****


**EXHIBIT
13**





ANNUAL
REPORT TO STOCKHOLDERS








STATE BANCORP,
    INC.
 2004
Annual Report
 
 
 
  *Success...One
Customer at a Time.*
  
  
  
  STATEBANCORP,
      INC.
 
 *S*tate
      Bank of Long Island was founded in 1966 by an energetic group of
      civic-minded businessmen seeking to enhance the quality of banking
      services on Long Island. They succeeded perhaps beyond their fondest
      expectations — and for many years now State Bank has ranked among the
      highest performing banks in New York State.
      
      Over
      the years, the Bank has adhered to a philosophy of “Measured, Orderly
      Growth” and has built a reputation for providing high-quality personal
      service to commercial firms, small businesses, municipalities, and
      consumers.
 
 
 *Adding
Value...*
  
 *The
quintessential definition for any business’s reason for*
 
 *being
is satisfying customer needs. From our beginning,*
 
 *State
Bank has understood that concept and has*
 
 *incorporated
it into our business cultivation efforts*
 *.*
 *By
making our customers our first priority,*
 
 *we
add value to our relationships that goes beyond*
 
 *offering
quality banking services*
 
 
  STATE BANCORP, INC. AND SUBSIDIARIES
 S ELECTED F INANCIAL D ATA
 
 
 Fiscal
      Year Ended December 31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000**OPERATING
      RESULTS**Interest
      income
    
    $
    70,037,106
    
    $
    64,682,876
    
    $
    67,132,444
    
    $
    69,937,207
    
    $
    72,925,122Interest
      expense
    
    
    12,800,553
    
    
    11,534,977
    
    
    15,239,307
    
    
    26,745,029
    
    
    35,788,522Net
      interest income
    
    
    57,236,553
    
    
    53,147,899
    
    
    51,893,137
    
    
    43,192,178
    
    
    37,136,600Provision
      for probable loan losses
    
    
    4,506,000
    
    
    3,935,004
    
    
    3,560,000
    
    
    3,600,000
    
    
    3,250,000Net
      interest income afterprovision for probable loan losses
    
    
    52,730,553
    
    
    49,212,895
    
    
    48,333,137
    
    
    39,592,178
    
    
    33,886,600Other
      income
    
    
    7,050,925
    
    
    9,142,923
    
    
    4,477,615
    
    
    4,973,313
    
    
    2,435,755Operating
      expenses
    
    
    41,043,230
    
    
    41,089,081
    
    
    37,477,362
    
    
    31,587,765
    
    
    21,977,203Net
      income
    
    $
    13,376,009
    
    $
    12,015,173
    
    $
    11,302,611
    
    $
    10,820,834
    
    $
    10,709,840**COMMON
      SHARE DATA**Basic
      earnings per common share (1)
    
    $
    1.48
    
    $
    1.35
    
    $
    1.27
    
    $
    1.19
    
    $
    1.17Diluted
      earnings per common share (1)
    
    $
    1.44
    
    $
    1.32
    
    $
    1.24
    
    $
    1.17
    
    $
    1.15Stock
      dividends
    
    
    5
    %
    
    5
    %
    
    5
    %
    
    5
    %
    
    8
    %Cash
      dividends per common share (1)
    
    $
    0.58
    
    $
    0.52
    
    $
    0.50
    
    $
    0.46
    
    $
    0.41**FINANCIAL
      POSITION**Total
      assets
    
    $
    1,437,290,967
    
    $
    1,441,000,363
    
    $
    1,362,282,184
    
    $
    985,770,997
    
    $
    1,021,223,348Total
      loans (2)
    
    $
    778,191,228
    
    $
    711,216,134
    
    $
    620,383,873
    
    $
    551,597,698
    
    $
    496,992,446Total
      deposits
    
    $
    1,269,634,078
    
    $
    1,216,286,903
    
    $
    1,147,026,508
    
    $
    884,709,462
    
    $
    895,107,149Total
      stockholders’ equity
    
    $
    101,049,842
    
    $
    94,711,522
    
    $
    87,682,631
    
    $
    76,288,429
    
    $
    72,306,737Weighted
      average number of common shares outstanding (1)
    
    
    9,023,180
    
    
    8,899,112
    
    
    8,926,160
    
    
    9,082,331
    
    
    9,182,098**OTHER
      DATA**Return
      on average total assets
    
    
    0.90
    %
    
    0.89
    %
    
    0.95
    %
    
    1.08
    %
    
    1.13
    %Return
      on average total stockholders’ equity
    
    
    13.75
    %
    
    13.18
    %
    
    13.66
    %
    
    13.94
    %
    
    17.91
    %Tier
      1 leverage ratio
    
    
    7.82
    %
    
    8.08
    %
    
    6.95
    %
    
    7.79
    %
    
    7.57
    %Net
      interest margin (FTE)
    
    
    4.22
    %
    
    4.31
    %
    
    4.77
    %
    
    4.79
    %
    
    4.32
    %Operating
      efficiency ratio
    
    
    64.2
    %
    
    70.7
    %
    
    66.0
    %
    
    64.5
    %
    
    52.5
    %Dividend
      payout ratio
    
    
    38.98
    %
    
    38.68
    %
    
    39.06
    %
    
    38.79
    %
    
    35.28
    %
 (1)
Retroactive recognition has been given for stock dividends.
 (2) Net
of unearned income and before allowance for probable loan losses.
 
 
  NETINCOME
      (dollars
      in thousands)
    RETURN
      ONAVERAGETOTALSTOCKHOLDERS’
      EQUITY
      (percent)
    AVERAGETOTALASSETS
      (dollars
      in millions)
  2
 
 
 TO OUR
STOCKHOLDERS, CUSTOMERS AND FRIENDS:
   
 *A*t
      the close of 2004, it is our pleasure to report to our many friends the
      completion of yet another year of record earnings growth. This is now our
      thirty-fourth consecutive year of earnings improvement, a record which we
      believe is unique among commercial banks both in New York State and
      perhaps the country. This is an achievement for which all of the State
      Bank family feels a well deserved sense of pride. Our reported earnings
      for the year ending December 31, 2004 were $13.4 million which represents
      an 11.3% improvement over the comparable 2003 period. Contributing to
      these earnings were a 13% increase in average loans outstanding to $735
      million, an 11% increase in average core deposits to $953 million, an
      improved Operating Efficiency Ratio of 64.2% versus 70.7% in 2003, anda
      lower effective income tax rate. These results were achieved in spite of a
      contraction in our net interest margin to 4.22% in 2004 from 4.31% in
      2003.
      Additionally,
      our Company's return on average
      assets was 0.90% in 2004 versus 0.89% in 2003, and our return on average
      stockholders’equity
      increased to 13.75% from 13.18% over the same time period. Total
      stockholders' equity was $101 million at December 31, 2004, up 7% compared
      to 2003. The Company's Tier I Leverage Ratio and Total
      Capital/Risk-Weighted Assets were 7.82% and 13.71%, respectively, at year
      end 2004. Our capital ratios remain well in excess of current regulatory
      guidelines for a well-capitalized institution.
      During
      2004, $5.2 million was distributed in cash dividends on our common stock,
      representing a payout ratio of 39.0%. Cash dividends of $4.6 million were
      distributed in 2003, representing a payout ratio of 38.7%. A total of $44
      million in cash dividends has been distributed to stockholders since 1979
      at an average payout ratio of 34.1%. In addition, we also distributed our
      35th consecutive annual stock dividend during 2004.
      For
      a more detailed analysis of the Company's consolidated financial
      statements, please refer to Management's Discussion and Analysis of
      Financial Condition and Results of Operations beginning on page 24 of this
      report.
      In
      general, economic developments both nationally and locally have an impact
      on the performance of our Company and that was clearly the case in 2004.
      On a national scale, the U.S. economy grew at an annual rate of 3.2%
      through 2004, slowing from the 4.5% rate of the first quarter. The Federal
      Reserve raised short-term interest rates several times in 2004 to close
      the year at 2.25% and now the median forecast for the Federal Funds Rate
      for year-end 2005 is 3.25%.
      Locally,
      Long Island's economic growth was supported by a combination of faster job
      growth, a robust housing market and strong consumer
 Daniel T.
Rowe
 *President*
 3
 
 C ASH D IVIDENDS P ER S HARE
*
 
 
 
  *Retroactive
recognition has been given for stock dividends and splits.
 
 
 spending.
      The most recent data shows that Long Island gained 15,000 jobs in 2004
      which is almost double the number of jobs generated in 2003. Sales tax
      collections, a barometer of consumer spending, are expected to be 6% to 8%
      higher in 2004 than they were in the previous year. The housing markets
      remain strong with values rising by 12% in Nassau and 17% in Suffolk.
      Tempering this positive economic outlook is a concern that housing prices
      and consumer spending have been rising faster than household income
      suggesting that this region may be in the midst of a housing debt
      
      This
      is now our thirty-fourth consecutive year of earnings improvement, a
      record which we believe is unique among commercial banks...
      
      bubble.
      It is expected that rising interest rates will dampen consumer spending
      and the housing market in 2005. We will closely monitor the effect this
      may have on our regional economy, of which we are so very much a part.
      During
      May, 2004 we were delighted to announce the formation of a*Professional
      Services Group*at
      State Bank. This talented group of banking veterans specializes in
      providing uniquely tailored financial services to the legal community,
      accounting firms, entrepreneurs and medical professionals. The Group
      offers great synergies with our core business model and we are confident
      that they will enable us to broaden and deepen our relationships in this
      market.
      Once
      again, the untiring efforts of both our Board of Directors and our
      Advisory Board have contributed greatly to the success of our Company over
      these many years. We were delighted to welcome three new members to the
      Board in 2004, K. Thomas Liaw, Gerard J. McKeon and Andrew J. Simons,
      bringing our total number of Directors to thirteen. Mr. Liaw is Chairman
      of the Department of Economics and Finance and Professor of Finance at St.
      John's University. Mr. McKeon has served on State Bank's Advisory Board
      since 1983 and had a prominent career at the New York Racing Association.
      Mr. Simons is the Associate Dean of St. John's University School of Law.
      It is with much enthusiasm that we look forward to the contributions that
      these distinguished individuals will bring to our Board in the years
      ahead.
    Richard W. Merzbacher
      *Vice Chairman*
 
 **
 4
  We
      similarly are pleased to announce the addition of five new members to our
      Advisory Board including: Thomas C. Catalano, Partner, Donohue, McGahan
      and Catalano; John Dugan, Farmingdale Physical Therapy Associates; ThomasJ.
      Killeen, Partner, Farrell Fritz, P.C.; James F. O'Brien, Law Offices of
      James F. O'Brien (January,2005); and Matthew C. Wilkoff, Vice President,
      Gerald J. Wilkoff, Inc. We anticipate that each of these new members will
      bring added depth to the Advisory Board's important function.
      It
      is with gratitude that we once again acknowledge the contribution of our
      Delaware subsidiaries, SB Portfolio Management and SB Financial Services,
      to the success of our Company and for the advisory and economic
      forecasting services they render.
      We
      are further pleased to report the continued success of our other
      subsidiary, Studebaker-Worthington Leasing Corporation, which, through
      their national presence, continues to make an increasingly important
      contribution to our Company.
      As
      we have frequently noted over the last several years, our Dividend
      Reinvestment Plan continues to afford our stockholders the opportunity to
      rein-vest their cash dividends in our Company stock. Additional purchases
      of stock can be made each quarter, both through the reinvestment of cash
      dividends as well as the investment of additional cash. Since its
      inception, this Plan has served to con-tribute over $13 million in capital
      towards the growth of our Company.
      Our
      challenge going forward in 2005 is not so much in achieving excellence, as
      it is in maintaining it. This year's Annual Report focuses, as last year's
      did, on what we know is our most valuable asset... our customers. Satisfying
      their financial needs is our first priority and is part of our business
      culture. The*Nielson
      Customer Satisfaction Survey*and
      its subsequent updates tell us that we have been and continue to be very
      successful in meeting our customers' needs. According to Nielson, no
      financial institution other than State Bank of Long Island, has ever
      achieved and maintained an overall customer satisfaction level of 96%. As
      pleased as we are with those results, our efforts going forward must focus
      on maintaining the high standards that we have set for ourselves.
      The
      year 2004 was one of continued achievement for all of us here at State
      Bancorp, Inc. and State Bank of Long Island. It is with eager anticipation
      that we look forward to the continued growth and prosperity of our fine
      organization. We are confident that the year ahead will bring us even
      greater successes as we continue to serve the people and businesses in our
      marketplace.
      
      
      
      Thomas
      F. Goldrick, Jr.
      *Chairman
      and Chief Executive Officer*
      **
      **
      *Richard
      W. Merzbacher
      *Vice
      Chairman**
      **
      **
      *Daniel
      T. Rowe
      *President**
    Thomas
      F. Goldrick, Jr.
      *Chairman
      and Chief Executive Officer*
 
 5
 
 *Banking
with Confidence*
 
 
 
  The RAMP
Organization was established in 1944 when Alfred F. Rampone opened the doors to
his first Ford dealership in Port Jefferson Village. Since its inception, the
organi zation's
mission has always been to provide the best
service and value possible.
From the sales people, to the Service Department and support staff, each area
works together closely as a team to ensure that the customer's experience is
always first-rate. As a result, RAMP has received numerous honors over the
years, including: Time Magazine's “Quality Dealer of the Year” Award, The Jack
Smith Leadership Award, the GM Mark of Excellence Dealer Award, and Ward's
Dealer Business magazine named it one of America's "Top 500
Dealers."
 Over
time, the RAMP Organization has experienced tremendous growth and now includes:
RAMP Ford, RAMP Chevrolet (Long Island's #1 Chevrolet dealer), RAMP Hummer, RAMP
Motorcycles, RAMP Transportation (school and commercial bus sales), and United
Bus Corporation and Adelwerth Bus Corporation (school transportation). In
addition, the RAMP Organization recently opened New York's exclusive Corvette
Retail Center which is dedicated to all things Corvette.
 The RAMP
Organization is owned and managed by the second and third generation of the
Rampone Family including: Charles Rampone Sr., Charles R. Rampone Jr., Wayne
Rampone, and John Rampone. With ten facilities in Suffolk and Dutchess Counties,
RAMP employs over 500 people.
 For more
than a decade, the RAMP Organization has relied on State Bank's quality products
and personalized service to support their growing family of
businesses.
     
