UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~JUNE~~SEPTEMBER 30, 2011

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission File No. 001-14783

STATE BANCORP, INC.

(Exact name of registrant as specified in its charter)

NEW YORK	11-2846511
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

TWO JERICHO PLAZA, JERICHO, NEW YORK 11753

(Address of principal executive offices) (Zip Code)

(516) 465-2200

(Registrant’s telephone number, including area code)

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

Yes [X]

No [ ]

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

Yes [X]

No [ ]

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

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

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

Yes [ ]

No [X]

As of ~~July~~October 2224, 2011, there were 16,959,~~725~~792 shares of registrant’s Common Stock outstanding.

STATE BANCORP, INC.

Form 10-Q

For the Quarterly Period Ended ~~June~~September 30, 2011

Table of Contents

		Page
	PART I
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) at June 30, 2011 and December 31, 2010	1
	Condensed Consolidated Balance Sheets (Unaudited) at September 30, 2011 and December 31, 2010	1
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2011 and 2010	2
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010	2
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited) for the Six Months Ended June 30, 2011 and 2010	3
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2011 and 2010	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2627
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4648
Item 4.	Controls and Procedures	4749
	PART II
Item 1.	Legal Proceedings	4850
Item 1A.	Risk Factors	4850
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5051
Item 3.	Defaults upon Senior Securities	5051
Item 4.	Removed and Reserved	5051
Item 5.	Other Information	5051
Item 6.	Exhibits	5051
	Signatures	5152

PART I

ITEM 1. - FINANCIAL STATEMENTS

STATE BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2011 and December 31, 2010
September 30, 2011 and December 31, 2010
(dollars in thousands, except per share data)
	June 30, 2011			December 31, 2010
	September 30, 2011			December 31, 2010
ASSETS:
Cash and non-interest-bearing balances due from banks	$	2322,~~788~~286		$	13,887
Interest-bearing balances due from banks		5461,~~382~~673			9,234
Securities held to maturity (estimated fair value of $21,895 in 2011 and $21,890 in 2010)		22,000			22,000
Securities held to maturity (estimated fair value of $19,530 in 2011 and $21,890 in 2010)		22,000			22,000
Securities available for sale - at estimated fair value		~~333~~302,~~602~~568			361,158
Federal Home Loan Bank and other restricted stock		54,402			6,381
Loans (net of allowance for loan losses of $27,731 in 2011 and $33,078 in 2010)		1,115,487			1,098,292
Loans (net of allowance for loan losses of $23,467 in 2011 and $33,078 in 2010)		1,138,954			1,098,292
Bank premises and equipment - net		5,~~871~~527			6,264
Bank owned life insurance		30,~~654~~755			31,728
Net deferred income taxes		1915,~~926~~532			24,066
Prepaid FDIC assessment		4,~~482~~180			5,456
Other assets		109,~~542~~809			11,513
TOTAL ASSETS	$	1,~~626~~617,~~136~~686		$	1,589,979
LIABILITIES:
Deposits:
Demand	$	381,~~701~~710		$	343,331
Savings		~~639~~626,~~330~~317			632,425
Time		~~379~~375,~~776~~684			372,979
Total deposits		1,~~400~~383,~~807~~711			1,348,735
Other temporary borrowings		32,000			25,000
Senior unsecured debt		29,000			29,000
Junior subordinated debentures		20,620			20,620
Other accrued expenses and liabilities		11,388			11,772
Payable - securities purchases		3,990			-
Total liabilities		1,464,815			1,435,127
Other accrued expenses and liabilities		10,990			11,772
Total liabilities		1,450,311			1,435,127
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized 250,000 shares; 36,842 shares issued and outstanding; liquidation preference of $36,842		36,~~367~~427			36,245
Common stock, $0.01 par value, authorized 50,000,000 shares; issued 17,678,750 shares in 2011 and 17,518,827 shares in 2010; outstanding 16,966,158 shares in 2011 and 16,695,808 shares in 2010		177			175
Common stock, $0.01 par value, authorized 50,000,000 shares; issued 17,672,684 shares in 2011 and 17,518,827 shares in 2010; outstanding 16,960,092 shares in 2011 and 16,695,808 shares in 2010		177			175
Warrant		1,057			1,057
Surplus		179,~~543~~941			179,293
Retained deficit		(4842,~~108~~418	)		(51,378	)
Treasury stock (712,592 shares in 2011 and 823,019 shares in 2010)		(12,012	)		(13,872	)
Accumulated other comprehensive income (net of taxes of $2,828 in 2011 and $2,193 in 2010)		4,297			3,332
Accumulated other comprehensive income (net of taxes of $2,766 in 2011 and $2,193 in 2010)		4,203			3,332
Total stockholders' equity		~~161~~167,~~321~~375			154,852
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,~~626~~617,~~136~~686		$	1,589,979
See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Six Months Ended June 30, 2011 and 2010
For the Three and Nine Months Ended September 30, 2011 and 2010
(in thousands, except per share data)
	Three Months					~~Six~~Nine Months
	2011			2010		2011			2010
INTEREST INCOME:
Interest and fees on loans	$	15,~~639~~887		$	15,~~074~~426	$	3046,~~719~~606		$	3046,~~696~~122
Federal funds sold and securities purchased under agreements to resell		-			2-		-			2
Securities held to maturity - taxable		~~217~~216			-41		~~433~~649			-41
Securities available for sale - taxable		2,~~744~~449			3,~~779~~464		57,~~354~~803			811,~~145~~609
Securities available for sale - tax-exempt		107			2725		2229			5479
Dividends on Federal Home Loan Bank and other restricted stock		2523			2825		5881			6388
Interest on balances due from banks		1418			68		1836			1018
Total interest income		18,~~649~~600			18,~~916~~989		3655,~~604~~204			3857,~~970~~959
INTEREST EXPENSE:
Deposits		1,~~792~~793			2,~~549~~471		35,~~669~~462			57,~~130~~601
Temporary borrowings		1410			1621		3242			4869
Senior unsecured debt		~~281~~280			~~281~~280		~~561~~841			~~561~~841
Junior subordinated debentures		~~179~~180			~~182~~188		~~357~~537			~~358~~546
Total interest expense		2,~~266~~263			32,~~028~~960		46,~~619~~882			69,~~097~~057
Net interest income		16,~~383~~337			1516,~~888~~029		3148,~~985~~322			3248,~~873~~902
Provision for loan losses		1,100			5,450		3,000			7,700
(Credit) provision for loan losses		(3,500	)		2,500		(500	)		10,200
Net interest income after provision for loan losses		15,283			10,438		28,985			25,173
Net interest income after (credit) provision for loan losses		19,837			13,529		48,822			38,702
NON-INTEREST INCOME:
Service charges on deposit accounts		~~416~~392			~~455~~467		~~858~~1,250			~~905~~1,372
Net gains on sales of securities		31933			~~2,525~~733		~~113~~1,046			23,~~781~~514
Income from bank owned life insurance		64			104		164			246
Other operating income		400			820		1,523			1,682
Other operating income		448			302		959			616
Total non-interest income		1,725			2,020		3,819			6,568
Total non-interest income		959			3,386		2,094			4,548
Income before operating expenses		21,562			15,549		52,641			45,270
Income before operating expenses		16,242			13,824		31,079			29,721
OPERATING EXPENSES:
Salaries and other employee benefits		65,~~241~~997			65,~~598~~959		1218,~~107~~104			1218,~~594~~553
Occupancy		1,~~347~~202			1,~~391~~349		23,~~769~~971			24,~~810~~159
Equipment		~~330~~279			~~269~~302		~~654~~933			~~573~~875
Marketing and advertising		~~205~~150			~~453~~377		~~513~~663			~~906~~1,283
FDIC and NYS assessment		~~553~~354			~~684~~697		1,~~153~~507			12,~~356~~053
Credit and collection		112			175		209			373
Data processing		234			280		754			800
Data processing		258			258		520			520
Merger-related expenses		154			-		1,511			-
Merger-related expenses		1,357			-		1,357			-
Other operating expenses		1,238			1,592		3,725			5,010
Other operating expenses		1,168			1,353		2,278			3,045
Total operating expenses		9,608			10,556		31,168			32,733
Total operating expenses		11,571			11,181		21,560			22,177
INCOME BEFORE INCOME TAXES		11,954			4,993		21,473			12,537
INCOME BEFORE INCOME TAXES		4,671			2,643		9,519			7,544
PROVISION FOR INCOME TAXES		4,827			1,783		8,429			4,651
PROVISION FOR INCOME TAXES		1,790			984		3,602			2,868
NET INCOME		7,127			3,210		13,044			7,886
NET INCOME		2,881			1,659		5,917			4,676
Preferred dividends and accretion		521			517		1,563			1,553
Preferred dividends and accretion		521			518		1,042			1,036
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	6,606		$	2,693	$	11,481		$	6,333
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	2,360		$	1,141	$	4,875		$	3,640
TOTAL COMPREHENSIVE INCOME	$	7,033		$	2,221	$	13,915		$	7,045
TOTAL COMPREHENSIVE INCOME	$	4,716		$	1,576	$	6,882		$	4,824
NET INCOME PER COMMON SHARE - BASIC	$	0.39		$	0.17	$	0.68		$	0.39
NET INCOME PER COMMON SHARE - BASIC	$	0.15		$	0.07	$	0.30		$	0.22
NET INCOME PER COMMON SHARE - DILUTED	$	0.39		$	0.17	$	0.68		$	0.39
NET INCOME PER COMMON SHARE - DILUTED	$	0.14		$	0.07	$	0.29		$	0.22
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC		16,553,250			16,303,237		16,512,303			16,243,505
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC		16,538,060			16,288,409		16,491,491			16,213,144
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED		16,693,969			16,401,923		16,648,936			16,318,595
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED		16,690,443			16,378,165		16,626,082			16,276,437
See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Six Months Ended June 30, 2011 and 2010
For the Nine Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share data)
	Six Months
	Nine Months
	2011			2010
Preferred Stock
Balance, January 1	$	36,245		$	36,016
Accretion of discount on preferred shares		~~122~~182			~~115~~172
Balance, June 30		36,367			36,131
Balance, September 30		36,427			36,188
Common Stock
Balance, January 1		175			173
Shares issued under the dividend reinvestment plan (25,331 shares in 2011 and 19,454 shares in 2010; at 95% of market value)		1			-
Shares issued under the dividend reinvestment plan (31,309 shares in 2011 and 30,485 shares in 2010; at 95% of market value)		1			-
Stock options exercised (20,163 shares in 2011)		-			-
Stock options exercised (21,551 shares in 2011)		-			-
Stock issued under directors' stock plan (14,000 shares in 2011 and 13,875 shares in 2010)		-			-
Stock-based compensation (100,429 shares in 2011 and 149,103 shares in 2010)		1			2
Stock-based compensation (86,997 shares in 2011 and 141,903 shares in 2010)		1			2
Balance, June 30		177			175
Balance, September 30		177			175
Warrant
Balance, January 1 and June 30		1,057			1,057
Balance, January 1 and September 30		1,057			1,057
Surplus
Balance, January 1		179,293			178,673
Shares issued under the dividend reinvestment plan (25,331 shares in 2011 and 19,454 shares in 2010; at 95% of market value)		240			148
Shares issued under the dividend reinvestment plan (31,309 shares in 2011 and 30,485 shares in 2010; at 95% of market value)		319			240
Stock options exercised (20,163 shares in 2011)		211			-
Stock options exercised (21,551 shares in 2011)		229			-
Stock issued under directors' stock plan (14,000 shares in 2011 and 13,875 shares in 2010)		102			140
Stock-based compensation (100,429 shares in 2011 and 149,103 shares in 2010)		488			709
Stock-based compensation (86,997 shares in 2011 and 141,903 shares in 2010)		789			987
Treasury stock reissued (110,427 shares in 2011 and 142,665 shares in 2010)		(791	)		(1,220	)
Balance, June 30		179,543			178,450
Balance, September 30		179,941			178,820
Retained Deficit
Balance, January 1		(51,378	)		(57,432	)
Net income		513,~~917~~044			47,~~676~~886
Accretion of discount on preferred shares		(~~122~~182	)		(~~115~~172	)
Stock-based compensation (100,429 shares in 2011 and 149,103 shares in 2010)		85			-
Stock-based compensation (86,997 shares in 2011 and 141,903 shares in 2010)		17			-
Cash dividend on common stock ($0.10 per share)		(1,690	)		(1,650	)
Cash dividend on common stock ($0.15 per share)		(2,538	)		(2,483	)
Cash dividend on preferred stock (5% per annum)		(~~920~~1,381	)		(~~921~~1,381	)
Balance, June 30		(48,108	)		(55,442	)
Balance, September 30		(42,418	)		(53,582	)
Treasury Stock
Balance, January 1		(13,872	)		(16,276	)
Treasury stock reissued (110,427 shares in 2011 and 142,665 shares in 2010)		1,860			2,404
Balance, June 30		(12,012	)		(13,872	)
Balance, September 30		(12,012	)		(13,872	)
Accumulated Other Comprehensive Income
Balance, January 1		3,332			6,304
Unrealized gains (1)		1,~~033~~501			1,~~824~~278
Reclassification adjustment (2)		(68630	)		(12,~~676~~119	)
Balance, June 30		4,297			6,452
Balance, September 30		4,203			5,463
Total Stockholders' Equity, June 30	$	161,321		$	152,951
Total Stockholders' Equity, September 30	$	167,375		$	154,249
Comprehensive Income
Comprehensive Income (Loss)
Net income	$	513,~~917~~044		$	47,~~676~~886
Other comprehensive income, net of tax:
Other comprehensive income (loss), net of tax:
Unrealized gains (1)		1,~~033~~501			1,~~824~~278
Reclassification adjustment (2)		(68630	)		(12,~~676~~119	)
Total other comprehensive income, net of tax		965			148
Total other comprehensive income (loss), net of tax		871			(841	)
Total Comprehensive Income, June 30	$	6,882		$	4,824
Total Comprehensive Income, September 30	$	13,915		$	7,045
(1) Unrealized gains (losses) on securities available for sale, net of taxes of $680 and $1,201 in 2011 and 2010, respectively.
(1) Unrealized gains (losses) on securities available for sale, net of taxes of $989 and $842 in 2011 and 2010, respectively.
(2) Adjustment for (gains) losses included in net income, net of taxes of $45 and $1,104 in 2011 and 2010, respectively.
(2) Adjustment for (gains) losses included in net income, net of taxes of $416 and $1,395 in 2011 and 2010, respectively.
See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2011 and 2010
For the Nine Months Ended September 30, 2011 and 2010
(in thousands)
	Six Months
	Nine Months
	2011			2010
OPERATING ACTIVITIES:
Net income	$	513,~~917~~044		$	47,~~676~~886
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,000			7,700
(Credit) provision for loan losses		(500	)		10,200
Depreciation and amortization of bank premises and equipment		~~837~~1,203			~~784~~1,182
Amortization of net premium on securities		12,~~457~~015			12,~~197~~083
Deferred income tax expense		37,~~505~~960			23,~~064~~713
Net gains on sales of securities		(~~113~~1,046	)		(23,~~781~~514	)
Income from bank owned life insurance		(164	)		(246	)
Net gains on sales of loans held for sale		-			(322	)
Change in fair value of derivative contracts		10			80
Income from bank owned life insurance		(265	)		(353	)
Stock-based compensation expense - net		574			711
Change in fair value of derivative contracts		153			97
Directors' stock plan expense		72			53
Stock-based compensation expense - net		807			989
Net payments and proceeds from sales of loans held for sale		2,300			351
Directors' stock plan expense		108			78
Decrease in other assets		856			1,642
Net payments and proceeds from sales of loans held for sale		3,580			992
Decrease in prepaid FDIC assessment		974			1,047
Decrease in other assets		1,779			2,251
Decrease in other accrued expenses and other liabilities		(250	)		(80	)
Decrease in prepaid FDIC assessment		1,276			1,570
Net cash provided by operating activities		18,975			17,198
Decrease in other accrued expenses and other liabilities		(1,016	)		(160	)
Net cash provided by operating activities		29,098			26,692
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		65108,~~186~~537			5689,~~751~~284
Proceeds from prepayments and maturities of securities available for sale		4479,~~574~~138			79122,~~711~~003
Purchases of securities available for sale		(81,948	)		(103,405	)
Purchases of securities held to maturity		-			(22,000	)
Decrease in Federal Home Loan Bank and other restricted stock		979			1,888
Purchases of securities available for sale		(124,620	)		(212,817	)
Increase in loans - net		(22,495	)		(8,541	)
Decrease in Federal Home Loan Bank and other restricted stock		1,979			88
Increase in loans - net		(43,742	)		(22,351	)
Benefit payments received on bank owned life insurance		1,239			-
Purchases of bank premises and equipment - net		(~~444~~466	)		(~~673~~1,201	)
Net cash provided by investing activities		7,091			25,731
Net cash provided by (used in) investing activities		22,065			(46,994	)
FINANCING ACTIVITIES:
Increase (decrease) in demand and savings deposits		4532,~~275~~271			(4616,~~556~~061	)
Increase in time deposits		62,~~797~~705			8552,~~835~~206
Decrease in other temporary borrowings		(2223,000	)		(455,000	)
Cash dividends paid on common stock		(12,~~690~~538	)		(12,~~650~~483	)
Cash dividends paid on preferred stock		(~~920~~1,381	)		(~~921~~1,382	)
Proceeds from reissuance of treasury stock		1,069			1,184
Proceeds from shares issued pursuant to compensation awards		~~211~~229			-
Proceeds from shares issued under dividend reinvestment plan		~~241~~320			~~148~~240
Net cash provided by (used in) financing activities		28,983			(6,960	)
Net cash provided by financing activities		9,675			28,704
NET INCREASE IN CASH AND CASH EQUIVALENTS		5560,~~049~~838			358,~~969~~402
CASH AND CASH EQUIVALENTS - JANUARY 1		23,121			28,624
CASH AND CASH EQUIVALENTS - JUNE 30	$	78,170		$	64,593
CASH AND CASH EQUIVALENTS - SEPTEMBER 30	$	83,959		$	37,026
SUPPLEMENTAL DATA:
Interest paid	$	47,~~630~~149		$	69,~~025~~199
Income taxes paid	$	~~223~~714		$	~~632~~802
Loans transferred to held for sale	$	23,~~300~~580			-
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 unaudited interim condensed consolidated financial statements include the accounts of State Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, State Bank of Long Island and its subsidiaries (the “Bank”). State Bancorp, Inc. and subsidiaries are collectively referred to hereafter as the “Company.” All intercompany accounts and transactions have been eliminated.

The Company has two unconsolidated subsidiaries, State Bancorp Capital Trust I and State Bancorp Capital Trust II (collectively the “Trusts”), entities formed in 2002 and 2003, respectively, to issue trust preferred securities. The Company has fully and unconditionally guaranteed all obligations of State Bancorp Capital Trust I and State Bancorp Capital Trust II under the trust agreements relating to the respective trust preferred securities. (See Note 8 of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data” of the Company’s 2010 Annual Report on Form 10-K.)

In the opinion of the Company’s management, the preceding unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal accruals, necessary for a fair presentation of its condensed consolidated balance sheets as of ~~June~~September 30, 2011 and December 31, 2010, its condensed consolidated statements of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2011 and 2010, its condensed consolidated statements of ~~cash~~stockholders’ ~~flows~~equity and comprehensive income (loss) for the ~~six~~nine months ended September ~~June~~ 30, 2011 and 2010 and its condensed consolidated statements of ~~stockholders’~~cash ~~equity~~flows ~~and comprehensive income (loss)~~ for the ~~six~~nine months ended ~~June~~September 30, 2011 and 2010. The preceding unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, as well as in accordance with predominant practices within the banking industry. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2011 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 2010 Annual Report on Form 10-K.

Accounting for Derivative Financial Instruments

From time to time, the Bank may execute customer interest rate swap transactions together with offsetting interest rate swap transactions with institutional dealers. Each swap is mutually exclusive, and the swaps are marked to market with changes in fair value recognized as other income, with the fair value for each individual swap generally offsetting the corresponding other. In the event of default, future changes in the fair value of these swap agreements are no longer offset and are recognized as income or loss as appropriate. The customer swap program provides a customer financing option that can result in longer maturity terms without incurring the associated interest rate risk. The Company does not currently hold any derivative financial instruments for trading purposes.

For the three and ~~six~~nine months ended ~~June~~September 30, 2011, net credit valuation adjustments (“CVA”) of $18143 thousand and $10153 thousand, respectively, were recorded as reductions to other income. For the three and ~~six~~nine months ended ~~June~~September 30, 2010, $6417 thousand and $8097 thousand, respectively, were recorded as reductions to other income. The CVA represents the consideration of credit risk of the counterparties to a transaction and the effect of any credit enhancements related to the transaction. As all customer interest rate swap transactions are currently offset by swap transactions with institutional dealers, we expect that their future impact on the Company’s financial statements will be immaterial. At ~~June~~September 30, 2011 and December 31, 2010, the total gross notional amount of swap transactions outstanding was $34 million and $35 million, respectively.

Information on the Company’s derivative financial instruments at ~~June~~September 30, 2011 and December 31, 2010 follows (in thousands).

	Fair Values of Derivative Instruments
		June 30, 2011		December 31, 2010
	Balance Sheet Location	Fair Value		Fair Value
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	1,997	$	2,111
Interest rate contracts	Other liabilities	$	2,093	$	2,198

	Fair Values of Derivative Instruments

		September 30, 2011		December 31, 2010
	Balance Sheet Location	Fair Value		Fair Value
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	2,187	$	2,111
Interest rate contracts	Other liabilities	$	2,427	$	2,198

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 and insurance benefit payments are recorded in other income.

Allowance for Loan Losses

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

The allowance consists of specific and general components. The specific component relates to loans that are impaired. Commercial and industrial loans and commercial real estate loans of all loan classes 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. Problem loans, for which certain terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”). Generally, management individually evaluates all non-accrual loans and TDRs in excess of $250 thousand for impairment. Those non-accrual loans and TDRs of all classes with balances less than $250 thousand as well as other groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment. The allowance for loan losses related to loans that are impaired includes reserves which are generally based on underlying collateral, discounted cash flow or the observable market price if the intent is to sell the loan.

The general component covers loans not individually evaluated for impairment and is based upon historical experience adjusted for current factors. For all loans regardless of portfolio segment, the Bank prepares a combined migration analysis which analyzes the historical loss experience. The migration analysis is prepared annually during the first quarter of the year for the purpose of determining the assigned allocation factors which are essential components of the allowance for loan losses calculation. Actual loss experience is supplemented by other risk components updated on a quarterly basis including large relationship risk, commercial/residential contractor risk, rising interest rate risk, energy and oil dependent risk, real estate risk and economic condition uncertainty.

