter 2008
Average impaired loan and lease balance	$	24,455,841		$	12,666,538

Interest income of $20,366 and $23,312, respectively, was recognized on impaired loans for the three and nine months ended September 30, 2009. Interest income of $11,733 and $57,514, respectively, was recognized on impaired loans for the three and nine months ended September 30, 2008.

Activity in the allowance for loan and lease losses for the nine months ended September 30, 2009 and 2008 is as follows:

	2009			2008
Balance, January 1	$	18,668,451		$	14,704,864
Adjustment due to sale of SB Equipment assets		-			(2,002,155	)
Provision charged to income		16,500,000			10,225,744
Charge-offs		(6,268,520	)		(8,627,296	)
Recoveries		501,188			271,359
Balance, September 30	$	29,401,119		$	14,572,516

The aggregate amount of loans classified as special mention ($97.9 million), substandard ($46.8 million), doubtful ($-0-) or loss ($0.3 million) by the Company's loan grading process has increased to $145.0 million at September 30, 2009 from $63.5 million at December 31, 2008. This increase reflects six relationships, each over $5.0 million, totaling $54.0 million. These relationships consisted of commercial and industrial loans totaling $29.0 million and commercial real estate credits totaling $25.0 million.

At September 30, 2009 and December 31, 2008, loans and leases with unpaid principal balances on which the Bank is no longer accruing interest income were $34.7 million and $16.1 million, respectively. The increase in such non-accrual loans at September 30, 2009 compared to December 31, 2008 was primarily due to the addition of $26 million from seven relationships to non-accrual status. These relationships consisted of residential construction and commercial real estate credits totaling $20 million, and commercial and industrial loans totaling $6 million. These additions were reduced by charge-offs of non-accrual loans of $2 million and cash payments received of $5 million. Loans and leases 90 days or more past due and still accruing interest totaled $7 thousand and $3 thousand at September 30, 2009 and December 31, 2008, respectively.

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 additional discretionary, actions by regulators that, if undertaken, 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 September 30, 2009 and December 31, 2008. 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 September 30, 2009:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	147,750		9.25	%	$	63,859		4.00	%		N/A		N/A
The Bank	$	153,550		9.62	%	$	63,827		4.00	%	$	79,784		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	147,750		11.95	%	$	49,452		4.00	%		N/A		N/A
The Bank	$	153,550		12.42	%	$	49,437		4.00	%	$	74,155		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	169,376		13.70	%	$	98,904		8.00	%		N/A		N/A
The Bank	$	169,171		13.69	%	$	98,873		8.00	%	$	123,592		10.00	%
As of December 31, 2008:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	154,081		9.38	%	$	65,721		4.00	%		N/A		N/A
The Bank	$	156,322		9.52	%	$	65,685		4.00	%	$	82,106		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	154,081		12.03	%	$	51,212		4.00	%		N/A		N/A
The Bank	$	156,322		12.22	%	$	51,185		4.00	%	$	76,777		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	180,118		14.07	%	$	102,424		8.00	%		N/A		N/A
The Bank	$	172,350		13.47	%	$	102,369		8.00	%	$	127,961		10.00	%

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 $5,526,300 or 15% of the preferred stock investment. The warrant is immediately exercisable and expires in ten years. The Company allocated $1,056,842 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 September 30, 2009, $177,167 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.

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 prohibits 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 the stock does not fully vest during the time the Treasury owns any debt or equity acquired under the Capital Purchase Program (“CPP”) (unless the only securities outstanding are warrants acquired under the CPP) and the amount of restricted stock granted does not have a value greater than one-third of the total annual compensation of the recipient. 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 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. On June 15, 2009, the Treasury issued an Interim Final Rule to provide guidance on the executive compensation provisions under ARRA. The Interim Final Rule clarified that any payments made in connection with a change in control of the Company will be prohibited golden parachute payments. Under the Interim Final Rule, a golden parachute payment is treated as paid at the time of departure or change in control and may include a right to amounts actually payable after the TARP period. In addition, the Interim Final Rule clarifies that in addition to payments for services performed or benefits accrued, (i) payments under tax-qualified retirement plans, (ii) payments made due to the employee’s death or disability and (iii) severance or similar payments required to be made pursuant to a state statute or foreign law are excluded from prohibited payments. The Treasury has the ability to make unilateral, retroactive changes to the Securities Purchase Agreement – Standard Terms (“Securities Purchase Agreement”) which governs the sale of the Series A Preferred Stock to the Treasury.

8. STOCK-BASED COMPENSATION

Incentive Stock Options

Under the terms of the Company’s incentive stock option plans adopted in April 1994, 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 September 30, 2009, incentive stock options for the purchase of 254,319 shares were outstanding and exercisable. No options have been exercised in 2009. The total intrinsic value of options exercised for the nine months ended September 30, 2008 was $292,899. The options outstanding and exercisable at September 30, 2009 have an intrinsic value of $3,001. A summary of stock option activity follows:

				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding - January 1, 2009		330,914		$	15.26
Granted		-			-
Exercised		-			-
Cancelled or forfeited		(76,595	)	$	13.69
Outstanding - September 30, 2009		254,319		$	15.73

The following summarizes shares subject to purchase from incentive stock options outstanding and exercisable as of September 30, 2009:

		Weighted-Average
	Shares	Remaining	Weighted-Average	Shares	Weighted-Average
Range of Exercise Prices	Outstanding	Contractual Life	Exercise Price	Exercisable	Exercise Price
$8.25 - $10.28	58,867	1.2 years	$9.76	58,867	$9.76
$12.45 - $13.61	84,839	3.0 years	$13.08	84,839	$13.08
$19.16	53,973	4.4 years	$19.16	53,973	$19.16
$22.63	56,640	5.4 years	$22.63	56,640	$22.63
	254,319	3.4 years	$15.73	254,319	$15.73

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 first nine months of 2009, the Company awarded 75,715 shares of restricted stock to certain key employees. The restricted stock awarded in 2009 and 2008 primarily vests one-third on each of the third through fifth anniversaries of the award date. The restricted stock awarded in 2006 vested in full in September 2009 at a fair value of $66,590. Based on an estimated forfeiture rate, of those shares awarded in 2009 and 2008, 169,000 shares are expected to vest over the five year period. 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 $1,761,298 to be expensed over the remaining period of 3.8 years. For the nine months ended September 30, 2009 and 2008, $298,735 and $200,108, respectively, were recognized as compensation expense, net of estimated forfeitures. The Company recognized tax benefits resulting from the compensation expense for the nine months ended September 30, 2009 and 2008 of $91,204 and $59,831, respectively.

A summary of restricted stock activity follows:

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2009		136,935		$	13.50
Granted		75,715		$	7.58
Vested		(7,482	)	$	19.95
Cancelled or forfeited		(2,142	)	$	13.00
Nonvested - September 30, 2009		203,026		$	11.06

At September 30, 2009, 362,506 shares were reserved for possible issuance of awards of options, SARs, restricted stock, performance units and unrestricted stock.

Non-Plan Stock-Based Compensation

In November 2006, non-qualified stock options and restricted stock awards were granted to Thomas M. O’Brien, the Company’s and the Bank’s President and Chief Executive Officer, 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 will vest 20% per year over five years. The estimated fair value of the options was $5.42 per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used: (1) dividend yield 3.32%; (2) expected volatility 35%; (3) risk-free interest rate 4.57%; and (4) expected life of options 7.3 years. At September 30, 2009, 65,898 of these options were exercisable, but none have been exercised. The options outstanding and those exercisable at September 30, 2009 have no intrinsic value.

The restricted stock awarded to Mr. O’Brien totals 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 nine months ended September 30, 2009 and 2008 was $100,219 and $161,136, respectively. A summary of restricted stock activity follows:

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2009		45,983		$	17.94
Granted		-			-
Vested		(12,543	)	$	17.94
Nonvested - September 30, 2009		33,440		$	17.94

The total remaining unrecognized compensation cost related to nonvested options and shares of restricted stock awarded to Mr. O’Brien is $997,500 and will be expensed over the weighted-average remaining period of 2.1 years. For the nine months ended September 30, 2009 and 2008, $359,100 was recognized as compensation expense in each period. The non-qualified stock options and the restricted stock awards were not issued as part of any of the Company’s registered stock-based compensation plans.