 “As our
businesses have grown to include additional product lines and a larger
geographic sales area, State Bank has been there to assist us every step of the
way. Since 1944 our businesses have operated on the core principles of honesty,
integrity, and fair dealing. State Bank not only provides us with superior
service, they share our values.”
 Charles
      R. Rampone, Jr.
 
 6
 
 
  *Above:* Charles
R. Rampone, Jr.
 *Right
(left to right):* Olga B.
Belleau, Assistant VicePresident, State Bank;
 Charles
R. Rampone, Jr., President, RAMP Organization;
 Jeffrey
Reid, Vice President, State Bank
 
 7
 
 
 
  *Above
(left to right):* Joe Raab,
Gerry Levy and Arnie Waldman
 *Left
(left to right):* Gerry
Levy, Executive Vice President, CBS Coverage Group, Inc.;
 Kevin
Hennessy, First Vice President, State Bank
 
 8
 
 *Service
without Compromise*
 
 
 
  CBS
Coverage Group, Inc. is an independent insurance broker and agent providing
insurance programs to individuals and businesses including employee benefits.
Representing approximately 30 top insurance providers such as Chubb, CNA, The
Harford and St. Paul Travelers, CBS provides insurance programs to 10,000
individual accounts and over 3,000 businesses in the New York Metropolitan area.
From traditional to more specialized programs including Professional Liability
for Attorneys, the insurance professionals at CBS are able to choose the best,
most comprehensive and cost-effective programs for their clients.
 Established
over 50 years ago, CBS has grown to become one of the top 10 insurance agencies
on Long Island. They credit their success to a strong commitment to provide the
best financial protection to their clients through quality products and
professional service.
 Most
recently, CBS financed the expansion of their new corporate office building in
Plainview, NY. Kevin Hennessy, First Vice President and Lending Officer, worked
closely with CEO/President Gerry Levy, Executive Vice President Joe Raab and
Vice President Arnie Waldman to structure the loan and provide other financial
services needed for their growing business.
 
 
 
 
 
 
 “State Bank makes all the difference to us in that
they understand our industry and their staff provides the personal attention we
need to continue to grow our business.”
 Joe
      Raab
 
 9
 
 *Banking
with Confidence*
 
  
 Brill &
Meisel is a midtown Manhattan law firm founded by Allen H. Brill and Elliott
Meisel in 1979 to provide high quality legal services to small and mid-sized
clients at competitive rates, especially in the real estate
and general commercial
areas. In addition to handling acquisitions, sales, financing and leasing of
both commercial and residential properties, the firm is well known for its role
in the creation and continuing representation of co-op and condominium
associations. Currently, Brill & Meisel represents over 100 co-ops and
condominium associations. The partners are frequently consulted by trade
journalists and are often quoted in their publications on related
subjects.
 In the
currently active real estate market, the relationship between State Bank and
Brill & Meisel has enabled the law firm to fulfill its mission of expediting
its clients' transactions through its escrow services. In addition, that
relationship has helped the firm meet its long and short-term financial
requirements as well as those of its clients.
     
 “ During
our many years of practice, we have had occasion to use and evaluate the
services of many banks, usually in Manhattan. I can confidently say that none
can compare, either personally or professionally, to the Professional Services
Group at State Bank. We look forward to a continuing relationship based on State
Bank's attentive service and its appreciation of the way we service our own
clients.”
 Elliott
      Meisel
 
 10
 
 
 
  *Above
(left to right):* Elliott
Meisel, Allen H. Brill
 *Right
(left to right):* Allen H.
Brill, Partner, Brill & Meisel;
 Elliott
Meisel, Partner, Brill & Meisel; Tara Rice, First Vice President, State
Bank;
 Steven
Biegelsen, First Vice President, State Bank
 
 11
 
 
  *Above:* Richard
N. Adonailo
 *Left
(left to right):* Richard
N. Adonailo,Chief Financial Officer & Vice
Chairman , AriZona
Beverages;
 Lucy
Mazany, First Vice President, State Bank
  12
 
 *Service
without Compromise*
 
  
  AriZona
Beverage Company is an internationally recognized brand name that is synonymous
with quality ready-to-drink teas, herbal teas, energy drinks, lightly flavored
waters and flavored coffees. In 1992, John Ferolito and Don Vultaggio launched
AriZona Ice Tea after
recognizing the rapidly increasing consumer demand for these products. From its
introduction in May of 1992, until today, the brand has been phenomenally
successful. In the January-February 2005 edition of Beverage Spectrum Magazine,
AriZona was listed as the leading seller in the beverage industry of
ready-to-drink teas.
 Almost as
popular as their product, AriZona's unique packaging designs have continuously
won international recognition for their creativity. Some of their accolades
include the London International Design Award for five consecutive years and
overall best package in 2000, first place for package design from the MOBIUS
Advertising Awards for four years, the International Brand Packaging Award, the
Clear Choice Award and the list goes on. While most of these designs were
created in-house, AriZona has also collaborated with professional artists such
as Peter Max and Buckeye Blake.
 Due to
the success of the brand, the Company has expanded their product
portfoli o to
include a natural carbonated soft drink line called Soho Soda and have joined
with Arnold Palmer Enterprises to develop Arnold Palmer Half & Half, a half
tea, half lemonade beverage. Recently, AriZona has been contacted by several
high profile companies for help with product development and package
design.
 
 “The
bankers at State Bank understand our business and are there when we need them.
While others talk about personal service, State Bank delivers it.”
 Richard
      N. Adonailo
 
 13
 
 *Banking
with Confidence*
 
 
  “Discover
the Spirit”...that's the slogan of the western-themed Coleman Country Day Camp
thirteen-acre ranch located in Merrick, Long Island. For more than 20 years,
Coleman Country Day Camp (CCDC) has invited children, entering nursery school
through tenth grade, to spend their summers exploring “new trails” loaded with
opportunities to help equip them for success in life. Activities at CCDC include
horseback riding, swimming, a petting zoo, a wide range of indoor and outdoor
sports and plenty more.
 Coleman
Country Day Camp is part of the extended Coleman Family Camps,
which includes: Camp Echo in Coleman
High Country and Coleman Cross Country. Camp Echo is a coed traditional
sleep-away camp located at the foot of the beautiful Catskill Mountains. For
more than 80 years, it has given children the opportunity to “Discover the
Adventure”; offering activities like boating, hiking, painting, and more.
 Coleman
Cross Country helps teens in seventh thru tenth grades “Discover the Planet” by
taking the adventure on the road cross-country to explore the USA during school
breaks. Recent journeys have visited Vermont and California.
 The
Coleman family firmly believes that camp is a vital element in a child's
education. Whether they are refining physical skills or honing emotional
competencies, campers are part of a special community where they feel welcomed,
included, and know that they belong. Coleman Family Camps has continually been
accredited by the American Camp Association.
 State
Bank and the Coleman family have shared a special relationship for many years.
The Bank is proud to be part of such a successful organization that provides a
truly wonderful experience to children of all ages.
     
 
 “State
Bank has enabled us to expand our offerings, consistently upgrade our facilities
and continually maintain the highest standards in youth development. The Bank
has been, and is, an invaluable and most appreciated partner.”
 George
      Coleman
 
 14
  
  *Above
(left to right):* Ross
Coleman, Marla
 Coleman,
Jordan Coleman, Jessica
 Coleman,
George Coleman
 *Right
(left to right):* George
Coleman,
 Director,
Coleman Family Camps;
 Jan
Yngstrom, Senior Vice President,
 State
Bank; Marla Coleman, Director,
 Coleman
Family Camps
 15
 
 
  *Above
(left to right):* Thomas
Murtha, Beau Gardon, Stephen J. McCarthy,
 Linda
Kass, Doris S. Wagner, Barbara Faron
 *Left
(left to right):* Robert
Nicols, Senior Vice President, State Bank
 Barbara
Faron, Executive Director,Federation of Organizations;
 Doris S.
Wagner, Deputy ExecutiveDirector, Federation of Organizations
 
 16
 
 *Service
without Compromise*
 
  
 
 In the
early 1970s, no formal organization existed that worked to improve the
conditions for individuals housed in psychiatric centers throughout New York
State. This function usually fell upon family members who would advocate for
good treatment and a safe environment. It was general ly
believed that the only answer to combat mental illness was permanent
hospitalization.
 Federation
of Organizations was incorporated in 1972 in direct response to this lack of
formal support. They operate under the philosophy that engaging people in the
recovery process and integration into community life is the desired outcome for
people recovering from mental illness. Federation of Organizations has developed
programs to meet the needs of children at risk, low-income seniors, individuals
recovering from mental illness and the homeless. Services and programs offered
on Long Island and in New York City include psychiatric rehabilitation,
counseling, employment, housing, case management, socialization, outreach,
advocacy, transportation, financial management, crisis intervention, drug and
alcohol counseling, education, group support, and nutrition.
 With the
financial assistance of State Bank of Long Island, Federation of Organizations
is scheduled to open their latest facility, The Irving Berkowitz Residence,
located on the Pilgrim Psychiatric Center campus in West Brentwood, NY. Housing
over 50 clients, this transitional facility will assist individuals in obtaining
the skills they need as they take another step towards their independence.
     
 “State
Bank has been such a large part of our success. They understand what our
intentions are and where we are headed. They put the focus on what is really
important, the client.”
 Barbara
      Faron
  17
 
 Banking
with Confidence
 
 
 
  In 1969,
Gordon VanVechten and Gene Eichner joined together to open a small retail
picture frame shop. Each contributed $2,000 in startup capital and immediately
set their sights on expanding their business. Now, 36 years later, their small
company has grown to become one of the largest and most successful manufacturers
of picture frame moulding in the United States.
 Framerica
prides itself on providing cutting-edge designs at great value. Its extensive
line of moulding includes more than 2000 profiles and finishes, in both
traditional and contemporary styles. Some newly added finishes include
NantucketTM, designed after weathered cottages in Nantucket, ParquetTM, a rare
“box grain” walnut finish, and ColoriTM, bright colored moulding with subtle wood
grains. Framerica stocks one of the industries largest inventories, allowing for
a variety of options to fulfill orders quickly and efficiently.
 Eichner
and VanVechten, who both carry the title of Co-Chairman, blend their individual
strengths to form a truly unique partnership. Eichner offers an innate sense for
marketing and sales complimented by VanVechten's ingenious ability for designing
innovative and modern production systems. Supported by a staff of more than 200,
Framerica continues to prosper by focusing on helping each customer succeed.
 Framerica's
new state-of-the-art facility, located in Yaphank, NY, emerged from the
relationship it shares with State Bank of Long Island. Over the years, this
relationship has grown to ensure that Framerica will continue to thrive for
years to come.
     
 “We are
extremely proud and honored to be associated with State Bank, especially with
Fred Heruth, who's been our terrific banker and our wonderful friend for more
than 25 years. He is a valuable adviser whose financial skills and keen insights
have helped us immeasurably in both our personal and professional
lives.”
 Gordon
      VanVechten, Gene Eichner
 
 
 18
  
  *Above
(left to right):* Gordon
VanVechten, Gene Eichner
 *Right
(left to right):* Gene
Eichner, Co-Chairman,Framerica;
 Gordon
VanVechten, Co-Chairman, Framerica;
 Fred
Heruth, First Vice President, State Bank
   19
  
  *Above:* Kathryn
Buettner & Ken Buettner
 *Left
(left to right):* Ken
Buettner, President,
 York
Scaffold Equipment Corp.;
 Kathryn
Buettner, Vice President,
 York
Scaffold Equipment Corp.;
 John
Governale, Vice President, State Bank
 20
 
 *Service
without Compromise*
 
  
 
 York
Scaffold has been serving the public for over 70 years with a full line of
ladders and scaffolding. They will sell, lease or install scaffolding and
sidewalk protection for contractors or building owners. Their scaffold inventory
includes traditional steel frames
as well as system scaffolds,
aluminum maintenance rolling towers, and "The Original Baker Scaffold." On the
ladder side of the business, York is a master stocking distributor for the
Werner Company - the largest manufacturer of aluminum and fiberglass step and
extension ladders in the world today. They are also the New York State master
distributor for the Wing Enterprises product line, including such ladders as the
“Little Giant Ladder System” and the “Little Jumbo Safety
Stepladder.”
 Family
owned and operated, with the third generation of the family currently leading
the company, York traces its roots back to a small shop on York Avenue in
Manhattan. As business grew, so did the need for a larger facility. In the late
1940's, York opened its Long Island City operation and is still there today,
covering over four city blocks. With a strong focus on quality product and
customer satisfaction, they have been at the forefront of innovation in the
industry and have expanded to keep pace with its needs.
 In
December of 2000, York became one of the first customers of the newly opened
State Bank branch in Long Island City. Today, they enjoy a strongly forged
relationship with both the branch and the Queens Lending Team.
     