The following portfolio segments have been identified: commercial and industrial loans (“C&I”), commercial real estate (“CRE”), residential real estate, loans to individuals and tax exempt and other loans. The Bank provides loans to small, moderate size and middle market borrowers and business entities diversified across industries. Loan types primarily include business installment loans, commercial lines of credit and commercial real estate loans. Loans are generally categorized as C&I, CRE and small business loans. C&I loans consist of a broad range of loans to a wide variety of business clients for acquisition of equipment, machinery or leasehold improvements, short term or seasonal working capital needs, and business expansion. C&I loans also include owner-occupied mortgages where the source of repayment is not from the property. CRE loans consist of loans on multifamily, mixed use, retail, office and industrial property or construction loans. Small business loans are a subset of C&I loans where the origination amount is less than $1 million.

Risk characteristics of the C&I portfolio segment vary and depend upon the specific borrower’s business and industry sector. Risk characteristics of the real estate portfolio segments tend to be cyclical and, in the Bank’s case, generally specific to the Long Island and New York City geographical area; at present the real estate market generally continues to be lackluster. Risk characteristics of the loans to individuals segment vary depending on the type of loan, the timing of repayment, the sources of repayment, and value and stability of any collateral.

Risk characteristics of the C&I portfolio segment vary and depend upon the specific borrower’s business and industry sector. Risk characteristics of the real estate portfolio segments tend to be cyclical and, in the Bank’s case, generally specific to the Long Island and New York City geographical area. Risk characteristics of the loans to individuals segment vary depending on the type of loan, the timing of repayment, the sources of repayment, and value and stability of any collateral.

Management’s goal is to have a balanced portfolio of loans. The allowable risk for the portfolio is determined by senior management through credit policies and annual business plans which are approved by the Board of Directors. The Bank monitors concentrations of risk as appropriate. A concentration of credit is the total of funded and unfunded loans, real estate loans, lines of credit, etc., issued to borrowers sharing similar characteristics such as industry, collateral/security type, size, pricing, location and other items that might have a bearing on risk management. It is also the Bank’s goal to diversify credit risk among a broad range of industries and/or industry sectors, and to monitor concentration on an ongoing basis.

Generally, the Bank processes a charge-off for any portion of a loan that is determined to be uncollectable regardless of portfolio segment or loan class. In addition, commercial loans under $25 thousand are generally fully charged off in the quarter in which they reach 180 days past due unless the loan is secured by real estate or liquid collateral; commercial loans $25 thousand and over are charged off if classified as a loss; non-revolving consumer loans are generally charged off in the quarter they reach 120 days past due; residential real estate loans are partially charged off for the amount that the loan exceeds the current value of the collateral property, no later than 180 days past due.

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

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

Recent Accounting Guidance

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, “Receivables: Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The objective of this ASU is for an entity to provide disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. An entity should provide disclosures on a disaggregated basis on two defined levels: 1) portfolio segment and 2) class of financing receivable. The ASU makes changes to existing disclosure requirements and includes additional disclosure requirements about financing receivables, including credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, and the nature and extent of TDRs that occurred during the period by class of financing receivables and their effect on the allowance for credit losses. The Company’s adoption on March 31, 2011 of the disclosures regarding activity in the allowance for loan losses and its adoption on December 31, 2010 of the other disclosures in this ASU except for those parts pertaining to TDRs, being disclosure-related only, had no impact on its results of operations. At its January 4, 2011, meeting, the FASB affirmed its decision to temporarily defer the effective date for TDRs.

In April 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU amends Topic 310 and provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. For purposes of measuring impairment of these receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. We do not expect that this accounting standards update will have a material impact on our financial condition, results of operations or financial statement disclosures.

In April 2011, the FASB issued ASU No. 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” This ASU amends Topic 310 and provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the beginning of the annual period of adoption. The new guidance will require creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. The Company’s adoption of this ASU on July 1, 2011 did not have a material impact on our financial condition, results of operations or financial statement disclosures.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 22): Presentation of Comprehensive Income.” The guidance contained in this ASU is the result of a joint project by the FASB and the International Accounting Standards Board (“IASB”) to improve the presentation of comprehensive income and to increase the consistency between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The ASU provides only two options for presenting other comprehensive income (“OCI”). The first option is to present the total of comprehensive income in the statement of income in one continuous statement. The second option is to present two separate but consecutive statements. The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The amendments do not require any transition disclosures. We do not expect that this ASU will have a material impact on our financial condition, results of operations or financial statement disclosures.

Merger-Related Expenses

In connection with the Company’s previously announced transaction with Valley National Bancorp (“Valley”), the Company has incurred expenses of $1.45 million for the ~~six~~nine months ended ~~June~~September 30, 2011. These consist primarily of legal expenses and investment bankers’ costs.

2. STOCKHOLDERS’ EQUITY

The Company has 250,000 shares of preferred stock authorized. In December 2008, the U.S. Department of the Treasury (the “U.S. Treasury”) purchased 36,842 shares of the Company’s fixed-rate cumulative perpetual Series A Preferred Stock par value $0.01 per share and liquidation preference $1,000 per share, with a redemption and liquidation value of $37 million and an initial annual dividend of 5% for five years and 9% thereafter. The U.S. Treasury also received a warrant to purchase 465,569 shares of the Company’s common stock with an exercise price of $11.87 per share representing an aggregate market price of $6 million or 15% of the preferred stock investment. The warrant is immediately exercisable and expires in ten years. Pursuant to the American Recovery and Reinvestment Act of 2009 (“ARRA”), subject to approval by the U.S. 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. If the Company were to redeem the preferred stock, the Company may repurchase the warrant. However, such a repurchase would not be mandatory.

Stock held in treasury by the Company is reported as a reduction to total stockholders’ equity. During the first ~~six~~nine months of 2011, the Company reissued 110,427 shares of common stock previously held in treasury to be used for contributions under the Company’s Employee Stock Ownership (“ESOP”) and 401(k) plans. In addition, the Company issued ~~159~~153,~~923~~857 new shares related to the Company’s Directors’ Stock, dividend reinvestment and equity-based compensation plans. The Company has not repurchased any of its common shares thus far in 2011.

3. EARNINGS PER COMMON SHARE

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

The computation of earnings per common share for the three and ~~six~~nine months ended ~~June~~September 30, 2011 and 2010 follows (in thousands, except share and per share data).

	Three Months Ended						~~Six~~Nine Months Ended
	June 30,						June 30,
	September 30,						September 30,
	2011			2010			2011			2010
Distributed earnings allocated to common stock	$	~~827~~828		$	~~814~~815		$	12,~~651~~478		$	12,~~619~~435
Undistributed earnings allocated to common stock		15,~~474~~621			~~302~~1,820			38,~~112~~735			13,~~955~~777
Net earnings allocated to common stock	$	26,~~301~~449		$	12,~~116~~635		$	411,~~763~~213		$	36,~~574~~212
Average market price	$	1211.2376		$	9.2906		$	11.0730		$	8.3760
Weighted average common shares outstanding, including shares considered participating securities (1)		16,959,~~412~~056			16,~~639~~659,~~801~~283			16,~~879~~905,~~126~~995			16,~~511~~560,~~305~~961
Less: weighted average participating securities (1)		(~~421~~405,~~352~~806	)		(~~351~~356,~~392~~046	)		(~~387~~393,~~635~~692	)		(~~298~~317,~~161~~456	)
Weighted average common shares outstanding		16,~~538~~553,~~060~~250			16,~~288~~303,~~409~~237			16,~~491~~512,~~491~~303			16,~~213~~243,~~144~~505
Dilutive effect of stock options, restricted stock grants and common stock warrants		~~152~~140,~~383~~719			8998,~~756~~686			~~134~~136,~~591~~633			6375,~~293~~090
Adjusted common shares outstanding - diluted		16,~~690~~693,~~443~~969			16,~~378~~401,~~165~~923			16,~~626~~648,~~082~~936			16,~~276~~318,~~437~~595
Net income per common share - basic	$	0.1539		$	0.0717		$	0.3068		$	0.2239
Net income per common share - diluted	$	0.1439		$	0.0717		$	0.2968		$	0.2239
Antidilutive common stock warrant issued to the Treasury under the CPP and not included in the calculation		-465,569			465,569			~~232~~310,~~785~~379			465,569
Other antidilutive potential shares not included in the calculation		~~404~~391,~~174~~145			~~467~~463,~~327~~298			~~408~~402,~~830~~935			~~503~~490,~~923~~381
(1) The Company's restricted stock grants are considered participating securities.

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 securities is included in interest income. Realized gains and losses on the sale of securities are reported in the consolidated statements of operations and determined using the adjusted cost of the specific security sold.

The amortized cost, gross unrealized gains and losses and estimated fair value of securities held to maturity and securities available for sale at ~~June~~September 30, 2011 and December 31, 2010 follow (in thousands).

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
June 30, 2011
September 30, 2011
Securities held to maturity:
Corporate securities	$	22,000	$	-	$	(~~105~~2,470	)	$	2119,~~895~~530
Securities available for sale:
Obligations of states and political
subdivisions	$	~~1,341~~600	$	10-	$	-		$	~~1,351~~600
Government Agency securities		4344,~~467~~857		84117		(~~240~~52	)		4344,~~311~~922
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		8668,~~482~~569		43,~~567~~369		(4430	)		9171,~~005~~908
FNMA		~~116~~97,~~466~~339		2,~~529~~667		(69103	)		~~118~~99,~~926~~903
GNMA		7379,~~630~~146		~~734~~1,195		(~~276~~181	)		7480,~~088~~160
Mortgage-backed securities and
collateralized mortgage obligations - commercial:
GNMA		5,~~092~~088		-		(~~171~~13	)		45,~~921~~075
Total securities available for sale		~~326~~295,~~478~~599		7,~~924~~348		(~~800~~379	)		~~333~~302,~~602~~568
Total securities	$	~~348~~317,~~478~~599	$	7,~~924~~348	$	(~~905~~2,849	)	$	~~355~~322,~~497~~098
December 31, 2010
Securities held to maturity:
Corporate securities	$	22,000	$	-	$	(110	)	$	21,890
Securities available for sale:
Obligations of states and political
subdivisions	$	1,883	$	23	$	-		$	1,906
Government Agency securities		40,894		176		(514	)		40,556
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		106,040		4,803		(95	)		110,748
FNMA		111,841		2,190		(414	)		113,617
GNMA		89,874		648		(1,050	)		89,472
Mortgage-backed securities and
collateralized mortgage obligations - commercial:
GNMA		5,101		-		(242	)		4,859
Total securities available for sale		355,633		7,840		(2,315	)		361,158
Total securities	$	377,633	$	7,840	$	(2,425	)	$	383,048

The amortized cost and estimated fair value of securities held to maturity and securities available for sale at ~~June~~September 30, 2011 are shown below by expected maturity (in thousands). 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 held to maturity:
Due after one year through five years	$	8,000	$	76,~~960~~990
Due after five years through ten years		14,000		1312,~~935~~540
Total securities held to maturity		22,000		2119,~~895~~530
Securities available for sale:
Due after one year through five years		23,673		23,727
Due in one year or less		3,292		3,389
Due after five years through ten years		16,141		16,027
Due after one year through five years		29,181		29,143
Due after ten years		4,994		4,908
Due after five years through ten years		4,000		3,994
Subtotal		44,808		44,662
Due after ten years		8,984		8,996
Subtotal		45,457		45,522
Mortgage-backed securities and
collateralized mortgage obligations - residential		~~276~~245,~~578~~054		~~284~~251,~~019~~971
Mortgage-backed securities and
collateralized mortgage obligations - commercial		5,~~092~~088		45,~~921~~075
Total securities available for sale		~~326~~295,~~478~~599		~~333~~302,~~602~~568
Total securities	$	~~348~~317,~~478~~599	$	~~355~~322,~~497~~098

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

	Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Proceeds	$	1743,~~547~~351	$	4732,~~966~~533	$	65108,~~186~~537	$	5689,~~751~~284
Gross gains		331,002		~~2,527~~734		~~640~~1,642		23,~~783~~517
Gross losses		269		21		~~527~~596		23
Tax provision, net		12370		~~1,002~~291		45415		1,~~104~~395

All of the Company’s securities with gross unrealized losses at both ~~June~~September 30, 2011 and December 31, 2010 had been in a continuous loss position for less than twelve months.

Unrealized losses have not been recognized in operations because the issuers’ bonds are of high credit quality, management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to recovery, and the decline in fair value is largely due to fluctuations in interest rates.

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

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

Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. In estimating OTTI, management considers: 1) the length of time and extent that fair value has been less than cost, 2) the financial condition and near term prospects of the issuer, 3) whether the market decline was affected by macroeconomic conditions and 4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company’s management considers whether the securities are issued by the U.S. Government or its agencies, whether downgrades by bond rating agencies have occurred, industry analysts’ reports and the issuer’s financial statements and related disclosures. Although the Company’s securities held to maturity at September 30, 2011 had gross unrealized losses of $2.5 million, upon review of the considerations mentioned here no OTTI was warranted. ~~LOANS~~ Management believes that the decline in price in the held to maturity bonds was due to a variety of factors including, but not limited to, a general widening in corporate bond spreads and the small size of the issue. Management has no reason to believe that these investments will not recover their value as they approach maturity.

At June 30, 2011 and December 31, 2010, net loans disaggregated by class consisted of the following (in thousands):

	June 30,		December 31,
	2011		2010
Commercial and industrial - owner-occupied mortgage	$	179,560	$	191,913
Commercial and industrial - general purpose		341,373		339,447
Real estate - commercial mortgage		487,257		449,861
Real estate - residential mortgage		77,760		83,696
Real estate - commercial construction		46,463		44,331
Real estate - residential construction		4,531		14,910
Loans to individuals		4,254		4,770
Tax exempt and other		2,020		2,442
Loans - net of unearned income		1,143,218		1,131,370
Less: Allowance for loan losses		27,731		33,078
Loans - net	$	1,115,487	$	1,098,292

5. LOANS

At September 30, 2011 and December 31, 2010, net loans disaggregated by class consisted of the following (in thousands):

	September 30,		December 31,
	2011		2010
Commercial and industrial - owner-occupied mortgage	$	177,754	$	191,913
Commercial and industrial - general purpose		347,341		339,447
Real estate - commercial mortgage		504,836		449,861
Real estate - residential mortgage		75,022		83,696
Real estate - commercial construction		46,963		44,331
Real estate - residential construction		4,560		14,910
Loans to individuals		4,046		4,770
Tax exempt and other		1,899		2,442
Loans - net of unearned income		1,162,421		1,131,370
Less: Allowance for loan losses		23,467		33,078
Loans - net	$	1,138,954	$	1,098,292

The following table presents information about the allowance for loan losses (in thousands):

	For the			For the Three Months Ended
	Last			~~June~~September 30,			~~March~~June 3130,			~~December~~March 31,			~~September~~December 3031,
	12 Months			2011			2011			~~2010~~2011			2010
Beginning balance	$	3132,~~259~~488		$	27,~~589~~731		$	3327,~~078~~589		$	3233,~~488~~078		$	3132,~~259~~488
Provision charged to operations		8,200			1,100			1,900			2,700			2,500
Provision (credit)		2,200			(3,500	)		1,100			1,900			2,700
Charge-offs		(1211,~~083~~973	)		(1,~~042~~151	)		(71,~~629~~042	)		(27,~~151~~629	)		(12,~~261~~151	)
Recoveries		~~355~~752			84387			~~240~~84			41240			~~(10~~41	)
Ending balance	$	2723,~~731~~467		$	2723,~~731~~467		$	27,~~589~~731		$	3327,~~078~~589		$	3233,~~488~~078

During the first ~~six~~nine months of 2011 there have been no changes in the accounting policies or methodology for determining and recording the provision for loan losses.

For the three and ~~six~~nine months ended ~~June~~September 30, 2011, the activity in the allowance for loan losses disaggregated by portfolio segment is shown below. At ~~June~~September 30, 2011 and December 31, 2010, the ending balance in the allowance for loan losses disaggregated by portfolio segment and impairment methodology follows below (in thousands). Also shown below are total loans at ~~June~~September 30, 2011 and December 31, 2010 disaggregated by portfolio segment and impairment methodology (in thousands).

	Commercial and industrial			Real estate - commercial			Real estate - residential (1)			Loans to individuals			Tax exempt and other			Unallocated			Total
Three months ended June 30, 2011
Three months ended September 30, 2011
Total allowance for loan losses:
Beginning balance	$	1615,~~566~~992		$	78,~~745~~322		$	1,~~293~~087		$	~~193~~173		$	1816		$	12,~~774~~141		$	27,~~589~~731
Provision charged to operations		123			577			29			6			(2	)		367			1,100
(Credit) provision		(4,368	)		426			223			(58	)		(1	)		278			(3,500	)
Charge-offs		(~~756~~750	)		-(90	)		(~~258~~300	)		(2811	)		-			-			(1,~~042~~151	)
Recoveries		59339			-			2347			21			-			-			84387
Ending balance	$	1511,~~992~~213		$	8,~~322~~658		$	1,~~087~~057		$	~~173~~105		$	1615		$	2,~~141~~419		$	2723,~~731~~467
Six months ended June 30, 2011
Nine months ended September 30, 2011
Total allowance for loan losses:
Beginning balance	$	20,144		$	7,893		$	1,809		$	181		$	17		$	3,034		$	33,078
Provision charged to operations		2,235			1,702			(73	)		30			(1	)		(893	)		3,000
(Credit) provision		(2,133	)		2,128			150			(28	)		(2	)		(615	)		(500	)
Charge-offs		(67,~~508~~258	)		(1,~~441~~531	)		(~~674~~974	)		(4859	)		-			-			(89,~~671~~822	)
Recoveries		~~121~~460			168			2572			1011			-			-			~~324~~711
Ending balance	$	1511,~~992~~213		$	8,~~322~~658		$	1,~~087~~057		$	~~173~~105		$	1615		$	2,~~141~~419		$	2723,~~731~~467
June 30, 2011
September 30, 2011
Total allowance for loan losses:
Individually evaluated for impairment	$	74,~~600~~682		$	1,~~515~~553		$	-		$	-		$	-		$	-		$	96,~~115~~235
Collectively evaluated for impairment		86,~~392~~531			67,~~807~~105			1,~~087~~057			~~173~~105			1615			2,~~141~~419			1817,~~616~~232
Ending balance	$	1511,~~992~~213		$	8,~~322~~658		$	1,~~087~~057		$	~~173~~105		$	1615		$	2,~~141~~419		$	2723,~~731~~467
Total loans:
Individually evaluated for impairment	$	2421,~~305~~805		$	12,~~113~~982		$	~~1,143~~942		$	14		$	-		$	-		$	3735,~~575~~743
Collectively evaluated for impairment		~~496~~503,~~628~~290			~~521~~538,~~607~~817			8178,~~148~~640			4,~~240~~032			21,~~020~~899			-			1,~~105~~126,~~643~~678
Ending balance	$	~~520~~525,~~933~~095		$	~~533~~551,~~720~~799		$	8279,~~291~~582		$	4,~~254~~046		$	21,~~020~~899		$	-		$	1,~~143~~162,~~218~~421
December 31, 2010
Total allowance for loan losses:
Individually evaluated for impairment	$	11,728		$	729		$	123		$	-		$	-		$	-		$	12,580
Collectively evaluated for impairment		8,416			7,164			1,686			181			17			3,034			20,498
Ending balance	$	20,144		$	7,893		$	1,809		$	181		$	17		$	3,034		$	33,078
Total loans:
Individually evaluated for impairment	$	30,153		$	8,184		$	2,304		$	16		$	-		$	-		$	40,657
Collectively evaluated for impairment		501,~~311~~207			486,008			96,~~729~~302			4,~~770~~754			2,442			-			1,~~091~~090,~~260~~713
Ending balance	$	531,~~464~~360		$	494,192		$	9998,~~033~~606		$	4,~~786~~770		$	2,442		$	-		$	1,131,~~917~~370
(1) This portfolio segment is comprised of the real estate - residential mortgage and the real estate - residential construction classes.

As of ~~June~~September 30, 2011 and December 31, 2010, the recorded investment in loans that are considered to be impaired is summarized below (in thousands).:

	June 30,			December 31,
	September 30,			December 31,
	2011			2010
Troubled debt restructurings with specifically allocated allowances for loss	$	2616,500		$	26,500
Allowance for loan loss specifically allocated to troubled debt restructurings		(72,~~370~~738	)		(8,158	)
		19,130			18,342
		13,762			18,342
Troubled debt restructurings with no specifically allocated allowance for loan loss		~~494~~492			547
Net troubled debt restructurings		1914,~~624~~254			18,889
Other impaired loans with specifically allocated allowances for loss		918,~~653~~153			13,610
Allowance for loan loss specifically allocated to other impaired loans		(13,~~745~~497	)		(4,422	)
		7,908			9,188
		14,656			9,188
Other impaired loans with no specifically allocated allowance for loan loss		~~928~~598			-
Net other impaired loans		815,~~836~~254			9,188
Total net impaired loans	$	2829,~~460~~508		$	28,077
Average impaired loan balance	$	3828,~~465~~938		$	15,602
Interest income recognized on impaired loans	$	~~546~~517		$	448

The Company has TDRs at ~~June~~September 30, 2011 that include ~~two~~a $10 million commercial ~~loans~~loan and a $7 million commercial real estate loan performing according to their ~~new~~revised terms. The Company’s TDRs primarily resulted from interest rate concessions and maturity extensions. The Company has allocated $73 million of specific reserves to customers whose loan terms have been modified in TDRs as of ~~June~~September 30, 2011. The Company has no commitments to lend any additional amounts to customers with outstanding loans that are classified as TDRs. The Company had no new TDRs in 2011.

The ~~following~~ table below presents ~~the Company’s impaired~~ loans ~~disaggregated~~ by class modified as TDRs for which there was a payment default within twelve months following the ~~six~~modification during both the three and nine months ended ~~June~~September 30, 2011. ~~and~~A loan is generally considered to be in payment default once it is individually determined that a payment default will be declared under the ~~year~~modified ~~ended~~terms. ~~December~~The ~~31,~~TDR ~~2010~~that (subsequently defaulted as presented below resulted in ~~thousands)~~no change to the allowance for loan losses and no charge-offs during both the three and nine months ended September 30, 2011.

	Number of loans		Recorded investment (in thousands)

Loans to individuals		1	$	14
Total		1	$	14

The terms of certain other loans were modified during the three and nine months ended September 30, 2011 that did not meet the definition of a TDR. These loans modified during the nine months ended September 30, 2011 had a total recorded investment at September 30, 2011 of $2 million, of which $466 thousand was modified during the three months ended September 30, 2011. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

A certain loan which was modified during the three and nine months ended September 30, 2011 and did not meet the definition of a TDR as the modification was a delay in a payment that was considered to be insignificant had a delay in principal payment of three months.