9. 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 September 30, 2009, the Bank had approximately $230,000,000 of real estate mortgage loan collateral pledged at the FHLB. Based on this collateral, the Bank had approximately $149,000,000 available to borrow overnight or on a term basis. There were no investment securities pledged. The FHLB line is renewed annually.

	Nine months ended			Twelve months ended
	September 30, 2009			December 31, 2008
Amount outstanding under lines of credit with the FHLB - end of period	$	60,000,000		$	-
Amount outstanding under lines of credit with the FHLB - period average	$	12,681,000		$	110,915,000
Weighted-average interest rate on average amount outstanding		0.43	%		2.52	%

At September 30, 2009 and December 31, 2008, the Bank had $3,000,000 outstanding in securities sold under agreements to repurchase.

On March 31, 2009, the Bank issued $29,000,000 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 annum is payable semi-annually in arrears on the 30 th day of each March and September, beginning September 30, 2009.

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.

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 is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. 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:

	September 30, 2009		Fair Value Measurements at September 30, 2009 Using Significant Other Observable Inputs (Level 2)
Assets:
Available for sale securities	$	395,022,468	$	395,022,468
Derivatives	$	2,175,586	$	2,175,586

Liabilities:
Derivatives	$	2,242,184	$	2,242,184

	December 31, 2008		Fair Value Measurements at December 31, 2008 Using Significant Other Observable Inputs (Level 2)		Fair Value Measurements at December 31, 2008 Using Significant Unobservable Inputs (Level 3)
Assets:
Available for sale securities	$	412,379,205	$	406,514,206	$	5,864,999
Derivatives	$	3,132,311	$	3,132,311	$	-

Liabilities:
Derivatives	$	1,500,858	$	1,500,858	$	-

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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Available for Sale Securities
	September 30, 2009			December 31, 2008
Beginning balance	$	5,864,999		$	-
Other-than-temporary impairment		(4,000,000	)		(6,203,195	)
Included in other comprehensive income		-			-
Transfers (out of) into Level 3		(1,864,999	)		12,068,194
Ending balance	$	-		$	5,864,999

Due to credit deterioration noted in the financial institution industry in general, 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 and resulted in the asset being 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 below:

	September 30, 2009		Fair Value Measurements at September 30, 2009 Using Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	15,391,216	$	15,391,216
Loans held for sale	$	9,302,360	$	9,302,360

	December 31, 2008		Fair Value Measurements at December 31, 2008 Using Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	9,953,910	$	9,953,910
Loans held for sale	$	5,321,577	$	5,321,577

Impaired loans with specific allocations had a principal amount of $22,991,856 and $11,908,500, with a valuation allowance of $7,600,640 and $1,954,590 at September 30, 2009 and December 31, 2008, respectively. The provision for losses on impaired loans was $6,216,844 and $1,826,908 for the nine months ended September 30, 2009 and 2008, respectively. Charge-offs of $2,585,807 and $3,345,544 were incurred on the transfer of loans to loans held for sale in the first nine months of 2009 and 2008, respectively. (See also Note 5 – Loans and Leases.)

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

	September 30, 2009				December 31, 2008
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash
equivalents	$	35,992	$	35,992	$	102,988	$	102,988
Accrued interest receivable		5,961		5,961		6,879		6,879
Federal Home Loan Bank and
other restricted stock		8,036		8,036		4,823		4,823
Loans and leases - net of the
allowance for loan
and lease losses		1,088,096		1,066,528		1,103,870		1,132,185
Total	$	1,138,085	$	1,116,517	$	1,218,560	$	1,246,875
Financial liabilities:
Deposits	$	1,307,962	$	1,127,670	$	1,481,048	$	1,367,381
Senior unsecured debt		29,000		27,927		-		-
Subordinated notes		10,000		11,109		10,000		12,113
Junior subordinated debentures		20,620		20,626		20,620		20,640
Accrued interest payable		1,172		1,172		1,433		1,433
Temporary borrowings		63,000		63,000		3,000		3,000
Total	$	1,431,754	$	1,251,504	$	1,516,101	$	1,404,567

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 and Leases - 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.

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, Subordinated Notes and Junior Subordinated Debentures - The fair value of senior unsecured debt, subordinated notes 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.

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

An income tax benefit of $0.9 million and an income tax expense of $2.6 million were recorded in the nine month periods ended September 30, 2009 and 2008, respectively. The Company is currently subject to a statutory Federal tax rate of 34%, a New York State tax rate of 7.1% plus a 17% MTA surcharge and a New York City tax rate of 9%. The Company’s overall effective tax rate was a benefit of 30.5% for the nine month period ended September 30, 2009, compared to an expense of 30.3% for the same period in the prior year. In addition, 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 September 30, 2009 there were no significant uncertain tax positions requiring additional recognition in its consolidated financial statements and does not believe that there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. There were no accruals for interest or penalties during the nine month period ended September 30, 2009.

At September 30, 2009 the Company has available a net operating loss carryforward of approximately $19 million that may be applied against future taxable income and is expected to expire in the year 2027. Based on projected future earnings, management believes it is more likely than not that the tax benefit of the carryforward will be realized within the carryforward period and therefore no valuation allowance has been recorded against the deferred tax assets.

12. SUBSEQUENT EVENTS

The Company’s Board declared a cash dividend of $0.05 per share at its October 27, 2009 meeting. The cash dividend will be paid on December 16, 2009 to stockholders of record on November 20, 2009.

On October 9, 2009, the Company filed a definitive proxy statement on Schedule 14A with the SEC in connection with a Special Meeting of Stockholders of the Company to be held on November 17, 2009. Stockholders will be asked to consider and vote upon the following matters: (1) the amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from 20,000,000 to 50,000,000, (2) the amendment to the Company’s Certificate of Incorporation to eliminate the classified board and provide for the annual election of the Board of Directors, and (3) the amendment to the Company’s Certificate of Incorporation to reduce the director and stockholder vote required to approve certain business combinations.

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

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

Executive Summary – State Bancorp, Inc. (the “Company”) is a one-bank holding company 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.

Financial performance of State Bancorp, Inc.
(dollars in thousands, except per share data)
As of or for the three and nine months ended September 30, 2009 and 2008

	Three months				Nine months
			Over/				Over/
			(under)				(under)
	2009	2008	2008		2009	2008	2008
Revenue (1)	$17,402	$16,704	4.2	%	$46,543	$51,279	(9.2)	%
Operating expenses	$11,341	$10,166	11.6	%	$33,036	$32,515	1.6	%
Provision for loan and lease losses	$3,000	$3,700	(18.9)	%	$16,500	$10,226	61.4	%
Net income (loss)	$1,941	$1,989	(2.4)	%	$(2,080)	$5,950	N/M	(2)
Net income (loss) per common share - diluted	$0.10	$0.14	(28.6)	%	$(0.25)	$0.42	N/M	(2)
Return on average total assets	0.47%	0.50%	(3)	bp	(0.17)%	0.49%	(66)	bp
Return on average total stockholders' equity	5.13%	6.95%	(182)	bp	(1.84)%	6.91%	(875)	bp
Tier I leverage ratio	9.25%	8.05%	120	bp	9.25%	8.05%	120	bp
Tier I risk-based capital ratio	11.95%	10.32%	163	bp	11.95%	10.32%	163	bp
Total risk-based capital ratio	13.70%	12.32%	138	bp	13.70%	12.32%	138	bp
Tangible common equity ratio	7.17%	7.02%	15	bp	7.17%	7.02%	15	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 September 30, 2009, the Company, on a consolidated basis, had total assets of approximately $1.6 billion, total deposits of approximately $1.3 billion and stockholders’ equity of approximately $152 million.

The Company recorded net income of $1.9 million, or $0.10 per diluted common share, for the third quarter of 2009 compared to $2.0 million, or $0.14 per diluted common share, for the third quarter of 2008. The decrease in net income in 2009 primarily reflects an increase in total operating expenses of $1.2 million largely as a result of a $1.0 million charge to write down the carrying value of loans held for sale to their estimated fair value and a $345 thousand increase in FDIC deposit insurance assessment expenses. The increase in total operating expenses was partially offset by an increase in net interest income of $201 thousand, a decrease of $700 thousand in the provision for loan and lease losses and a $496 thousand increase in total non-interest income. Earnings per diluted common share in 2009 was negatively impacted by quarterly dividends paid on preferred stock issued under the Capital Purchase Program (“CPP”).