 
 "State
Bank has always been dependable and reliable. Their people always go out of
their way to meet our needs."
 ****Ken
      Buettner
  21
  
 
 BOARD
OF DIRECTORS
  *Standing
(left to right):* Jeffrey
S. Wilks, Arthur Dulik, Jr., Joseph F. Munson, Richard W. Merzbacher, Thomas F.
Goldrick, Jr., Daniel T. Rowe, Andrew J. Simons, J. Robert Blumenthal, Gerard J.
McKeon,Gerald P. Rosenberg (Secretary to the Board)
 *Seated
(left to right):* John F.
Picciano, Suzanne H. Rueck, Thomas E. Christman, K. Thomas Liaw
  22
   STATE
BANCORP, INC. AND SUBSIDIARIES
 
 
 
 
 
 Financial
      ContentsManagement's
      Discussion and Analysis of Financial Condition and Results of
      Operations
    24Report
      of Independent Registered Public Accounting Firm
    41Consolidated
      Balance Sheets
    42Consolidated
      Statements of Income
    43Consolidated
      Statements of Cash Flows
    44Consolidated
      Statements of Stockholders' Equity and Comprehensive Income (Loss)
    45Notes
      to Consolidated Financial Statements
    46Statistical
      Information
    61Market
      Data
    66
  23
  STATE BANCORP, INC. AND SUBSIDIARIES
  Management's
Discussion and Analysis of Financial Condition and Results of Operations
 
 OVERVIEW
 State
Bancorp, Inc. (the "Company") is a one-bank holding company, which was formed on
June 24, 1986. The Company operates as the parent for its wholly owned
subsidiary, State Bank of Long Island and subsidiaries (the "Bank"), a New York
State chartered commercial bank founded in 1966, and its unconsolidated wholly
owned subsidiaries, State Bancorp Capital Trust I and II (collectively the
"Trusts"), entities formed in 2002 and 2003, respectively, to issue Trust
Preferred securities. The income of the Company is principally derived through
the operation of the Bank and its subsidiaries, SB Portfolio Management Corp.
("SB Portfolio"), SB Financial Services Corp. ("SB Financial"),
Studebaker-Worthington Leasing Corp. ("SWLC"), New Hyde Park Leasing Corp. and
SB ORE Corp.
 The
Bank serves its customer base through fifteen full-service branches and a
lending center in Jericho, NY. Of the Bank's branch locations, seven are in
Nassau County, five are in Suffolk County and three are in Queens County. The
Bank offers a full range of banking services to individuals, corporations,
municipalities and small to medium-sized businesses. Retail and commercial
products include checking accounts, NOW accounts, money market accounts,
passbook and statement savings accounts, certificates of deposit, individual
retirement accounts, commercial loans, personal loans, residential,
construction, home equity, commercial mortgage loans, consumer loans, small
business lines of credit, equipment leases, cash management services and
telephone and online banking. In addition, the Bank also provides access to
annuity products, mutual funds, discount brokerage services, sweep and lock box
products and, through its association with U.S.
Trust Company, a full range of wealth management and financial planning
services.
 SB
Portfolio and SB Financial, based in Wilmington, Delaware, each wholly owned
subsidiaries of the Bank, were formed in 1998. SB Portfolio provides investment
management services to the Bank and the Company while SB Financial provides
balance sheet management services such as interest rate risk modeling,
asset/liability management reporting and general advisory services to the Bank.
 The
Company also owns SWLC, a nationwide provider of business equipment leasing that
has been conducting business for over thirty years.
 For
the year ended December 31, 2004, the Company recorded record levels of
earnings, loans, deposits and Tier I capital. The following discussion is
intended to provide the reader with further insight into the principal factors
contributing to the financial results of the Company and its subsidiaries for
the periods shown. It should be read in conjunction with the consolidated
financial statements and notes thereto for a full understanding of this
analysis.
 
 **Financial
      performance of State Bancorp, Inc.**
      (dollars
      in thousands, except per share data)
      As
      of or for the years ended December 31,
    
    2004
    
    2003
    
    Over/
      (under)2003Revenue
      (1)
    
    $
    64,288
    
    $
    62,291
    
    
    3
    %Operating
      expenses
    
    
    41,043
    
    
    41,089
    
    
    —Provision
      for probable loan losses
    
    
    4,506
    
    
    3,935
    
    
    15Net
      income
    
    
    13,376
    
    
    12,015
    
    
    11Net
      income per share—diluted (2)
    
    
    1.44
    
    
    1.32
    
    
    9Dividend
      payout ratio
    
    
    38.98
    %
    
    38.68
    %
    
    30bpReturn
      on average total stockholders' equity
    
    
    13.75
    %
    
    13.18
    %
    
    57Tier
      I leverage ratio
    
    
    7.82
    %
    
    8.08
    %
    
    (26)bpTier
      I capital ratio
    
    
    12.46
    %
    
    12.26
    %
    
    20Total
      capital ratio
    
    
    13.71
    %
    
    13.46
    %
    
    25
 bp—denotes
basis points; 100 bp equals 1%.
 (1)
    Represents
      net interest income plus total other income. See Revenue of State Bancorp,
      Inc. table in Results of Operations and Financial Condition section.
 (2)
    Retroactive
      recognition has been given for stock dividends.
 
 OPPORTUNITIES,
RISKS AND THREATS
 The
Company's 2004 performance is discussed in detail on the following pages.
Certain statements contained in this discussion are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are based on management's current expectations
regarding a range of issues that could potentially impact the Company's
performance in future periods. Forward-looking statements are subject to risks
and uncertainties that may cause actual results to differ materially from those
discussed herein. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identified by the use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," "is confident that" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Factors that could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in: market interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, the quality and composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company's primary trade area, accounting
principles and guidelines and other economic, competitive, governmental,
regulatory and technological factors affecting the Company's operations, pricing
and services.
 As
noted in recent years' annual reports to stockholders, management expects that
the upcoming year will again provide the most difficult challenges that the
Company has ever faced. Intense competition in the Company's tri-county trade
area continues unabated from a variety of new competitors through both de novo
branching and acquisition. Management expects that the Company will continue to
focus on careful expansion of the loan and lease portfolios, significant expense
reduction initiatives and strategies to improve noninterest income generation.
Management recently announced that State Bank of Long Island expects to open its
sixteenth branch facility in Westbury, Long Island by mid-year 2005. This
location is projected to provide excellent retail and commercial deposit
potential and is also expected to assist in the growth of the commercial loan
portfolio based upon its strategic location contiguous to an industrial park.
During 2004, the Company expanded its staff of professional bankers in the areas
of cash management sales, professional services deposit generation and
commercial lending. Recent industry consolidation has provided the Company with
the opportunity to add these experienced, relationship-oriented bankers to staff
to support future growth and market penetration. Technology upgrades and new
products will continue to be developed to support branch deposit growth and
improve cross-selling efforts. By continuing our long-standing philosophy of *Measured,
Orderly Growth* ,
maintaining a "Customer First" attitude and adhering to the ideals contained in
our mission statement which are continually reinforced by our Board of Directors
and executive management team, the Company has been able to apply a consistent
standard of excellence honed over many years that management is hopeful will yet
again produce another productive year during 2005.
  24
  STATE BANCORP, INC. AND SUBSIDIARIES
   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 Consolidated Financial Statements, 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 probable loan losses and income taxes. 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 bases 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 Probable Loan Losses**
 In
management's opinion, the most critical accounting policy impacting the
Company's financial statements is the evaluation of the allowance for probable
loan losses. Management carefully monitors the credit quality of the loan
portfolio and, on a quarterly basis, charges off the amounts of those loans
deemed uncollectible. Management evaluates the fair value of collateral
supporting the impaired loans using independent appraisals and other measures of
fair value. This process involves subjective judgments and assumptions and is
subject to change based on factors that may be outside the control of the
Company.
 
 
 
 Management
of the Company recognizes that, despite its best efforts to minimize risk
through a rigorous credit review process, losses will occur. In times of
economic slowdown, either regional or national, the 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 both the micro and macro economic conditions as
reflected in the loan portfolio and the economy as a whole. Factors considered
in this evaluation include, but are not limited to, estimated losses from loan
and other credit arrangements, general economic conditions, changes in credit
concentrations or pledged collateral, historical loan loss experience and trends
in portfolio volume, maturity, composition, delinquencies and nonaccruals. The
allowance for probable loan losses is available to absorb charge-offs from any
loan category. Additions to the allowance are made through the provision for
probable loan losses, which is a charge to operating earnings. The adequacy of
the provision and the resulting allowance for probable 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 nonperforming loan data, collateral
values, regulatory examination results and changes in the size and character of
the loan portfolio. Thus, an increase in the size of the loan portfolio or in
any of its components could necessitate an increase in the allowance even though
credit quality and problem loan totals may be improving
 
 **Accounting
for Income Taxes**
 The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, which requires the recording of deferred
income taxes that reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Management exercises significant
judgment in the evaluation of the amount and timing of the recognition of the
resulting tax assets and liabilities and the judgments and estimates required
for the evaluation are periodically updated based upon changes in business
factors and the tax laws.
 The
Company's New York State income taxes are under examination for the years ended
December 31, 1999, 2000 and 2001. At this time, management cannot estimate the
likelihood that the examination will change the tax liability for the years
under examination. As such, no liability has been recognized in the consolidated
balance sheets at December 31, 2004 or 2003.
 
 RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
 
 **Summary
of Financial Performance**
 The
Company achieved its *thirty-fourth* consecutive
year of record earnings during 2004. Net income improved by 11.3% to $13.4
million in 2004 versus $12.0 million in 2003. Basic earnings per common share
increased by 9.6% in 2004 to $1.48 per share from $1.35 a year ago (per share
earnings have been adjusted to reflect the impact of a 5% stock dividend paid by
the Company during 2004). Diluted earnings per common share were $1.44 and $1.32
in 2004 and 2003, respectively, an improvement of 9.1%. Growth in net interest
income coupled with a lower effective income tax rate were the primary reasons
for the earnings improvement during 2004. The increase in net interest income
resulted from an expanded interest-earning asset base, primarily through growth
in commercial loans and commercial mortgages and leases originated at SWLC.
Somewhat offsetting the foregoing factors was a narrower net interest margin, a
lower level of other income due to a reduction in net security gains in 2004 and
an increase in the provision for probable loan losses.
  25
  STATE BANCORP, INC. AND SUBSIDIARIES
  **Revenue
      of State Bancorp, Inc.**
    
    
    
    
    
    Over/(dollars
      in thousands)
    
    
    
    
    
    (under)For
      the years ended December 31,
    
    2004
    
    2003
    
    2003Net
      interest income
    
    $
    57,237
    
    $
    53,148
    
    
    8
    %Service
      charges on deposit accounts
    
    
    2,279
    
    
    1,618
    
    
    41Net
      security gains
    
    
    2,150
    
    
    5,842
    
    
    (63
    )Income
      from bank owned life insurance
    
    
    879
    
    
    —
    
    
    n/m(1
    )Other
      operating income
    
    
    1,743
    
    
    1,683
    
    
    4Total
      revenue
    
    $
    64,288
    
    $
    62,291
    
    
    3
    %
 (1)
n/m—denotes not meaningful.
 
 The
Company's capital position, by all industry-standard measures, is strong. The
ratio of average total stockholders' equity to average total assets was 6.66%
and 6.73% in 2004 and 2003, respectively. Based upon banking industry regulatory
guidelines, a "well-capitalized" institution must maintain a Tier I leverage
ratio of at least 5.00% and Tier I and total capital to risk-weighted assets
ratios of at least 6.00% and 10.00%, respectively. At December 31, 2004, the
Company's Tier I leverage ratio was 7.82% while its risk-weighted ratios were
12.46% for Tier I capital and 13.71% for total capital. These ratios are in
excess of the foregoing regulatory guidelines and also compare favorably to the
Company's peers.
 Each of
the Company's primary measures of financial performance improved during 2004.
Return on average equity increased to 13.75% from 13.18% a year ago. Return on
average assets increased to 0.90% in 2004 versus 0.89% in 2003. The Company's
primary expense measurement ratio, the operating efficiency ratio, improved
during 2004 to 64.2% from 70.7% in 2003. As a result of the continued low level
of interest rates during 2004, however, the Company's net interest margin
(tax-equivalent basis) narrowed by nine basis points to 4.22% from 4.31% a year
ago.
 The
Company's primary market area of Nassau, Suffolk and Queens Counties, provides
significant opportunity for both deposit growth and commercial and residential
lending. Well over four million people live and work in this contiguous area and
over 120 thousand businesses also call this home. As has been the case across
most of the country, soaring real estate values and consumer spending once again
drove the local economy during 2004. The diversity of the local marketplace
combined with a highly educated work force has produced a fertile growth area
for small business creation, particularly in the high-tech, medical, biotech and
services sectors. The Company has developed lending products and marketing
strategies to address the diverse credit-related needs of the residents and
businesses in this area. Continued growth in consumer, business and municipal
deposits, supplemented by borrowed funds, is expected to fund projected loan
growth in 2005. Loan demand once again improved during 2004. On a year over year
basis, total gross loans and leases grew, on average, by 12.7% versus 2003. On a
spot basis, year-end 2004 loans and leases outstanding were $67 million (or
9.4%) above the comparable 2003 date. Due to a continuation of the historically
low interest rate cycle that we have experienced during the past three years,
consumer spending once again supported the economy throughout 2004. Mortgage
refinance activity slowed down noticeably but dramatically improved real estate
values continued to provide a "wealth effect" for consumers that propelled
spending throughout the year. However, as a result of the continued volatility
of world events, the uncertain direction of the U.S. economy and the weakness of
the U.S. dollar, many businesses have yet to increase their capital investment
in infrastructure to support expansion. Business spending once again lagged the
consumer for the third year in a row. All signs, however, point to a recovery
during 2005 for this very important sector of the Company's business. The
Company enters 2005 prepared for an improved outlook for its business clientele
that will translate into increased demand for all variety of credit-related
products. Management of the Company is, however, well aware that any improvement
is inextricably linked to both the direction of interest rates and the shape of
the yield curve coupled with geopolitical events occurring thousands of miles
from the Company's trade area that may also negatively impact near-term economic
growth.
 Management
of the Company has historically been very conservative with respect to granting
credit to current and prospective borrowers. Coupled with the continued economic
uncertainty both locally and nationally, management expects that 2005 will again
see moderate loan growth of approximately 6% to 8% in the Company's core
competencies of commercial and industrial credits, commercial mortgages and
equipment leasing. It is expected that spreads will tighten due to ongoing
competitive pressures and a flattening of the interest rate yield curve. Funding
costs are also projected to rise during 2005 as the Federal Open Market
Committee ("FOMC") is expected to increase the overnight funds rate by up to an
additional 100 basis points. Although the asset sensitivity inherent in the
Company's balance sheet would normally result in an improved net interest margin
in a period of rising rates, the flattening of the yield curve is expected to
mitigate this improvement in the near term. Management expects that, absent a
change in the slope of the yield curve, the Company's net interest margin will
decline moderately in 2005 from historical levels.
 Excluding
the loan portfolio, asset growth in 2005 will likely come from the fixed income
investment portfolio in both the taxable and tax-exempt areas. The Company's
branch network is expected to provide low-cost core deposit funding to support
anticipated asset growth. The Company will continue to aggressively pursue
expense reductions and operating efficiencies along with revenue-generating
sales initiatives to improve net interest income.
 