	Recorded investment (1)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
June 30, 2011
With an allowance recorded:
Commercial and industrial - owner-occupied mortgage	$	275	$	275	$	56	$	138	$	-
Commercial and industrial - general purpose		23,765		24,005		7,544		23,155		406
Real estate - commercial mortgage		5,613		5,718		1,105		5,730		-
Real estate - commercial construction		6,500		6,500		410		6,500		131
Totals	$	36,153	$	36,498	$	9,115	$	35,523	$	537
With no related allowance recorded:
Commercial and industrial - general purpose	$	264	$	264	$	-	$	1,704	$	-
Real estate - residential mortgage		1,143		1,143		-		1,223		9
Loans to individuals		15		15		-		15		-
Totals	$	1,422	$	1,422	$	-	$	2,942	$	9
December 31, 2010
With an allowance recorded:
Commercial and industrial - general purpose	$	30,049	$	30,132	$	11,728	$	8,026	$	204
Real estate - commercial mortgage		1,684		1,743		247		882		-
Real estate - residential mortgage		799		799		79		403		-
Real estate - commercial construction		6,500		6,500		482		4,897		212
Real estate - residential construction		1,078		1,078		44		812		-
Totals	$	40,110	$	40,252	$	12,580	$	15,020	$	416
With no related allowance recorded:
Commercial and industrial - general purpose	$	104	$	104	$	-	$	132	$	14
Real estate - residential mortgage		427		427		-		432		17
Loans to individuals		16		16		-		18		1
Totals	$	547	$	547	$	-	$	582	$	32
(1) Recorded investment is defined here as unpaid principal balance less non-accrual interest paid.

The following table presents the Company’s impaired loans disaggregated by class for the nine months ended September 30, 2011 and the year ended December 31, 2010 (in thousands):

At June 30, 2011 and December 31, 2010, non-accrual loans were $12 million and $15 million, respectively. There was no interest income recognized on non-accrual loans for either of the three or six month periods ended June 30, 2011 and 2010. At June 30, 2011 and December 31, 2010, there were two loans totaling $56 thousand and three loans totaling $104 thousand, respectively, restructured and no longer accruing interest. At both periods June 30, 2011 and December 31, 2010, there were five TDRs with an aggregate principal balance of $27 million still accruing interest. At both June 30, 2011 and December 31, 2010, loans 90 days or more past due and still accruing interest totaled $1 thousand.

	Recorded investment (1)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
September 30, 2011
With an allowance recorded:
Commercial and industrial - owner-occupied mortgage	$	7,456	$	7,456	$	1,675	$	2,513	$	1
Commercial and industrial - general purpose		14,215		14,504		3,007		13,610		305
Real estate - commercial mortgage		6,482		6,614		1,116		3,376		-
Real estate - commercial construction		6,500		6,500		437		6,500		197
Totals	$	34,653	$	35,074	$	6,235	$	25,999	$	503

With no related allowance recorded:
Commercial and industrial - general purpose	$	134	$	134	$	-	$	1,703	$	-
Real estate - residential mortgage		942		942		-		1,222		14
Loans to individuals		14		14		-		14		-
Totals	$	1,090	$	1,090	$	-	$	2,939	$	14

December 31, 2010
With an allowance recorded:
Commercial and industrial - general purpose	$	30,049	$	30,132	$	11,728	$	8,026	$	204
Real estate - commercial mortgage		1,684		1,743		247		882		-
Real estate - residential mortgage		799		799		79		403		-
Real estate - commercial construction		6,500		6,500		482		4,897		212
Real estate - residential construction		1,078		1,078		44		812		-
Totals	$	40,110	$	40,252	$	12,580	$	15,020	$	416

With no related allowance recorded:
Commercial and industrial - general purpose	$	104	$	104	$	-	$	132	$	14
Real estate - residential mortgage		427		427		-		432		17
Loans to individuals		16		16		-		18		1
Totals	$	547	$	547	$	-	$	582	$	32

(1) Recorded investment is defined here as unpaid principal balance less non-accrual interest paid.

~~The~~At ~~following~~September ~~table~~30, ~~presents~~2011 ~~the~~and ~~recorded~~December ~~investment~~31, in2010, non-accrual loans were $12 million and ~~past~~$15 ~~due~~million, ~~loans~~respectively. ~~over~~There 90was ~~days~~no ~~still~~interest income recognized on non-accrual asloans for either of ~~June~~the three or nine month periods ended September 30, 2011 and 2010. At September 30, 2011 and December 31, 2010, ~~disaggregated~~there bywere ~~class~~two ~~(in~~loans ~~thousands)~~totaling $55 thousand and three loans totaling $104 thousand, respectively, restructured and no longer accruing interest. At September 30, 2011 and December 31, 2010, there were four TDRs totaling $17 million and five TDRs totaling $27 million, respectively, still accruing interest. At both September 30, 2011 and December 31, 2010, loans 90 days or more past due and still accruing interest totaled $1 thousand.

The following table presents the recorded investment in non-accrual and past due loans over 90 days still on accrual as of September 30, 2011 and December 31, 2010 disaggregated by class (in thousands):

	Non-accrual loans		Loans past due over 90 days still accruing
June 30, 2011
September 30, 2011
Commercial and industrial - owner-occupied mortgage	$	275	$	-
Commercial and industrial - general purpose	$	4,223	$	-
Commercial and industrial - general purpose		4,667		-
Real estate - commercial mortgage		6,643		-
Real estate - commercial mortgage		5,613		-
Real estate - residential mortgage		690		-
Real estate - residential mortgage		969		-
Loans to individuals		84		1
Loans to individuals		65		1
Total	$	11,640	$	1
Total	$	11,589	$	1
December 31, 2010
Commercial and industrial - general purpose	$	11,017	$	-
Real estate - commercial mortgage		1,684		-
Real estate - residential mortgage		973		-
Real estate - residential construction		1,078		-
Loans to individuals		104		1
Total	$	14,856	$	1

At ~~June~~September 30, 2011 and December 31, 2010, past due loans disaggregated by class were as follows (in thousands).:

	30 - 59 days past due and accruing		60 - 89 days past due and accruing		Greater than 90 days past due and still accruing		Non-accrual loans		Total past due		Loans not past due and still accruing		Total loans
June 30, 2011
September 30, 2011
Commercial and industrial - owner-occupied mortgage	$	-7,456	$	-	$	-	$	~~275~~-	$	~~275~~7,456	$	~~179~~170,~~285~~298	$	~~179~~177,~~560~~754
Commercial and industrial - general purpose		21,~~514~~163		2111,~~235~~471		-		4,~~667~~223		2816,~~416~~857		~~312~~330,~~957~~484		~~341~~347,~~373~~341
Real estate - commercial mortgage		1,~~325~~609		~~162~~-		-		56,~~613~~643		78,~~100~~252		~~480~~496,~~157~~584		~~487~~504,~~257~~836
Real estate - residential mortgage		~~579~~2,809		~~216~~423		-		~~969~~690		13,~~764~~922		7571,~~996~~100		7775,~~760~~022
Real estate - commercial construction		~~6,500~~-		-		-		-		~~6,500~~-		3946,963		46,~~463~~963
Real estate - residential construction		-		-		-		-		-		4,~~531~~560		4,~~531~~560
Loans to individuals		~~396~~15		6-		1		6584		~~468~~100		3,~~786~~946		4,~~254~~046
Tax exempt and other		-		-		-		-		-		21,~~020~~899		21,~~020~~899
Total	$	1113,~~314~~052	$	2111,~~619~~894	$	1	$	11,~~589~~640	$	4436,~~523~~587	$	1,~~098~~125,~~695~~834	$	1,~~143~~162,~~218~~421
December 31, 2010
Commercial and industrial - owner-occupied mortgage	$	-	$	-	$	-	$	-	$	-	$	191,913	$	191,913
Commercial and industrial - general purpose		452		20,247		-		11,017		31,716		307,731		339,447
Real estate - commercial mortgage		1,344		3,341		-		1,684		6,369		443,492		449,861
Real estate - residential mortgage		198		175		-		973		1,346		82,350		83,696
Real estate - commercial construction		-		-		-		-		-		44,331		44,331
Real estate - residential construction		-		-		-		1,078		1,078		13,832		14,910
Loans to individuals		24		8		1		104		137		4,633		4,770
Tax exempt and other		-		-		-		-		-		2,442		2,442
Total	$	2,018	$	23,771	$	1	$	14,856	$	40,646	$	1,090,724	$	1,131,370

During the first six months of 2011, the Company sold commercial and industrial loans and commercial real estate loans of $5 million and $3 million, respectively. These loans were of deteriorating credit quality and demonstrated material weaknesses making full recapture of principal and interest questionable. Charge-offs amounting to $4 million and $1 million had been taken on these commercial and industrial loans and commercial real estate loans, respectively. No gain or loss was recognized upon the sale of these loans.

AtDuring ~~June~~the ~~30,~~first nine months of 2011, the Company sold commercial and ~~December~~industrial ~~31,~~loans ~~2010,~~and ~~based~~commercial ~~upon~~real ~~the~~estate ~~most~~loans ~~recent~~of ~~analysis~~$5 ~~performed,~~million ~~the~~and ~~following~~$4 ~~table~~million, ~~presents~~respectively. ~~the~~These ~~Company’s~~loans ~~loan~~were ~~portfolio~~of deteriorating credit ~~risk~~quality ~~profile~~and bydemonstrated ~~internally~~material ~~assigned~~weaknesses ~~grade~~making ~~disaggregated~~full byrecapture ~~class~~ of ~~loan~~principal ~~(in~~and ~~thousands)~~interest questionable. Charge-offs amounting to $4 million and $1 million had been taken on these commercial and industrial loans and commercial real estate loans, respectively. No gain or loss was recognized upon the sale of these loans.

	Commercial and industrial - owner-occupied mortgage		Commercial and industrial - general purpose		Real estate - commercial mortgage		Real estate - residential mortgage		Real estate - commercial construction		Real estate - residential construction		Loans to individuals		Tax exempt and other		Total
June 30, 2011
Watch list loans:
Loans requiring special attention but neither criticized nor classified	$	4,134	$	10,241	$	11,338	$	4,644	$	-	$	-	$	202	$	-	$	30,559
Special mention		2,910		13,613		15,628		399		4,592		-		869		-		38,011
Substandard		8,035		20,236		14,309		1,259		6,500		1,476		529		-		52,344
Doubtful		-		12,790		-		-		-		-		6		-		12,796
Loss		-		16		-		-		-		-		-		-		16
Total watch list loans		15,079		56,896		41,275		6,302		11,092		1,476		1,606		-		133,726
Pass		164,481		284,477		445,982		-		35,371		3,055		-		2,020		935,386
Performing (1)		-		-		-		71,458		-		-		2,648		-		74,106
Total loans	$	179,560	$	341,373	$	487,257	$	77,760	$	46,463	$	4,531	$	4,254	$	2,020	$	1,143,218
December 31, 2010
Watch list loans:
Loans requiring special attention but neither criticized nor classified	$	2,916	$	18,267	$	15,059	$	2,057	$	-	$	3,147	$	140	$	-	$	41,586
Special mention		2,526		16,221		26,226		97		4,576		4,804		869		-		55,319
Substandard		7,906		24,244		11,887		2,222		6,500		3,027		562		-		56,348
Doubtful		-		12,717		-		-		-		-		28		-		12,745
Loss		-		-		-		-		-		-		-		-		-
Total watch list loans		13,348		71,449		53,172		4,376		11,076		10,978		1,599		-		165,998
Pass		178,565		267,998		396,689		-		33,255		3,932		-		2,442		882,881
Performing (1)		-		-		-		79,320		-		-		3,171		-		82,491
Total loans	$	191,913	$	339,447	$	449,861	$	83,696	$	44,331	$	14,910	$	4,770	$	2,442	$	1,131,370
(1) In general, certain homogeneous loans are not risk-graded, but rather measured based upon payment performance. Loans categorized here are typically performing as agreed upon with the borrower.

At September 30, 2011 and December 31, 2010, based upon the most recent analysis performed, the following table presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan (in thousands):

	Commercial and industrial - owner-occupied mortgage		Commercial and industrial - general purpose		Real estate - commercial mortgage		Real estate - residential mortgage		Real estate - commercial construction		Real estate - residential construction		Loans to individuals		Tax exempt and other		Total
September 30, 2011
Watch list loans:
Loans requiring special attention but neither criticized nor classified	$	10,401	$	8,290	$	5,845	$	3,597	$	-	$	-	$	192	$	-	$	28,325
Special mention		1,447		18,420		13,762		2,543		4,592		-		1,262		-		42,026
Substandard		7,708		17,228		12,905		764		6,500		1,476		131		-		46,712
Doubtful		-		2,653		1,314		-		-		-		5		-		3,972
Loss		-		-		-		-		-		-		-		-		-
Total watch list loans		19,556		46,591		33,826		6,904		11,092		1,476		1,590		-		121,035
Pass		158,198		300,750		471,010		-		35,871		3,084		-		1,899		970,812
Performing (1)		-		-		-		68,118		-		-		2,456		-		70,574
Total loans	$	177,754	$	347,341	$	504,836	$	75,022	$	46,963	$	4,560	$	4,046	$	1,899	$	1,162,421

December 31, 2010
Watch list loans:
Loans requiring special attention but neither criticized nor classified	$	2,916	$	18,267	$	15,059	$	2,057	$	-	$	3,147	$	140	$	-	$	41,586
Special mention		2,526		16,221		26,226		97		4,576		4,804		869		-		55,319
Substandard		7,906		24,244		11,887		2,222		6,500		3,027		562		-		56,348
Doubtful		-		12,717		-		-		-		-		28		-		12,745
Loss		-		-		-		-		-		-		-		-		-
Total watch list loans		13,348		71,449		53,172		4,376		11,076		10,978		1,599		-		165,998
Pass		178,565		267,998		396,689		-		33,255		3,932		-		2,442		882,881
Performing (1)		-		-		-		79,320		-		-		3,171		-		82,491
Total loans	$	191,913	$	339,447	$	449,861	$	83,696	$	44,331	$	14,910	$	4,770	$	2,442	$	1,131,370

(1) In general, certain homogeneous loans are not risk-graded, but rather measured based upon payment performance. Loans categorized here are typically performing as agreed upon with the borrower.

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

6. LEGAL PROCEEDINGS

A case was filed on May 6, 2011 in the Supreme Court of the State of New York, Nassau County, on behalf of a putative class of the Company’s stockholders against the Company, the Company’s directors and Valley challenging the merger of the Company into Valley (Edith K. Grossman v. State Bancorp, Inc., et al (No. 600469/2011)). The complaint alleges that the individual defendants, who are directors of the Company, breached their fiduciary duties of care, loyalty, good faith and independence owed to the stockholders of the Company, and that the Company and Valley aided and abetted the alleged fiduciary breaches. The complaint generally alleges that the individual defendants did not maximize stockholder value and agreed to transaction terms that limited their ability to pursue and accept competing offers for the Company, resulting in a “deficient sales process.” The complaint seeks, among other things, an order enjoining the defendants from proceeding with and consummating the transaction, and other equitable and monetary relief. On June 9, 2011, the defendants moved to dismiss the complaint. That motion has not yet been decided. On July 14, 2011, Plaintiff sought leave to amend the complaint to add allegations that the joint S-4 and proxy statement seeking approval for the merger had insufficient disclosures regarding projections and regarding Sandler O’Neill and Co.’s fairness opinion. The court has not yet allowed the proposed amendment. The Company, the individual defendants and Valley vigorously deny all of the claims and allegations. The Company’s Board of Directors believes that this is a typical meritless strike suit. The Company and the individual defendants intend to defend the claims vigorously.

On October 24, 2011, the parties entered into an agreement in principle to settle the action. The agreement is set forth in a Memorandum of Understanding (“MOU”). The defendants believe that no further disclosure other than what was set forth in the previous filing of the amended proxy statement-prospectus is required under applicable laws, but to avoid the costs, distraction and disruption of further litigation, the defendants have agreed, as part of the MOU and without admitting to the validity of any allegations made in the action, to make certain additional disclosures requested by the plaintiffs in the proxy statement-prospectus. The proposed settlement is subject to, among other things, court approval, plaintiffs conducting confirmatory discovery to confirm the fairness and adequacy of the terms of the settlement and the disclosures relating to the proposed merger and the closing of the proposed merger. On October 26, 2011, the Honorable Timothy S. Driscoll signed a Preliminary Approval Order with regard to the lawsuit and the MOU, among other things scheduling a hearing on the approval of the settlement by the court on November 29, 2011 at 9:30 a.m. in the Supreme Court of the State of New York in Mineola, New York.

The Company, the individual defendants and Valley deny any wrongdoing in connection with the proposed merger.

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

7. REGULATORY MATTERS

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital and Tier I capital, as defined in the federal banking regulations, to risk-weighted assets and of Tier I capital to average assets as shown in the following table. Each of the Company’s and the Bank’s capital ratios exceeds applicable regulatory capital requirements and the Bank meets the requisite capital ratios to be well-capitalized as of ~~June~~September 30, 2011 and December 31, 2010. 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 and ratios are as follows (dollars in thousands):

						For Capital					To Be Considered
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2011:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	162,270		10.07	%	$	64,467		4.00	%		N/A		N/A
The Bank	$	159,696		9.91	%	$	64,443		4.00	%	$	80,554		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	162,270		12.74	%	$	50,942		4.00	%		N/A		N/A
The Bank	$	159,696		12.54	%	$	50,942		4.00	%	$	76,412		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	178,335		14.00	%	$	101,883		8.00	%		N/A		N/A
The Bank	$	175,761		13.80	%	$	101,883		8.00	%	$	127,354		10.00	%
As of December 31, 2010:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	153,261		9.53	%	$	64,294		4.00	%		N/A		N/A
The Bank	$	152,608		9.50	%	$	64,269		4.00	%	$	80,336		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	153,261		12.29	%	$	49,895		4.00	%		N/A		N/A
The Bank	$	152,608		12.23	%	$	49,930		4.00	%	$	74,896		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	169,069		13.55	%	$	99,791		8.00	%		N/A		N/A
The Bank	$	168,427		13.49	%	$	99,861		8.00	%	$	124,826		10.00	%

Generally, for regulatory capital purposes, deferred tax assets that are dependent upon future taxable income are limited to the lesser of: (i) the amount of deferred tax assets that a financial institution expects to realize within one year of the calendar quarter-end date based on its projected future taxable income or (ii) 10% of the amount of an institution’s Tier I capital. Based on these restrictions, at June 30, 2011, $15 million of the Company’s net deferred tax assets were deducted from Tier I capital and risk-weighted assets compared to $18 million at December 31, 2010. The Company anticipates that the amount of its net deferred tax assets disallowed for regulatory capital purposes will gradually decline in coming quarters as it anticipates future taxable income.

State banking regulations limit, absent regulatory approval, the Bank’s dividends to the Company to the lesser of the Bank’s undivided profits and the Bank’s retained net income for the current year plus its retained net income for the preceding two years (less any required transfers to capital surplus) up to the date of any dividend declaration in the current calendar year. As of June 30, 2011, $4 million was available for payment of dividends to the Company from the Bank according to these limitations without seeking regulatory approval.

						For Capital					To Be Considered
	Actual					Adequacy Purposes					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2011:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	172,874		10.80	%	$	64,041		4.00	%		N/A		N/A
The Bank	$	168,035		10.50	%	$	64,017		4.00	%	$	80,021		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	172,874		13.45	%	$	51,406		4.00	%		N/A		N/A
The Bank	$	168,035		13.08	%	$	51,406		4.00	%	$	77,109		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	189,030		14.71	%	$	102,812		8.00	%		N/A		N/A
The Bank	$	184,191		14.33	%	$	102,812		8.00	%	$	128,515		10.00	%
As of December 31, 2010:
Tier I Capital to Total Adjusted
Average Assets (Leverage):
The Company	$	153,261		9.53	%	$	64,294		4.00	%		N/A		N/A
The Bank	$	152,608		9.50	%	$	64,269		4.00	%	$	80,336		5.00	%
Tier I Capital to Risk-Weighted Assets:
The Company	$	153,261		12.29	%	$	49,895		4.00	%		N/A		N/A
The Bank	$	152,608		12.23	%	$	49,930		4.00	%	$	74,896		6.00	%
Total Capital to Risk-Weighted Assets:
The Company	$	169,069		13.55	%	$	99,791		8.00	%		N/A		N/A
The Bank	$	168,427		13.49	%	$	99,861		8.00	%	$	124,826		10.00	%

~~The preferred stock~~Generally, ~~purchased~~for byregulatory ~~the~~capital ~~U.S.~~purposes, ~~Treasury~~deferred intax ~~December~~assets ~~2008,~~that ~~qualifies~~are asdependent ~~Tier~~upon Ifuture ~~capital~~taxable ~~for~~income ~~regulatory~~are ~~reporting~~limited ~~purposes.~~to ~~The~~the ~~U.S.~~lesser ~~Treasury~~of: ~~also~~(i) the ~~received~~amount aof ~~warrant~~deferred totax ~~purchase~~assets ~~465,569~~that ~~shares~~a offinancial ~~the~~institution ~~Company’s~~expects ~~common~~to ~~stock~~realize ~~with~~within anone ~~exercise~~year ~~price~~ of ~~$11.87~~the ~~per~~calendar ~~share~~quarter-end ~~representing~~date anbased ~~aggregate~~on ~~market~~its ~~price~~projected offuture $6taxable ~~million~~income or 15(ii) 10% of the ~~preferred~~amount ~~stock~~of ~~investment.~~an ~~The~~institution’s ~~warrant~~Tier isI ~~immediately~~capital. ~~exercisable~~Based ~~and~~on ~~expires~~these ~~ten~~restrictions, ~~years~~at ~~from~~September 30, ~~the date of issuance~~2011, ~~or December 2018. The Company allocated~~ $110 million of the ~~proceeds~~Company’s ~~from~~net ~~the~~deferred ~~issuance~~tax ofassets ~~the~~were ~~preferred~~deducted ~~stock~~from toTier ~~the~~I ~~value~~capital ofand risk-weighted ~~the~~assets ~~warrant~~compared ~~representing~~to an$18 million ~~unamortized~~at ~~discount~~December 31, ~~on preferred stock~~2010. The ~~discount~~Company isanticipates ~~being~~that ~~amortized~~the toamount ~~preferred~~of ~~stock~~its ~~using~~net andeferred ~~effective~~tax ~~yield~~assets ~~method~~disallowed ~~over~~for aregulatory ~~five-year~~capital ~~period.~~purposes ~~Through~~will ~~June~~gradually ~~30,~~decline ~~2011,~~in ~~$581~~coming ~~thousand~~quarters ofprimarily ~~the~~due ~~discount~~to ~~has~~anticipated ~~been~~future ~~accreted~~taxable ~~to preferred stock~~income.

State banking regulations limit, absent regulatory approval, the Bank’s dividends to the Company to the lesser of the Bank’s undivided profits and the Bank’s retained net income for the current year plus its retained net income for the preceding two years (less any required transfers to capital surplus) up to the date of any dividend declaration in the current calendar year. As of September 30, 2011, $8 million was available for payment of dividends to the Company from the Bank according to these limitations without seeking regulatory approval.