Revenue of State Bancorp, Inc.
(dollars in thousands)
For the three and nine months ended September 30, 2009 and 2008

	Three months				Nine months
			Over/				Over/
			(under)				(under)
	2009	2008	2008		2009	2008	2008
Net interest income	$15,607	$15,406	1.3	%	$45,906	$47,024	(2.4)	%
Service charges on deposit accounts	504	468	7.7	%	1,690	1,623	4.1	%
Net security gains (losses)	486	(10)	N/M	(1)	(2,832)	50	N/M	(1)
Income from bank owned life insurance	182	276	(34.1)	%	554	793	(30.1)	%
Other operating income	623	564	10.5	%	1,225	1,789	(31.5)	%
Total revenue	$17,402	$16,704	4.2	%	$46,543	$51,279	(9.2)	%

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

The Company’s return on average total assets decreased to 0.47% in the third quarter of 2009 from 0.50% in the third quarter of 2008, while return on average total stockholders’ equity decreased to 5.13% in the third quarter of 2009 from 6.95% in the third quarter of 2008. Primarily due to a decrease in the Company’s average earning asset yield offset somewhat by a decrease in the average cost of interest-bearing liabilities, the Company’s net interest margin declined by six basis points to 4.06% in the third quarter of 2009 from 4.12% in the third quarter of 2008.

The Company’s primary market area of Nassau, Suffolk, Queens and Manhattan provides opportunity for deposit growth and commercial and industrial lending. The economy in the New York metropolitan region remains fragile and unemployment levels continue to be high. Based on our assessment of the current market conditions and continuing economic pressures, together with our determination of credit risk within our portfolio from our ongoing review process, our provision for loan losses was $3.0 million in the third quarter of 2009 compared to $3.7 million in the third quarter of 2008. Nevertheless, our allowance for loan and lease losses increased to $29 million at September 30, 2009 from $19 million at December 31, 2008. We believe that we are aggressive in the ongoing review of our credit portfolio and in our action plans for loans that begin to demonstrate weaknesses. When appropriate, we continue to pursue opportunities to proactively liquidate and dispose of certain problem loans by selling such loans in the market either individually or, if conditions allow, in a bulk sale transaction. Liquidity for the disposition of problem credits, although thin, has improved in recent months. Management remains clearly focused on reaching an expedited resolution to the problem loans in our portfolio in the near term. In the first nine months of 2009, we wrote-down certain problem loans totaling $9.9 million to estimated fair market value of $7.4 million and transferred the net balance to loans held for sale after determining that such action represented the most cost-effective long-term solution. During the third quarter of 2009 and subsequent to their transfer to loans held for sale, an additional $1.0 million charge was recorded to write down the carrying value of these loans held for sale to their estimated fair value. Total loans held for sale amounted to $9.3 million at September 30, 2009 compared to $5.3 million at December 31, 2008.

Net charge-offs in the third quarter of 2009 were $1.6 million. Problem and non-performing loans remain a cause for continued close management attention. Our primary concern is the impact of the present difficult economic conditions on certain residential construction loans when the loan amounts are in excess of projected sales or where the Bank would have to advance significant additional funds to complete the project (see discussion on non-performing assets in the Asset Quality section). It continues to be our belief that the Bank is best served by exiting these facilities through the sale of its position to investors who are better suited to realize the value that may come over time. We generally attempt to sell such loans prior to their becoming non-performing or shortly thereafter.

The primary focus of the Company’s loan and lease portfolio is commercial real estate and commercial and industrial loans. Residential lending constitutes less than 10% of our total portfolio at September 30, 2009. The Company’s securities portfolio contains no subprime, structured debt or exotic structures. At September 30, 2009, the fair value of the securities portfolio represented 103% of book value. The past practice of taking corporate credit risk in the Bank’s investment portfolio has been discontinued.

We continue to expect to achieve modest loan growth this year in our core competencies of commercial and industrial credits and commercial mortgage loans. We remain cautious on credit conditions and the inherent risk in lending portfolios which is being exacerbated in this weak economy. The risk of economic recovery being marked by modest growth and elevated unemployment levels is substantial. Within the confines of current market conditions, the Company continues to build for the future while forthrightly addressing its existing problems. We are attracting new client relationships and have selectively hired experienced commercial relationship managers to join our team of professional bankers.

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

Concern for the stability of the banking and financial systems reached a magnitude which has resulted in unprecedented government intervention including, but not limited to, the passage of the Emergency Economic Stabilization Act (“EESA”), the implementation of the CPP, the Temporary Liquidity Guarantee Program (“TLGP”) and the Troubled Asset Relief Program (“TARP”), all of which are described in greater detail in Item 1. “Business” and Item 1A. of the Company’s 2008 Annual Report on Form 10-K. During 2009, some of these programs have been expanded and new programs have been announced to stimulate the economy and stabilize the housing market.

The Company has participated in the CPP through its December 2008 issuance of Series A Preferred Stock and a warrant to purchase common stock to the Treasury. The Company is participating in the Transaction Account Guarantee Program of the FDIC’s TLGP which provides non-interest bearing transaction accounts and interest bearing transaction accounts with interest rates no higher than 0.50% at the Bank with unlimited FDIC insurance coverage beyond the current limit of $250,000. The unlimited coverage was to be in effect through December 31, 2009. Effective October 1, 2009, a final rule adopted by the FDIC extends the TLGP for six months to June 30, 2010. Management anticipates that the cost of continuing to participate in the TLGP will be immaterial to the Company’s financial statements. The Company 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 annum and a maturity of March 30, 2012. The FDIC guarantee will be in effect through the maturity date, March 30, 2012.

The U.S. Government is currently reviewing a plan for regulatory reform that would consolidate bank regulators, create new government agencies and give new powers to the Federal Reserve. Specific proposals include, among other things, the creation of a new national bank supervisor to regulate all federally chartered depository institutions, giving the Federal Reserve the power to regulate systemic risk to the nation’s financial stability and the creation of a Consumer Financial Protection Agency to regulate consumer financial products. The Company will continue to monitor the progress of these proposals and their possible effect on the Company. As currently written, the proposals will not have a material adverse effect on the Company’s operations.

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

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

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

Commercial loans are assigned credit risk grades using a scale of one to ten with allocations for probable losses made for pools of similar risk-graded loans. Loans 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 and lease losses, classified loans are assigned allocation factors ranging from 24% to 100% of the outstanding loan balance and are based on the Company’s historic loss experience. Loans that have potential weaknesses, generally in grade seven, that require close monitoring by senior management, are termed “criticized” loans in accordance with regulatory guidelines. Criticized loans are assigned an allocation factor of 4% based on historic loss experience. Non-accrual loans and leases in excess of $250 thousand are individually evaluated for impairment and are not included in these risk grade pools. A loan is considered “impaired” when, based on current information and events, it is probable that both the principal and interest due under the original contractual terms will not be collected 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. Allocations for loans which are performing satisfactorily, generally in grades one through six, are based on historic experience for other performing loans and leases and are assigned an allocation factor of 0.55% of the loan balance. An allowance allocation factor for portfolio macro factors ranging from 1-70 basis points is calculated to cover potential losses from a number of variables, not the least of which is the current economic uncertainty.

It is the present intent of management to continue to monitor 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 and lease portfolio. The provision is continually evaluated relative to portfolio risk and regulatory guidelines and will continue to be closely reviewed. In addition, various bank regulatory agencies, as an integral part of their examination process, closely review the allowance for loan and lease losses. Such agencies may require the Company to recognize additions to the allowance based on their 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 losses carryforward. 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.

Other-Than-Temporary Impairment (“OTTI”) of Investment Securities – One recent significant change in practice relates to management’s assertion regarding recovery of declines in fair value, moving from an assertion about “intent and ability to hold to recovery” to a “do not intend to sell” or “it is more likely than not that it will not be required to sell” prior to recovery assertion. In instances where the Company will not be required to sell the bond or doesn’t intend to sell the bond, the components of the impairment charge would be bifurcated. The credit loss component would be recognized in earnings, and the other components would be recognized in other comprehensive income. In instances where the Company intends to sell or is more likely than not to be required to sell prior to recovery the full OTTI charge is to be recognized in earnings. (See also Note 4 – Investment Securities.)