 NET
INTEREST INCOME
 
 **2004
versus 2003**
 Net
interest income, the difference between interest earned on loans and investments
and interest paid on deposits and borrowed funds, continues to be the Company's
primary source of operating earnings. Net interest income is influenced by the
average balance and mix of the Company's interest-earning assets, the yield on
those assets and the current level of market interest rates. These rates are
significantly influenced by the actions of the FOMC, which periodically adjusts
the Federal funds rate, the rate at which banks borrow funds from one another on
an overnight basis. During 2004, the FOMC increased the Federal funds rate five
times from its low of 1.00% to its year-end 2004 level of 2.25%.
  26
  STATE BANCORP, INC. AND
SUBSIDIARIES
  During
2004, net interest income increased by 7.7% to $57.2 million. This improvement
was driven by an increase in average interest-earning assets of $116 million
(9.2%), primarily loans and tax-exempt municipal securities. Growth in
commercial loans, commercial mortgages and lease receivables led the $83 million
or 12.7% increase in average loans outstanding to $735 million in 2004 versus
2003. The loan growth resulted, in part, from expanded relationships with a
select group of experienced builders that the Company has successfully worked
with in the past and new opportunities developed in both Queens and on Long
Island. Management of the Company expects that an improved economy in 2005 will
result in additional opportunity for the Company's equipment leasing subsidiary,
SWLC, to again expand its portfolio. Current forecasts indicate that computer
and office equipment will be replaced at ever increasing levels during 2005 as
the "jobless" recovery we have experienced morphs into a traditional post-war
recovery. Average investment securities grew by $39 million (6.7%) to $616
million due principally to an increase of $36 million in short-term (under one
year) tax-exempt municipal securities. Somewhat offsetting this growth was a $4
million decline in mortgage-backed securities. As of December 31, 2004,
approximately 71% of the Company's investment portfolio was owned and managed by
SB Portfolio.
 Average
interest-earning assets have grown by 9.2%, 12.3% and 17.9% in 2004, 2003 and
2002, respectively. Low-cost core deposits, principally demand deposits, savings
accounts and money market accounts, have funded the asset expansion during the
past three years. Growth in each of these deposit categories offset reductions
in both retail and large denomination certificates of deposit and served to
reduce the Company's cost of funds again in 2004.
 Average
core deposit balances increased by $92 million or 10.6% to $953 million in 2004.
The growth and retention of low-cost core deposit balances remains one of the
Company's top strategic priorities since the growth of these deposits is a key
element in the Company's expansion strategy. These low-cost deposits also are
critical to the Company's efforts to improve net income through the widest
possible net interest margin. During 2004, average core deposit balances
represented 78% of total deposits, up from 74% and 60% in 2003 and 2002,
respectively. The contribution of several recently opened branches, the addition
of a group of bankers dedicated to calling on law firms and an increase in
municipal and commercial deposit relationships were responsible for growth in
all core deposit categories. Average demand deposit balances grew by $45 million
or 18.3% in 2004 and $47 million or 23.7% in 2003. Average savings deposits
expanded by $47 million or 7.6% on a year-over-year basis. This growth resulted
primarily from higher levels of rate-indexed savings accounts (up 1.6%) and
interest-bearing transaction accounts (up 17.5%) in 2004. During 2004, the
Company's fully taxable equivalent (FTE) net interest margin contracted by nine
basis points to 4.22%, from 4.31% a year ago. The narrower margin resulted from
multiple factors, most notably higher short-term interest rates and a flattening
of the yield curve which negatively impacted the return on cash flow generated
by the Company's investment portfolio. Despite a continued shift in the asset
mix to a greater dependence on loans and leases as a percentage of total
interest earning assets, the Company's yield on average interest-earning assets
fell by eight basis points to 5.14%. Higher short-term interest rates, partially
offset by continued growth in low cost sources of core funding, resulted in a
one basis point increase in the average rate paid on the Company's supporting
funds to 0.92% in 2004.
 The
following table summarizes the net interest margin on a quarterly basis for
2004.
 
 4th
      Qtr
    
    3rd
      Qtr
    
    2nd
      Qtr
    
    1st
      QtrInterest-earning
      assets:Securities
    
    
    3.45
    %
    
    3.59
    %
    
    3.69
    %
    
    3.27
    %Federal
      funds sold
    
    
    1.83
    
    
    2.03
    
    
    —
    
    
    0.80Securities
      purchased under agreements
      to resell
    
    
    2.04
    
    
    0.89
    
    
    0.93
    
    
    0.94Interest-bearing
      deposits
    
    
    1.63
    
    
    1.24
    
    
    1.12
    
    
    0.38Loans
    
    
    6.88
    
    
    6.78
    
    
    6.59
    
    
    6.61Total
      interest-earning assets
    
    
    5.28
    %
    
    5.27
    %
    
    5.15
    %
    
    4.88
    %Interest-bearing
      liabilities:Savings
      deposits
    
    
    1.01
    %
    
    0.83
    %
    
    0.67
    %
    
    0.69
    %Time
      deposits
    
    
    1.86
    
    
    1.61
    
    
    1.54
    
    
    1.73Total
      savings and time deposits
    
    
    1.25
    
    
    1.06
    
    
    0.91
    
    
    1.00Federal
      funds purchased
    
    
    2.07
    
    
    1.64
    
    
    1.21
    
    
    1.13Securities
      sold under agreements
      to repurchase
    
    
    1.90
    
    
    1.52
    
    
    1.14
    
    
    1.13Other
      borrowed funds
    
    
    2.17
    
    
    1.66
    
    
    1.25
    
    
    1.27Junior
      subordinated debentures
    
    
    5.69
    
    
    5.19
    
    
    4.84
    
    
    4.82Total
      interest-bearing liabilities
    
    
    1.39
    %
    
    1.23
    %
    
    1.03
    %
    
    1.09
    %Net
      interest margin—tax-equivalent
      basis
    
    
    4.21
    %
    
    4.33
    %
    
    4.33
    %
    
    4.02
    %
 
 Management
anticipates a moderate narrowing of the net interest margin in 2005 despite
projected increases in low-cost core deposit balances and growth in loans and
leases. An increase in short-term rates will increase the Company's cost of
funds while a continued flattening of the "long end" of the yield curve will
create additional pricing pressure in the loan portfolio. Management expects
that the opening of a new branch in Westbury, the continued maturation of the
Company's existing retail branches and expected growth in the municipal and
professional services sectors will provide access to additional low-cost sources
of funds as well as provide significant opportunity to expand the Company's loan
portfolio. The Company has been quite successful in its efforts to source loan
growth in Queens County and will continue to target this market in 2005.
Selected other geographic areas such as the north shore peninsula of Nassau
County and the south shore of western Suffolk County along with additional
residential development financing are expected to provide opportunities for
portfolio growth over the next year. Management of the Company expects that the
high level of personal service delivered by relationship officers coupled with
the inevitable customer dissatisfaction resulting from the continued
consolidation of the local banking market will produce numerous commercial and
municipal banking relationship opportunities, both for deposits and loans, which
will enhance profitability in 2005 and beyond.
 Average
total loans grew by 12.7%, 11.7% and 7.3% in 2004, 2003 and 2002, respectively.
At the same time that this growth has been achieved, credit quality in the
Company's loan portfolio has improved each year. Nonaccrual loans declined to $5
million or 0.7% of total loans as of December 31, 2004, the lowest level in five
years, while the allowance for probable loan losses as a percentage of
nonaccrual loans has risen to 228%, its highest level in fifteen
years.
  27
  STATE BANCORP, INC. AND SUBSIDIARIES
  Although
rates increased during 2004, they remain low enough to support a continued
residential construction and remodeling boom and an ongoing commercial real
estate development expansion, each of which is only expected to abate in the
next few years because of a lack of available land in the Bank's trade area.
These factors, combined with an intensified calling effort, particularly in
Queens County, and the exit of a major lender from the local commercial
marketplace were the primary reasons for the growth in the Company's loan
portfolio during the past year. Management of the Company expects additional
opportunity for loan growth during the next twelve months as the result of
additional penetration in the Queens County marketplace, a large and diverse
market with over 50,000 businesses and two million residents. An array of
competitive loan and deposit products, along with numerous equipment leasing
options offered by SWLC, provide commercial lenders and branch managers with a
suite of products suitable for most types of relationships. These products,
coupled with responsive, personal customer service provided by a group of highly
experienced bankers, will enable the Company to take advantage of opportunities
presented by the consolidation of the local banking market as well as an entrée
into any new markets that will enhance stockholder value.
 Average
commercial loans, mortgages and leases grew at rates of 5.3%, 17.8% and 29.6%,
respectively, in 2004. At December 31, 2004, total gross loans and leases
outstanding amounted to $778 million, up 9.4% when compared to the comparable
2003 date. The year-end loan portfolio was composed of approximately 46%
commercial mortgages, 34% commercial loans, 11% residential mortgages and home
equity lines of credit, and 9% all other loans and leases. It is expected that
the 2005 loan mix will remain, on a percentage basis, approximately the same as
2004.
 Based
upon recent local and national economic forecasts, management of the Company
anticipates that loans outstanding will grow at a rate of 6% to 8% in 2005. The
continued consolidation of the New York City and Long Island banking markets
still provides the greatest potential for loan growth. As local and national
money center and regional bank competitors continue to enter the local market
through acquisition and de novo branching strategies, many retail, commercial
and municipal customers will benefit from a stable, locally run community bank
with an excellent reputation and a strong capital base.
 Management
of the Company is committed to high quality loan growth. A comprehensive credit
review process provides a quality control tool to ensure that only top quality
loans are brought to the credit committee for consideration. This rigorous
process is of paramount importance as the Company attempts to gain market share
while combating far larger competitors by offering an improved product mix
during 2005 and beyond.
 
 **2003
versus 2002**
 Net
interest income increased by 2.4% to $53.1 million during 2003 as the result of
growth in average interest-earning assets of $139 million (up 12.3%). Growth in
loans and Government Agency securities accounted for much of the asset
expansion. Increases in commercial loans, mortgages, consumer installment loans
and lease receivables paced the $68 million or 11.7% increase in average loans
outstanding in 2003 versus 2002. Average investment securities grew by $63
million or 12.3% due to increases of $41 million and $23 million in Government
Agency and mortgage-backed securities, respectively. Somewhat offsetting this
growth was a decline in tax-exempt municipal paper (down $13 million), primarily
local, short-term issues related to existing school district customers. Funding
the growth in interest-earning assets was a $251 million (41.1%) increase in
core deposits, representing 74% of total deposits in 2003 versus 60% in 2002.
Growth in demand deposits ($47 million) and savings balances ($204 million)
accounted for the core deposit expansion in 2003.
 During
2003, the Company's net interest rate margin narrowed to 4.31% from 4.77% in the
prior year. The reduced margin resulted from multiple factors, most notably:
lower short-term interest rates coupled with a moderately asset-sensitive
balance sheet. Despite a shift in the asset mix to a greater dependence on loans
and leases as a percentage of total earning assets, lower interest rates served
to reduce the Company's earning asset yield by 91 basis points to 5.22%. The
substantial growth in low cost sources of core funding during 2003 contributed
to a 43 basis points reduction in the average rate paid on supporting funds to
0.91% from 1.34% in 2002.
 
 INVESTMENT
SECURITIES
 SFAS
No. 115 requires the Company, at the time of purchase, to designate each
investment security as either "available for sale"("AFS"), "held to maturity" or
"trading," depending upon investment objectives, liquidity needs and ultimate
intent. Securities available for sale are stated at market value, with
unrealized gains or losses reported as a separate component of stockholders'
equity until realized. Securities held to maturity are stated at cost, adjusted
for amortization of premium or accretion of discount, if any. Trading securities
are generally purchased with the intent of capitalizing on short-term price
differences by selling them in the near term. The Company did not hold any
trading securities at December 31, 2004 and 2003.
 At
December 31, 2004, the Company held $513 million in AFS securities (94% of the
investment portfolio) at a pre-tax unrealized net loss of $344 thousand, versus
an unrealized net gain of $3.6 million at year-end 2003. At year-end 2004, the
AFS portfolio was divided into the following categories: 7% corporate and other
securities (including Federal Home Loan Bank of New York ("FHLB") stock); 10%
tax-exempt municipal paper; 32% callable U.S. Government Agency securities; and
51% mortgage-backed securities ("MBS") (mainly FNMA and GNMA obligations). The
held to maturity portion of the portfolio, which totaled $30 million, was
composed almost entirely of Agency securities.
 The
continuation of an unusually low interest rate environment, albeit one with a
pronounced upward bias, once again created favorable bond market conditions
during much of 2004. The Company maintained a defensive investment posture
throughout the year due to the upward rate cycle bias. In light of these
circumstances, a conservative portfolio was constructed and designed to generate
cash flow so as to take advantage of reinvestment opportunities in a rising rate
environment. Securities such as premium MBS issues, callable Agencies and
floating rate securities were purchased with the intention of not only creating
cash flow for reinvestment, but also to limit the sensitivity of the portfolio's
market value to movements in interest rates. Cash flows from the portfolio
contain both principal and interest components, and as more cash flow is
generated, the remaining average life of the security is effectively reduced. A
shorter-lived security is beneficial in a rising rate environment because the
longer the maturity of a security, the more sensitive its market value is to
changes in interest rates.
  28
  STATE BANCORP, INC. AND
SUBSIDIARIES
  The
Company's investment policy is conservative in nature and identifies liquidity
and safety of paramount importance among its objectives and, as such, the
portfolio is largely comprised of Government Agency securities, MBS issues of
Government-sponsored entities and local municipal notes. In addition to the
creation of liquidity, risk management is another important aspect of the
Company's investment strategy. The Company's portfolio construction is
intentionally designed so as to avoid taking on credit risk while managing
market risk. Market risk is measured by the sensitivity of the portfolio's
market value to changes in the level of interest rates, and is managed by
investing in shorter-lived instruments. The incremental yield garnered in the
Company's investment strategy is largely the result of optionality. This
optionality manifests itself in callable Government Agency securities and the
propensity for faster prepayment in premium (above market rate) MBS. The
defensive posture of the portfolio, with a continuing emphasis on cash flow
generation and the avoidance of credit and market risk, remains a prudent
strategy and is expected to continue in light of the current and forecasted
interest rate environment.
 The
Company's investment portfolio increased by a nominal $1 million at year-end
2004 versus the comparable 2003 date primarily as the result of reductions in
tax-exempt municipal (down $41 million) and MBS issues (down $22 million) which
were offset by growth in Agency securities (up $70 million). The Company took
advantage of the low rate environment to once again strategically reposition a
portion of the investment portfolio during 2004. Securities were sold at gains
when it was forecasted that those gains were going to be eliminated naturally
through calls on Agency securities and accelerated principal paydowns on the MBS
portfolio. Local, short-term municipal paper is sold throughout the year as part
of the Company's asset/liability management function.
 The
Company's holdings of Agency securities increased during 2004 as these issues
provided the best "value play" on the yield curve. The Agency issues on the
Company's balance sheet are all callable within two years and most have final
maturities of less than twelve years. If rates were to fall during 2005, it is
likely that these securities would be called in the next twelve months. The
notes are AAA credits that provide a competitive yield well in excess of the
Company's incremental funding cost and are pledgeable to secure municipal
deposits and other borrowings and, therefore, are an integral part of the
Company's funding strategy. Net MBS holdings declined by $22 million due to
accelerated principal repayments arising out of the last vestiges of the recent
residential refinancing boom. The MBS issues held by the Company are primarily
medium-term (average life) in nature with most final maturities less than
fifteen years. The Company's portfolio of tax-exempt municipal notes decreased
by $41 million at year-end 2004 versus the comparable 2003 date as part of a
repositioning of the investment portfolio to take advantage of the upward trend
in rates during the fourth quarter. The Company continues to expand its
municipal relationships and, as a natural outgrowth of that business, purchases
short-term (one year or less) municipal paper to support those relationships.
The vast majority of the municipal paper that is purchased is classified as
available for sale and eventually sold into the secondary market when market
conditions are favorable.
 The
Company received MBS principal paydowns of $89 million and $125 million in 2004
and 2003, respectively. Management expects that this trend will continue in 2005
at a noticeably reduced rate due to the current and forecasted higher interest
rate environment.
 The
Company's investment portfolio is very low-risk in nature due to its
concentration of U.S. Government Agency, local municipal notes and AAA-rated MBS
balloon and pass-through issues. As of December 31, 2004, the MBS portfolio had
an average life of approximately 2.5 years after adjusting for historical
prepayment patterns. Approximately 75% of the MBS portfolio, including
collateralized mortgage obligations ("CMOs"), had final maturities in excess of
ten years. In general, principal prepayments on these securities will increase
as interest rates fall and, conversely, prepayments will slow down as interest
rates rise. CMOs accounted for less than 6% of the total investment portfolio as
of year-end 2004. The CMOs held by the Company did not meet the regulatory
definition of a high-risk security. The Company owned $62 million of structured
(step up) notes as of December 31, 2004. The Government Agency portfolio,
callable in 2005 and 2006, has final maturities in the seven- to fifteen-year
maturity range.
 The
Company's investment subsidiary, SB Portfolio, contributed significantly to the
success of the Company during 2004. This subsidiary now holds and manages
approximately 71% of the Company's investment portfolio. The majority of
securities domiciled with SB Portfolio are MBS; however, portions of its
portfolio are also dedicated to Government Agency and long-term tax-exempt paper
as well. SB Portfolio has its own investment policy and Board of Directors;
however, it still adheres to the stringent safety and quality standards present
throughout the Company in its investment evaluation process. Management of the
Company expects that SB Portfolio will continue to grow during 2005 through the
reinvestment of its own interest income as well as through additional capital
infusions from the parent Company if market conditions warrant. The Company
provided $75 million in additional capital to SB Portfolio during
2004.
 