The preferred stock, purchased by the U.S. Treasury in December 2008, qualifies as Tier I capital for regulatory reporting purposes. The U.S. Treasury also received a warrant to purchase 465,569 shares of the Company’s common stock with an exercise price of $11.87 per share representing an aggregate market price of $6 million or 15% of the preferred stock investment. The warrant is immediately exercisable and expires ten years from the date of issuance, or December 2018. The Company allocated $1 million of the proceeds from the issuance of the preferred stock to the value of the warrant representing an unamortized discount on preferred stock. The discount is being amortized to preferred stock using an effective yield method over a five-year period. Through September 30, 2011, $642 thousand of the discount has been accreted to preferred stock.

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

The Reform Act requires the federal bank regulatory agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. These requirements must be no less than those to which insured depository institutions are currently subject. Thus, it is likely that we will become subject to capital requirements that are higher than those to which we are currently subject, although it is unknown at this time what these requirements will be. The new requirements will also eliminate the use of trust preferred securities issued after May 19, 2010 as a component of Tier 1 capital for depository institution holding companies of our size, although because we had less than $15 billion of consolidated assets as of December 31, 2009, we will continue to be permitted to include our $20 million of trust preferred securities, all of which were issued before May 19, 2010, as an element of Tier 1 capital.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) requires the federal bank regulatory agencies to establish consolidated risk-based and leverage capital requirements for insured depository institutions, depository institution holding companies and systemically important nonbank financial companies. These requirements must be no less than those to which insured depository institutions are currently subject. Thus, it is likely that we will become subject to capital requirements that are higher than those to which we are currently subject, although it is unknown at this time what these requirements will be. The new requirements will also eliminate the use of trust preferred securities issued after May 19, 2010 as a component of Tier 1 capital for depository institution holding companies of our size, although because we had less than $15 billion of consolidated assets as of December 31, 2009, we will continue to be permitted to include our $20 million of trust preferred securities, all of which were issued before May 19, 2010, as an element of Tier 1 capital.

8. STOCK-BASED COMPENSATION

Incentive Stock Options

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

At ~~June~~September 30, 2011, incentive stock options for the purchase of ~~189~~174,~~066~~763 shares were outstanding and exercisable. The options outstanding and exercisable at ~~June~~September 30, 2011 had anno intrinsic value ~~of $32 thousand~~. The total intrinsic value of options exercised and the total cash received from option exercises for the first ~~six~~nine months of 2011 were $911 thousand and $~~211~~229 thousand, respectively. The Company recognized tax benefits resulting from option exercises for the ~~six~~nine months ended ~~June~~September 30, 2011 of $34 thousand. No options were exercised in 2010. A summary of stock option activity follows:

				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding - January 1, 2011		235,286		$	16.15
Granted		-			-
Exercised		(2021,~~163~~551	)	$	10.4962
Forfeited or expired		(2638,~~057~~972	)	$	1012.3189
Outstanding - June 30, 2011		189,066		$	17.56
Outstanding - September 30, 2011		174,763		$	17.57

The following summarizes shares subject to purchase from incentive stock options outstanding and exercisable as of ~~June~~September 30, 2011:

		Weighted-Average
	Shares	Remaining	Weighted-Average	Shares	Weighted-Average
Range of Exercise Prices	Outstanding	Contractual Life	Exercise Price	Exercisable	Exercise Price
$12.45 - $13.61	74,950	1.0 years	$13.09	74,950	$13.09
$19.16 - $22.63	99,813	2.9 years	$20.93	99,813	$20.93
	174,763	2.1 years	$17.57	174,763	$17.57

		Weighted-Average
	Shares	Remaining	Weighted-Average	Shares	Weighted-Average
Range of Exercise Prices	Outstanding	Contractual Life	Exercise Price	Exercisable	Exercise Price
$12.45 - $13.61	81,273	1.2 years	$13.09	81,273	$13.09
$19.16 - $22.63	107,793	3.2 years	$20.93	107,793	$20.93
	189,066	2.3 years	$17.56	189,066	$17.56

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 ~~six~~nine months of 2011, the Company awarded 126,993 shares of restricted stock to certain key employees.

The restricted stock awards currently outstanding primarily vest one-third on each of the third through fifth anniversaries of the award date. The fair value of restricted stock awards vested during the first six months of 2011 and 2010 was $514 thousand and $225 thousand, respectively. Based on an estimated forfeiture rate, of the 384,187 shares currently outstanding, 365,000 shares are expected to vest over the remaining vesting life. The Company recognizes compensation expense over the vesting period at the fair market value of the shares on the award date. If a participant’s service terminates for any reason other than death or disability, then the participant shall forfeit to the Company any shares acquired by the participant pursuant to the restricted stock award which remain subject to vesting conditions.20

The ~~total~~restricted ~~remaining~~stock ~~unrecognized~~awards ~~compensation~~currently ~~cost~~outstanding ~~related~~primarily tovest ~~nonvested~~one-third ~~shares~~on each of ~~restricted~~the ~~stock~~third isthrough ~~$2.8~~fifth ~~million~~anniversaries atof ~~June~~the ~~30,~~award ~~2011~~date. ~~and~~The isfair ~~expected~~value toof berestricted ~~expensed~~stock ~~over~~awards ~~the~~vested ~~weighted~~during ~~average~~the ~~remaining~~first ~~vesting~~nine ~~life~~months of ~~2.9~~2011 ~~years.~~and ~~These~~2010 ~~shares~~was ~~would~~$539 ~~vest~~thousand ~~immediately~~and ~~upon~~$225 ~~change~~thousand, ofrespectively. ~~control~~Based ofon ~~the~~an ~~Company.~~estimated ~~For~~forfeiture rate, of the ~~six~~369,587 ~~months~~shares ~~ended~~currently ~~June~~outstanding, 30354,000 ~~2011~~shares ~~and~~are ~~2010,~~expected ~~$334~~to ~~thousand~~vest ~~and~~over ~~$442~~the ~~thousand,~~remaining ~~respectively,~~vesting ~~were~~life. ~~recognized~~The asCompany recognizes compensation expense, ~~net~~over the vesting period at the fair market value of ~~estimated~~the ~~forfeitures~~shares on the award date. ~~The~~If ~~Company~~a ~~recognized~~participant’s ~~tax~~service ~~benefits~~terminates ~~resulting~~for ~~from~~any reason other than death or disability, then the ~~compensation~~participant ~~expense~~shall ~~for~~forfeit to the ~~six~~Company ~~months~~any ~~ended~~shares ~~June~~acquired ~~30,~~by ~~2011~~the ~~and~~participant ~~2010~~pursuant ofto ~~$124~~the ~~thousand~~restricted ~~and~~stock ~~$150~~award ~~thousand,~~which ~~respectively~~remain subject to vesting conditions.

The total remaining unrecognized compensation cost related to nonvested shares of restricted stock is $2.5 million at September 30, 2011 and is expected to be expensed over the weighted average remaining vesting life of 2.4 years. These shares would vest immediately upon change of control of the Company. For the nine months ended September 30, 2011 and 2010, $509 thousand and $585 thousand, 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, 2011 and 2010 of $173 thousand and $199 thousand, respectively.

A summary of restricted stock activity follows:

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2011		313,563		$	9.85
Granted		126,993		$	10.74
Vested		(4042,~~669~~503	)	$	12.6369
Forfeited or expired		(1528,~~700~~466	)	$	9.1959
Nonvested - June 30, 2011		384,187		$	9.87
Nonvested - September 30, 2011		369,587		$	9.85

At ~~June~~September 30, 2011, ~~102~~127,~~745~~456 shares were reserved for possible issuance of awards of options, SARs, restricted stock, performance units and unrestricted stock.

Non-Plan Stock-Based Compensation

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

In November 2006, the Company granted non-qualified stock options and restricted stock awards to the CEO, pursuant to the terms of his employment agreement. The non-qualified stock options to purchase 164,745 shares have an exercise price of $17.84 and are vesting 20% per year over five years. At ~~June~~September 30, 2011, 131,796 of these options were exercisable, but none have been exercised. The options outstanding and those exercisable at ~~June~~September 30, 2011 have no intrinsic value. The restricted stock awarded to the CEO totaled 83,612 shares and was awarded at an average price of $17.94 to vest in 20 equal quarterly installments over five years. The fair value of restricted stock awards vested during the ~~six~~nine months ended ~~June~~September 30, 2011 and 2010 was $~~150~~225 thousand and $73111 thousand, respectively.

A summary of restricted stock activity follows:

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2011		39,312		$	12.72
Granted		-			-
Vested		(812,~~362~~535	)	$	17.94
Nonvested - June 30, 2011		30,950		$	11.31
Nonvested - September 30, 2011		26,777		$	10.27

The total remaining unrecognized compensation cost related to nonvested options and shares of restricted stock is $350 thousand at June 30, 2011 and will be expensed over the weighted average remaining vesting life of 1.4 years. For the six months ended June 30, 2011 and 2010, $265 thousand and $269 thousand, respectively, were recognized as compensation expense. The non-qualified stock options and the restricted stock awards were not issued as part of any of the Company’s registered stock-based compensation plans.21

The total remaining unrecognized compensation cost related to nonvested options and shares of restricted stock is $217 thousand at September 30, 2011 and will be expensed over the weighted average remaining vesting life of 1.2 years. For the nine months ended September 30, 2011 and 2010, $398 thousand and $403 thousand, respectively, were recognized as compensation expense. The non-qualified stock options and the restricted stock awards were not issued as part of any of the Company’s registered stock-based compensation plans.

9. BORROWINGS

The Bank may use a secured line of credit with the Federal Home Loan Bank of New York (“FHLB”) for overnight funding or on a term basis to match fund asset purchases. The amount of this line of credit will fluctuate based upon the amount of pledged collateral in the form of real estate mortgage loans and investment securities. At ~~June~~September 30, 2011, the Bank had approximately $~~318~~331 million of real estate mortgage loan collateral, including approximately $~~300~~314 million in commercial real estate loans, pledged at the FHLB. Based on this collateral, the Bank had approximately $~~226~~235 million available to borrow overnight or on a term basis. There were no investment securities pledged at ~~June~~September 30, 2011. The FHLB line is renewed annually.

The following table provides information on the Bank’s FHLB line at and for the ~~six~~nine months ended ~~June~~September 30, 2011 and year ended December 31, 2010 (dollars in thousands).

	Six months ended			Year ended
	Nine months ended			Year ended
	June 30, 2011			December 31, 2010
	September 30, 2011			December 31, 2010
Amount outstanding under line of credit with the FHLB - end of period	$	-		$	22,000
Amount outstanding under line of credit with the FHLB - period average	$	21,~~022~~341		$	7,386
Weighted-average interest rate on average amount outstanding		0.41	%		0.45	%

At ~~June~~September 30, 2011 and December 31, 2010, the Bank had $2 million and $3 million, respectively, outstanding in securities sold under agreements to repurchase at a weighted-average interest rate of 1.88%.

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

The Company’s two unconsolidated trust subsidiaries currently have outstanding a total of $20 million in trust preferred securities. 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 two trust subsidiaries used the proceeds from the issuance of the trust preferred securities to acquire junior subordinated debentures issued by the Company. The junior subordinated debentures related to Trust I total $10 million, have a coupon rate of three-month LIBOR plus 345 basis points and mature on November 7, 2032. Those debentures related to Trust II also total $10 million, have a coupon rate of three-month LIBOR plus 285 basis points and mature on January 23, 2034.

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 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 impaired loans.

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

	Carrying Amount at June 30, 2011		Fair Value Measurements at June 30, 2011 Using Significant Other Observable Inputs (Level 2)
	Carrying Amount at September 30, 2011		Fair Value Measurements at September 30, 2011 Using Significant Other Observable Inputs (Level 2)
Assets:
Securities available for sale:
Obligations of states and political subdivisions	$	~~1,351~~600	$	~~1,351~~600
Government Agency securities		4344,~~311~~922		4344,~~311~~922
Mortgage-backed securities and collateralized mortgage obligations - residential:
FHLMC		9171,~~005~~908		9171,~~005~~908
FNMA		~~118~~99,~~926~~903		~~118~~99,~~926~~903
GNMA		7480,~~088~~160		7480,~~088~~160
Mortgage-backed securities and collateralized mortgage obligations - commercial:
GNMA		45,~~921~~075		45,~~921~~075
Total securities available for sale	$	~~333~~302,~~602~~568	$	~~333~~302,~~602~~568
Derivatives	$	12,~~997~~187	$	12,~~997~~187
Liabilities:
Derivatives	$	2,~~093~~427	$	2,~~093~~427

2223

	Carrying Amount at December 31, 2010		Fair Value Measurements at December 31, 2010 Using Significant Other Observable Inputs (Level 2)
Assets:

Securities available for sale:
Obligations of states and political subdivisions	$	1,906	$	1,906
Government Agency securities		40,556		40,556
Mortgage-backed securities and collateralized mortgage obligations - residential:
FHLMC		110,748		110,748
FNMA		113,617		113,617
GNMA		89,472		89,472
Mortgage-backed securities and collateralized mortgage obligations - commercial:
GNMA		4,859		4,859
Total securities available for sale	$	361,158	$	361,158

Derivatives	$	2,111	$	2,111

Liabilities:

Derivatives	$	2,198	$	2,198

For the ~~six~~nine months ended ~~June~~September 30, 2011 and the year ended December 31, 2010, there were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

Assets and Liabilities Measured on a Non-Recurring Basis

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

	June 30, 2011		Fair Value Measurements at June 30, 2011 Using Significant Unobservable Inputs (Level 3)
	September 30, 2011		Fair Value Measurements at September 30, 2011 Using Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial and industrial - owner-occupied mortgage	$	~~219~~5,781	$	~~219~~5,781
Commercial and industrial - general purpose		1611,~~221~~208		1611,~~221~~208
Real estate - commercial mortgage		45,~~508~~366		45,~~508~~366
Real estate - commercial construction		6,~~090~~063		6,~~090~~063
Total impaired loans	$	27,038	$	27,038
Net impaired loans	$	28,418	$	28,418

2324

	December 31, 2010		Fair Value Measurements at December 31, 2010 Using Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans:
Commercial and industrial - general purpose	$	18,321	$	18,321
Real estate - commercial mortgage		1,437		1,437
Real estate - residential mortgage		720		720
Real estate - commercial construction		6,018		6,018
Real estate - residential construction		1,034		1,034
Total impaired loans	$	27,530	$	27,530
Net impaired loans	$	27,530	$	27,530

Impaired loans with specific allocations had a principal amount of $3635 million and $4041 million, with a valuation allowance of $96 million and $13 million at ~~June~~September 30, 2011 and December 31, 2010, respectively. The provision for losses on impaired loans was ($~~682)~~1.9 ~~thousand~~million and $~~965~~1.1 ~~thousand~~million for the ~~six~~nine months ended ~~June~~September 30, 2011 and 2010, respectively. (See also Note 5 – Loans.)

The carrying amounts and estimated fair values of the Company’s financial instruments are as follows (in thousands):

	June 30, 2011				December 31, 2010
	September 30, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	7883,~~170~~959	$	7883,~~170~~959	$	23,121	$	23,121
Accrued interest receivable		54,~~537~~971		54,~~537~~971		5,776		5,776
Securities held to maturity		22,000		2119,~~895~~530		22,000		21,890
Securities available for sale		~~333~~302,~~602~~568		~~333~~302,~~602~~568		361,158		361,158
Federal Home Loan Bank and
other restricted stock		54,402		N/A		6,381		N/A
Loans - net of the
allowance for loan losses		1,~~115~~138,~~487~~954		1,~~123~~155,~~717~~052		1,098,292		1,109,500
Derivatives		12,~~997~~187		12,~~997~~187		2,111		2,111
Financial liabilities:
Deposits	$	1,~~400~~383,~~807~~711	$	1,~~310~~333,~~023~~808	$	1,348,735	$	1,257,572
Senior unsecured debt		29,000		29,~~319~~219		29,000		29,386
Junior subordinated debentures		20,620		1513,~~568~~919		20,620		11,470
Accrued interest payable		~~638~~384		~~638~~384		650		650
Temporary borrowings		32,000		32,000		25,000		25,000
Derivatives		2,093		2,093		2,198		2,198
Payable - securities purchases		3,990		3,990		-		-
Derivatives		2,427		2,427		2,198		2,198

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.

2425

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

Securities Held to Maturity and Securities Available for Sale – For securities held to maturity and securities available for sale, the estimated fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using a quoted market price for similar securities.

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

Loans - For certain homogeneous categories of loans, such as some residential real estate loans 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 and savings accounts is estimated by discounting the expected future cash flows against the interest rate swap curve, as it best represents the cost of alternative funding sources. The fair value of fixed-maturity certificates of deposit is estimated using the interest rate swap rates of similar term points.

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

Junior Subordinated Debentures - The fair value of junior subordinated debentures is estimated using observed market prices.

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

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

Derivatives – The fair value is estimated as previously described.

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

11. INCOME TAXES

Income tax expense of $38.64 million and $24.97 million were recorded during the ~~six~~nine months ended ~~June~~September 30, 2011 and 2010, respectively. The Company’s overall effective tax rate was 3839% for the ~~six~~nine months ended ~~June~~September 30, 2011 ~~and~~compared ~~2010~~to 37% for the same period in the prior year.

The Company is no longer subject to examination by Federal taxing authorities for years before January 1, 2008. In addition, the Company is no longer subject to examination by New York State (“NYS”) and New York City (“NYC”) taxing authorities for years before January 1, 2007. The Company is currently under examination by NYS for the NYS franchise tax returns for the years ended December 31, 2007 through ~~2009~~2010.

On a quarterly basis, the Company performs an evaluation of its tax positions and has concluded that as of ~~June~~September 30, 2011 there were no significant uncertain tax positions requiring additional recognition in its consolidated financial statements and the Company 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. During the ~~six~~nine months ended ~~June~~September 30, 2011, there were no material accruals for interest and/or penalties.

The Company has net operating loss carryforwards of approximately $17 million for Federal income tax and $37 million for NYS tax purposes which may be applied against future taxable income. Both the Federal and NYS unused net operating loss carryforwards are expected to expire between the years 2027 and 2029. It is anticipated that these carryforwards, both Federal and NYS, will be utilized prior to their expiration based on the Company’s future years’ projected earnings and therefore no valuation allowance has been recorded against the deferred tax assets. In addition, the Company has alternative minimum tax (“AMT”) credit carryover of $1 million which does not expire.26

25The Company has net operating loss carryforwards of approximately $7 million for Federal income tax and $28 million for NYS tax purposes which may be applied against future taxable income. Both the Federal and NYS unused net operating loss carryforwards are expected to expire between the years 2027 and 2029. It is anticipated that these carryforwards, both Federal and NYS, will be utilized prior to their expiration based on the Company’s future years’ projected earnings and therefore no valuation allowance has been recorded against the deferred tax assets. In addition, the Company has alternative minimum tax (“AMT”) credit carryover of $2 million which does not expire.

12. MERGER-RELATED ACTIVITY

On April 28, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Valley, providing for the merger of the Company with and into Valley, with Valley as the surviving entity (the “Merger”). Immediately following the Merger, the Bank will merge with and into Valley National Bank, a national banking association and wholly-owned subsidiary of Valley, with Valley National Bank surviving the merger. Subject to the terms and conditions of the Merger Agreement, upon consummation of the Merger, each share of common stock of the Company will be converted into one share of Valley common stock, subject to the payment of cash in lieu of fractional shares. The Merger Agreement provides that, prior to the consummation of the Merger, Valley will fund the purchase by either Valley or the Company from the U.S. Treasury of each share of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of the Company (the “TARP Preferred Stock”) issued and outstanding on that date. In addition, Valley may, but is not required to, purchase the outstanding warrant (the “TARP Warrant”) to purchase Company common stock. If Valley does not purchase the TARP Warrant, such warrant will be converted at the effective time of the Merger into a warrant to purchase Valley common stock, subject to appropriate adjustments in accordance with its terms.

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: the failure of the Company and Valley to satisfy the closing conditions in the ~~merger~~Merger ~~agreement~~Agreement, market interest rates, general economic conditions, legislative/regulatory changes including the ~~Dodd-Frank Wall Street~~ Reform ~~and Consumer Protection~~ Act ~~(the “Reform Act”)~~, monetary and fiscal policies of the U.S. Government, changes in FDIC assessments, the ability to raise additional capital (equity or debt) on favorable terms, the quality and composition of the loan or investment portfolios, demand for loan products, demand for financial services in the Company’s primary trade area, regional economic activity in New York, litigation, tax and other regulatory matters, accounting principles and guidelines, other economic, competitive, governmental, regulatory and technological factors affecting the Company’s operations, pricing and services and those risks detailed in the Company’s periodic reports filed with the SEC.

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

Executive Summary – State Bancorp, Inc. (the “Company”) is a one-bank holding company formed in 1985 and is 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 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 operations 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 real estate 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 real estate loans. The Bank does not engage in subprime lending and does not offer payment option ARMs or negative amortization loan products.

The Board of Directors of the Company has unanimously approved the Merger. The Merger is subject to the approval of the Company’s stockholders, approvals from applicable banking regulators and other customary conditions. The Office of the Comptroller of the Currency and the Federal Reserve Bank of New York have granted their approval of the merger. We anticipate the closing of the Merger to take place in the fourth quarter of 2011. In connection with the merger, Valley has filed with the SEC a Registration Statement on Form S-4 that includes a proxy statement of the Company and a prospectus of Valley, as well as other relevant documents concerning the proposed transaction. A definitive proxy statement will be mailed to stockholders of the Company after the Registration Statement is declared effective. The Registration Statement has not yet become effective. The definitive proxy statement will contain more detailed information regarding the Merger.

Financial performance of State Bancorp, Inc.
(dollars in thousands, except per share data)
As of or for the quarters and six months ended June 30, 2011 and 2010
	Quarters ended June 30,									Six months ended June 30,
							Over/									Over/
							(under)									(under)
	2011			2010			2010			2011			2010			2010
Revenue (1)	$	17,342		$	19,274			(10.0	) %	$	34,079		$	37,421			(8.9	) %
Operating expenses	$	10,214		$	11,181			(8.6	) %	$	20,203		$	22,177			(8.9	) %
Provision for loan losses	$	1,100		$	5,450			(79.8	) %	$	3,000		$	7,700			(61.0	) %
Net income	$	2,881		$	1,659			73.7	%	$	5,917		$	4,676			26.5	%
Net income per common share - diluted	$	0.14		$	0.07			100	%	$	0.29		$	0.22			32	%
Return on average total assets		0.71	%		0.40	%		31	bp		0.74	%		0.58	%		16	bp
Return on average common stockholders' equity		7.70	%		3.96	%		374	bp		8.09	%		6.39	%		170	bp
Tier I leverage ratio		10.07	%		8.93	%		114	bp		10.07	%		8.93	%		114	bp
Tier I risk-based capital ratio		12.74	%		12.02	%		72	bp		12.74	%		12.02	%		72	bp
Total risk-based capital ratio		14.00	%		13.28	%		72	bp		14.00	%		13.28	%		72	bp
Tangible common equity ratio (non-GAAP)		7.62	%		7.17	%		45	bp		7.62	%		7.17	%		45	bp
bp - denotes basis points; 100 bp equals 1%.
(1) Represents net interest income plus total non-interest income.