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

Material Changes in Financial Condition - Total assets of the Company were $1.6 billion at September 30, 2009. When compared to December 31, 2008, total assets decreased by $97 million or 6%. This was primarily attributable to declines in cash and due from banks and securities available for sale of $66 million and $17 million, respectively. The decrease in the investment portfolio largely reflects declines in mortgage-backed and U.S. Government agency securities. The decrease in mortgage-backed securities is attributable to sales and principal repayments of $76 million and $87 million, respectively, offset to a large extent by purchases of $155 million. The decrease in U.S. Government agency securities is largely due to sales and maturities totaling $10 million.

At September 30, 2009, total deposits were $1.3 billion, a decrease of $173 million when compared to December 31, 2008. This was largely attributable to decreases in certificates of deposit, including those of the Certificate of Deposit Account Registry Service (“CDARS”) and other brokered deposits, of $108 million and savings deposits of $76 million, respectively. CDARS is a network of financial institutions that exchanges deposits with one another to maximize FDIC coverage of their depositors. These decreases were partially offset by an increase in demand deposits of $11 million. Core deposit balances represented approximately 69% of total deposits at September 30, 2009 compared to 65% at year-end 2008. Short-term borrowed funds, consisting primarily of FHLB advances, totaled $63 million at September 30, 2009 and $3 million at December 31, 2008. The Company participated in the Debt Guarantee Program of the TLGP in March 2009 whereby the Bank issued $29 million in FDIC-guaranteed senior non-secured debt at a fixed interest rate of 2.625% per annum and a maturity of March 30, 2012.

Capital Resources - Total stockholders’ equity amounted to $152 million at September 30, 2009, representing a decrease of $2 million from December 31, 2008. The decrease from year-end 2008 largely reflects the net loss recorded in the first nine months of 2009. Management continually evaluates the Company’s capital position in light of current and future growth objectives and regulatory guidelines.

In December 2008, the Company issued to the U.S. Treasury $37 million of 5% fixed rate cumulative perpetual preferred stock and a warrant to purchase 465,569 shares of common stock. This increase in capital has allowed the Company to reinforce its commitment to serve the credit needs of our clients and the communities in which we operate. The Company contributed $34 million of this capital to its Bank subsidiary in December 2008.

The Company’s tangible common equity to tangible assets ratio was 7.17% at September 30, 2009 compared to 6.91% at December 31, 2008 and 7.02% at September 30, 2008. 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. With respect to the calculation of the actual unaudited TCE ratio as of September 30, 2009, reconciliations of tangible common equity to GAAP total common stockholders’ equity and tangible assets to GAAP total assets are set forth below (in thousands):

Total stockholders' equity	$	151,559
Less: preferred stock		(35,962	)
Less: warrant		(1,057	)
Total common stockholders' equity		114,540
Less: intangible assets		-
Tangible common equity	$	114,540

Total assets	$	1,596,464
Less: intangible assets		-
Tangible assets	$	1,596,464

At September 30, 2009, the Bank’s Tier I leverage ratio was 9.62% while its risk-based capital ratios were 12.42% for Tier I capital and 13.69% for total capital. These ratios exceed the minimum regulatory guidelines for a well-capitalized institution. Table 2-1 summarizes the Company’s capital ratios as of September 30, 2009 and compares them to current minimum regulatory guidelines and December 31 and September 30, 2008 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:
September 30, 2009	9.25%	11.95%	13.70%
December 31, 2008	9.38%	12.03%	14.07%
September 30, 2008	8.05%	10.32%	12.32%

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 October 27, 2009 meeting. The cash dividend will be paid on December 16, 2009 to stockholders of record on November 20, 2009.

The Company did not repurchase any shares of its common stock during the first nine months of 2009 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. 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 optionally redeem the debentures related to Trust I, which bear a coupon rate of three-month LIBOR plus 345 basis points, prior to the maturity date of November 7, 2032 at par. The Company has the right to optionally redeem the debentures related to Trust II, which bear a coupon rate of three-month LIBOR plus 285 basis points, prior to the maturity date of January 23, 2034 at par. As of September 30, 2009, the Company has chosen not to redeem these debentures, and in the future will continue to evaluate the cost effectiveness of these borrowings. The weighted average rate on all trust preferred securities outstanding was 4.26% and 6.29% for the first nine months of 2009 and 2008, respectively.

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

The Company’s (parent only) primary funding sources are dividends from the Bank and proceeds from the Dividend Reinvestment and Stock Purchase Plan (the “DRP”). 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 September 30, 2009, $2.1 million in 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. As the Federal Reserve Bank (“FRB”) pays interest on excess reserve balances, the Company may leave balances at the FRB if the rate being paid is higher than would be available from other short-term investments. Liquid assets declined to $404 million at September 30, 2009 from $457 million at December 31, 2008, resulting largely from reductions in interest earning balances at the FRB and securities available for sale. Liquidity is 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 and the capital markets.

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

The Company’s primary sources of funds are cash provided by deposits, proceeds from maturities and sales of securities available for sale, and cash provided by operating activities. At September 30, 2009, total deposits were $1.3 billion, a decrease of $173 million when compared to December 31, 2008. Of the total time deposits at September 30, 2009, $332 million are scheduled to mature within the next 12 months. During the first nine months of 2009 and 2008, proceeds from sales and maturities of securities available for sale totaled $196 million and $241 million, respectively. Additionally, the Company issued $29 million in FDIC-guaranteed senior non-secured debt under the TLGP in March of 2009.

The Company’s primary uses of funds are for the origination of loans and the purchase of investment securities. During the first nine months of 2009 and 2008, the Company had an increase in loans and loans held for sale (net of unearned income, principal paydowns and other dispositions, and before allowance for loan and lease losses) totaling $3 million and $70 million, respectively. The Company did not purchase any loans during the first nine months of 2009 or 2008. The Company purchased securities available for sale totaling $180 million and $227 million during the first nine months of 2009 and 2008, 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 September 30, 2009, access to approximately $149 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 September 30, 2009, approximately $86 million in informal lines of credit extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. At September 30, 2009, $60 million in advances were outstanding under lines of credit with the FHLB. At September 30, 2009, no funds were drawn on correspondent bank lines of credit. To supplement its short-term borrowed funds, the Company also utilized CDARS for $88 million in short-term certificates of deposit outstanding at September 30, 2009. CDARS deposits 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. As of September 30, 2009, $30 million in such brokered deposits were outstanding, none of which is maturing in the fourth quarter of 2009. 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 and determines the amount of collateral, if deemed necessary, to be obtained by the Bank upon extension of credit. Collateral required varies, but may include accounts receivable, inventory, equipment and real estate. At September 30, 2009 and 2008, commitments to originate loans and leases and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $207 million and $241 million, respectively.

Letters of credit are conditional commitments guaranteeing payments of drafts in accordance with the terms of the letter of credit agreements. Commercial letters of credit are used primarily to facilitate trade or commerce and are also issued to support public and private borrowing arrangements, bond financing and similar transactions. Collateral may be required to support letters of credit based upon management’s evaluation of the creditworthiness of each customer. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan and lease facilities to customers. Most letters of credit expire within one year. At September 30, 2009 and 2008, letters of credit outstanding were approximately $16 million in each period. At September 30, 2009 and 2008, the uncollateralized portion was approximately $3 million in each period.

The use of derivative financial instruments, i.e. 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. From time to time, customer interest rate swap transactions together with offsetting interest rate swap transactions with institutional dealers may be executed. At September 30, 2009 and 2008, the total gross notional amount of swap transactions outstanding was $38 million and $28 million, respectively.

On September 15, 2008 and October 3, 2008, respectively, Lehman and Lehman Special Financing filed Voluntary Petitions under Chapter 11 of the U.S. Bankruptcy Code, each of which constituted an event of default under the swap agreements the Bank had with Lehman Special Financing. The Bank filed proofs of claim with the United States Bankruptcy Court, Southern District, on January 13, 2009. As a result of the events of default, the Bank terminated the interest rate swap agreements with Lehman Special Financing. The terminations resulted in several customer interest rate swap transactions no longer being offset by that institutional dealer and a loss to the Company on those swap agreements of approximately $584 thousand was recorded in the third quarter of 2008. During the third quarter of 2009, the Company recorded a gain of $221 thousand on the sale of its claims against Lehman and Lehman Special Financing.