 SUMMARY
OF LOAN LOSS EXPERIENCE AND ALLOWANCE FOR PROBABLE LOAN LOSSES
 One
of management's primary objectives is to maintain a high quality loan portfolio
in all economic climates. This objective is achieved by maintaining high
underwriting standards coupled with regular evaluation of each borrower's
creditworthiness and risk exposure. Management seeks to avoid loan
concentrations within industries and customer segments in order to minimize
credit exposure. The Company's senior lending personnel work in conjunction with
loan officers to determine the level of risk in the Company's loan-related
assets and establish an adequate level for the allowance for probable loan
losses. An outside loan review consultant is also utilized to independently
verify the loan classifications and the adequacy of the allowance for probable
loan losses. Management actively seeks to reduce the level of nonperforming
assets, defined as nonaccrual loans and other real estate owned, through
aggressive collection efforts and, where necessary, litigation and charge-off.
Other real estate owned properties are aggressively marketed for sale utilizing
local commercial and residential realtors as appropriate.
  29
  STATE BANCORP, INC. AND SUBSIDIARIES
  As
illustrated in Table I, the Company's nonperforming assets decreased by $3.4
million to $7.9 million at year-end 2004 versus 2003 following a $5.0 million
increase in 2003 versus 2002. At December 31, 2004, total nonperforming assets
as a percentage of loans and other real estate owned amounted to 1.0% as
compared to 1.6% and 1.0% at year-end 2003 and 2002, respectively. The Company
held one commercial property in other real estate owned at year-end 2004 with a
carrying value of $2.7 million. Management actively sought to dispose of this
property during 2004 and still expects to complete a sale transaction during
2005 with no material impact on the Company's financial statements. The year-end
2004 decline in nonperforming assets, as defined by the Company, resulted from a
$3.4 million decrease in nonaccrual loans. The reduction in nonaccrual loans
during 2004 resulted from the upgrade of several commercial credits from
nonperforming status, coupled with a combination of paydowns and charge-offs.
 Management
of the Company actively reviews the level and composition of nonperforming
assets. During 2004, this meant a continuation of the strategy of collection
through proactive litigation combined with enhanced collateral positions on
virtually all nonperforming assets. In 2004, the Company experienced a
significant decrease in the total level of nonaccrual loans, restructured
accruing loans and loans 90 days or more past due and still accruing. The total
level of these assets fell by $3.5 million during 2004 to $8.0 million at
year-end. This decrease in nonperforming assets resulted in improved coverage
ratios at year-end. The allowance for probable loan losses as a percentage of
nonaccrual loans advanced to 228% from 124% at year-end 2003, while the
allowance for probable loan losses as a percentage of nonaccrual loans,
restructured accruing loans and loans 90 days or more past due and still
accruing also increased during 2004 to 224% from 122% a year ago. At December
31, 2004, the Company had no restructured accruing loans. Loans in this category
are composed mainly of loans which have demonstrated performance in accordance
with the terms of their restructure agreements; however, they did not yield a
market rate of interest subsequent to their restructuring.
 Based
upon current economic conditions, management has determined that the current
level of the allowance for probable loan losses is adequate in relation to the
risks present in the portfolio. Management considers many factors in this
analysis, among them delinquency trends, concentrations within segments of the
loan portfolio as well as recent charge-off experience when assessing the degree
of credit risk in the portfolio. Collateral appraisals and estimates of current
value influence the estimation of the required allowance balance at any point in
time. The Company's loan portfolio is concentrated in commercial and industrial
loans and commercial mortgages, the majority of which are fully secured by
collateral with a market value in excess of the carrying value of the individual
loans. Although overall loan quality has improved and remains strong, management
of the Company increased the level of the provision for probable loan losses
during 2004 in recognition of the continued growth in the portfolio and the
resulting possibility of increased losses inherent in that growth. The provision
for probable loan losses totaled $4.5 million in 2004, $3.9 million in 2003 and
$3.6 million in 2002. The resulting allowance for probable loan losses balance
of $12.0 million at December 31, 2004 amounted to 1.5% of loans outstanding in
both 2004 and 2003 and 1.6% in 2002.
 Net
loan charge-offs totaled $3.2 million in 2004 and 2003 and $2.8 million in 2002,
respectively. Recoveries totaled $187 thousand in 2004 versus $304 thousand in
2003 and $202 thousand in 2002. Although the local economy grew moderately
during the past year, existing weaknesses in certain sectors of the economy may
cause future problems. The potential consequences of a rapid increase in
interest rates or a prolonged economic slowdown in industries which impact the
Company's borrower base make it difficult to forecast the impact on asset
quality that will result during 2005 or any additional charge-offs that will be
required during the year.
 It
is the present intent of management to further increase the level of the
allowance for probable loan losses to reflect any exposure represented by
fluctuations in the local real estate market and the underlying value that that
market provides as collateral to certain segments of the loan portfolio. In
recognition of the economic uncertainties previously elaborated upon, the normal
risks inherent in any credit portfolio and expected growth in the loan
portfolio, management anticipates that the 2005 provision for loan losses will
approximate last year's level. The provision is continually evaluated relative
to portfolio risk and regulatory guidelines and will continue to be closely
reviewed throughout the coming year. In addition, various regulatory agencies,
as an integral part of their examination process, closely review the allowance
for probable loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgment of information available to
them at the time of their examinations.
 The
Company has no foreign loans outstanding. The concentration of loans exceeding
10% of total loans was the Bank's loans totaling $130 million and $112 million
to real estate operators, lessors and developers, and to building construction
contractors, respectively. Repayment of these loans is dependent in part upon
the overall economic health of the
  30
  STATE BANCORP, INC. AND
SUBSIDIARIES
  Company's
market area and current real estate values. Management of the Company is not
aware of any trends, events or uncertainties that will have, or that are
reasonably likely to have, a material effect on the Company's liquidity, capital
resources or future operating results. For loans not separately disclosed
herein, management is not aware of information relating to any material credit
that would impact the ability of those borrowers to comply with loan repayment
terms.
 
 TABLE
I
 Analysis
      of Nonperforming Assets at December 31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000(Dollars
      in thousands)Nonaccrual
      loans
    
    $
    5,274
    
    $
    8,666
    
    $
    6,317
    
    $
    8,920
    
    $
    10,736Other
      real estate
    
    
    2,650
    
    
    2,650
    
    
    —
    
    
    —
    
    
    330Total
      nonperforming assets
    
    $
    7,924
    
    $
    11,316
    
    $
    6,317
    
    $
    8,920
    
    $
    11,066Restructured
      accruing loans
    
    $
    —
    
    $
    —
    
    $
    107
    
    $
    284
    
    $
    406Loans
      90 days or more past due and still accruing interest
    
    $
    89
    
    $
    149
    
    $
    129
    
    $
    405
    
    $
    3,542Total
      loans outstanding
    
    $
    778,191
    
    $
    711,216
    
    $
    620,384
    
    $
    551,598
    
    $
    496,992Total
      stockholders' equity
    
    $
    101,050
    
    $
    94,712
    
    $
    87,683
    
    $
    76,288
    
    $
    72,307Allowance
      for probable loan losses
    
    $
    12,020
    
    $
    10,732
    
    $
    10,046
    
    $
    9,255
    
    $
    9,207Key
      ratios:Allowance
      for probable loan losses as a percent of total loans
    
    
    1.5
    %
    
    1.5
    %
    
    1.6
    %
    
    1.7
    %
    
    1.9
    %Nonaccrual
      loans as a percent of total loans
    
    
    0.7
    %
    
    1.2
    %
    
    1.0
    %
    
    1.6
    %
    
    2.2
    %Nonperforming
      assets (1) as a percent of total loans and other real estate
    
    
    1.0
    %
    
    1.6
    %
    
    1.0
    %
    
    1.6
    %
    
    2.2
    %Allowance
      for probable loan losses as a percent of nonaccrual loans
    
    
    227.9
    %
    
    123.8
    %
    
    159.0
    %
    
    103.8
    %
    
    85.8
    %Allowance
      for probable loan losses as a percent of nonaccrual loans,restructured
      accruing loans and loans 90 days or more past due andstill
      accruing interest
    
    
    224.1
    %
    
    121.7
    %
    
    153.3
    %
    
    96.3
    %
    
    62.7
    %(1)
      Excludes restructured accruing loans and loans 90 days or more past due
      and still accruing interest.
 
 OTHER
INCOME
 
 **2004
versus 2003**
 Other
income decreased by 22.9% in 2004 when compared to 2003, solely the result of
lower net security gains. Excluding the impact of net security transactions in
each year, other income totaled $4.9 million in 2004, up 48.5% versus 2003. This
improvement resulted from growth in several categories, including service
charges on deposit accounts (up 40.9%), other operating income (up 3.6%) and the
addition of income associated with the purchase of Bank Owned Life Insurance
(BOLI) during 2004. A significant increase in return item charges resulting from
improved collection efforts coupled with higher deposit-related charges
accounted for the growth in service charges on deposits. Other operating income
improved by $60 thousand as the result of growth in foreign exchange fees,
letter of credit fees, merchant services income and ATM fees. Somewhat
offsetting these positive factors were lower mortgage loan sale fees and reduced
sweep account income.
 Return
item charges represent the Company's most significant source of other income.
These fees improved by 51.8% in 2004 versus 2003 as the result of a successful
Bank-wide effort to improve collection efforts by commercial and retail
relationship managers. Other service charges on deposits increased by 25.0% in
2004 as the result of new and expanded relationships developed during the year
and a reduction in fee waivers based upon customer profitability.
 During
2004, the Company recorded $2.1 million in net security gains as the result of
selected sales of investment securities, principally long-term municipal notes,
mortgage-backed securities and Government Agency paper, to achieve certain
portfolio restructuring goals related to the current and projected interest rate
environment. This compares to net gains of $5.8 million in 2003 and $1.7 million
in 2002.
 Other
operating income improved by a modest 3.6% in 2004 following an increase of
29.3% in 2003. Growth in several categories accounted for the improvement,
principally: during the first quarter of 2004, the Company made a $25 million
investment in BOLI which yielded $879 thousand in tax-advantaged revenue. The
continued expansion of the Company's commercial and municipal customer base and
improved sales of products such as letters of credit, merchant card processing,
debit cards and foreign exchange wire transfers during 2004 also served to
improve other operating income. During the past year, the Company took several
steps to improve and enhance its fee-based products including hiring an officer
dedicated to cash management sales, providing a bill-pay option with Personal
Account Manager (PAM), the Company's Internet banking product, and enhancing our
existing strategic partnership to provide lock box services. The Company's money
market sweep account product also remains popular for businesses looking to
maximize their return on idle cash in a low rate environment. Each of these
products is expected to improve other income generation in 2005 as the Company
further penetrates the geographic areas surrounding its branch network
throughout Nassau, Suffolk and Queens Counties. More important than the
Company's strong sales culture or its competitive product line, the quality of
the Company's staff is the key to further growth of other income in 2005 and in
subsequent years. Management of the Company is confident that the right people
combined with the right products will produce superior results over time. Every
effort will be made to speed the development of new products to satisfy customer
needs in an effort to provide superior return on investment for our
stockholders.
  31
  STATE BANCORP, INC. AND SUBSIDIARIES
  **2003
versus 2002**
 Other
income increased by over 100% in 2003 when compared to 2002 largely the result
of greater net security gains. During 2003, the Company recorded $5.8 million in
net security gains versus $1.7 million in 2002. Excluding the impact of net
security transactions in each year, other income totaled $3.3 million in 2003,
up 18.7% versus 2002. Higher levels of deposit service charges (primarily return
item charges, up 15.8%), residential mortgage loan sale fees, annuity
commissions, letter of credit fees, wire transfer fees and cash management
product sales accounted for the improvement in income. Somewhat offsetting these
positive factors were lower sweep account income, wealth management referral
fees and ATM service charge income.
 