AsThe Bank maintains its corporate headquarters in Jericho, New York and serves its customer base through sixteen branches in Nassau, Suffolk, Queens and Manhattan. The Bank offers a full range of ~~June~~banking 30services to our diverse customer base which includes commercial real estate owners and developers, ~~2011~~small to middle market businesses, ~~the~~professional ~~Company~~service firms, onmunicipalities aand ~~consolidated~~consumers. ~~basis~~Retail and commercial products include checking accounts, ~~had~~NOW ~~total~~accounts, ~~assets~~money market accounts, savings accounts, certificates of ~~$1.6~~deposit, ~~billion~~individual retirement accounts, ~~total~~commercial ~~deposits~~loans, commercial real estate loans, small business lines of $1credit, cash management services and telephone and online banking.4 ~~billion~~In addition, the Bank also provides access to annuity products and ~~stockholders~~mutual funds. The Company’s ~~equity~~loan ofportfolio ~~$161~~is ~~million~~concentrated in commercial and industrial loans and commercial real estate loans. The Bank does not engage in subprime lending and does not offer payment option ARMs or negative amortization loan products.

~~The~~On April 28, 2011, the Company ~~recorded~~entered ~~net~~into ~~income~~an Agreement and Plan of ~~$2.9~~Merger ~~million,~~(the ~~and~~“Merger ~~$0.14~~Agreement”) ~~per~~with ~~diluted~~Valley ~~common~~National ~~share~~Bancorp (“Valley”), providing for the ~~second~~merger ~~quarter~~ of ~~2011~~the Company with and into Valley, ~~compared~~with toValley ~~net~~as ~~income~~the ofsurviving $1entity (the “Merger”).7 ~~million~~Immediately following the Merger, ~~and~~the ~~$0.07~~Bank ~~per~~will ~~diluted~~merge ~~common~~with ~~share~~and into Valley National Bank, ~~for~~a ~~the~~national ~~second~~banking ~~quarter~~association ofand ~~2010.~~wholly-owned ~~Several~~subsidiary ~~positive~~of ~~trends~~Valley, ~~were~~with ~~evident~~Valley ~~this~~National ~~reporting~~Bank ~~period~~surviving ~~compared~~the merger. Subject to the ~~same~~terms ~~quarter~~and ~~last~~conditions ~~year,~~of ~~most~~the ~~notably~~Merger Agreement, aupon ~~$4.4~~consummation ~~million~~of ~~decrease~~the inMerger, ~~the~~each ~~provision~~share ~~for~~of ~~loan~~common ~~losses~~stock ~~and~~of athe ~~$495~~Company ~~thousand~~will ~~increase~~be inconverted ~~net~~into ~~interest~~one ~~income~~share asof ~~the~~Valley ~~result~~common ofstock, asubject ~~wider~~to ~~net~~the ~~interest~~payment ~~margin.~~of ~~Core~~cash ~~operating~~in ~~expenses~~lieu (aof ~~non-GAAP~~fractional ~~financial~~shares. The ~~measure)~~Merger ~~declined~~Agreement byprovides ~~8.6%~~that, prior to ~~$10.2~~the ~~million~~consummation inof the ~~second~~Merger, ~~quarter~~Valley ofwill ~~2011~~fund ~~resulting~~the inpurchase anby ~~improvement~~either ofValley or the Company’s ~~operating~~from ~~efficiency~~the ~~ratio to 58~~U.8%S. ~~Core~~Treasury ~~operating~~of ~~expenses~~each ~~exclude~~share ~~merger-related expenses~~ of ~~$1.4~~Fixed ~~million,~~Rate ~~primarily~~Cumulative ~~legal~~Perpetual ~~fees~~Preferred Stock, ~~associated~~Series ~~with~~A, of the ~~Merger.~~Company ~~The~~(the ~~Company~~“TARP ~~expects~~Preferred ~~that~~Stock”) ~~non-interest~~issued ~~expense~~and ~~will~~outstanding ~~continue~~on tothat ~~increase~~date. In ~~due~~addition, toValley ~~Merger-related~~may, ~~costs.~~but ~~Partially~~is ~~offsetting~~not ~~these~~required ~~improvements~~to, ~~net~~purchase ~~gains~~the onoutstanding warrant (the ~~sales~~“TARP ofWarrant”) ~~securities~~to ~~declined~~purchase byCompany $2common stock.5 If ~~million~~Valley indoes not purchase the ~~second~~TARP ~~quarter~~Warrant, ofsuch ~~2011~~warrant ~~compared~~will tobe ~~2010.~~converted ~~Excluding~~at the ~~merger-related~~effective ~~expenses,~~time ~~second~~of ~~quarter~~the ~~net~~Merger ~~income~~into ~~was~~a ~~$3.7~~warrant ~~million~~to ~~and~~purchase ~~earnings~~Valley ~~per~~common ~~diluted~~stock, ~~common~~subject ~~share~~to ~~was~~appropriate adjustments $0in accordance with its terms.~~19.~~

Revenue of State Bancorp, Inc.
(dollars in thousands)
For the quarters and six months ended June 30, 2011 and 2010
	Quarters ended June 30,				Six months ended June 30,
			Over/				Over/
			(under)				(under)
	2011	2010	2010		2011	2010	2010
Net interest income	$16,383	$15,888	3.1	%	$31,985	$32,873	(2.7)	%
Service charges on deposit accounts	416	455	(8.6)	%	858	905	(5.2)	%
Net gains on sales of securities	31	2,525	(98.8)	%	113	2,781	(95.9)	%
Income from bank owned life insurance	64	104	(38.5)	%	164	246	(33.3)	%
Other operating income	448	302	48.3	%	959	616	55.7	%
Total revenue	$17,342	$19,274	(10.0)	%	$34,079	$37,421	(8.9)	%

The Board of Directors of the Company has unanimously approved the Merger. The Merger is subject to the approval of the Company’s stockholders, approvals from applicable banking regulators and other customary conditions. The Office of the Comptroller of the Currency granted its approval of the Merger on July 7, 2011. On July 15, 2011, the Company received written confirmation that the transaction may proceed without the prior approval of the Federal Reserve Bank of New York. We expect the Merger to be effective in early January 2012. In connection with the Merger, Valley has filed with the SEC a Registration Statement on Form S-4 that includes a proxy statement of the Company and a prospectus of Valley and an Amendment to the Registration Statement on Form S-4, as well as other relevant documents concerning the proposed transaction. The Registration Statement was declared effective on November 1, 2011. A definitive proxy statement containing more detailed information regarding the Merger was mailed to stockholders of the Company on or about November 2, 2011 in connection with a special meeting of shareholders called to be held on December 5, 2011.

The Company’s return on average total assets at 0.71% for the second quarter of 2011 compares favorably to 0.40% for the second quarter of 2010, while return on average common stockholders’ equity increased to 7.70% for the second quarter of 2011 from 3.96% for the second quarter of 2010. The Company’s net interest margin increased by 16 basis points to 4.32% for the second quarter of 2011 from 4.16% for the second quarter of 2010. Generally, the Company’s net interest margin is impacted not only by the average balance and mix of the Company’s interest-earning assets and interest-bearing liabilities, but also by the level of market interest rates. These rates are significantly influenced by the actions of the Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “FOMC”) policy makers.

While some signs of modest economic recovery have emerged in recent quarters, the sustainability of any improvement remains uncertain as unemployment levels and the housing sector continue to exhibit weakness. The subdued pace of economic recovery and the risks inherent in lending in this environment remain causes for continued caution. Consequently, the management of credit quality and operating expenses remain areas of ongoing and diligent focus across the Company. Although quality commercial loan demand remains tepid, we are experiencing an improving flow of loan originations within our middle market commercial loan portfolio, representing our effort to diversify away from an earlier heavier reliance on construction and commercial real estate lending.

The primary focus of the Company’s loan portfolio is commercial and industrial loans and commercial real estate. We expect to achieve modest loan growth this year. We remain cautious, however, on credit conditions and the inherent risk in lending portfolios.

The provision for loan losses was $1.1 million in the second quarter of 2011 compared to $5.5 million in the second quarter of 2010. The decrease in provision reflects the amount of provision deemed necessary to maintain an adequate allowance for loan losses taking into account the current status of watch list loans. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.) The allowance for loan losses was $28 million at June 30, 2011 and $33 million at December 31, 2010.

The Company’s securities portfolio contains no subprime exposure, structured debt or exotic structures. At June 30, 2011, the fair value of the securities portfolio represented 102% of amortized cost.

Financial performance of State Bancorp, Inc.
(dollars in thousands, except per share data)
As of or for the quarters and nine months ended September 30, 2011 and 2010


	Quarters ended September 30,											Nine months ended September 30,
							Over/											Over/
							(under)											(under)
	2011			2010			2010					2011			2010			2010
Revenue (1)	$	18,062		$	18,049			0.1	%			$	52,141		$	55,470			(6.0	)	%
Operating expenses	$	9,608		$	10,556			(9.0	%			$	31,168		$	32,733			(4.8	)	%
(Credit) provision for loan losses	$	(3,500	)	$	2,500			N/M		(2	)	$	(500	)	$	10,200			N/M		(2	)
Net income	$	7,127		$	3,210			122.0	%			$	13,044		$	7,886			65.4		%
Net income per common share - diluted (3)	$	0.39		$	0.17			129	%			$	0.68		$	0.39			74		%
Return on average total assets		1.75	%		0.78	%		97		bp			1.08	%		0.65	%		43			bp
Return on average common stockholders' equity		20.67	%		9.09	%		1,158		bp			12.45	%		7.31	%		514			bp
Tier I leverage ratio		10.80	%		9.33	%		147		bp			10.80	%		9.33	%		147			bp
Tier I risk-based capital ratio		13.45	%		12.03	%		142		bp			13.45	%		12.03	%		142			bp
Total risk-based capital ratio		14.71	%		13.29	%		142		bp			14.71	%		13.29	%		142			bp
Tangible common equity ratio (non-GAAP)		8.03	%		7.11	%		92		bp			8.03	%		7.11	%		92			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.
(3) The amounts of $0.39 and $0.68 for the quarter and nine months ended September 30, 2011, respectively, were originally reported in error as $0.40 and $0.69, respectively, in the press release issued by the Company on October 19, 2011.

As of September 30, 2011, the Company, on a consolidated basis, had total assets of $1.6 billion, total deposits of $1.4 billion and stockholders’ equity of $167 million.

The Company recorded net income of $7.1 million, and $0.39 per diluted common share, for the third quarter of 2011, compared to net income of $3.2 million, and $0.17 per diluted common share, for the third quarter of 2010. The improvement in the 2011 third quarter results versus the comparable 2010 period primarily reflected a $3.5 million credit to the provision for loan losses, a $948 thousand decline in total operating expenses and a $308 thousand increase in net interest income. Core operating expenses declined by 10.4% to $9.5 million in the third quarter of 2011 resulting in an improvement of the Company’s operating efficiency ratio to 55.0% (non-GAAP financial measures). Core operating expenses exclude Merger-related expenses, primarily legal fees. The Company expects that non-interest expense will continue to increase due to Merger-related costs. Excluding the Merger-related expenses, third quarter net income was $7.2 million and earnings per diluted common share was $0.39 (non-GAAP financial measures).

Revenue of State Bancorp, Inc.
(dollars in thousands)
For the quarters and nine months ended September 30, 2011 and 2010


	Quarters ended September 30,				Nine months ended September 30,
			Over/				Over/
			(under)				(under)
	2011	2010	2010		2011	2010	2010
Net interest income	$16,337	$16,029	1.9	%	$48,322	$48,902	(1.2)	%
Service charges on deposit accounts	392	467	(16.1)	%	1,250	1,372	(8.9)	%
Net gains on sales of securities	933	733	27.3	%	1,046	3,514	(70.2)	%
Other operating income	400	820	(51.2)	%	1,523	1,682	(9.5)	%
Total revenue	$18,062	$18,049	0.1	%	$52,141	$55,470	(6.0)	%

The Company’s return on average total assets at 1.75% for the third quarter of 2011 compares favorably to 0.78% for the third quarter of 2010, while return on average common stockholders’ equity increased to 20.67% for the third quarter of 2011 from 9.09% for the third quarter of 2010. The Company’s net interest margin increased by seven basis points to 4.23% for the third quarter of 2011 from 4.16% for the third quarter of 2010. Generally, the Company’s net interest margin is impacted not only by the average balance and mix of the Company’s interest-earning assets and interest-bearing liabilities, but also by the level of market interest rates. These rates are significantly influenced by the actions of the Federal Open Market Committee of the Board of Governors of the Federal Reserve System (the “FOMC”) policy makers.

A $3.5 million credit to the provision for loan losses was recorded in the third quarter of 2011 versus a $2.5 million provision in the third quarter of 2010, reflecting an adjustment to the provision deemed necessary to maintain an adequate allowance for loan losses taking into account the current status of watch list loans and the payment in full of two impaired loans that had required an allowance allocation and were resolved for no loss. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.) The allowance for loan losses was $23 million at September 30, 2011 and $33 million at December 31, 2010.

The Company’s securities portfolio contains no subprime exposure, structured debt or exotic structures. At September 30, 2011, the fair value of the securities portfolio represented 101% of amortized cost.

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

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

Management recognizes that, despite its best efforts to minimize risk through its credit review process, losses will inevitably occur. In times of economic slowdown, regional or national, the credit risk inherent in the Company’s loan portfolio will increase. The timing and amount of loan losses that occur are dependent upon several factors, most notably qualitative and quantitative factors about the financial conditions as reflected in the loan portfolio and the economy as a whole. Factors considered in the evaluation of the allowance for loan losses for all portfolio segments include, but are not limited to, the following: 1) estimated probable inherent losses from loan and other credit arrangements, 2) general economic conditions, 3) credit risk grades assigned to commercial and industrial and commercial real estate loans, 4) changes in credit concentrations or pledged collateral, 5) historical loan loss experience and 6) trends in portfolio volume, maturity, composition, delinquencies and non-accruals. The allowance for loan losses is established to absorb probable inherent loan losses. Additions to the allowance are made through the provision for loan losses, which is a charge to current operating earnings. The adequacy of the provision and the resulting allowance for loan losses is determined by management’s continuing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data, collateral values and changes in the size and character of the loan portfolio. Despite such a review, the level of the allowance for loan losses remains an estimate, cannot be precisely determined and may be subject to significant changes from quarter to quarter. Based on current economic conditions, management believes that the current level of the allowance for loan losses is adequate in relation to the probable inherent losses present in the portfolio.

2930

Commercial loans in all portfolio segments are assigned credit risk grades using a scale of one to ten with allocations for probable inherent losses made for pools of similar risk-graded loans. Loans in all portfolio segments with signs of credit deterioration, generally in grades eight through ten and internally risk-graded as substandard, doubtful and loss, respectively, are termed “classified” loans in accordance with guidelines established by the Company’s regulators. “Criticized” loans, generally in grade seven and internally risk-graded as special mention, have potential weaknesses, often temporary in nature, requiring management’s extra vigilance. Loans requiring special attention but not warranting categorization as either criticized or classified are generally in grade six. Watch list loans consist of criticized loans, classified loans, and those loans requiring special attention but not warranting categorization as either criticized or classified. Loans generally in grades one to six are termed “pass” loans, except for those loans in grade six that are on the watch list. When management analyzes the allowance for loan losses, classified loans in all portfolio segments are assigned allocation factors ranging from 20% to 100% of the outstanding loan balance and are based on the Company’s historic loss experience. For all portfolio segments, non-accrual loans in excess of $250 thousand are individually evaluated for impairment and are not included in these risk grade pools. A loan is considered “impaired” when, based on current information and events, it is probable that both the principal and interest due under the original contractual terms will not be collected in full. The Company measures impairment of collateralized loans based on the fair value of the collateral, less estimated costs to sell. For loans that are not collateral-dependent, impairment is measured by using the present value of expected cash flows, discounted at the loan’s effective interest rate. An allowance allocation factor for additional portfolio macro factors, including various real estate related sectors, currently ranging from 1-35 basis points is calculated to cover potential losses from a number of variables, not the least of which is the current economic uncertainty.

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

For all loans regardless of portfolio segment, the Bank prepares a combined migration analysis which analyzes the historical loss experience. The migration analysis is prepared at least annually for the purpose of determining the assigned allocation factors which is an essential component of the allowance for loan losses level. Additional risk components including large relationship risk, commercial/residential contractor risk, rising interest rate risk, energy and oil dependent risk, real estate risk, and economic condition uncertainty are also considered. Based upon charge-off history, the Company generally makes adjustments, if necessary, to its allocation factors annually.

Risk characteristics of the commercial and industrial portfolio segment vary and depend upon the specific borrower’s business and industry sector. Risk characteristics of the real estate portfolio segments tend to be cyclical and, in the Bank’s case, generally specific to the Long Island and New York City geographical area; at present the real estate market generally continues to be lackluster. Risk characteristics of the loans to individuals segment vary depending on the type of loan, the timing of repayment, the sources of repayment, and value and stability of any collateral.

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

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

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

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

Material Changes in Financial Condition - Total assets of the Company were $1.6 billion at ~~June~~September 30, 2011. When compared to December 31, 2010, total assets increased by $3628 million. This change primarily reflects increases in balances due from banks and net loans of $5561 million and $1741 million, respectively, partially offset by a decrease in investment securities of $2859 million.

The ~~increase~~decrease in ~~balances~~the ~~due~~investment ~~from~~portfolio ~~banks~~largely ~~resulted~~reflects ~~from~~sales ~~temporary~~and ~~inflows~~prepayments of ~~deposits~~mortgage-backed ~~from~~securities ~~municipal~~of ~~tax receivers~~U.S. ~~Net~~Government-sponsored ~~loans~~enterprises ~~were~~totaling $~~1.1~~80 ~~billion~~million atand ~~June~~$63 30million, ~~2011,~~respectively. anThese ~~increase~~were ofpartially ~~$17~~offset ~~million~~by aspurchases ~~compared~~of tomortgage-backed ~~December~~securities ~~31,~~totaling ~~2010~~$83 million. ~~Before~~Sales ~~allowance~~of ~~for~~investment ~~loan~~securities ~~losses~~were ~~and~~executed ~~unearned~~during ~~income,~~periods ~~the~~of ~~increase~~historically inlow ~~commercial~~interest ~~real~~rates, ~~estate~~allowing ~~loans~~the ofCompany ~~$34~~to ~~million~~exit ~~was~~high ~~partially~~book ~~offset~~value bypositions athat ~~decrease~~management offelt ~~$15~~were ~~million~~due into ~~commercial~~prepay ~~and~~faster ~~industrial~~in ~~loans~~the atnear ~~June~~term. The ~~30,~~net ~~2011~~decrease asin ~~compared~~the toinvestment portfolio ~~year~~is ~~end~~the ~~2010.~~main Incause ~~addition,~~of the ~~allowance~~rise ~~for~~in ~~loan~~balances ~~losses~~due ~~decreased~~from $5banks. The ~~million~~additional atcash ~~June~~is ~~30,~~expected ~~2011~~to ~~compared~~be toredeployed ~~December~~into ~~31,~~the ~~2010,~~Bank’s ~~reflecting~~loan ~~the~~portfolio ~~amount~~as ofnew ~~allowance~~customers ~~deemed~~and ~~necessary~~products toare ~~maintain~~developed anthrough ~~adequate~~the ~~allowance~~balance ~~for~~of ~~loan~~the ~~losses~~year.

~~The~~Net ~~decrease~~loans inwere ~~the~~$1.1 ~~investment~~billion ~~portfolio~~at ~~largely~~September ~~reflects~~30, ~~sales~~2011, ~~and~~an ~~prepayments~~increase of ~~mortgage-backed~~$41 ~~securities~~million ofas Ucompared to December 31, 2010.S. ~~Government-sponsored~~An ~~enterprises~~increase ~~totaling~~in ~~$48~~commercial ~~million~~real ~~and~~estate loans of $4452 million, ~~respectively.~~was ~~These were~~ partially offset by ~~purchases~~a decrease of ~~mortgage-backed~~$11 ~~securities~~million ~~totaling~~in ~~$62~~commercial ~~million~~and industrial loans at September 30, 2011 as compared to year end 2010.

At ~~June~~September 30, 2011, ~~total~~net ~~deposits~~deferred income taxes were $~~1.4~~16 ~~billion~~million, ana ~~increase~~decrease of $528 million ~~when~~from ~~compared to~~ December 31, 2010, ~~largely~~primarily due to anthe ~~increase~~utilization ~~in core deposit balances. Core deposit balances increased $45 million as an increase~~ of $385 million in ~~demand~~net ~~deposits,~~operating ~~primarily~~loss ~~business~~carryforwards ~~demand~~and ~~deposit~~a ~~balances, was coupled with an increase of~~ $74 million reduction in ~~savings~~the ~~deposits,~~deferred ~~largely~~tax ~~municipal~~impact ~~savings~~of ~~deposits.~~the ~~Core~~allowance ~~deposit~~for ~~balances~~loan ~~represented~~losses. These ~~approximately~~were ~~73%~~partially ofoffset ~~total~~by ~~deposits~~a at$400 ~~June~~thousand ~~30,~~increase ~~2011~~in ~~compared~~the todeferred ~~72%~~tax atimpact ~~year~~of ~~end~~equity-based ~~2010.~~compensation ~~Short-term~~and ~~borrowed~~accrued ~~funds~~expenses, ~~consisting~~coupled ~~primarily~~with ofa ~~FHLB advances, totaled~~ $3400 ~~million~~thousand atnet ~~June~~increase ~~30,~~in ~~2011~~the ~~and~~AMT ~~$25 million at December 31, 2010~~credit.

~~Capital~~At ~~Resources~~September -30, ~~Total~~2011, ~~stockholders’~~total ~~equity~~deposits ~~amounted~~were to$1.4 billion, an increase of $~~161~~35 million atwhen ~~June~~compared 30to December 31, ~~2011~~2010, ~~representing~~largely due to growth in core deposit balances. Core deposit balances increased $32 million as an increase of $638 million ~~from~~in ~~December~~demand 31deposits, ~~2010.~~primarily ~~The~~business ~~increase~~demand ~~from~~deposit ~~year~~balances, ~~end~~was ~~2010~~partially ~~largely~~offset ~~reflects~~by ~~net~~a ~~income~~decrease ~~retained~~of ~~and~~$6 ~~the~~million ~~reissuance~~in ofsavings ~~common~~deposits, ~~stock~~largely ~~previously~~municipal ~~held~~savings indeposits. ~~treasury~~Core todeposit bebalances ~~used~~represented ~~for~~approximately ~~contributions~~73% ~~under~~of ~~the~~total ~~Company’s~~deposits ~~ESOP~~at ~~and~~September ~~401(k)~~30, ~~plans.~~2011 ~~Management~~compared ~~continually~~to ~~evaluates~~72% ~~the~~at ~~Company’s~~year ~~capital~~end ~~position~~2010. inShort-term ~~light~~borrowed funds, consisting primarily of ~~current~~FHLB ~~and~~advances, ~~future~~totaled ~~growth~~$2 ~~objectives~~million at September 30, 2011 and ~~regulatory~~$25 ~~guidelines~~million at December 31, 2010.