In addition, during the second and third quarters of 2009, the unhedged customer interest rate swap transactions were once again offset by an institutional dealer. As all customer interest rate swap transactions are now hedged, we expect that their future impact on the Company’s financial statements will be immaterial. For the three months ended September 30, 2009, a net gain of $160 thousand was recorded, while for the nine months ended September 30, 2009, a net loss of $68 thousand was recognized. The 2009 amounts include the gain of $221 thousand on the sale of the Bank’s claims against Lehman and Lehman Special Financing. For the three and nine months ended September 30, 2008, a net loss of $584 thousand was recognized.

Contractual Obligations – Shown below are the amounts of payments due under specified contractual obligations, aggregated by category of contractual obligation, for specified time periods. All information is as of September 30, 2009.

	Payments due by period (in thousands)
			Less than						More than
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years
Leases covering various equipment,
branches, office space and land	$	15,935	$	3,159	$	4,931	$	2,504	$	5,341
Time deposits		408,904		331,905		69,612		7,387		-
FHLB borrowings		60,000		60,000		-		-		-
Securities sold under agreements to repurchase		3,000		2,000		1,000		-		-
Senior unsecured debt		29,000		-		29,000		-		-
Subordinated notes		10,000		-		-		10,000		-
Junior subordinated debentures		20,620		-		-		-		20,620
Total	$	547,459	$	397,064	$	104,543	$	19,891	$	25,961

Material Changes in Results of Operations for the Three Months Ended September 30, 2009 versus the Three Months Ended September 30, 2008 - The Company recorded net income of $1.9 million for the third quarter of 2009 compared to $2.0 million for the third quarter of 2008. The decrease in net income in 2009 primarily reflects an increase in total operating expenses of $1.2 million largely as a result of a $1.0 million charge to write down the carrying value of loans held for sale to their estimated fair value and a $345 thousand increase in FDIC insurance assessment expenses. The increase in total operating expenses was partially offset by an increase in net interest income of $201 thousand, a decrease of $700 thousand in the provision for loan and lease losses and a $496 thousand increase in total non-interest income.

As shown in Table 2-2 (A) following this discussion, net interest income increased by 1.3% to $15.6 million resulting from a $36 million increase in average interest-earning assets, despite a six basis point decline in the Company’s net interest margin to 4.06% in 2009. The decrease in the Company’s net interest margin to 4.06% during the third quarter of 2009 from 4.12% a year ago primarily resulted from a 73 basis point decrease in the Company’s average earning asset yield to 5.09%, offset by a 79 basis point decrease in the cost of total average interest-bearing liabilities to 1.43%. The decline in the Company’s average earning asset yield was a result of several factors, most notably reduced asset yields due to lower interest rates, increased non-performing assets and accelerated cash flows on investment securities. The lower asset yield resulted primarily from the impact of a 70 basis point reduction in average yield on loans and leases, offset in part by the $34 million increase in the average balance of loans and leases, which carry a significantly higher yield than the securities portfolio. Yields on all average interest-earning assets were lower during the third quarter of 2009 as compared to the third quarter of 2008 due to the prevailing lower interest rate environment.

The increase in average interest-earning assets largely reflects growth in commercial and industrial loans, and commercial mortgage loans that resulted in a 3% increase in average loans and leases outstanding to $1.1 billion during the third quarter of 2009 versus the comparable period in 2008. Average interest-earning balances, primarily at the FRB, increased $7 million during the third quarter of 2009 as compared to the same period in 2008, while average investment securities declined $3 million. The decrease in investment securities reflects the Company’s improved balance sheet mix from securities into higher-yielding loans.

The reduction in the cost of average interest-bearing liabilities in 2009 resulted from an increase in average core deposits coupled with a lower prevailing rate environment in the third quarter of 2009 versus the comparable 2008 period. The average cost of time and savings deposits and junior subordinated debentures declined by 82 basis points and 200 basis points, respectively, in the third quarter of 2009 versus 2008. The Company experienced a $102 million increase in average total deposits during the third quarter of 2009 versus 2008. This increase, together with the Company’s March 2009 issuance of $29 million in senior unsecured debt guaranteed by the FDIC under the TLGP, resulted in a reduction in average other temporary borrowings in 2009. Average federal funds purchased, securities sold under agreements to repurchase and other temporary borrowings declined $135 million during the third quarter of 2009 versus the comparable 2008 period.

The provision for loan and lease losses was $3.0 million in the third quarter of 2009, representing a decrease of $700 thousand versus the comparable 2008 period. 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, regulatory examination results and changes in the size and character of the loan portfolio. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.)

Total non-interest income increased $496 thousand to $1.8 million during the third quarter of 2009 when compared to the third quarter of 2008 resulting primarily from a $520 thousand gain on the liquidation in the third quarter of 2009 of one $10 million par value trust preferred CDO that had previously been classified as OTTI. (See also Note 4 – Investment Securities.) In addition, during the third quarter of 2009, the Company recorded a gain of $221 thousand on the sale of its claims against Lehman and Lehman Special Financing in connection with a loss recorded during the third quarter of 2008 related to three interest rate swap positions. (See also Off-Balance Arrangements contained herein.)

Operating expenses of State Bancorp, Inc.
(dollars in thousands)
For the three and nine months ended September 30, 2009 and 2008

	Three months				Nine months
			Over/				Over/
			(under)				(under)
	2009	2008	2008		2009	2008	2008
Salaries and other employee benefits	$5,926	$5,632	5.2	%	$17,223	$17,370	(0.8)	%
Occupancy	1,391	1,426	(2.5)	%	4,341	4,200	3.4	%
Equipment	307	302	1.7	%	908	919	(1.2)	%
Legal	188	(197)	N/M	(1)	533	2,536	(79.0)	%
Marketing and advertising	-	150	(100.0)	%	750	437	71.6	%
FDIC and NYS assessment	657	312	110.6	%	2,971	565	425.8	%
Credit and collection	1,151	186	518.8	%	1,513	545	177.6	%
Other operating expenses	1,721	2,355	(26.9)	%	4,797	5,943	(19.3)	%
Total operating expenses	$11,341	$10,166	11.6	%	$33,036	$32,515	1.6	%

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

Total operating expenses increased $1.2 million or 11.6% to $11.3 million during the third quarter of 2009 when compared to the third quarter of 2008. The increase in total operating expenses primarily reflects higher credit and collection expenses due to the $1.0 million charge to write down the carrying value of loans held for sale to their estimated fair value, higher legal expenses due to the expense credit recorded in 2008 resulting from the settlement of the shareholder derivative suit, higher FDIC and NYS assessment expenses and higher salaries and other employee benefits expenses due to staff additions. These were partially offset by lower marketing and advertising and other operating expenses. The reduction in other operating expenses in 2009 was primarily due to the $584 thousand loss recorded during the third quarter of 2008 related to three interest rate swap positions. (See also Off-Balance Arrangements contained herein.)

FDIC and NYS assessment expenses increased in the third quarter of 2009 when compared to the third quarter of 2008 primarily due to higher FDIC deposit insurance assessment fees in 2009. On February 27, 2009, the FDIC adopted a final rule that initially raised the assessment rate schedule, uniformly across all four risk categories into which the FDIC assigns insured institutions, by seven basis points (annualized) of insured deposits beginning on January 1, 2009. Under the final rule, the Bank’s assessment rate was 15 basis points (annualized) for the third quarter of 2009. On September 29, 2009, the FDIC published a Notice of Proposed Rulemaking that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011. We expect that we may be required to prepay an estimated $7.6 million on December 30, 2009 for our fourth quarter of 2009 and all of 2010, 2011 and 2012 FDIC assessments.

Due in part to the increase in total operating expenses, the Company’s operating efficiency ratio (total operating expenses divided by the sum of fully taxable equivalent net interest income and non-interest income, excluding net securities gains and losses) increased to 66.6% in the third quarter of 2009 versus 60.2% in the third quarter of 2008. The Company’s other measure of expense control, the ratio of total operating expenses to average total assets, was 2.77% for the third quarter of 2009 versus 2.55% for the third quarter of 2008.