 OPERATING
EXPENSES
 
 **2004
versus 2003**
 Operating
expenses decreased by 0.1% to $41.0 million in 2004 when compared to 2003.
Higher levels of salaries and employee benefits, increased occupancy and growth
in other operating expenses were more than offset by reductions in legal
expenses, marketing and advertising, equipment and credit and collection costs.
Legal expenses declined by $1.0 million or 26.0% during 2004. The largest
component of the Company's legal expenses relates to ongoing litigation arising
out of the Bank's deposit relationship with Island Mortgage Network, Inc.
("Island Mortgage" or "IMN") and its affiliates, as previously disclosed in the
Company's Form 10-Q and 10-K filings with the Securities and Exchange
Commission. These expenses totaled $2.3 million, $3.8 million and $3.3 million
in 2004, 2003 and 2002, respectively. The Company expects to incur additional
costs related to this litigation during 2005; however, these costs are not
specifically quantifiable at this point in time.
 Island
Mortgage established and maintained dozens of deposit accounts at State Bank of
Long Island ("State Bank" or the "Bank") commencing in mid-February 1999 and
continuing through early July 2000. Island Mortgage was principally engaged in
offering and providing mortgages to consumers. Island Mortgage apparently
financed its operations in significant part through the use of loans and/or
revolving lines of credit provided by lenders not related to the Bank. State
Bank never had a lending relationship with Island Mortgage.
 On
June 30, 2000, the Banking Department of the State of New York suspended Island
Mortgage's mortgage banker license. On July 19, 2000, Island Mortgage and its
publicly held parent company, AppOnline.com, Inc., filed a petition under
Chapter 11 of the Bankruptcy Code in the Eastern District of New York.
Subsequently, certain of Island Mortgage's lenders filed an involuntary
bankruptcy petition against Action Abstract, Inc., an entity to which they
apparently had regularly wired funds in connection with their dealings with
Island Mortgage. At the request of the Trustee in the Island Mortgage bankruptcy
case, various bankruptcy cases involving Island Mortgage entities were later
substantively consolidated.
 In
the course of those bankruptcy cases, it has been alleged that Island Mortgage
engaged in a widespread pattern of fraud directed at lenders, title agents,
closing companies and others with whom Island Mortgage regularly dealt. A number
of Island Mortgage's creditors have since asserted that the Bank participated in
Island Mortgage's alleged fraudulent scheme. Currently, there are three Island
Mortgage-related litigations pending in which claims have been asserted against
State Bank (and, in one case, State Bank's parent corporation State Bancorp,
Inc.) Those litigations are:
 
 —
    *Broward
      Title Co. v. Alan Jacobs, et al.,*Adv.
      Proc. No. 01-8181, Bankruptcy Court for the Eastern District of New York.
      On or about July 9, 2002, Broward's motion to sever its claims against the
      Bank (and certain other defendants) was granted, allowing Broward to
      conduct a nonjury trial of its claims against the remaining defendants in
      the bankruptcy court. Broward's claims against State Bank and those other,
      severed defendants were referred to the United States District Court for
      the Eastern District of New York on or about August 6, 2002. Since that
      time, Broward has not made any affirmative attempts to prosecute its case
      against State Bank in the district court, although it may attempt to do so
      at a later date.
 —
    *Household
      Commercial Financial Services, Inc., et al. v. Action Abstract, Inc., et
      al.,*Adv.
      Proc. No. 02-8167, Bankruptcy Court for the Eastern District of New York.
      On or about June 4, 2002, plaintiffs commenced this adversary proceeding
      with respect to State Bank. The Complaint alleges that plaintiffs extended
      lines of credit to, and entered into mortgage purchase agreements with,
      defendant Island Mortgage. According to the Complaint, millions of dollars
      of funds that plaintiffs deposited into State Bank accounts maintained by
      Island Mortgage and its related entities to fund mortgages were
      misappropriated as the result of Island Mortgage's alleged scheme to
      defraud plaintiffs and unjustly enrich defendants. Plaintiffs claim the
      following with respect to State Bank: 1) the Bank aided and abetted the
      allegedly fraudulent scheme perpetrated by Island Mortgage; 2) the Bank
      aided and abetted in a breach of the fiduciary duties an Island Mortgage
      affiliate allegedly owed to plaintiffs; and, 3) the Bank was negligent in
      failing to recognize and act on signs that Island Mortgage was allegedly
      misappropriating the funds plaintiffs advanced to Island Mortgage.
      Plaintiffs claim they are entitled to not less than $52 million, plus
      interest and punitive damages.
 
 On January 31, 2005, the bankruptcy court ruled on State
      Bank's motion for summary judgment. The plaintiffs' claims for negligence
      and aiding and abetting a breach of fiduciary duty were dismissed. The
      claim for aiding and abetting fraud was not dismissed, although the court
      ruled that one of the plaintiffs (Matrix) could not seek damages for the
      period after June 6, 2000. It is unknown at this time whether any of the
      plaintiffs will seek reconsideration of the summary judgment decision by
      the bankruptcy court or will seek to appeal the summary judgment decision
      to the district court.
 
 
  32
  STATE BANCORP, INC. AND
SUBSIDIARIES
  —
    *Moritz,
      et al. v. National Settlement Services Corp., et al.,*Civil
      Action No. 3:00 CV 426 MU, Western District of North Carolina. State Bank
      and the plaintiffs have entered into a binding agreement to settle the
      case for $20 thousand, the money has been paid, and the releases have been
      exchanged and are fully operative. The case is expected to be formally
      dismissed shortly.
 A
separate Island Mortgage-related litigation, *Alan
M. Jacobs, as Chapter 11 Trustee v. State Bank of Long Island,* Adv.
Proc. No. 02-8157, Bankruptcy Court for the Eastern District of New York, was
settled in mid-2004. Pursuant to the settlement agreement, approved by the court
on June 8, 2004, the Bank paid the Island Mortgage estates $223 thousand, while
at the same time the Bank was authorized to, and did, exercise its right to
set-off $123 thousand from accounts that Island Mortgage maintained at the Bank.
The parties have exchanged general releases, and all of Island Mortgage's
accounts at the Bank have been closed.
 The
Bank is defending these lawsuits vigorously, and management believes that the
Bank has substantial defenses to the claims that have been asserted. However,
the ultimate outcome of these lawsuits cannot be predicted with certainty. It
also remains possible that other parties may pursue additional claims against
the Bank related to the Bank's dealings with IMN and its affiliates. The Bank's
legal fees and expenses will continue to be significant, and those costs, in
addition to any costs associated with settling the IMN-related litigations or
satisfying any adverse judgments, could have a material adverse effect on the
Bank's results of operations or financial position.
 In
addition to the litigations noted above, the Company and the Bank are subject to
other 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.
 
 Operating
      expenses of State Bancorp, Inc.
      (dollars
      in thousands)
      For
      the years ended December 31,
    
    2004
    
    2003
    
    Over/
      (under)2003Salaries
      and other employee benefits
    
    $
    23,898
    
    $
    22,692
    
    
    5
    %Occupancy
    
    
    4,001
    
    
    3,853
    
    
    4Equipment
    
    
    1,464
    
    
    1,560
    
    
    (6
    )Legal
    
    
    2,859
    
    
    3,863
    
    
    (26
    )Marketing
      and advertising
    
    
    1,001
    
    
    1,416
    
    
    (29
    )Credit
      and collection
    
    
    748
    
    
    1,371
    
    
    (45
    )Other
      operating expenses
    
    
    7,072
    
    
    6,334
    
    
    12Total
      operating expenses
    
    $
    41,043
    
    $
    41,089
    
    
    —
    %
 
 Salaries
and other employee benefits increased by $1.2 million (5.3%) during 2004 as a
result of the creation of a Professional Services Group (PSG) staffed with six
officers coupled with growth in staff in several other areas of the Company.
Increased supplementary compensation costs, health care, FICA expenses, and
related increases in 401(k) and employee stock ownership plan (ESOP)
contributions also added to the growth in salaries and benefits costs during
2004. Also contributing to the growth in operating expenses during 2004 were
higher levels of occupancy costs (up 3.9%) and other operating expenses (up
11.6%). Somewhat offsetting the foregoing increases were reductions in equipment
expense (6.2%), marketing and advertising costs (29.3%) and credit and
collection expenses (45.4%).
 The
reduction in total operating expenses recorded by the Company during 2004 is
reflective of lower IMN-related legal fees and various costs control measures
put in place in 2003. This reduction, though nominal, is a noticeable
improvement from the rates of growth in operating expenses experienced during
2003 (9.6%), 2002 (18.6%) and 2001 (43.7%). The expense increase experienced
during 2003 was primarily due to an increase in staff to support growth in the
Company's core business model while the higher expenses recorded in 2002 and
2001 were due primarily to the previously noted IMN litigation, the acquisition
of SWLC in 2001 and the opening of five new branch offices during the same
period. Wherever possible, the Company strives to exploit existing and emerging
technologies to enhance productivity to reduce the level of staff and
infrastructure necessary to support the growth and expansion of the Company's
primary lines of business. Management is clearly focused on the goal of reducing
the Company's operating efficiency ratio (total operating expenses divided by
the sum of fully taxable equivalent net interest income and other income,
excluding net security gains or losses) to a level below 55%, commensurate with
our high performing peer group. This needs to be accomplished through a
combination of revenue growth and stringent expense control in all areas.
Although the expansion of staff and branch facilities in recent years, along
with growth in both the lending staff and operational support functions, has
resulted in rates of operating expense growth above corporate targets,
management is confident that these investments in the Company's core business
model will pay dividends in the coming years. Operating expenses are expected to
increase in 2005 as a result of the projected mid-year opening of a new branch
in Westbury, the leasing of additional office space in our current Mineola
location, the addition to staff of several lending officers and the full year
impact of the PSG function in 2005. Expense control measures put in place for
2004, including strict guidelines with respect to increases in base compensation
for current staff, will continue to be observed. Excluding the impact of any
2005 IMN litigation-related expenses, which are not yet specifically
quantifiable, management of the Company expects that the projected expansion of
the Company's asset and revenue bases will offset expected growth in the
Company's operating expenses. The rate of growth in loans, core deposit balances
and fee-based sources of revenue planned for the coming year is expected to more
than offset the anticipated increase in operating expenses that comes with
normal growth and expansion.
  33
  STATE BANCORP, INC. AND SUBSIDIARIES
  The
Company's primary expense control rates of measurement are the operating
efficiency ratio and the ratio of total operating expenses to average assets.
The Company's operating efficiency ratio decreased to 64.2% in 2004 versus 70.7%
and 66.0% in 2003 and 2002, respectively. Prior to the IMN litigation and the
recent branch expansion program, the Company's efficiency ratio was 52.5% in
2000. It is one of management's primary strategic objectives to reduce the
efficiency ratio to this level once again. The second measure of expense control
utilized by the Company is total operating expenses to average assets. The
Company recorded ratios of 2.77% in 2004 and 3.03% and 3.14% in 2003 and 2002,
respectively, in this category; a notable improvement. Management of the Company
is extremely cognizant of expense management and places great emphasis on
control of operating expenses, but always in the context of prudent growth and
expansion of the Company's branch network and of profitable lines of business
with a quantifiable return on equity and accretive impact on earnings per share.
Management is also aware, however, that the appropriate resources necessary to
grow the Company's revenue base must also be made available in order to improve
earnings for the long term. Along these lines, management also monitors the
ratio of average assets per FTE employee and, at over $5 million per employee,
the Company ranks in the top 10% of its peer group in this category. This
efficient utilization of staff is another reason behind the Company's excellent
record of growth in earnings and assets.
 Rates
of growth in both net interest income and other income are expected to outpace
increases in operating expenses (excluding IMN-related legal expenses) in the
coming year, thereby resulting in anticipated improvements in each of the
foregoing expense control ratios in 2005. The Company's long-term goal, as
stated in numerous previous stockholder communications, continues to be to
reduce its operating efficiency ratio to a level of 55% or less and to lower the
operating expenses to average assets ratio to 2.25% or lower. While this is not
expected to occur during 2005, largely the result of costs related to the IMN
litigation, it remains a long-term objective to continually improve these ratios
in both absolute terms and in relation to the Company's community bank peer
group. An analysis of the remaining components of 2004 operating expenses, by
category, follows.
 Occupancy
expenses totaled $4.0 million in 2004, an increase of 3.9% when compared to
2003. This increase resulted from a combination of higher real estate taxes (up
26.4%), additional space leased during 2004 and increased utility costs.
Partially offsetting these increases was a decline in maintenance and repair
costs. The increase in rental costs in 2004 versus 2003 (up 4.0%) resulted
principally from costs associated with a small office leased in New York City
for the Professional Services Group in mid-2004. Real estate taxes rose
substantially in 2004 when compared to the prior year as the result of higher
commercial property tax rates assessed on the Company's Nassau County branches
in 2004. Building and leasehold depreciation was essentially flat in 2004 versus
2003 while utility costs rose by 3.6% from year to year. Occupancy costs are
expected to rise at a slightly faster pace in 2005 as additional space in
Mineola, a new branch in Westbury and the full year impact of the New York City
office are all taken into account.
 Equipment
expenses decreased by 6.2% to $1.5 million in 2004 as the result of a reduction
in computer equipment depreciation related to the Company's mainframe system.
Also contributing to this decrease were lower equipment rental and repair costs
and lower equipment maintenance insurance fees. Management of the Company
expects equipment expenses to increase in 2005 as a new mainframe system will be
put into service and several other technology initiatives are expected to be
funded.
 Legal
expenses, as previously noted, decreased by $1.0 million (26.0%) during 2004.
Approximately eighty percent of the Company's legal expenses relate to the
ongoing IMN litigation previously disclosed in the Company's Securities and
Exchange Commission filings. Management of the Company expects that additional
expenses will be incurred related to this litigation during 2005, the extent of
which is not specifically quantifiable at this time.
 Marketing
and advertising costs decreased by $415 thousand (29.3%) during 2004 when
compared to 2003. This decrease resulted principally from a more targeted
approach to event sponsorships in 2004 based on customer profitability, coupled
with a reduction in promotions-related expenses in 2004 as no new branches were
opened by the Company. It is expected that this expense category will increase
next year as the result of a new branch opening and expected costs to be
incurred with a 2005 corporate branding effort. Stringent cost control measures
will continue to be applied to this expense category in the next twelve months.
 Credit
and collection costs declined by $623 thousand (45.4%) in 2004 versus the year
earlier period. Significantly lower expenses associated with loan collection
work, principally due to the improved overall quality of the loan and lease
portfolio, accounted for the bulk of the decline in this category. Also
contributing to this decrease were lower costs associated with appraisal and
inspection fees, mortgage taxes and credit reports as the result of a slowdown
in residential mortgage refinancing activity during 2004.
 Other
operating expenses increased by 11.6% to $7.1 million in 2004 when compared to
2003. This growth resulted from increases in several expense categories, mainly
audit and examination fees, other real estate expenses and correspondent bank
service charges. The increase in audits and examination expenses (up 81.0%)
increased directly as the result of increased Government compliance
requirements, specifically the audit costs arising from the Sarbanes-Oxley Act.
Other real estate expenses, specifically real estate taxes paid, increased
during 2004 as a commercial property foreclosed on during 2003 was held for a
full year. Somewhat offsetting these negative factors were decreases in several
expense categories, most notably meetings and seminars, messenger and delivery
costs and postage expenses. Management of the Company expects that operating
expenses, in absolute terms, will continue to grow as the Company expands its
operations, the markets it serves and the products it offers. Management
anticipates an overall rate of increase of 5% to 7% as an expense growth
estimate for 2005.
 