The Company’s Dividend Reinvestment and Stock Purchase Plan (the “DRP”) allows existing shareholders to reinvest cash dividends in Company stock and/or to purchase additional shares through optional cash investments on a quarterly basis. The DRP allows for a periodic incremental increase in capital to the extent of our shareholders’ participation.

In November 2008, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective in December 2008. This shelf registration statement allows the Company to periodically offer and sell, from time to time, in one or more offerings, individually or in any combination, up to an aggregate of $100 million of the Company’s common stock, preferred stock, senior debt securities, subordinated debt securities, or warrants to purchase common stock or preferred stock. The shelf registration statement provides the Company with capital raising flexibility and enables the Company to promptly access the capital markets in order to pursue growth opportunities that may become available in the future or permit the Company to comply with any changes in the regulatory environment that call for increased capital requirements. The Company’s ability, and any decision to issue and sell securities pursuant to the shelf registration statement, is subject to market conditions and the Company’s capital needs at such time. As of June 30, 2011, the Company had not issued and sold any securities pursuant to the shelf registration statement.

The Company’s tangible common equity to tangible assets ratio was 7.62% at June 30, 2011 compared to 7.39% at December 31, 2010 and 7.17% at June 30, 2010. 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 or as required by bank regulatory agencies. Set forth below are the reconciliations of tangible common equity to GAAP total common stockholders’ equity and tangible assets to GAAP total assets at June 30, 2011 (in thousands):

Total stockholders' equity	$	161,321
Less: preferred stock		(36,367	)
Less: warrant		(1,057	)
Total common stockholders' equity		123,897
Less: intangible assets		-
Tangible common equity	$	123,897
Total assets	$	1,626,136
Less: intangible assets		-
Tangible assets	$	1,626,136

At June 30, 2011, the Bank’s Tier I leverage ratio was 9.91% while its risk-based capital ratios were 12.54% for Tier I capital and 13.80% for total capital. These ratios exceed the minimum regulatory guidelines for a well-capitalized institution, or 5.00%, 6.00% and 10.00%, respectively. Table 2-1 summarizes the Company’s capital ratios as of June 30, 2011 and compares them to current minimum regulatory guidelines and December 31 and June 30, 2010 actual results.

TABLE 2-1	Tier I Leverage			Tier I Capital/Risk-Weighted Assets			Total Capital/Risk-Weighted Assets
Regulatory Minimum		3.00% - 4.00	%		4.00	%		8.00	%
Ratios as of:
June 30, 2011		10.07	%		12.74	%		14.00	%
December 31, 2010		9.53	%		12.29	%		13.55	%
June 30, 2010		8.93	%		12.02	%		13.28	%

The Company has participated in the Capital Purchase Program (“CPP”) through its December 2008 issuance of Series A Preferred Stock and a warrant to purchase common stock to the U.S. Treasury. As a participant in the U.S. Treasury CPP, the Company is subject to certain restrictions regarding dividend payments, stock repurchases and executive compensation. The U.S. Treasury’s consent is required for any increase in common dividends per share that is greater than the amount of the last quarterly cash dividend declared prior to October 14, 2008, and any repurchases of common stock until the earlier of a redemption or December 5, 2011. Furthermore, the ARRA and Interim Final Regulations issued on June 15, 2009 prohibit the payment or accrual of any bonus, retention award or incentive compensation to, in the Company’s case, the five (5) most highly-compensated employees. This

~~prohibition~~Capital ~~does~~Resources ~~not~~- ~~apply~~Total tostockholders’ ~~the~~equity ~~granting~~amounted ~~of restricted stock, provided that (a) the stock is subject~~ to a$167 ~~minimum~~million ~~2-year~~at ~~service-based~~September ~~vesting requirement~~30, ~~(b) the stock~~2011, ~~once~~representing ~~vested,~~an ~~cannot~~increase beof ~~sold~~$13 ormillion ~~otherwise~~from ~~transferred,~~December ~~with certain exceptions~~31, ~~until~~2010. ~~designated~~The ~~portions~~increase ~~of the~~from ~~financial~~year ~~assistance~~end ~~received~~2010 ~~under~~largely ~~the~~reflects ~~CPP~~net ~~have~~income ~~been~~retained ~~repaid~~ and ~~(c)~~ the ~~amount~~reissuance of ~~restricted~~common stock ~~granted,~~previously held in ~~any~~treasury ~~year, does not have a value greater than one-third of the total annual compensation of the recipient. In addition, this prohibition does not apply~~ to ~~any bonus, retention award or incentive compensation required to~~ be ~~paid~~used under a valid employment agreement entered into on or before February 11, 2009. The ARRA also prohibits the payment of any severance or payment to any named executive officer (“NEO”) or any of the next five (5) most highly-compensated employees for ~~departure~~contributions ~~from~~under the Company’s ~~for~~ESOP ~~any~~and reason, or, with certain exceptions, due to a change in control, except for payments relating to services already performed or benefits previously accrued. In addition, under ARRA, any bonus payment made to the twenty 401(20k) 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 criteriaplans. ~~Further,~~Management ascontinually aevaluates ~~participant in~~ the ~~CPP, the~~ Company’s ~~has~~capital ~~agreed~~position ~~not to claim a federal deduction~~ in ~~excess~~light of current ~~$500~~and ~~thousand~~future ~~per~~growth ~~person~~objectives ~~per~~and ~~year~~regulatory ~~for the compensation it pays to its NEOs for any fiscal year in which it has financial assistance outstanding~~guidelines. For these purposes, financial assistance includes the Series A Preferred Stock but does not include common stock warrants. The U.S. Treasury has the ability to make unilateral, retroactive changes to the Securities Purchase Agreement which governs the sale of the Series A Preferred Stock to the U.S. Treasury.

~~Additionally,~~The ~~under~~Company’s ~~the~~Dividend ~~CPP~~Reinvestment ~~the~~and ~~Company~~Stock ~~must~~Purchase ~~receive~~Plan ~~consent from~~ (the ~~U.S.~~“DRP”) ~~Treasury~~allows inexisting ~~order~~shareholders to ~~increase~~reinvest ~~its~~cash ~~dividend~~dividends onin ~~common~~Company stock and/or to anpurchase ~~amount~~additional ~~that~~shares isthrough ~~greater~~optional ~~than the amount of the last quarterly~~ cash ~~dividend~~investments ~~declared prior to October 14, 2008 which was the $0.10 per common share declared~~ on ~~July~~a ~~29,~~quarterly ~~2008~~basis. The ~~Company’s~~DRP ~~Board~~allows ~~declared~~for a ~~cash~~periodic ~~dividend~~incremental ofincrease ~~$0.05~~in ~~per~~capital ~~share at its July 26, 2011 meeting. The cash dividend will be paid on September 16, 2011~~ to ~~stockholders~~the extent of ~~record~~our onshareholders’ ~~August 19, 2011~~participation.

In November 2008, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective in December 2008. This shelf registration statement allows the Company to periodically offer and sell, from time to time, in one or more offerings, individually or in any combination, up to an aggregate of $100 million of the Company’s common stock, preferred stock, senior debt securities, subordinated debt securities, or warrants to purchase common stock or preferred stock. The shelf registration statement provides the Company with capital raising flexibility and enables the Company to promptly access the capital markets in order to pursue growth opportunities that may become available in the future or permit the Company to comply with any changes in the regulatory environment that call for increased capital requirements. The Company’s ability, and any decision to issue and sell securities pursuant to the shelf registration statement, is subject to market conditions and the Company’s capital needs at such time. As of September 30, 2011, the Company had not issued and sold any securities pursuant to the shelf registration statement.

The Company’s tangible common equity to tangible assets ratio was 8.03% at September 30, 2011 compared to 7.39% at December 31, 2010 and 7.11% at September 30, 2010. 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 or as required by bank regulatory agencies. Set forth below are the reconciliations of tangible common equity to GAAP total common stockholders’ equity and tangible assets to GAAP total assets at September 30, 2011 (in thousands):

Total stockholders' equity	$	167,375
Less: preferred stock		(36,427	)
Less: warrant		(1,057	)
Total common stockholders' equity		129,891
Less: intangible assets		-
Tangible common equity	$	129,891

Total assets	$	1,617,686
Less: intangible assets		-
Tangible assets	$	1,617,686

At September 30, 2011, the Bank’s Tier I leverage ratio was 10.50% while its risk-based capital ratios were 13.08% for Tier I capital and 14.33% for total capital. These ratios exceed the minimum regulatory guidelines for a well-capitalized institution, or 5.00%, 6.00% and 10.00%, respectively. Table 2-1 summarizes the Company’s capital ratios as of September 30, 2011 and compares them to current minimum regulatory guidelines and December 31 and September 30, 2010 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, 2011	10.80%	13.45%	14.71%
December 31, 2010	9.53%	12.29%	13.55%
September 30, 2010	9.33%	12.03%	13.29%

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

Pursuant to the terms of the Merger Agreement, prior to the consummation of the Merger, Valley will fund the purchase, by either Valley or the Company, from the U.S. Treasury of each share of the TARP Preferred Stock issued and outstanding on that date.

Additionally, under the CPP the Company must receive consent from the U.S. 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 which was the $0.10 per common share declared on July 29, 2008. The Company’s Board declared a cash dividend of $0.10 per share at its October 25, 2011 meeting. The cash dividend will be paid on December 16, 2011 to stockholders of record on November 11, 2011. The Company received a waiver from Valley allowing the declaration and payment of such dividend notwithstanding certain provisions of the Merger Agreement limiting regular quarterly dividends to $0.05 per share and requiring the record and payment dates for the Company’s dividends to align with the dates that Valley uses for its regular quarterly dividends.

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 year and a maturity of March 30, 2012. The FDIC guarantee will be in effect through the March 2012 maturity date.

The Company has not repurchased any of its common shares thus far in 2011 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 U.S. Treasury’s consent is also required for any repurchases of common stock until the earlier of a redemption of the ~~Series~~TARP 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 trust subsidiaries used the proceeds of the issuance of the securities to purchase junior subordinated debentures issued by the Company. The Company has the right to redeem the debentures related to Trust I, which bear a coupon rate of three-month LIBOR plus 345 basis points, on any interest payment date prior to the maturity date of November 7, 2032 at par. The Company has the right to redeem the debentures related to Trust II, which bear a coupon rate of three-month LIBOR plus 285 basis points, on any interest payment date prior to the maturity date of January 23, 2034 at par. However, under the CPP, the Company must get approval from the U.S. Treasury before it can redeem any capital securities. This requirement will remain in place as long as the Series A Preferred Stock is outstanding. The weighted average cost of all trust preferred securities outstanding was 3.49% and 3.50% for the six months ended June 30, 2011 and 2010, respectively.34

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 trust subsidiaries used the proceeds of the issuance of the securities to purchase junior subordinated debentures issued by the Company. The Company has the right to redeem the debentures related to Trust I, which bear a coupon rate of three-month LIBOR plus 345 basis points, on any interest payment date prior to the maturity date of November 7, 2032 at par. The Company has the right to redeem the debentures related to Trust II, which bear a coupon rate of three-month LIBOR plus 285 basis points, on any interest payment date prior to the maturity date of January 23, 2034 at par. However, under the CPP, the Company must get approval from the U.S. Treasury before it can redeem any capital securities. This requirement will remain in place as long as the TARP Preferred Stock is outstanding. The weighted average cost of all trust preferred securities outstanding was 3.48% and 3.54% for the nine months ended September 30, 2011 and 2010, respectively.

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

The Company’s (parent only) primary funding sources are dividends from the Bank, the issuance of common stock and proceeds from the DRP. Dividend payments from the Bank are subject to regulatory limitations, generally based on capital levels and current and retained earnings, imposed by regulatory agencies with authority over the Bank. As of ~~June~~September 30, 2011, $48 million was available for payment of dividends to the Company from the Bank according to these limitations without seeking regulatory approval.

Additional sources of liquidity at the holding company level have included issuances of securities into the capital markets, including private issuances of common stock, trust preferred securities and senior debt. The Company’s ability to access the capital markets for additional financing at favorable terms may be limited by, among other things, market conditions, interest rates, the Company’s capital levels, the Bank’s ability to pay dividends to the Company, the Company’s credit profile and ratings and the Company’s business model.

33Liquidity - Liquidity management is defined as both the Company’s and the Bank’s ability to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments and the ability to take advantage of business opportunities as they arise. Asset liquidity is provided by short-term investments and the marketability of securities available for sale. The Company may also leave excess reserve balances at the Federal Reserve Bank (“FRB”) if the rate being paid is higher than would be available from other short-term investments. Liquid assets were $361 million at September 30, 2011 compared to $368 million at December 31, 2010. These liquid assets may include assets that have been pledged against municipal deposits or other short-term borrowings. Liquidity is also provided by the maintenance of a 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.

Liquidity - Liquidity management is defined as both the Company’s and the Bank’s ability to meet their financial obligations on a continuous basis without material loss or disruption of normal operations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, funding new and existing loan commitments and the ability to take advantage of business opportunities as they arise. Asset liquidity is provided by short-term investments and the marketability of securities available for sale. The Company may also leave excess reserve balances at the Federal Reserve Bank (“FRB”) if the rate being paid is higher than would be available from other short-term investments. Liquid assets increased to $385 million at June 30, 2011 compared to $368 million at December 31, 2010, largely due to higher balances at the FRB. These liquid assets may include assets that have been pledged against municipal deposits or other short-term borrowings. Liquidity is also provided by the maintenance of a 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.

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

The Company’s primary sources of funds are cash provided by deposits and borrowings, proceeds from maturities and sales of securities available for sale, and cash provided by operating activities. At ~~June~~September 30, 2011, total deposits were $1.4 billion, an increase of $5235 million when compared to December 31, 2010. Of the total time deposits at ~~June~~September 30, 2011, $~~314~~305 million are scheduled to mature within the next 12 months. At ~~June~~September 30, 2011, total borrowings were $5352 million, a decrease of $2223 million when compared to December 31, 2010. Of the total borrowings at ~~June~~September 30, 2011, $3029 million are scheduled to mature within the next 12 months. Based on historical experience, the Company expects to be able to replace a substantial portion of those maturing deposits and borrowings. For the ~~six~~nine months ended ~~June~~September 30, 2011 and 2010, proceeds from sales and maturities of securities available for sale totaled $~~110~~188 million and $~~136~~211 million, respectively.

The Company’s primary uses of funds are for the origination of loans and the purchase of investment securities. For the six months ended June 30, 2011 and 2010, the Company had an increase in loans (net of unearned income, principal paydowns and other dispositions, and before allowance for loan losses) totaling $22 million and $8 million, respectively. The Company did not purchase any loans in 2011 or 2010. The Company purchased investment securities totaling $82 million and $103 million during the six months ended June 30, 2011 and 2010, respectively.

In 2010, the FDIC issued guidance regarding managing funding and liquidity risk and strengthening liquidity risk management practices. The policy statement emphasizes the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets and a formal, well-developed contingency funding plan as primary tools for measuring and managing liquidity risk. The FDIC guidance noted that that each institution should actively monitor and control liquidity risk exposure and funding needs within and across legal entities, take into account operational limitations to the transferability of liquidity and implement appropriate measurement, monitoring and reporting systems commensurate with the risk profile, scope of operations and business activities of the institution.

The Asset/Liability Committee of the Board of Directors (the “ALCO”) is responsible for oversight of the liquidity position and the asset/liability structure. The Board has delegated authority to management to establish specific policies and operating procedures governing liquidity levels and develop plans to address future and current liquidity needs. Management monitors the rates and cash flows from the loan and investment portfolios while also examining the maturity structure and volatility characteristics of liabilities to develop an optimum asset/liability mix. Available funding sources include retail, commercial and municipal deposits, purchased liabilities and stockholders’ equity. At June 30, 2011, access to approximately $226 million under the Bank’s FHLB line of credit was available for overnight or term borrowings with maturities of up to thirty years. The amount of the FHLB line of credit will fluctuate based upon the amount of pledged collateral in the form of real estate mortgage loans and investment securities. At June 30, 2011, approximately $73 million and $5 million in unsecured and secured lines of credit, respectively, extended by correspondent banks were also available to be utilized, if needed, for short-term funding purposes. At June 30, 2011, no advances were outstanding with the FHLB and no funds were drawn on correspondent bank lines of credit.

To supplement its short-term borrowed funds, the Company also utilized the Certificate of Deposit Account Registry Service (“CDARS”) for $37 million and $28 million in short-term certificates of deposit outstanding at June 30, 2011 and December 31, 2010, respectively. CDARS is a network of financial institutions that exchanges deposits with one another to maximize FDIC coverage of their depositors. CDARS deposits, even though they are sourced from Bank customers, are considered, for regulatory purposes, to be brokered deposits. These deposits were generally available at rates lower than the competitive market rates on local certificates of deposit, offered us greater flexibility and were more efficient to obtain. Notwithstanding the CDARS deposits, and pursuant to authorization limits, management may also access the traditional brokered deposit market for funding. At both June 30, 2011 and December 31, 2010, $30 million in such brokered deposits were outstanding, $25 million of which is scheduled to mature within the next 12 months. 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, including all outstanding commitments and letters of credit.

Our ten largest depositor relationships accounted for approximately 26% of our deposits at June 30, 2011. Our largest depositor relationship accounted for approximately 7% of our deposits at June 30, 2011. In addition, approximately 5% of our deposits at June 30, 2011, which includes deposits gathered through CDARS, are considered for regulatory purposes to be brokered deposits. Brokered deposits are at a greater risk of being withdrawn and placed on deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits in significant amounts. Federal banking law and regulation places restrictions on depository institutions regarding brokered deposits.

Due to the short-term nature of the deposit balances maintained by our large depositors, the deposit balances they maintain with us may fluctuate. Of our ten largest deposit relationships, five are local municipalities and the balances of their deposits tend to fluctuate on a seasonal basis throughout the year. The loss of one or more of our ten largest customers, or a significant decline in the deposit balances due to ordinary course fluctuations related to these customers’ businesses, in all likelihood would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short term basis to replace such deposits. Depending on the interest rate environment and competitive factors, low cost deposits may need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. Based on historical experience and our available sources of liquidity, the Company expects to be able to replace a substantial portion of any large deposits or brokered deposits that may be withdrawn.

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At June 30, 2011 and 2010, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $190 million and $202 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 ~~the~~Company’s ~~same~~primary asuses ~~that~~of ~~involved~~funds inare ~~extending~~for ~~loan~~the ~~facilities~~origination toof ~~customers.~~loans ~~Most~~and ~~letters~~the purchase of ~~credit~~investment ~~expire~~securities. ~~within~~For ~~one~~the ~~year.~~nine Atmonths ~~June~~ended September 30, 2011 and 2010, ~~letters~~the Company had an increase in loans (net of ~~credit~~unearned ~~outstanding~~income, ~~were~~principal ~~approximately~~paydowns and other dispositions, and before allowance for loan losses) totaling $1544 million and $1322 million, respectively. AtThe ~~June~~Company ~~30,~~did not purchase any loans in 2011 ~~and~~or 2010,. ~~the~~The ~~uncollateralized~~Company ~~portion~~purchased ~~was~~investment ~~approximately~~securities totaling $2125 million and $3235 million during the nine months ended September 30, 2011 and 2010, respectively.

~~The~~In ~~use of derivative financial instruments~~2010, ~~i.e.~~the ~~interest~~FDIC ~~rate~~issued ~~swaps,~~guidance ~~exposes~~regarding ~~the~~managing ~~Company~~funding toand ~~credit~~liquidity risk. ~~This~~and ~~credit~~strengthening ~~exposure~~liquidity ~~relates~~risk tomanagement ~~possible~~practices. ~~losses~~The ~~that~~policy ~~would~~statement beemphasizes ~~recognized if~~ the ~~counterparties~~importance ~~fail~~of tocash ~~perform~~flow ~~their~~projections, ~~obligations~~diversified ~~under~~funding ~~the~~sources, ~~contracts.~~stress ~~To mitigate this credit exposure~~testing, ~~only~~a ~~counterparties~~cushion of ~~substantial~~liquid ~~credit~~assets ~~standing are utilized~~ and ~~the exchange of collateral over~~ a ~~certain credit threshold is required. From time to time~~formal, ~~the~~well-developed ~~Bank~~contingency ~~may~~funding ~~execute~~plan ~~customer~~as ~~interest~~primary ~~rate~~tools ~~swap~~for ~~transactions~~measuring ~~together~~and ~~with~~managing ~~offsetting~~liquidity ~~interest rate swap transactions with institutional dealers~~risk. ~~Each~~ ~~swap~~The isFDIC ~~mutually~~guidance ~~exclusive,~~noted ~~and~~that ~~the~~that ~~swaps are marked to fair value with changes in fair value recognized as other income, with the fair value for~~ each ~~individual~~institution ~~swap~~should ~~with~~actively ~~the~~monitor ~~institutional~~and ~~dealer~~control ~~largely~~liquidity ~~offsetting~~risk ~~the~~exposure ~~corresponding~~and ~~swap~~funding ~~with~~needs ~~the~~within ~~Bank’s~~and ~~customer.~~across ~~Net~~legal ~~credit~~entities, take ~~valuation~~into ~~adjustments~~account ~~(“CVA”)~~operational ~~are~~limitations ~~recorded~~to ~~in other operating income. The CVA represents~~ the ~~consideration~~transferability of ~~credit~~liquidity ~~risk~~and ofimplement ~~the~~appropriate ~~counterparties~~measurement, tomonitoring ~~a transaction~~ and ~~the~~reporting ~~effect~~systems ofcommensurate ~~any~~with ~~credit enhancements related to~~ the ~~transaction.~~risk Atprofile, ~~June~~scope ~~30,~~of ~~2011~~operations and ~~2010,~~business ~~the~~activities ~~total gross notional amount~~ of ~~swap~~the ~~transactions outstanding was $34 million and $36 million, respectively~~institution.