The Company’s income tax expense was $1.1 million in the third quarter of 2009 as compared to $849 thousand in 2008. 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 Nine Months Ended September 30, 2009 versus the Nine Months Ended September 30, 2008 - For the nine months ended September 30, 2009 the Company recorded a net loss of $2.1 million compared to net income of $6.0 million in the same 2008 period. The factors contributing to the decrease in earnings were lower net interest income, a significant increase in the provision for loan and lease losses, lower non-interest income and increased total operating expenses.

As shown in Table 2-2 (B) following this discussion, the decrease of $1.1 million in net interest income for the first nine months of 2009 versus the comparable period in 2008 resulted from a 15 basis point contraction in the Company’s net interest margin to 3.99% in 2009 from 4.14% a year ago. The lower margin was primarily due to a 103 basis point reduction in the Company’s average interest-earning asset yield to 5.08% in 2009 resulting from a 127 basis point decline in the yield on loans and leases versus 2008. The reduced loan and lease yield was negatively impacted by lower market interest rates and an increase in non-accrual loans in 2009. The yield on the Company’s securities portfolio declined by 37 basis points to 4.58% in 2009 from 4.95% a year ago as the result of accelerated cash flows on mortgage-backed assets. Partially offsetting the reduced earning asset yield was a 105 basis point decline in the Company’s average cost of interest-bearing liabilities to 1.50% in 2009. The lower cost of funds in 2009 resulted from lower rates on maturing time deposits, growth in lower-yield savings deposits (up $53 million) and a n increase in demand deposits (up $21 million) in 2009. Partially offsetting the decline in the Company’s net interest margin was an $18 million increase in average interest-earning assets in 2009, primarily loans and leases which grew by $46 million (4%) and replaced declines in lower-yielding assets such as securities purchased under agreements to resell (down $33 million) and securities (down $8 million).

The provision for loan and lease losses increased by $6.3 million for the first nine months of 2009 as compared to 2008 due to several factors, including an increase in non-accrual loans of $20 million and internal risk rating downgrades of several commercial loan relationships. The Company recorded net loan and lease charge-offs of $5.8 million and $8.4 million for the first nine months of 2009 and 2008, respectively. (See also Asset Quality contained herein.)

The decline in total non-interest income resulted largely from net security losses of $2.8 million due to the first quarter 2009 $4.0 million non-cash OTTI write down of a trust preferred CDO. During the third quarter of 2009, the Company liquidated this security at a gain of $520 thousand. Income from bank owned life insurance (“BOLI”) declined by $239 thousand for the first nine months of 2009 versus the comparable 2008 period due to a lower rate of return on BOLI assets. Other operating income decreased by $563 thousand in 2009, due to reductions in sweep program fees coupled with losses recorded on certain customer interest rate swaps in 2009.

Total operating expenses increased by $521 thousand or 1.6% to $33.0 million for the first nine months of 2009, primarily due to a $2.4 million increase in FDIC and NYS assessment, an increase in credit and collection expenses due to the $1.0 million charge to write down the carrying value of loans held for sale to their estimated fair value, and a $313 thousand increase in marketing and advertising expenses in 2009. The increase in FDIC and NYS assessment expenses recorded in 2009 was due to several factors, most notably the FDIC insurance fund special assessment recorded in the second quarter of 2009, a higher FDIC deposit insurance assessment rate in 2009 and fees associated with participation in the Treasury TAGP which was not in existence in the 2008 period. The increase in marketing and advertising expenses in 2009 versus 2008 resulted from corporate branding efforts undertaken in the first half of 2009 coupled with significant reductions in print, broadcast and other media advertising during the comparable 2008 period. Largely offsetting these increases were a reduction in legal expenses of $2.0 million related to the shareholder derivative lawsuit settled in 2008 and a $1.1 million decline in other operating expenses, largely the result of the $584 thousand loss recorded during the third quarter of 2008 related to three interest rate swap positions.

On May 22, 2009, the FDIC adopted a final rule imposing a special assessment on insured institutions as part of the agency's efforts to rebuild the Deposit Insurance Fund (“DIF”) and help maintain public confidence in the banking system. The final rule established a special assessment of five basis points on each FDIC-insured depository institution's assets, minus its Tier 1 capital, as of June 30, 2009. The special assessment was collected September 30, 2009. Under generally accepted accounting principles, the full amount of the Company’s special assessment was accrued as an expense in the second quarter of 2009.

The Company’s operating efficiency ratio was 66.4% for the first nine months of 2009 and 62.8% for the first nine months of 2008. The Company’s ratio of total operating expenses to average total assets was 2.70% for the first nine months of 2009 and 2.67% for the first nine months of 2008.

Asset Quality – There is no subprime exposure in the Company’s securities portfolio. All of the mortgage-backed securities and collateralized mortgage obligations held in the Company’s portfolio are issued by U.S. Government-sponsored enterprises. (See also Note 4 – Investment Securities.)

The Company’s loan and lease portfolio is concentrated in commercial and industrial loans and commercial mortgage loans. The Bank does not engage in subprime lending and the Bank’s adjustable-rate residential mortgage (ARM) exposure is less than 1% of the total loan and lease portfolio. The Bank has not offered payment option ARM or negative amortization loan products.

Non-performing assets, defined by the Company as non-accrual loans and leases and other real estate owned (“OREO”), totaled $35 million (which includes $9 million in loans held for sale which have been previously written down to their estimated fair value) at September 30, 2009, $16 million (which includes $2 million in loans held for sale) at December 31, 2008 and $14 million (which includes $500 thousand in loans held for sale) at September 30, 2008. The increase in non-accrual loans at September 30, 2009 compared to December 31, 2008 was primarily due to the addition of $26 million from seven relationships to non-accrual status. These relationships consisted of residential construction and commercial real estate credits totaling $20 million, and commercial and industrial loans totaling $6 million. These additions were reduced by charge-offs of non-accrual loans of $2 million and cash payments received of $5 million. At September 30, 2009, December 31, 2008 and September 30, 2008, the Company held no OREO. Loans and leases 90 days or more past due and still accruing interest totaled $7 thousand and $3 thousand at September 30, 2009 and December 31, 2008, respectively. At September 30, 2008, there were no loans 90 days or more past due and still accruing interest.

The allowance for loan and lease losses amounted to $29 million or 2.7% of loans and leases, excluding loans held for sale, at September 30, 2009, $19 million or 1.7% of loans and leases, excluding loans held for sale, at December 31, 2008, and $15 million or 1.3% of loans and leases, excluding loans held for sale, at September 30, 2008. The allowance for loan and lease losses as a percentage of total non-performing assets, excluding loans held for sale, was 116% at September 30, 2009, 134% at December 31, 2008 and 104% 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 and lease losses. While the allowance for loan and lease losses as a percentage of non-performing assets is lower at September 30, 2009 than at December 31, 2008, management believes that the current level of the allowance for loan and lease losses is adequate in relation to the probable incurred losses present in the portfolio. This is based, in part, on additional collateral in the form of cash and real estate obtained during 2009. 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 and lease portfolio, recent charge-off experience, local and national economic conditions, current real estate market conditions in geographic areas where the Company’s loans and leases are located, changes in the trend of non-performing loans and leases, changes in interest rates, and loan and lease portfolio growth. Changes in one or a combination of these factors may adversely affect the Company’s loan and lease portfolio resulting in increased delinquencies, loan and lease losses and future levels of loan and lease loss provisions. (See also Critical Accounting Policies, Judgments and Estimates contained herein.)

Loans to borrowers which the Bank has identified as requiring special attention (such as a result of changes affecting the borrower’s industry, management, financial condition or other concerns) will be added to the 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.

Watch list summary (1)
			Increase/
	September 30, 2009	December 31, 2008	(decrease)

Commercial and industrial loans:
Number	127	78	49
Aggregate value	$59 million	$25 million	$34 million

Commercial real estate loans:
Number	55	38	17
Aggregate value	$106 million	$63 million	$43 million

Residential real estate loans:
Number	10	5	5
Aggregate value	$1 million	less than $1 million	less than $1 million

All other loans:
Number	6	10	(4)
Aggregate value	less than $1 million	less than $1 million	less than $1 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 adopted a more aggressive workout and disposition posture for watch list relationships. 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 may not maintain control over such relationships. It is anticipated that management will use a variety of strategies, depending on individual case circumstances, to exit relationships where the fundamental credit quality shows indications of more than temporary or seasonal deterioration. We cannot give any assurance that such strategies will enable us to exit such relationships especially in light of recent credit market conditions.