 **2003
versus 2002**
 Excluding
marketing and advertising costs, operating expenses rose by a combined 9.6% in
all categories to $41.1 million during 2003. The largest component of this
increase related to growth in salaries and other employee benefits costs, which
expanded by $2.8 million or 13.9% as the result of staff growth in various areas
of the Company. The full year impact of branches opened during 2002 also
negatively impacted the year-to-year comparison. Increased supplementary
compensation costs, health care, life insurance and FICA expenses, and related
increases in 401(k) and employee stock ownership (ESOP) contributions all added
to the growth in salaries and benefits costs during 2003.
  34
  STATE BANCORP, INC. AND SUBSIDIARIES
  Occupancy
costs expanded by 16.3% in 2003 to $3.9 million due principally to the full year
impact of an expanded branch network, additional space occupied by support areas
during 2002, higher real estate taxes, increased utility expenses and an
increase in maintenance and repair costs.
 Equipment
expenses increased by 14.2% to $1.6 million in 2003 as the result of the
purchase of new equipment and related maintenance costs, largely due to the
ongoing expansion of the Company's technology network.
 Legal
expenses, primarily related to the IMN litigation, grew by $316 thousand (8.9%)
during 2003.
 Marketing
and advertising costs decreased significantly during 2003 (down 33.3%). This
decrease resulted principally from nonrecurring expenses related to a corporate
sponsorship of the U.S. Open golf event held on Long Island coupled with
promotions related to the Company's new branch locations during 2002.
 Credit
and collection costs increased by 22.7% in 2003 versus 2002 as the result of
litigation efforts related to nonperforming assets.
 Other
operating expenses increased by 6.9% to $7.7 million in 2003 versus 2002. This
growth resulted from increases in several expense categories, most notably,
audit and examination fees, computer software maintenance, and other real estate
expenses.
 
 EFFECTIVE
INCOME TAX RATE
 
 **2004
versus 2003**
 Income
tax provisions of $5.4 million, $5.3 million and $4.0 million were recorded in
2004, 2003 and 2002, respectively. The Company is currently subject to both a
statutory incremental Federal tax rate of 35% (34% for the first $10 million of
taxable income), and a New York State tax rate of 7.5%, plus a surcharge of 17%.
The Company's overall effective tax rate was 28.6%, 30.4% and 26.3% in 2004,
2003 and 2002, respectively.
 The
decrease in 2004's effective tax rate was due to a higher level of tax-exempt
income coupled with a reduction in fully-taxable net security gains. SB
Portfolio, which provides investment management services to the Bank and the
Company, managed approximately $387 million and $302 million in assets at
year-end 2004 and 2003, respectively, primarily MBS, Government Agency and
tax-exempt municipal securities in Delaware. The income from these assets is
exempt from New York State income taxes and totaled $14.2 million, including net
gains on securities of $2.2 million, and $13.6 million, including net gains on
securities of $4.3 million, in 2004 and 2003, respectively. Management of the
Company anticipates that the consolidated 2005 effective tax rate will be
similar to that of 2004 at an approximate rate of between 29.0% and 30.0%.
 The
Company's New York State income taxes are under examination for the years ended
December 31, 1999, 2000 and 2001. At this time, management cannot estimate the
likelihood that the examination will change the tax liability for the years
under examination. As such, no liability has been recognized in the consolidated
balance sheets at December 31, 2004 or 2003.
 
 **2003
versus 2002**
 The
Company's effective tax rate increased to 30.4% in 2003 from 26.3% in 2002. This
increase was largely due to a lower level of tax-exempt income coupled with
growth in New York State taxable income resulting from balance sheet expansion.
At year-end 2003 and 2002, respectively, approximately $302 million and $293
million in Government Agencies, MBS and tax-exempt municipal securities were
managed by SB Portfolio. The income from these assets is exempt from New York
State income taxes and totaled $13.6 million, including net gains on securities
of $4.3 million, and $14.4 million, including net gains on securities of $1.6
million, in 2003 and 2002, respectively.
 
 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. These 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 and equipment, real estate and income-producing commercial properties.
At December 31, 2004 and 2003, commitments to originate loans and commitments
under unused lines of credit for which the Bank is obligated amounted to
approximately $252 million and $227 million, respectively.
 Letters
of credit are conditional commitments issued by the Bank guaranteeing payments
of drafts in accordance with the terms of the letter of credit agreements.
Commercial letters of credit are used primarily to facilitate trade or commerce
and are also issued to support public and private borrowing arrangements, bond
financing and similar transactions. Collateral may be required to support
letters of credit based upon management's evaluation of the creditworthiness of
each customer. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Most letters of credit expire within one year. Management does not anticipate
any material losses as a result of these transactions. At December 31, 2004 and
2003, the Bank had letters of credit outstanding of approximately $13 million
and $14 million, respectively.
 
 35
 
 STATE BANCORP, INC. AND SUBSIDIARIES
 
 At
year-end 2004, the Company was a party to two interest rate swap agreements with
terms expiring in September 2007 that economically hedge a portion of the
interest rate variability in its portfolio of prime rate loans. These agreements
effectively require the Company to pay prime interest rate and receive a fixed
rate of 6.01% from the counterparties on $50 million of loan assets. The fair
value of the swap agreements was ($440) thousand, inclusive of accrued interest
of $18 thousand, at December 31, 2004. During 2004, the Company recognized
interest income of $850 thousand under the agreements.
 The
Company is also obligated under various leases covering certain equipment,
branches, office space and the land on which its head office is built. The
minimum payments under these leases, certain of which contain escalation
clauses, are as follows: in 2005, $2.5 million; in 2006, $2.0 million; in 2007,
$2.0 million; in 2008, $1.9 million; in 2009, $1.8 million; and the remainder to
2012, $3.3 million.
 
 TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
 Shown
below are the amounts of payments due under specified contractual obligations,
aggregated by category of contractual obligation, for specified time periods.
All information is as of December 31, 2004.
 Payments
      due by period(in
      thousands)Less
      than
    
    
    
    
    
    More
      than**Contractual
      Obligations**
    
    Total
    
    1
      year
    
    1-3
      years
    
    3-5
      years
    
    5
      yearsLeases
      covering various Bank equipment, branches, office space and land
    
    $
    13,491
    
    $
    2,517
    
    $
    3,952
    
    $
    3,706
    
    $
    3,316Federal
      Home Loan Bank of New York overnight and term borrowings
    
    
    32,000
    
    
    32,000
    
    
    —
    
    
    —
    
    
    —Obligations
      under equipment lease financing
    
    
    266
    
    
    154
    
    
    112
    
    
    —
    
    
    —Junior
      subordinated debentures
    
    
    20,620
    
    
    —
    
    
    —
    
    
    —
    
    
    20,620Total
    
    $
    66,377
    
    $
    34,671
    
    $
    4,064
    
    $
    3,706
    
    $
    23,936
 
 CAPITAL
RESOURCES
 The
strength of the Company's capital position provides the platform for successful
financial performance, efficient utilization of resources and its capacity to
expand its assets and increase earnings. The Company strives to maintain an
efficient level of capital, commensurate with its risk profile, on which a
competitive rate of return to stockholders will be realized over both the short
and long term. Capital is managed to enhance stockholder value while providing
flexibility for management to act opportunistically in a changing marketplace.
In determining an optimal capital level, the Company also considers the capital
levels of its peers and the evaluations of its primary regulators. During 2004,
the Company's capital was expanded by the amount of its net income earned and
common stock issued net of cash dividends paid to stockholders and shares
repurchased. At December 31, 2004, stockholders' equity totaled $101.0 million,
an increase of 6.7% from year-end 2003. Total equity at December 31, 2003 was
$94.7 million. Retention of earnings, net of cash dividends paid on common
stock, added $8.2 million to equity in 2004. Somewhat offsetting this growth was
the repurchase of 88,137 shares of stock as part of the Company's stock
repurchase plan. Approximately $2.0 million in capital was allocated to purchase
these shares at an average price of $22.55 per share. Under the Board of
Directors' revised share repurchase authorization, management may repurchase up
to 574,005 additional shares if market conditions warrant. This action will only
occur if management feels that the purchase will be at prices that are accretive
to earnings per share.
 Internal
capital generation, defined as earnings less cash dividends paid on common
stock, is the primary catalyst supporting the Company's future growth of assets
and stockholder value. Management continually evaluates the Company's capital
position in light of current and future growth objectives and regulatory
guidelines.
 During
2002 and 2003, the Company enhanced its Tier I capital position through the
issuance of a total of $20 million in trust preferred securities, each through
pooled offering structures. The trust preferred securities, which currently
qualify as Tier I capital for regulatory capital purposes, were issued by newly
established subsidiaries, State Bancorp Capital Trusts I and II. The securities
each bear an interest rate tied to three-month LIBOR and are each redeemable by
the Company in whole or in part after five years or earlier under certain
circumstances. The average rate on all trust preferred securities outstanding
was 4.63% during 2004. As of year-end 2004 and 2003, the Company's Tier I
capital ratios were 7.82% and 8.08%, respectively.
 The
Company has no present plans to issue or utilize its authorized preferred stock.
These shares afford management additional flexibility with respect to future
equity financing to support business expansion.
 Management
strives to provide stockholders with a competitive return on their investment in
the Company. During 2004, the Board of Directors increased the Company's
quarterly cash dividend by 7.1% to $0.15 per share. Cash dividends on the
Company's common stock amounted to $0.58 per share in 2004. Since the payment of
its first cash dividend in 1979, the Company has distributed over $44 million to
stockholders, representing an average payout rate of 34.1%. In addition, the
Company also paid a 5% stock dividend in 2004, the *35th
consecutive year* that
it has paid a stock dividend.
  36
  STATE BANCORP, INC. AND SUBSIDIARIES
  
  The
Company also makes a common stock dividend reinvestment plan available to its
stockholders. This plan allows existing stockholders to reinvest cash dividends
in Company stock and/or to purchase additional shares through optional cash
investments on a quarterly basis. Shares are purchased at a 5% discount from the
current market price under either plan option. During 2004 and 2003, $2.5
million and $2.8 million, respectively, were added to stockholders' equity
through plan participation. Approximately 17% of the Company's cash dividends
were reinvested in 2004 under this plan, and since inception, approximately
$13.2 million in additional equity has been added through plan participation.
Management anticipates continued future growth in equity through the program.
 State
Bancorp, Inc. and its subsidiaries are subject to various regulatory capital
requirements administered by the Federal Reserve Board and the Federal Deposit
Insurance Corporation. These regulatory authorities measure capital adequacy on
a risk-weighted assets basis. Their guidelines provide a method of monitoring
capital adequacy that is sensitive to the risk factors inherent in a bank's
asset base, including off-balance sheet exposures. The guidelines assign various
weights to different asset types depending upon their risk profile. Generally
speaking, assets with greater risk require more capital support than do less
risky assets. In addition, a leverage standard has been established to
supplement the risk-based ratios in assessing an institution's overall capital
adequacy. Failure to maintain the Bank's capital ratios in excess of minimum
regulatory guidelines requires bank regulatory authorities to take prompt
corrective action in accordance with the provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations
arising from FDICIA established five categories of capitalization for depository
institutions: (1) well-capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized and (5) critically
undercapitalized. Based upon its December 31, 2004 capital position as outlined
in Table II, the Bank's capital ratios exceed the minimums established for a
well-capitalized institution and exceed, by a significant margin, the minimum
requirements under FDICIA. Failure to meet minimum capital requirements can
initiate certain actions by regulators that could have a direct effect on the
Company's and the Bank's operations and financial statements. The Company has no
plans or commitments for capital utilization or expenditures that would affect
its current capital position or would impact its future financial performance.
 TABLE
      II
    
    
    
    
    
    
    
    
    
    Regulatory
      Criteriafor
      a Well-Regulatory
    
    The
      Bank’s Ratios as of December 31,
    
    CapitalizedMinimum
    
    2004
    
    2003
    
    2002
    
    InstitutionLeverage
      ratio - Tier I Capital to Total Adjusted Assets
    
    
    3.00-5.00
    %
    
    7.79
    %
    
    7.97
    %
    
    6.88
    %
    
    5.00
    %Tier
      I Capital/Risk-Weighted Assets
    
    
    4.00
    %
    
    12.41
    %
    
    12.09
    %
    
    11.26
    %
    
    6.00
    %Total
      Capital/Risk-Weighted Assets
    
    
    8.00
    %
    
    13.66
    %
    
    13.29
    %
    
    12.51
    %
    
    10.00
    %
 
 LIQUIDITY
 Liquidity
management is defined as the Company's ability to meet its 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, and the
ability to fund new and existing loan commitments and also to take advantage of
business opportunities as they arise. Liquidity is composed of the maintenance
of a strong base of core deposits, maturing short-term assets including cash and
due from banks, the ability to sell or pledge marketable assets, access to lines
of credit and the capital markets.
 Liquidity
at the Company 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 to the Company. 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 its 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 for the Company, while deposit flows and
securities prepayments are somewhat less predictable in nature, as they are
often subject to external factors beyond the control of management. Among these
are changes in the local and national economies, competition from other
financial institutions and changes in market interest rates.
  37
  STATE BANCORP, INC. AND SUBSIDIARIES
  The Funds
Management Committee and the Asset/Liability Management Committee (ALCO) are
jointly responsible for oversight of the Company's liquidity position and
management of its asset/liability structure. The ALCO establishes specific
policies and operating procedures governing the Company's liquidity levels and
develops plans to address future and current liquidity needs. This Committee
monitors the loan and investment portfolios while also examining the maturity
structure and volatility characteristics of the Company's liabilities to develop
an optimum asset/liability mix. Funding sources available to the Company include
retail, commercial and municipal deposits, purchased liabilities and
stockholders' equity. If needed for short-term liquidity purposes, the Company
has access to $47 million in unsecured lines of credit extended by correspondent
banks. In addition, the Company can utilize its secured line of credit with the
Federal Home Loan Bank of New York to access up to $123 million in market rate
funds with maturities of up to thirty years. Pursuant to authorization limits
set by the Board of Directors, management of the Company may also access the
brokered deposit market for funding as it deems necessary. As of year-end 2004,
$75 million in such funds, maturing in 2005 and 2006, were utilized by the
Company. Brokered deposits were not utilized as a source of funds during 2003.
 Asset
liquidity is provided by short-term investments and the marketability of
securities available for sale. At December 31, 2004, the Company had $458
million in such liquid assets. The Company's loan portfolio and investment
securities held to maturity are of high quality and mixed maturity, providing an
excellent source of internal liquidity through maturities and periodic
repayments of principal. At year-end 2004, approximately $511 million of these
assets, including mortgage-backed securities, were due to mature or be repaid
within one year. Cash flows provided by the loan and investment portfolios are
typically utilized to reduce the Company's borrowed funds position and/or to
fund loan and investment securities growth. The Company's operating, investing
and financing activities are conducted within the overall constraints of the
Company's liquidity management policy.
 During
2004, the Company made a $25 million investment in BOLI. Distributions are made
to the Company only upon the death of an insured officer in accordance with the
underlying policy. Accordingly, the BOLI held by the Company does not generate
regular cash flows for reinvestment.
 While
past performance does not guarantee future results, management believes that the
Company's funding sources, including dividends from the Bank, and the Bank's
funding sources will be adequate to meet their future liquidity requirements.
 