~~Material~~The ~~Changes~~Asset/Liability inCommittee ~~Results~~of the Board of ~~Operations~~Directors –(the ~~Comparison~~“ALCO”) is responsible for oversight of the ~~Quarters~~liquidity ~~Ended~~position ~~June~~and ~~30,~~the ~~2011~~asset/liability structure. The Board has delegated authority to management to establish specific policies and ~~2010~~operating -procedures ~~The~~governing ~~Company~~liquidity ~~recorded~~levels ~~net~~and ~~income~~develop ofplans $2to address future and current liquidity needs.9 Management ~~million~~monitors ~~for~~the rates and cash flows from the ~~second~~loan ~~quarter~~and investment portfolios while also examining the maturity structure and volatility characteristics of ~~2011,~~liabilities to develop an ~~improvement~~optimum ofasset/liability $1mix.2 ~~million~~Available ~~from~~funding ~~the~~sources ~~second~~include ~~quarter~~retail, ofcommercial ~~2010.~~and ~~The~~municipal ~~2011~~deposits, ~~second~~purchased ~~quarter~~liabilities ~~results~~and ~~versus~~stockholders’ ~~the~~equity. ~~comparable~~At ~~2010~~September ~~period~~30, ~~primarily~~2011, ~~reflected~~access ato approximately $~~4.4~~235 million ~~decrease~~under in the ~~provision~~Bank’s ~~for~~FHLB ~~loan~~line ~~losses~~of ~~and~~credit awas ~~$495~~available ~~thousand~~for ~~increase~~overnight inor ~~net~~term ~~interest~~borrowings ~~income.~~with ~~Partially~~maturities ~~offsetting~~of ~~these~~up ~~improvements,~~to ~~net~~thirty ~~gains~~years. onThe amount of the ~~sales~~FHLB line of ~~securities~~credit ~~declined~~will byfluctuate ~~$2.5~~based ~~million~~upon the amount of pledged collateral in the ~~second~~form ~~quarter~~ of ~~2011~~real ~~compared~~estate tomortgage ~~2010~~loans and weinvestment ~~incurred~~securities. ~~Merger-related~~At ~~expenses~~September of30, 2011, approximately $~~1.4~~73 million, ~~primarily~~and ~~legal~~$5 ~~fees~~million in unsecured and secured lines of credit, ~~associated~~respectively, ~~with~~extended ~~the~~by ~~Company’s~~correspondent ~~previously~~banks ~~announced~~were ~~transaction~~also ~~with~~available ~~Valley.~~to ~~Core~~be ~~operating~~utilized, ~~expenses~~if (aneeded, ~~non~~for short-~~GAAP~~term ~~financial~~funding ~~measure~~purposes. ~~excluding~~At ~~Merger-related~~September ~~expenses)~~30, ~~declined~~2011, ~~8.6%~~no toadvances ~~$10.2~~were ~~million~~outstanding inwith the ~~second~~FHLB ~~quarter~~and ofno ~~2011~~funds were drawn on correspondent bank lines of credit.

AsTo ~~shown~~supplement inits ~~Table 2~~short-2term borrowed funds, the Company also utilized the Certificate of Deposit Account Registry Service (A“CDARS”) ~~following~~for ~~this~~$41 ~~discussion~~million and $28 million in short-term certificates of deposit outstanding at September 30, ~~net~~2011 ~~interest~~and ~~income~~December ~~increased~~31, 32010, respectively.1% CDARS is a network of financial institutions that exchanges deposits with one another to ~~$16~~maximize FDIC coverage of their depositors.4 ~~million~~CDARS asdeposits, ~~the~~even ~~Company’s~~though ~~net~~they ~~interest~~are ~~margin~~sourced ~~increased~~from Bank customers, are considered, for regulatory purposes, to 4be brokered deposits.~~32%~~ ~~during~~These deposits were generally available at rates lower than the ~~second~~competitive ~~quarter~~market rates on local certificates of ~~2011~~deposit, ~~from~~offered ~~4.16%~~us agreater ~~year~~flexibility ~~ago~~and were more efficient to obtain. ~~The~~Notwithstanding ~~increased~~the ~~net~~CDARS ~~interest~~deposits, ~~margin~~and ~~primarily~~pursuant ~~resulted~~to ~~from~~authorization alimits, 26management ~~basis~~may ~~point~~also ~~reduction~~access the traditional brokered deposit market for funding. At both September 30, 2011 and December 31, 2010, $30 million in ~~the~~such ~~Company’s~~brokered ~~cost~~deposits were outstanding, $25 million of ~~average~~which ~~total~~is ~~interest~~scheduled to mature within the next 12 months. The Bank, currently a well-~~bearing~~capitalized ~~liabilities~~depository institution, is allowed to 0solicit and accept, renew or roll over any brokered deposit without restriction.~~84%~~ inShould ~~2011~~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. ~~The~~Should the Bank become undercapitalized, it may not accept, renew, or roll over any brokered deposit. As the Company’s ~~yield~~liquidity onremains ~~average~~satisfactory ~~total~~due ~~interest-earning~~to its deposit base, borrowing capacity secured by liquid assets ~~decreased~~and ~~four~~other ~~basis~~funding ~~points~~sources, management believes that existing funding sources will be adequate to ~~4.91%~~meet infuture ~~2011~~liquidity requirements, including all outstanding commitments and letters of credit.

~~The~~Our ~~average~~ten ~~yield~~largest ondepositor ~~the~~relationships ~~Company’s~~accounted ~~loans~~for ~~increased~~approximately ~~to 5.49~~26% inof ~~the~~our ~~second~~deposits ~~quarter~~at ofSeptember 30, 2011. ~~from~~Our ~~5.44%~~largest indepositor ~~the~~relationship ~~second~~accounted ~~quarter~~for approximately 9% of ~~2010~~our deposits at September 30, 2011. In ~~2011~~addition, ~~the~~approximately ~~Company~~5% ~~collected~~of aour ~~prepayment~~deposits ~~penalty~~at ~~and~~September an30, ~~assignment~~2011, ~~fee~~which ~~totaling~~includes ~~$167~~deposits ~~thousand~~gathered onthrough ~~the~~CDARS, ~~payoff~~are ofconsidered afor ~~commercial~~regulatory ~~loan.~~purposes ~~This~~to ~~improved~~be ~~the~~brokered ~~Company’s~~deposits. ~~average~~Brokered ~~loan~~deposits ~~yield~~are byat ~~six~~a ~~basis~~greater ~~points~~risk ~~and~~of ~~the~~being ~~net~~withdrawn ~~interest~~and ~~margin~~placed byon ~~five~~deposit ~~basis~~at ~~points~~another ininstitution ~~the~~offering ~~second~~a ~~quarter~~higher ofinterest ~~2011.~~rate, ~~The~~thus ~~average~~posing ~~balance~~liquidity risk offor ~~the~~institutions ~~Company’s~~that ~~loan~~gather ~~portfolio~~brokered ~~increased~~deposits ~~$30~~in ~~million~~significant ~~for~~amounts. ~~the~~Federal ~~second~~banking ~~quarter~~law ofand ~~2011~~regulation asplaces ~~compared~~restrictions toon ~~the~~depository ~~same~~institutions ~~period~~regarding inbrokered ~~2010~~deposits.

~~The~~Due ~~average~~to ~~yield~~the onshort-term nature of the ~~Company’s~~deposit ~~securities~~balances ~~declined~~maintained toby ~~3.44%~~our inlarge depositors, the ~~second~~deposit ~~quarter~~balances ofthey ~~2011~~maintain ~~from~~with 3us may fluctuate.~~85%~~ inOf ~~the~~our ~~second~~ten ~~quarter~~largest ofdeposit ~~2010.~~relationships, ~~This~~four isare ~~largely~~local amunicipalities ~~result~~and the balances of ~~principal~~their ~~paydowns~~deposits ~~and~~tend ~~sales~~to offluctuate ~~mortgage-backed~~on ~~securities~~a ofseasonal ~~U.S.~~basis ~~Government-sponsored~~throughout ~~enterprises~~the year. ~~These~~The ~~securities~~loss ~~had~~of ~~higher~~one ~~yields~~or ~~than~~more ~~those~~ of ~~the~~our ~~securities~~ten ~~subsequently~~largest ~~purchased.~~customers, ~~The~~or ~~lower~~a ~~yields~~significant ~~reflect~~decline in the ~~lower~~deposit ~~rate~~balances ~~environment~~due into ~~2011.~~ordinary ~~The~~course ~~average~~fluctuations ~~balance~~related ofto ~~the~~these ~~Company~~customers’s ~~securities~~businesses, ~~portfolio~~in ~~decreased~~all ~~$51~~likelihood ~~million~~would ~~for~~adversely ~~the~~affect ~~second~~our ~~quarter~~liquidity ofand require ~~2011~~us asto ~~compared~~raise deposit rates to ~~the~~attract ~~same~~new ~~period~~deposits, inpurchase ~~2010.~~federal ~~This~~funds ~~was~~or ~~primarily~~borrow ~~due~~funds on a short term basis to ~~sales~~replace such deposits. Depending on the interest rate environment and ~~prepayments~~competitive offactors, ~~mortgage-backed~~low ~~securities~~cost deposits may need to be replaced with higher cost funding, asresulting ~~well~~in asa decrease in net interest income and net income. Based on historical experience and our available sources of liquidity, the Company’s ~~fourth~~expects ~~quarter~~to ~~2010~~be ~~decision~~able to ~~cease~~replace ~~purchasing~~a ~~bonds~~substantial ~~due~~portion toof ~~the~~any ~~low~~large ~~rate~~deposits ~~environment~~or brokered deposits that may be withdrawn.

The reduction in the cost of average total interest-bearing liabilities in 2011 resulted largely from the Company’s ongoing management of deposit rates, reflecting the continuing low market interest rate environment. The average cost of time and savings deposits both declined by 26 basis points in the second quarter of 2011 compared to the second quarter of 2010. The Company also experienced a $30 million decrease in the average balance of time deposits for the second quarter of 2011 compared to the second quarter of 2010. At both June 30, 2011 and 2010, the Company had $30 million in traditional brokered deposits, which does not include CDARS deposits, with a weighted-average cost of 2.81%.

The provision for loan losses was $1.1 million in the second quarter of 2011, representing a decrease of $4.4 million versus the comparable 2010 period. The second quarter 2011 provision for loan losses slightly exceeded the $1.0 million of net charge-offs recorded during this period. We have determined that the level of $28 million in total allowance for loan losses is adequate at June 30, 2011. The adequacy of the provision and the resulting allowance for loan losses, which decreased by $5 million from December 31, 2010 to $28 million at June 30, 2011, is determined by management’s continuing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data including the current status of watch list loans, collateral values and changes in the size and mix of the loan portfolio. Although there were a number of loan payments and risk rating upgrades and downgrades during the second quarter of 2011, both total non-accrual loans and total watch list loans declined since December 31, 2010. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.)

~~Total non~~Off-~~interest~~Balance ~~income~~Sheet ~~declined~~Arrangements by- ~~$2.4~~The ~~million~~Bank inis ~~the~~a ~~second~~party ~~quarter~~to offinancial ~~2011~~instruments ~~versus~~with ~~the~~off-balance ~~comparable~~sheet ~~2010~~risk ~~period~~in ~~principally~~the ~~due~~normal tocourse ~~lower net gains on sales~~ of ~~securities~~business ~~and~~to ~~decreased~~meet ~~income~~the ~~from~~financing ~~bank~~needs ~~owned life insurance reflecting a lower rate~~ of ~~return~~its customers. These ~~were~~financial ~~partially~~instruments ~~offset~~include bycommitments anto ~~increase~~extend incredit ~~other~~and ~~operating~~standby ~~income~~and documentary letters of ~~$146~~credit. Those ~~thousand~~instruments ~~attributable~~involve, to ~~higher~~varying ~~overdraft volume~~degrees, ~~letter~~elements of credit ~~and~~risk ~~loan~~in ~~sourcing~~excess ~~fees~~of the amount recognized in ~~2011.~~the ~~Net~~consolidated ~~gains~~financial onstatements. The ~~sales~~Bank ofuses ~~securities~~the ~~were~~same ~~$31~~credit ~~thousand~~policies in ~~the~~making ~~second~~commitments ~~quarter~~and ofconditional ~~2011~~obligations ~~compared~~as toit ~~$2.5~~does ~~million~~ for ~~the~~on-balance ~~same~~sheet ~~period last year~~instruments.

Operating expenses of State Bancorp, Inc.
(dollars in thousands)
For the quarters and six months ended June 30, 2011 and 2010
	Quarters ended June 30,				Six months ended June 30,
			Over/				Over/
			(under)				(under)
	2011	2010	2010		2011	2010	2010
Salaries and other employee benefits	$6,241	$6,598	(5.4)	%	$12,107	$12,594	(3.9)	%
Occupancy	1,347	1,391	(3.2)	%	2,769	2,810	(1.5)	%
Equipment	330	269	22.7	%	654	573	14.1	%
Marketing and advertising	205	453	(54.7)	%	513	906	(43.4)	%
FDIC and NYS assessment	553	684	(19.2)	%	1,153	1,356	(15.0)	%
Credit and collection	112	175	(36.0)	%	209	373	(44.0)	%
Data processing	258	258	0.0	%	520	520	0.0	%
Other operating expenses	1,168	1,353	(13.7)	%	2,278	3,045	(25.2)	%
Core operating expenses (1)	10,214	11,181	(8.6)	%	20,203	22,177	(8.9)	%
Merger-related expenses	1,357	-	N/M	(2)	1,357	-	N/M	(2)
Total operating expenses	$11,571	$11,181	3.5	%	$21,560	$22,177	(2.8)	%
(1) Core operating expenses are a non-GAAP presentation.
(2) N/M - denotes % variance not meaningful for statistical purposes.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the customer. Collateral required varies, but may include accounts receivable, inventory, equipment, real estate and income-producing commercial properties. At September 30, 2011 and 2010, commitments to originate loans and commitments under unused lines of credit for which the Bank is obligated amounted to approximately $192 million in each period.

~~Total~~Letters ~~operating expenses for the second quarter~~ of ~~2011~~credit ~~increased~~are byconditional ~~$390~~commitments ~~thousand~~guaranteeing ~~due~~payments ~~to $1.4 million~~ of ~~Merger-related~~drafts ~~expenses.~~in ~~Second~~accordance ~~quarter~~with ~~2011~~the ~~core~~terms ~~operating~~of ~~expenses~~the (aletter ~~non-GAAP~~of ~~measure~~credit ~~that excludes Merger-related expenses) decreased by $967 thousand or 8~~agreements.6% toCommercial ~~$10.2~~letters ~~million compared to the second quarter~~ of ~~2010.~~credit ~~This~~are ~~decrease~~used ~~was~~primarily ~~due~~ to ~~cost~~facilitate ~~reductions~~trade ~~achieved~~or incommerce ~~several~~and ~~expense~~are ~~categories,~~also ~~most~~issued ~~notably~~to ~~salaries~~support public and ~~other~~private ~~employee~~borrowing ~~benefits~~arrangements, ~~marketing~~bond ~~and~~financing ~~advertising, FDIC~~ and ~~NYS~~similar ~~assessment and credit and collection~~transactions. ~~Salaries~~Collateral ~~and~~may ~~other~~be ~~employee~~required ~~benefits~~to ~~declined~~support byletters ~~$357~~of ~~thousand~~credit inbased ~~the~~upon ~~second~~management’s ~~quarter~~evaluation of ~~2011 versus 2010 primarily as~~ the ~~result~~creditworthiness of aeach ~~reduction~~customer. The incredit ~~staff~~risk ~~count~~involved in ~~2011~~issuing ~~and~~letters aof ~~decline~~credit inis essentially the ~~Company’s~~same ~~defined~~as ~~contribution~~that ~~plan~~involved ~~expense.~~in ~~Marketing~~extending ~~and~~loan ~~advertising~~facilities ~~expenses~~to ~~declined~~customers. byMost ~~$248~~letters ~~thousand~~of incredit ~~2011~~expire ~~due~~within toone ayear. ~~reduction~~At inSeptember ~~spending~~30, ~~related~~2011 toand ~~brand~~2010, ~~building.~~letters Inof ~~addition,~~credit weoutstanding ~~experienced~~were ~~year-over-year~~approximately ~~reductions~~$16 inmillion ~~expenses~~and in$14 ~~occupancy~~million, ~~FDIC~~respectively. ~~and~~At ~~NYS~~September ~~assessment~~30, 2011 and ~~credit~~2010, ~~and~~the ~~collection~~uncollateralized ofportion ~~$44~~was ~~thousand,~~approximately $~~131~~2 ~~thousand~~million ~~and~~in ~~$63~~each ~~thousand, respectively~~period.

The use of derivative financial instruments, i.e. interest rate swaps, exposes the Company’s ~~operating~~to ~~efficiency~~credit ~~ratio~~risk. ~~(total~~This ~~operating~~credit ~~expenses~~exposure ~~divided~~relates byto possible losses that would be recognized if the ~~sum~~counterparties offail ~~fully~~to ~~taxable~~perform ~~equivalent~~their ~~net~~obligations ~~interest~~under ~~income~~the ~~and~~contracts. ~~non-interest~~To ~~income~~mitigate this credit exposure, ~~excluding~~only ~~net~~counterparties ~~securities~~of ~~gains~~substantial ~~and~~credit ~~losses)~~standing ~~was~~are ~~66.7%~~utilized inand the ~~second~~exchange ~~quarter~~ of ~~2011~~collateral ~~compared~~over toa 66certain credit threshold is required.5% inFrom time to time, the ~~second~~Bank ~~quarter~~may ofexecute ~~2010.~~customer ~~The~~interest ~~Company’s~~rate ~~other~~swap ~~measure~~transactions oftogether ~~expense~~with ~~control~~offsetting interest rate swap transactions with institutional dealers. Each swap is mutually exclusive, and the ~~ratio~~swaps ofare ~~total~~marked ~~operating~~to ~~expenses~~fair tovalue ~~average~~with ~~total~~changes ~~assets~~in fair value recognized as other income, ~~was~~with ~~2.84%~~the fair value for each individual swap with the ~~second~~institutional ~~quarter~~dealer oflargely ~~2011~~offsetting ~~versus~~the 2corresponding swap with the Bank’s customer.~~71%~~ ~~for~~Net credit valuation adjustments (“CVA”) are recorded in other operating income. The CVA represents the ~~second~~consideration ~~quarter~~of credit risk of ~~2010.~~the ~~Excluding~~counterparties ~~merger-related~~to ~~expenses,~~a transaction and the ~~Company’s~~effect ~~second~~of ~~quarter~~any ~~2011~~credit ~~operating~~enhancements ~~efficiency~~related ~~ratio~~to ~~was~~the 58transaction.8% At September 30, 2011 and ~~its~~2010, the total ~~operating~~gross ~~expenses~~notional toamount ~~average~~of ~~total~~swap ~~assets~~transactions ~~ratio~~outstanding was 2$34 million and $36 million, respectively.~~51%.~~

~~Core~~Material ~~operating~~Changes ~~expenses~~in ~~are~~Results ~~calculated~~of byOperations ~~subtracting~~– ~~merger~~Comparison of the Quarters Ended September 30, 2011 and 2010 -~~related~~ ~~expenses~~The ~~from~~Company ~~total~~recorded ~~operating~~net ~~expenses~~income of $7. ~~The~~1 ~~core~~million ~~operating~~for ~~efficiency~~the ~~ratio~~third isquarter ~~calculated~~of by2011, ~~dividing~~an ~~core~~improvement ~~operating~~of ~~expenses~~$3.9 bymillion from the ~~sum~~third quarter of ~~fully~~2010. ~~taxable~~The ~~equivalent~~2011 ~~("FTE")~~third ~~net~~quarter ~~interest~~results ~~income~~versus ~~and~~the ~~non-interest~~comparable ~~income,~~2010 ~~excluding~~period ~~net~~primarily ~~securities~~reflected ~~gains~~a ~~and~~$3.5 million credit to the provision for loan losses., ~~The~~a ~~total~~$948 ~~core~~thousand decline in total operating expenses toand ~~average~~a ~~total~~$308 thousand ~~assets~~increase ~~ratio~~in isnet interest income.

As shown in Table 2-2 (A) following this discussion, net interest income increased 1.9% to $16.3 million as the Company’s net interest margin increased to 4.23% during the third quarter of 2011 from 4.16% a year ago. The increased net interest margin primarily resulted from a 22 basis point reduction in the Company’s cost of average total interest-bearing liabilities to 0.85% in 2011. The Company’s yield on average total interest-earning assets decreased 12 basis points to 4.81% in 2011.

The average yield on the Company’s loans decreased to 5.45% in the third quarter of 2011 from 5.56% in the third quarter of 2010. This reflected a $215 million increase in the average balance of commercial and industrial loans which generally tend to be lower yielding than commercial real estate loans, the average balance of which declined $157 million. The average balance of the Company’s loan portfolio increased $57 million for the third quarter of 2011 as compared to the same period in 2010.

The average yield on the Company’s securities declined to 3.19% in the third quarter of 2011 from 3.45% in the third quarter of 2010. This is largely a result of principal paydowns and sales of mortgage-backed securities of U.S. Government-sponsored enterprises. These securities had higher yields than those of the securities subsequently purchased. The lower yields reflect the lower rate environment in 2011. The average balance of the Company’s securities portfolio decreased $74 million for the third quarter of 2011 as compared to the same period in 2010. This was primarily due to sales and prepayments of mortgage-backed securities.

~~calculated by dividing core operating expenses by average total assets.~~ The ~~core~~reduction ~~operating~~in ~~efficiency~~the ~~and~~cost ~~total~~of ~~core operating expenses to~~ average total ~~assets~~interest-bearing ~~ratios~~liabilities ~~are~~in ~~not~~2011 ~~required~~resulted bylargely ~~GAAP~~from orthe byCompany’s ~~applicable~~ongoing ~~bank regulatory requirements, but are used by~~ management ~~to evaluate the level~~ of ~~operating~~deposit ~~expenses.~~rates, ~~Since~~reflecting ~~there~~the iscontinuing nolow ~~authoritative~~market ~~requirement~~interest torate ~~calculate~~environment. ~~these~~The ~~ratios,~~average ~~our~~cost ~~ratios~~of ~~are~~time ~~not~~and ~~necessarily~~savings ~~comparable~~deposits todeclined ~~similar~~24 ~~efficiency~~basis ~~measures~~points ~~disclosed~~and or18 ~~used~~basis bypoints, ~~other~~respectively, ~~companies~~ in the ~~financial~~third ~~services~~quarter ~~industry.~~of ~~Core~~2011 ~~operating~~compared ~~expenses,~~to the ~~core~~third ~~operating~~quarter ~~efficiency~~of ~~ratio~~2010. ~~and~~The ~~the~~Company ~~total~~also ~~core~~experienced ~~operating expenses to average total assets ratio are non-GAAP financial measures and should be considered in addition to, not as~~ a ~~substitute~~$49 ~~for~~million ordecrease ~~superior to, financial measures determined~~ in ~~accordance with GAAP. With respect to~~ the ~~calculation~~average balance of ~~core~~time ~~operating~~deposits ~~expenses~~for ~~and~~ the ~~actual~~third ~~unaudited~~quarter ~~core~~of ~~operating~~2011 ~~efficiency~~compared ~~and total core operating expenses~~ to ~~average~~the ~~total~~third ~~assets~~quarter ~~ratios~~of as2010. At ofboth ~~June~~September 30, 2011 and 2010, the ~~reconciliation~~Company ofhad ~~core~~$30 ~~operating~~million ~~expenses~~in totraditional ~~GAAP~~brokered ~~total~~deposits, ~~operating~~which ~~expenses~~does ~~and~~not ~~the~~include ~~calculation~~CDARS ofdeposits, ~~the~~with ~~core~~a ~~operating efficiency and total core operating expenses to~~ weighted-average ~~total~~cost ~~assets~~of ~~ratios are set forth below:~~2.81%.