The provision for loan and lease losses is continually evaluated relative to portfolio risk and regulatory guidelines considering all economic factors that affect the loan and lease 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. Due to the uncertainties cited above, management expects to record loan charge-offs in future periods, which management believes have been adequately reserved for in the allowance for loan and lease losses. A further review of the Company’s non-performing assets may be found in Table 2-3 following this analysis.

TABLE 2 - 2 (A)
NET INTEREST INCOME ANALYSIS
For the Three Months Ended September 30, 2009 and 2008 (unaudited)
(dollars in thousands)

	2009								2008
	Average					Average			Average					Average
	Balance (1)		Interest			Yield/Cost			Balance (1)		Interest			Yield/Cost
ASSETS:
Interest-earning assets:
Securities (2)	$	388,060	$	4,146			4.24	%	$	391,064	$	4,880			4.96	%
Federal Home Loan Bank and other restricted stock		5,769		35			2.41			8,051		92			4.55
Interest-bearing deposits		10,677		3			0.11			3,271		13			1.58
Loans and leases (3)		1,121,278		15,409			5.45			1,086,993		16,805			6.15
Total interest-earning assets		1,525,784	$	19,593			5.09	%		1,489,379	$	21,790			5.82	%
Non-interest-earning assets		97,040								95,958
Total Assets	$	1,622,824							$	1,585,337

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits	$	589,269	$	1,145			0.77	%	$	503,892	$	1,491			1.18	%
Time deposits		439,151		2,073			1.87			456,092		3,488			3.04
Total savings and time deposits		1,028,420		3,218			1.24			959,984		4,979			2.06
Federal funds purchased		-		-			-			6,485		39			2.39
Other temporary borrowings		12,630		25			0.79			141,402		785			2.21
Senior unsecured debt		29,000		280			3.83			-		-			-
Subordinated notes		10,000		231			9.16			10,000		231			9.19
Junior subordinated debentures		20,620		213			4.10			20,620		316			6.10
Total interest-bearing liabilities		1,100,670		3,967			1.43			1,138,491		6,350			2.22
Demand deposits		354,341								320,464
Other liabilities		17,737								12,525
Total Liabilities		1,472,748								1,471,480
Stockholders' Equity		150,076								113,857
Total Liabilities and Stockholders' Equity	$	1,622,824							$	1,585,337
Net interest income/margin				15,626			4.06	%				15,440			4.12	%
Less tax-equivalent basis adjustment				(19	)							(34	)
Net interest income			$	15,607							$	15,406

(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 $9 and $8 in 2009 and 2008, respectively.
(3) Interest on loans and leases includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent
basis adjustments were $10 and $26 in 2009 and 2008, respectively.

TABLE 2 - 2 (B)
NET INTEREST INCOME ANALYSIS
For the Nine Months Ended September 30, 2009 and 2008 (unaudited)
(dollars in thousands)

	2009								2008
	Average					Average			Average					Average
	Balance (1)		Interest			Yield/Cost			Balance (1)		Interest			Yield/Cost
ASSETS:
Interest-earning assets:
Securities (2)	$	391,486	$	13,398			4.58	%	$	399,142	$	14,789			4.95	%
Federal Home Loan Bank and other restricted stock		5,734		74			1.73			8,111		413			6.80
Securities purchased under agreements to
resell		6,538		6			0.12			39,624		963			3.25
Interest-bearing deposits		18,122		24			0.18			3,249		57			2.34
Loans and leases (3)		1,118,428		45,080			5.39			1,072,644		53,450			6.66
Total interest-earning assets		1,540,308	$	58,582			5.08	%		1,522,770	$	69,672			6.11	%
Non-interest-earning assets		92,955								103,434
Total Assets	$	1,633,263							$	1,626,204

LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings deposits	$	596,774	$	3,578			0.80	%	$	544,235	$	6,179			1.52	%
Time deposits		461,524		7,010			2.03			452,847		11,696			3.45
Total savings and time deposits		1,058,298		10,588			1.34			997,082		17,875			2.39
Federal funds purchased		300		1			0.45			7,741		161			2.78
Securities sold under agreements to
repurchase		1,154		4			0.46			-		-			-
Other temporary borrowings		15,681		84			0.72			141,607		2,772			2.61
Senior unsecured debt		19,546		563			3.85			-		-			-
Subordinated notes		10,000		693			9.27			10,000		694			9.27
Junior subordinated debentures		20,620		666			4.32			20,620		995			6.45
Total interest-bearing liabilities		1,125,599		12,599			1.50			1,177,050		22,497			2.55
Demand deposits		340,260								319,235
Other liabilities		16,622								14,975
Total Liabilities		1,482,481								1,511,260
Stockholders' Equity		150,782								114,944
Total Liabilities and Stockholders' Equity	$	1,633,263							$	1,626,204
Net interest income/margin				45,983			3.99	%				47,175			4.14	%
Less tax-equivalent basis adjustment				(77	)							(151	)
Net interest income			$	45,906							$	47,024

(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 $31 and $71 in 2009 and 2008, respectively.
(3) Interest on loans and leases includes the effects of tax-equivalent basis adjustments, using a 34% tax rate. Tax-equivalent
basis adjustments were $46 and $80 in 2009 and 2008, respectively.

TABLE 2 - 3

ANALYSIS OF NON-PERFORMING ASSETS
AND THE ALLOWANCE FOR LOAN AND LEASE LOSSES
September 30, 2009 versus December 31, 2008 and September 30, 2008
(dollars in thousands)


NON-PERFORMING ASSETS BY TYPE:
	Period Ended
	9/30/2009			12/31/2008			9/30/2008
Non-accrual Loans and Leases (1)	$	25,354		$	13,970		$	13,985
Non-accrual Loans Held for Sale		9,302			2,102			500
Other Real Estate Owned ("OREO")		-			-			-
Total Non-performing Assets	$	34,656		$	16,072		$	14,485

Loans and Leases 90 Days or More Past Due and Still Accruing (1)	$	7		$	3		$	-
Gross Loans and Leases Outstanding (1)	$	1,108,195		$	1,117,216		$	1,096,300
Loans Held for Sale	$	9,302		$	5,322		$	4,500


ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES:
	Quarter Ended
	9/30/2009			12/31/2008			9/30/2008
Beginning Balance	$	27,954		$	14,573		$	17,248
Provision		3,000			7,000			3,700
Net Charge-Offs		(1,553	)		(2,905	)		(6,375	)
Ending Balance	$	29,401		$	18,668		$	14,573


KEY RATIOS:
	Period Ended
	9/30/2009			12/31/2008			9/30/2008
Allowance as a % of Total Loans and Leases (1)		2.7	%		1.7	%		1.3	%

Non-accrual Loans and Leases as a % of Total Loans and Leases		3.1	%		1.4	%		1.3	%

Non-performing Assets as a % of Total Loans and Leases and OREO (2)		3.1	%		1.4	%		1.3	%

Allowance for Loan and Lease Losses as a % of Non-accrual Loans and Leases (1)		116	%		134	%		104	%

Allowance for Loan and Lease Losses as a % of Non-accrual Loans and
Leases, and Loans and Leases 90 days or More Past Due and Still Accruing (1)		116	%		134	%		104	%


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

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 re-pricing and cash flow characteristics of interest-earning assets and interest-bearing liabilities helps identify risk. The Company’s ALCO sets forth policy guidelines that limit the level of interest rate risk within specified tolerance ranges. Management must determine the appropriate level of risk, under policy guidelines, which will enable the Company to achieve its performance objectives within the confines imposed by its business objectives and the external environment within which it operates.

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

The Company’s asset/liability and interest rate risk management policy limits interest rate risk exposure to -12% and -15% of the base case net interest income for net earnings at risk at the 12-month and 24-month time horizons, respectively. Net earnings at risk is the potential adverse change in net interest income arising from up to +200/-100 basis point change in interest rates ramped over a 12 month period, and measured over a 24 month time horizon. The Company’s balance sheet is held flat over the 24 month time horizon with all principal cash flows assumed to be reinvested in similar products and term points at the simulated market interest rates.

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. When there is minimal variability in net interest income in either a rising or falling interest rate environment, the Company may be considered “interest rate neutral.”

As of September 30, 2009, the Company’s balance sheet is considered slightly asset sensitive. This is evidenced by the increase in net interest income in a hypothetical rising rate scenario. This is due to the relative rate insensitivity of non-maturity deposits.

% Change in Net Interest Income
12 Month Interest Rate Changes
Basis Points

September 30, 2009
Time Horizon	Down 100			Base Flat			Up 100			Up 200
Year One		-4.1	%		0.0	%		2.0	%		2.4	%
Year Two		-5.6	%		0.1	%		2.7	%		3.1	%

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 September 30, 2009, the variability in the Company’s MVPE after an immediate hypothetical shock in interest rates of +200/-100 basis points is low. The small changes in the percentage change in MVPE and the MVPE Ratio continue to be a result of the closely matched duration of assets and liabilities on the Bank’s balance sheet. The low volatility of MVPE is also attributable to the low interest rate environment at September 30, 2009 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

September 30, 2009
	Down 100			Base Flat			Up 100			Up 200
% Change in MVPE (1)		0.7	%		0.0	%		-2.8	%		-6.4	%
MVPE Ratio		19.6	%		19.7	%		19.1	%		18.3	%

(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 third quarter of 2009 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

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, 2008, except as described below.

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

As a bank holding company, one of our principal sources of funds is dividends from our subsidiaries. These funds are used to service our debt as well as to pay expenses and dividends on our common stock. Our non-consolidated interest expense on our debt obligations was $1.4 million and $1.7 million for the nine months ended September 30, 2009 and 2008, respectively. Our non-consolidated operating expenses were $112 thousand and $19 thousand for the nine months ended September 30, 2009 and 2008, respectively. State banking regulations limit, absent regulatory approval, the Bank’s dividends to us to the lesser of the Bank’s undivided profits and the Bank’s retained net income for the current year plus its retained net income for the preceding two years (less any required transfers to capital surplus) up to the date of any dividend declaration in the current calendar year. As of September 30, 2009, $2.1 million in dividends were available to the Company from the Bank according to these limitations without seeking regulatory approval.

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

Dividend payments from the Bank would also be prohibited under the “prompt corrective action” regulations of the federal bank regulators if the Bank is, or after payment of such dividends would be, undercapitalized under such regulations. In addition, the Bank is subject to restrictions under federal law that limit its ability to transfer funds or other items of value to us and our nonbanking subsidiaries, including affiliates, whether in the form of loans and other extensions of credit, investments and asset purchases, or other transactions involving the transfer of value. Unless an exemption applies, these transactions by the Bank with us are limited to 10% of the Bank’s capital and surplus and, with respect to all such transactions with affiliates in the aggregate, to 20% of the Bank’s capital and surplus. As of September 30, 2009, a maximum of approximately $35 million was available to us from the Bank according to these limitations. Moreover, loans and extensions of credit to affiliates generally are required to be secured in specified amounts. A bank’s transactions with its non-bank affiliates also are required generally to be on arm’s-length terms. We do not have any borrowings from the Bank and do not anticipate borrowing from the Bank in the future.

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

Our other primary source of funding is our DRP, which allows existing stockholders to reinvest cash dividends in our common stock and/or to purchase additional shares through optional cash investments on a quarterly basis. Shares are purchased at up to a 15% discount from the current market price under both the dividend reinvestment option and with additional cash payments. No assurance can be given that we will continue the DRP or that stockholders will make purchases in the future.

Our results of operations are affected by economic conditions in the New York metropolitan area and nationally.

As a result of our geographic concentration in the New York metropolitan area, our results of operations largely depend upon economic conditions in this region.

We are in the midst of a recession and thus are operating in a challenging and uncertain economic environment, globally, nationally and locally. Financial institutions continue to be affected by sharp declines in the real estate and financial markets. Decreases in real estate values could negatively affect the value of property used as collateral for our loans. Adverse changes in the economy may also affect the ability of our borrowers to make timely repayments of their loans, which would have an impact on our earnings. If poor economic conditions result in decreased demand for real estate loans, our profits may continue to decline because our investment alternatives may earn less income for us than real estate loans.

We continue to see loan delinquencies and charge-offs. The Company’s non-performing loans totaled $35 million (which includes $9 million in loans held for sale which have been previously written down to their estimated fair value) at September 30, 2009 compared to $16 million (which includes $2 million in loans held for sale) at December 31, 2008. Net loan charge-offs recorded for the first nine months of 2009 were $5.8 million and our provision for loan and lease losses for the first nine months of 2009 was $16.5 million. The impact of the national and local economic recession along with any further deterioration could drive losses beyond that which is provided for in our allowance for loan losses and result in additional consequences, such as loan delinquencies, increased problem assets and foreclosures, declining demand for our products and services, decreased deposits and declining collateral value for our loans.

If our investment in the Federal Home Loan Bank of New York is classified as other-than-temporarily impaired or as permanently impaired, our earnings and stockholders’ equity could decrease.

We own common stock of the Federal Home Loan Bank of New York (“FHLB-NY”). We hold the FHLB-NY common stock to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the FHLB-NY’s advance program. The aggregate cost and fair value of our FHLB-NY common stock as of September 30, 2009 was $4.6 million based on its par value. This amount fluctuates as a function of our FHLB-NY borrowings. There is no public market for our FHLB-NY common stock.

Recent published reports indicate that certain member banks of the Federal Home Loan Bank System, not including the FHLB-NY, may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the FHLB-NY, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB-NY common stock could be deemed other-than-temporarily impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the after-tax amount of an impairment charge.

The loss of key personnel could impair the Bank’s future success.

The Bank’s future success depends in part on the continued service of its executive officers, other key members of management and its staff, as well as its ability to continue to attract, motivate and retain additional highly qualified employees. The loss of services of key personnel could have an adverse effect on the Bank’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The Company currently has an employment agreement in place with its Chief Executive Officer. Change in control agreements are in place for selected key officers. The American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed by the President on February 17, 2009 and imposed strict new limits on executive compensation for all CPP participants, including a prohibition on the payment or accrual of any bonus, retention award or incentive compensation to the Company’s five most highly compensated employees. These prohibitions may negatively impact the Company’s ability to retain existing key staff members and/or to attract additional qualified personnel to join the Company in key positions.

Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.

FDIC insurance premiums have increased substantially in 2009 and we may have to pay significantly higher FDIC premiums in the future and prepay insurance premiums. Market developments have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule on February 27, 2009, which raised regular deposit insurance premiums. On May 22, 2009, the FDIC also implemented a five basis point special assessment of each insured depository institution’s total assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009, collected by the FDIC on September 30, 2009. The amount of this special assessment was $730 thousand. Additional special assessments may be imposed by the FDIC for future quarters at the same or higher levels.

In addition, the FDIC recently announced a proposed rule that would require insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. If the proposed rule is adopted, the prepaid assessments would be collected on December 30, 2009. We have estimated that the total prepaid assessments would be approximately $7.6 million, which would be recorded as a prepaid expense (asset) as of December 30, 2009. As of December 31, 2009 and each quarter thereafter, we would record an expense for our regular deposit assessment for the quarter and an offsetting credit to the prepaid assessment until the asset is exhausted.

We participate in the TLGP for noninterest-bearing transaction deposit accounts. Banks that participate in the TLGP noninterest-bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. To the extent that these TLGP assessments are insufficient to cover any loss or expenses arising from the TLGP program, the FDIC is authorized to impose an emergency special assessment on all FDIC-insured depository institutions. The FDIC has authority to impose charges for the TLG program upon the holding companies of such depository institutions as well. The TLGP was scheduled to end December 31, 2009, but the FDIC extended the program to June 30, 2010. In announcing the extension, the FDIC indicated that it will charge a higher guarantee fee to banks that elect to participate in the extension to reflect each bank’s risk. We have elected to participate in the extension.

These changes may cause the premiums and TLGP assessments charged by the FDIC to increase. These actions could significantly increase our non-interest expense in 2009 and in future periods. The prepayment of our FDIC assessments also may temporarily reduce our liquidity.

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

Not applicable.

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. – OTHER INFORMATION

Not applicable.

ITEM 6. - EXHIBITS

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)

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.

10/28/09		/s/ Thomas M. O'Brien
Date		Thomas M. O'Brien,
		President and Chief Executive Officer

10/28/09		/s/ Brian K. Finneran
Date		Brian K. Finneran,
		Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Description
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)