Core Operating Expenses	Quarter to Date			Year to Date
	6/30/2011			6/30/2011
Total operating expenses	$	11,571		$	21,560
Less: merger-related expenses		(1,357	)		(1,357	)
Core operating expenses	$	10,214		$	20,203
Core Operating Efficiency Ratio	Quarter to Date			Year to Date
	6/30/2011			6/30/2011
Core operating expenses	$	10,214		$	20,203
FTE net interest income		16,397			32,014
FTE non-interest income		992			2,179
Less: net gains on sales of securities		(31	)		(113	)
Non-interest income excluding net securities gains		961			2,066
		58.84	%		59.28	%
Total Core Operating Expenses to Average Total Assets Ratio	Quarter to Date 6/30/2011			Year to Date 6/30/2011
Core operating expenses	$	10,214		$	20,203
Core operating expenses annualized		40,968			40,741
Average total assets		1,633,335			1,613,499
		2.51	%		2.53	%

A $3.5 million credit to the provision for loan losses was recorded in the third quarter of 2011, representing a reduction of $6.0 million versus the comparable 2010 period. This reduction primarily resulted from a lower level of watch list loans and the third quarter 2011 payment in full of two impaired loans that had required an allowance allocation and were resolved for no loss. These two impaired loans, a $10 million TDR and a $4 million non-accrual loan, had estimated allocation allowances of $4.7 million and $1.0 million, respectively. We have determined that the level of $23 million in total allowance for loan losses is adequate at September 30, 2011. The adequacy of the provision and the resulting allowance for loan losses, which decreased by $10 million from December 31, 2010 to $23 million at September 30, 2011, is determined by management’s continuing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data including the current status of watch list loans, collateral values and changes in the size and mix of the loan portfolio. Both total non-accrual loans and total watch list loans have declined since December 31, 2010. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.)

~~The~~Total ~~Company’s~~non-interest income ~~tax~~declined ~~expense~~by ~~was~~ $~~1.8~~295 ~~million~~thousand in the ~~second~~third quarter of 2011 asversus ~~compared to $1.0 million in~~ the ~~second~~comparable ~~quarter of~~ 2010. ~~The~~period ~~Company’s~~principally ~~overall~~due ~~effective~~to ~~tax~~lower ~~rate~~net ~~was~~gains ~~38%~~on ~~for~~sales ~~the~~of ~~second~~loans ~~quarter~~held offor ~~2011~~sale ~~compared~~and toincreased ~~37%~~interest ~~for~~rate ~~the~~swap ~~same~~CVA ~~period~~reductions into ~~the~~other ~~prior year~~income. ~~The~~Net ~~Company~~gains ~~has~~on ~~performed~~sales ~~an evaluation~~ of ~~its~~securities ~~tax~~were ~~positions~~$933 ~~and~~thousand ~~concluded~~in ~~that~~the ~~there~~third ~~were~~quarter noof ~~significant~~2011 ~~uncertain~~compared ~~tax~~to ~~positions~~$733 ~~that~~thousand ~~required~~for ~~recognition~~the insame ~~its~~period ~~financial~~last ~~statements~~year.

Material Changes in Results of Operations – Comparison of the Six Months Ended June 30, 2011 and 2010 – For the six months ended June 30, 2011 the Company recorded net income of $5.9 million compared to $4.7 million in the corresponding 2010 period. The factors contributing to the increase in net income were a $4.7 million decrease in the provision for loan losses and a $617 thousand decline in total operating expenses in 2011, partially offset by reductions in net interest income and non-interest income of $888 thousand and $2.5 million, respectively.

Operating expenses of State Bancorp, Inc.
(dollars in thousands)
For the quarters and nine months ended September 30, 2011 and 2010


	Quarters ended September 30,				Nine months ended September 30,
			Over/				Over/
			(under)				(under)
	2011	2010	2010		2011	2010	2010
Salaries and other employee benefits	$5,997	$5,959	0.6	%	$18,104	$18,553	(2.4)	%
Occupancy	1,202	1,349	(10.9)	%	3,971	4,159	(4.5)	%
Equipment	279	302	(7.6)	%	933	875	6.6	%
Marketing and advertising	150	377	(60.2)	%	663	1,283	(48.3)	%
FDIC and NYS assessment	354	697	(49.2)	%	1,507	2,053	(26.6)	%
Data processing	234	280	(16.4)	%	754	800	(5.8)	%
Other operating expenses	1,238	1,592	(22.2)	%	3,725	5,010	(25.6)	%
Core operating expenses (1)	9,454	10,556	(10.4)	%	29,657	32,733	(9.4)	%

Merger-related expenses	154	-	N/M	(2)	1,511	-	N/M	(2)
Total operating expenses	$9,608	$10,556	(9.0)	%	$31,168	$32,733	(4.8)	%

(1) Core operating expenses are a non-GAAP presentation.
(2) N/M - denotes % variance not meaningful for statistical purposes.

As shown in Table 2-2 (B) following this discussion, net interest income declined 2.7% to $32.0 million as the Company’s net interest margin decreased to 4.24% during the first half of 2011 from 4.33% a year ago. The decreased net interest margin primarily resulted from a $12 million reduction in average total interest-earning assets coupled with a 28 basis point reduction in the total interest-

~~earning~~Total ~~assets~~operating ~~yield,~~expenses ~~largely~~for ~~reflecting~~ the 78third ~~basis~~quarter ~~point~~of ~~reduction~~2011 indecreased ~~the~~by ~~average~~$948 ~~yield~~thousand oncompared to the ~~securities~~third ~~portfolio~~quarter of 2010. ~~This~~Third ~~was~~quarter ~~partially~~2011 ~~offset~~core byoperating expenses (a 26non-GAAP ~~basis~~measure ~~point~~that ~~reduction~~excludes inMerger-related expenses) decreased by $1.1 million or 10.4% to $9.5 million compared to the ~~average~~third ~~cost~~quarter of ~~total~~2010. ~~interest-bearing~~This ~~liabilities~~decrease was due to 0cost reductions achieved in several expense categories, most notably occupancy, marketing and advertising, and FDIC and NYS assessment.~~86%~~ ~~during~~Occupancy expenses declined $147 thousand in the ~~first~~third ~~half~~quarter of 2011 ~~compared~~versus to2010 primarily as the ~~same~~result ~~period~~of a branch closing in ~~2010~~August of 2011. Marketing and advertising expenses declined by $227 thousand in 2011 due to a reduction in media spending. In addition, we experienced a year-over-year reduction in FDIC and NYS assessment expenses of $343 thousand.

The ~~average~~Company’s ~~yield~~operating onefficiency ratio (total operating expenses divided by the ~~Company’s~~sum ~~loans~~of ~~decreased~~fully totaxable 5equivalent net interest income and non-interest income, excluding net securities gains and losses) was 55.439% in the ~~first~~third ~~half~~quarter of 2011 ~~from~~compared 5.to 60.7% in the ~~first~~third ~~half~~quarter of 2010. ~~This~~The ~~resulted from the~~ Company’s ~~ongoing~~other ~~efforts~~measure toof ~~diversify~~expense ~~away~~control, ~~from~~the aratio ~~heavier~~of ~~reliance~~total onoperating ~~commercial~~expenses ~~real~~to ~~estate~~average ~~toward~~total ~~commercial~~assets, ~~and~~was ~~industrial~~2.35% ~~loans~~for ~~which~~the ~~generally~~third ~~tend~~quarter toof be2011 ~~lower~~versus ~~yielding~~2.57% ~~The~~for ~~average~~the ~~balance~~third quarter of 2010. Excluding Merger-related expenses, the Company’s ~~loan~~third quarter ~~portfolio~~2011 ~~increased~~operating ~~$34~~efficiency ~~million~~ratio ~~for~~was ~~the~~55.0% ~~first~~and ~~half~~its oftotal ~~2011~~operating asexpenses ~~compared~~ to ~~the~~average ~~same~~total ~~period~~assets inratio ~~2010~~was 2.32% (non-GAAP financial measures).

Core operating expenses are calculated by subtracting Merger-related expenses from total operating expenses. The ~~average~~core ~~yield~~operating onefficiency ratio is calculated by dividing core operating expenses by the ~~Company’s~~sum of fully taxable equivalent ("FTE") net interest income and non-interest income, excluding net securities ~~declined~~gains toand 3losses.~~30%~~ inThe ~~the~~total ~~first~~core ~~half~~operating ofexpenses ~~2011~~to ~~from~~average 4total assets ratio is calculated by dividing core operating expenses by average total assets.~~08%~~ inThe ~~the~~core ~~first~~operating ~~half~~efficiency and total core operating expenses to average total assets ratios are not required by GAAP or by applicable bank regulatory requirements, but are used by management to evaluate the level of ~~2010~~operating expenses. ~~This~~Since there is ~~largely~~no aauthoritative ~~result~~requirement ofto ~~principal~~calculate ~~paydowns~~these ~~and~~ratios, ~~sales~~our ofratios ~~mortgage-backed~~are ~~securities~~not ofnecessarily ~~U.S.~~comparable ~~Government-sponsored~~to ~~enterprises.~~similar ~~These~~efficiency ~~securities~~measures ~~had~~disclosed ~~higher~~or ~~yields~~used ~~than~~by ~~those~~other ofcompanies in the ~~securities~~financial ~~subsequently~~services ~~purchased~~industry. ~~The~~Core ~~lower~~operating ~~yields~~expenses, ~~reflect~~ the ~~lower~~core ~~rate~~operating ~~environment~~efficiency inratio ~~2011.~~and ~~The~~the total core operating expenses to average ~~balance~~total ofassets ~~the~~ratio ~~Company’s~~are ~~securities~~non-GAAP ~~portfolio~~financial ~~decreased~~measures ~~$51~~and ~~million~~should ~~for~~be ~~the~~considered ~~first~~in ~~half~~addition ofto, ~~2011~~not as ~~compared~~a substitute for or superior to, ~~the~~financial ~~same~~measures ~~period~~determined in ~~2010.~~accordance ~~This~~with ~~was~~GAAP. ~~primarily~~With ~~due~~respect to ~~sales~~the calculation of core operating expenses and ~~prepayments~~the actual unaudited core operating efficiency and total core operating expenses to average total assets ratios as of ~~mortgage-backed~~September ~~securities~~30, as2011, ~~well~~the asreconciliation of core operating expenses to GAAP total operating expenses and the ~~Company’s~~calculation ~~fourth~~of ~~quarter~~the ~~2010~~core ~~decision~~operating toefficiency ~~cease~~and ~~purchasing~~total ~~bonds~~core ~~due~~operating expenses to ~~the~~average ~~low~~total ~~rate~~assets ~~environment.~~ratios are set forth below:

The reduction in the cost of average total interest-bearing liabilities in 2011 resulted largely from the Company’s ongoing management of deposit rates, reflecting the continuing low market interest rate environment. The average cost of time and savings deposits declined by 19 basis points and 29 basis points, respectively, in the first half of 2011 compared to the first half of 2010. The Company also experienced a $40 million decrease in the average balance of time deposits for the first half of 2011 compared to the first half of 2010.

The provision for loan losses was $3.0 million in the first half of 2011, representing a decrease of $4.7 million versus the comparable 2010 period. We have determined that the level of $28 million in total allowance for loan losses is adequate at June 30, 2011. The adequacy of the provision and the resulting allowance for loan losses, which decreased by $5 million from December 31, 2010 to $28 million at June 30, 2011, is determined by management’s continuing review of the loan portfolio, including identification and review of individual problem situations that may affect a borrower’s ability to repay, delinquency and non-performing loan data including the current status of watch list loans, collateral values and changes in the size and mix of the loan portfolio. Although there were a number of loan payments and risk rating upgrades and downgrades during the first half of 2011, both total non-accrual loans and total watch list loans declined since December 31, 2010. We completed the strategic sale and settlement of three commercial loans totaling $8 million. We initially planned to resolve the loans, but decided to sell them in March of 2011. Two of these loans totaling $7 million had involved lengthy workout negotiations and we determined that to continue with protracted litigation most likely would have been very costly and time-consuming with uncertain recovery results. (See also Critical Accounting Policies, Judgments and Estimates, and Asset Quality contained herein.)

Total non-interest income declined by $2.5 million in the first half of 2011 versus the comparable 2010 period principally due to lower net gains on sales of securities and decreased income from bank owned life insurance reflecting a lower rate of return. These were partially offset by an increase in other operating income of $343 thousand attributable to higher overdraft volume, letter of credit and loan sourcing fees in 2011. Net gains on sales of securities were $113 thousand in the first six months of 2011 compared to $2.8 million for the same period last year.

First half 2011 total operating expenses decreased by $617 thousand or 2.8% to $21.6 million compared to the first half of 2010. This decrease was due to cost reductions achieved in several expense categories, in particular salaries and other employee benefits, marketing and advertising, FDIC and NYS assessment and credit and collection. Salaries and other employee benefits declined by $487 thousand in the first half of 2011 versus 2010 primarily as the result of a reduction in staff count in 2011 and a decline in the Company’s defined contribution plan expense. Marketing and advertising expenses declined by $393 thousand in 2011 due to a reduction in spending related to brand building. In addition, we experienced year-over-year reductions in expenses in occupancy, FDIC and NYS assessment and credit and collection of $41 thousand, $203 thousand and $164 thousand, respectively. Total operating expenses, excluding $1.4 million in merger-related expenses, decreased by $2.0 million or 8.9% to $20.2 million in the first half of 2011 from the comparable 2010 period.

The Company’s operating efficiency ratio (total operating expenses divided by the sum of fully taxable equivalent net interest income and non-interest income, excluding net securities gains and losses) was 63.3% in the first half of 2011 compared to 63.7% in the first half of 2010. The Company’s other measure of expense control, the ratio of total operating expenses to average total assets, was 2.69% for the first half of 2011 versus 2.73% for the first half of 2010. Excluding merger-related expenses, the Company’s first half 2011 operating efficiency ratio was 59.3% and its total operating expenses to average total assets ratio was 2.53%.

Income tax expense of $3.6 million and $2.9 million were recorded during the six months ended June 30, 2011 and 2010, respectively. The Company’s overall effective tax rate was 38% for the six months ended June 30, 2011 and 2010. 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.

Core Operating Expenses	Quarter to Date			Year to Date
	9/30/2011			9/30/2011
Total operating expenses	$	9,608		$	31,168
Less: merger-related expenses		(154	)		(1,511	)
Core operating expenses	$	9,454		$	29,657

Core Operating Efficiency Ratio	Quarter to Date			Year to Date
	9/30/2011			9/30/2011
Core operating expenses	$	9,454		$	29,657
FTE net interest income		16,350			48,364

FTE non-interest income		1,777			3,956
Less: net gains on sales of securities		(933	)		(1,046	)
FTE non-interest income excluding net securities gains		844			2,910
Total FTE revenue		17,194			51,274
		54.98	%		57.84	%

Total Core Operating Expenses to Average Total Assets Ratio	Quarter to Date 9/30/2011			Year to Date 9/30/2011
Core operating expenses	$	9,454		$	29,657
Core operating expenses annualized		37,508			39,651
Average total assets		1,619,595			1,615,554

		2.32	%		2.45	%

~~Asset~~The ~~Quality~~Company’s –income ~~There~~tax isexpense nowas ~~subprime~~$4.8 ~~exposure~~million in the third quarter of 2011 as compared to $1.8 million in the third quarter of 2010. The Company’s ~~securities~~overall ~~portfolio.~~effective ~~All~~tax ofrate was 40% for the ~~mortgage-backed~~third ~~securities~~quarter ~~and~~of ~~collateralized~~2011 ~~mortgage~~compared ~~obligations~~to ~~held~~36% for the same period in the prior year. The Company’s ~~portfolio~~has ~~are~~performed ~~issued~~an byevaluation ~~U.S.~~of ~~Government~~its ~~agency~~tax positions and ~~sponsored~~concluded ~~enterprises. (See~~that ~~also~~there ~~Note~~were 4no tosignificant ~~the~~uncertain ~~Unaudited~~tax ~~Condensed~~positions ~~Consolidated~~that ~~Financial~~required ~~Statements~~recognition –in ~~Investment~~its ~~Securities~~financial statements.)

~~Non-accrual~~Material ~~loans~~Changes ~~totaled~~in ~~$12~~Results ~~million (~~of ~~which~~Operations ~~there~~– ~~were~~Comparison noof ~~loans~~the ~~held~~Nine ~~for~~Months ~~sale~~Ended ~~that~~September ~~were~~30, ~~previously~~2011 ~~written~~and ~~down~~2010 to– ~~their~~For ~~estimated~~the ~~fair~~nine ~~value)~~months atended ~~June~~September 30, 2011, ~~$15~~the ~~million~~Company ~~(which~~recorded ~~includes~~net noincome ~~loans~~of ~~held for sale) at December 31, 2010 and~~ $713.0 million ~~(which~~compared ~~includes~~to $~~319 thousand in loans held for sale) at June 30, 2010~~7.9 ~~The $5~~ million ~~net increase~~ in ~~non-accrual~~the ~~loans~~corresponding ~~at June 30, 2011 compared to June 30,~~ 2010 ~~resulted~~period. ~~primarily~~The ~~from~~factors ~~additions~~contributing to ~~non-accrual~~the ~~status,~~increase ~~partially~~in ~~offset~~net byincome ~~several~~were ~~strategic~~a ~~commercial loan sales, settlements and charge-offs~~$10.7 ~~The~~million ~~net~~reduction ~~decrease~~ in ~~non-accrual~~the ~~loans~~provision atfor ~~June~~loan ~~30,~~losses ~~2011 compared to December 31, 2010 was primarily due to the strategic sale~~ and ~~settlement~~a ~~of three commercial loans totaling~~ $81.6 million ~~during~~decline ~~the~~in ~~first~~total ~~quarter~~operating ofexpenses in 2011, partially offset by ~~the~~reductions ~~addition~~in tonet ~~non-accrual~~interest ~~status~~income ~~of one commercial real estate loan of $4 million. At June 30, 2011, December 31, 2010~~ and ~~June 30, 2010, the Company held no other real estate owned (“OREO”). Loans 90 days or more past due and still accruing~~ non-interest atincome ~~June~~of ~~30, 2011 and December 31, 2010 totaled~~ $1580 thousand atand ~~both periods~~$2.7 ~~At June 30~~million, ~~2010 loans 90 days or more past due and still accruing interest were $9 thousand~~respectively.

AtAs ~~June~~shown ~~30,~~in ~~2011~~Table ~~and~~2-2 ~~December~~(B) ~~31,~~following ~~2010~~this discussion, net ~~impaired~~interest ~~loans~~income ~~totaled~~declined 1.2% to $2848.3 million, ~~primarily~~as ~~consisting~~the ofCompany’s ~~two~~net ~~classified,~~interest ~~partially~~margin ~~secured~~decreased ~~commercial~~to ~~and~~4.24% ~~industrial~~during ~~loans~~the ~~each~~first ~~with~~nine amonths ~~principal balance~~ of ~~$10~~2011 ~~million~~from ~~and~~4.27% a ~~classified~~year ~~$7 million secured land loan~~ago. ~~These~~The ~~three~~decreased ~~loans~~net ~~are~~interest ~~considered~~margin toprimarily beresulted ~~TDRs.~~from ~~Each~~a of$6 ~~the~~million ~~borrowers~~reduction ~~requested~~in ~~and~~average ~~was~~total ~~granted~~ interest-earning ~~rate~~assets orcoupled ~~other~~with ~~concessions.~~a ~~These~~22 ~~credits~~basis ~~have~~point ~~been~~reduction onin the ~~Company’s~~total ~~watch~~interest-earning ~~list~~assets ~~for several years~~yield, ~~are~~largely ~~fully~~reflecting ~~advanced~~the ~~and~~60 ~~performing~~basis atpoint ~~June~~reduction ~~30,~~in ~~2011~~the inaverage ~~accordance~~yield ~~with~~on ~~their~~the ~~revised~~securities ~~terms~~portfolio. ~~The~~This ~~Company~~was ~~had~~partially ~~TDRs~~offset by ~~amounting~~a to24 $7basis ~~million~~point atreduction ~~June~~in ~~30,~~the ~~2010.~~average ~~The~~cost ~~allowance~~of ~~for~~total ~~loan~~interest-bearing ~~losses~~liabilities ~~specifically allocated~~ to ~~TDRs~~0.86% ~~and~~during ~~other~~the ~~impaired~~first ~~loans~~nine ~~was~~months $9of ~~million, $13 million and $1 million at June 30,~~ 2011, ~~December~~compared ~~31,~~to ~~2010~~the ~~and~~same ~~June~~period ~~30,~~in 2010~~, respectively~~.

~~Loans~~The toaverage ~~borrowers~~yield ~~which~~on the ~~Bank has identified as requiring special attention (such as a result of changes affecting the borrower~~Company’s ~~industry,~~loans ~~management,~~decreased ~~financial~~to ~~condition~~5.44% ~~or other concerns) are included~~ in the ~~Company’s~~first ~~watch~~nine ~~list~~months asof ~~well~~2011 asfrom ~~loans~~5.59% ~~which~~in ~~are~~the ~~criticized~~first ornine ~~classified~~months byof ~~bank regulators or loan review auditors~~2010. ~~The~~This ~~majority~~reflected ofa ~~such~~$206 ~~watch~~million ~~list~~increase ~~loans~~in ~~were~~the ~~originated~~average asbalance ~~residential~~of ~~construction,~~ commercial ~~real estate or commercial~~ and industrial loans. Inwhich ~~some~~generally ~~cases,~~tend ~~additional~~to ~~collateral~~be inlower ~~the~~yielding ~~form~~than of commercial real estate ~~was~~loans, ~~taken~~the ~~based~~average onbalance ~~current~~of ~~valuations.~~which ~~Thus,~~declined ~~there~~$165 ~~exists~~million. aThe ~~broad~~average ~~base~~balance of ~~collateral~~the ~~with~~Company’s aloan ~~mix~~portfolio ofincreased ~~various~~$42 ~~types~~million offor ~~corporate~~the ~~assets~~nine ~~including~~months ~~inventory,~~ended ~~receivables~~September ~~and equipment~~30, ~~and~~2011 ~~commercial~~as ~~real~~

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