 ASSET/LIABILITY
MANAGEMENT AND MARKET RISK
 The
process by which financial institutions manage interest-earning assets and
funding sources under different interest rate environments is called
asset/liability management. The primary goal of asset/liability management is to
increase net interest income within an acceptable range of overall risk
tolerance. Management must ensure that liquidity, capital, interest rate and
market risk are prudently managed. Asset/ liability and interest rate risk
management are governed by policies reviewed and approved annually by the
Company's Board of Directors. The Board has delegated responsibility for
asset/liability and interest rate risk management to the ALCO. The ALCO meets
quarterly and sets strategic directives that guide the day to day
asset/liability management activities of the Company as well as reviewing and
approving all major funding, capital and market risk management programs. The
ALCO, in conjunction with a noted industry consultant, also focuses on current
market conditions, balance sheet management strategies, deposit and loan pricing
issues and interest rate risk measurement and mitigation.
 
 INTEREST
RATE RISK
 Interest
rate risk is the potential adverse change to earnings or capital arising from
movements in interest rates. This risk can be quantified by measuring the change
in net interest margin relative to changes in market rates. Reviewing repricing
characteristics of interest-earning assets and interest-bearing liabilities
identifies risk. The Company's Funds Management Committee sets forth policy
guidelines that limit the level of interest rate risk within specified tolerance
ranges. Management must determine the appropriate level of risk, under policy
guidelines, which will enable the Company to achieve its performance objectives
within the confines imposed by its business objectives and the external
environment within which it operates.
 Interest
rate risk arises from repricing risk, basis risk, yield curve risk and options
risk, and is measured using financial modeling techniques including interest
rate ramp and shock simulations to measure the impact of changes in interest
rates on earnings for periods up to two years. These simulations are used to
determine whether corrective action may be warranted or required in order to
adjust the overall interest rate risk profile of the Company.
 Asset
and liability management strategies may also involve the use of instruments such
as interest rate swaps to hedge interest rate risk. During 2003 the Company
executed $50 million of four-year interest rate swaps to economically hedge a
portion of the interest rate variability in its portfolio of prime rate loans.
No additional swap transactions were executed during 2004.
 Management
performs simulation analysis to assess the Company's asset/liability position on
a dynamic repricing basis using software developed by a well known industry
vendor. Simulation modeling applies alternative interest rate scenarios and
periodic forecasts of future business activity to estimate the related impact on
net interest income. The use of simulation modeling assists management in its
continuing efforts to achieve earnings stability in a variety of interest rate
environments.
 The
Company's asset/liability and interest rate risk management policy limits
interest rate risk exposure to -12% and -15% of the base case net income for net
earnings at risk at the 12 month and 24 month time horizons, respectively. Net
earnings at risk is the potential adverse change in net income arising from up
to +/- 200 basis point change in interest rates ramped over a 12-month period,
and measured over a 24-month time horizon using the Company's business forecast.
  38
  STATE BANCORP, INC. AND SUBSIDIARIES
  **Net
Interest Income Sensitivity**
 %
      Change in Net Interest Income12-Month
      Interest Rate RampsTime
    
    Basis
      PointsHorizon
    
    Down
      100
    
    Down
      50
    
    Base
      Flat
    
    Up
      100
    
    Up
      200Year
      One
    
    
    0.2
    %
    
    0.6
    %
    
    0.0
    %
    
    -1.7
    %
    
    -4.3
    %Year
      Two
    
    
    11.8
    %
    
    11.5
    %
    
    10.3
    %
    
    6.3
    %
    
    1.1
    %
 
 Management
also monitors equity value at risk as a percentage of market value of portfolio
equity ("MVPE"). The Company's MVPE is the difference between the market value
of its interest-sensitive assets and the market value of its interest-sensitive
liabilities. MVPE at risk is the potential adverse change in the present value
(market value) of total equity arising from an immediate hypothetical shock in
interest rates. Management uses scenario analysis on a static basis to assess
its equity value at risk by modeling MVPE under various interest rate shock
scenarios.
 When
modeling MVPE at risk, management recognizes the high degree of subjectivity
when projecting long-term cash flows and reinvestment rates, and therefore uses
MVPE at risk as a relative indicator of interest rate risk.
 
 **MVPE
Sensitivity**
 MVPE
      VariabilityImmediate
      Interest Rate ShocksBasis
      PointsDown
      100
    
    Down
      50
    
    Base
      Flat
    
    Up
      100
    
    Up
      200%
      Change in MVPE(1)
    
    
    -0.5
    %
    
    0.1
    %
    
    0.0
    %
    
    -3.3
    %
    
    -7.6
    %MVPE
      Ratio
    
    
    13.2
    %
    
    13.4
    %
    
    13.4
    %
    
    12.9
    %
    
    12.2
    %
 (1)
Assumes 40% marginal tax rate.
 
 Simulation
and scenario techniques in asset/liability modeling are influenced by a number
of estimates and assumptions with regard to embedded options, prepayment
behaviors, pricing strategies and cash flows. Such assumptions and estimates are
inherently uncertain and, as a consequence, simulation and scenario output will
neither precisely estimate the level of, or the changes in, net interest income
and MVPE, respectively.
 To
mitigate the impact of changes in interest rates, as a general rule, the balance
sheet should be structured so that repricing opportunities exist for both assets
and liabilities in approximately equivalent amounts at basically the same time
intervals.
 In
managing interest rate risk, imbalances in these repricing opportunities at any
point in time constitute an interest-sensitivity gap, which is the difference
between interest-sensitive assets and interest-sensitive liabilities. When
monitoring its interest-sensitivity gap position, management recognizes that
these static measurements do not reflect the results of any projected activity
and are best utilized as early indicators of potential interest rate exposures.
 The
accompanying table sets forth the amounts of assets and liabilities outstanding
as of December 31, 2004 which, based upon certain assumptions, are expected to
reprice or mature in each of the time frames shown. Except as stated, the amount
of assets and liabilities shown to reprice or mature within a particular time
frame was determined in accordance with the earlier of the term to repricing or
the contractual terms of the asset or liability.
 The
Company bases its deposit decay rates on the results of a core deposit behavior
study performed by an independent industry consultant. Thus, the decay rates for
deposit accounts, with the exception of CDs, for which contractual maturities
are readily available, were as follows: 12.5% per year for savings deposits over
an eight-year period; 9.1% per year for demand deposits over an eleven-year
period; 16.7% per year over a six-year period for money fund accounts of
individuals, partnerships and corporations and 5.9% per year over a
seventeen-year period for NOW accounts; and 20% per year over a five-year period
for money fund accounts of municipalities. All short-term municipal deposits are
included in the 0-6 months category due to their seasonality and volatility.
These decay assumptions reflect the historical stability of the Company's core
deposit base, which may or may not be indicative of the industry average of its
peers.
 An
asset-sensitive gap indicates an excess of interest-sensitive assets over
interest-sensitive liabilities, whereas a liability-sensitive gap indicates the
opposite. At December 31, 2004, the Company had a one-year cumulative
asset-sensitivity gap of $212 million. In a rising rate environment, an
asset-sensitive gap position generally indicates that increases in income from
interest-bearing assets will outpace increases in expense associated with
funding those assets. In addition, the Company's net interest margin and net
income would improve under this scenario. Conversely, in a declining interest
rate environment, the Company's cost of funds would decline more slowly than the
yield on its rate-sensitive assets and would likely result in a contraction of
net interest income.
 Interest
rate risk can be reduced by various strategies, including the administration of
liability costs and the investment of asset maturities and cash flows in such a
way as to insulate net interest income from the effects of changes in interest
rates. As previously mentioned, a static gap position is best utilized as a tool
for early detection of potential interest rate exposure. Management monitors the
Company's cumulative one-year gap with a view that rate-sensitive assets and
liabilities are approximately equal in that time frame. Due to the nature of the
Company's business, primarily the seasonality of its municipal funding function,
an exactly matched one-year gap is unlikely to occur. Rather, as previously
discussed, management relies on net interest income simulation analysis to
manage the Company's asset/liability position on a dynamic repricing basis.
  39
  STATE BANCORP, INC. AND SUBSIDIARIES
  TABLE
III
 **Sensitivity
      Time Horizon****(1)**0-6
    
    6-12
    
    1-5
    
    Over
    
    Noninterest-(dollars
      in thousands)
    
    Months
    
    Months
    
    Years
    
    5
      Years
    
    Sensitive
    
    TotalINTEREST-SENSITIVE
      ASSETSLoans
      (net of unearned income) (2)
    
    $
    426,640
    
    $
    35,585
    
    $
    225,333
    
    $
    85,359
    
    $
    5,274
    
    $
    778,191Securities
      purchased under agreements to resell, Federal funds sold
      and interest-bearing deposits
    
    
    44,840
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    44,840Securities
      held to maturity
    
    
    —
    
    
    14,997
    
    
    14,993
    
    
    —
    
    
    —
    
    
    29,990Securities
      available for sale (3)
    
    
    92,183
    
    
    62,958
    
    
    260,167
    
    
    93,745
    
    
    3,991
    
    
    513,044Total
      interest-earning assets
    
    
    563,663
    
    
    113,540
    
    
    500,493
    
    
    179,104
    
    
    9,265
    
    
    1,366,065Unrealized
      net loss on securities available for sale
    
    
    (345
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (345
    )Noninterest-bearing
      cash and due from banks
    
    
    29,095
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    29,095All
      other assets (7)
    
    
    7,491
    
    
    9,544
    
    
    19,554
    
    
    3
    
    
    5,884
    
    
    42,476Total
      Assets
    
    $
    599,904
    
    $
    123,084
    
    $
    520,047
    
    $
    179,107
    
    $
    15,149
    
    $
    1,437,291INTEREST-SENSITIVE
      LIABILITIESSavings
      accounts (4)
    
    $
    20,090
    
    $
    18,091
    
    $
    144,724
    
    $
    108,543
    
    $
    —
    
    $
    291,448Money
      fund and NOW accounts (5)
    
    
    69,292
    
    
    27,822
    
    
    222,712
    
    
    46,041
    
    
    —
    
    
    365,867Time
      deposits (6)
    
    
    255,169
    
    
    26,900
    
    
    34,924
    
    
    413
    
    
    —
    
    
    317,406Total
      interest-bearing deposits
    
    
    344,551
    
    
    72,813
    
    
    402,360
    
    
    154,997
    
    
    —
    
    
    974,721Securities
      sold under agreements to repurchase, Federal fundspurchased and
      other borrowings
    
    
    32,095
    
    
    59
    
    
    112
    
    
    —
    
    
    —
    
    
    32,266Junior
      subordinated debentures
    
    
    20,620
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    20,620Total
      interest-bearing liabilities
    
    
    397,266
    
    
    72,872
    
    
    402,472
    
    
    154,997
    
    
    —
    
    
    1,027,607All
      other liabilities, equity and demand deposits (7)
    
    
    25,183
    
    
    15,353
    
    
    107,370
    
    
    160,728
    
    
    101,050
    
    
    409,684Total
      Liabilities and Equity
    
    $
    422,449
    
    $
    88,225
    
    $
    509,842
    
    $
    315,725
    
    $
    101,050
    
    $
    1,437,291Cumulative
      interest-sensitivity gap (8)
    
    $
    177,455
    
    $
    212,314
    
    $
    222,519
    
    $
    85,901
    
    $
    —Cumulative
      interest-sensitivity ratio (9)
    
    
    142.0
    %
    
    141.6
    %
    
    121.8
    %
    
    106.4
    %
    
    100.0
    %Cumulative
      interest-sensitivity gap as a % of Total Assets
    
    
    12.3
    %
    
    14.8
    %
    
    15.5
    %
    
    6.0
    %
    
    —
    %
 
 (1)
    Allocations
      to specific interest-sensitivity periods are based on the earlier of the
      repricing or maturity date.
 (2)
    Nonaccrual
      loans are shown in the noninterest-sensitive category.
 (3)
    Estimated
      principal reductions have been assumed for mortgage-backed securities
      based upon their current constant prepayment rates. Securities containing
      embedded options are allocated to the interest-sensitivity period that
      best reflects the anticipated repricing impact of the embedded option.
 (4)
    Savings
      deposits, excluding short-term municipal deposits, are assumed to decline
      at a rate of 12.5% per year over an eight-year period based upon the
      nature of their historically stable core deposit relationships. Short-term
      municipal deposits are included in the 0-6 months category.
 (5)
    Money
      fund accounts of individuals, partnerships and corporations and NOW
      accounts are assumed to decline at a rate of 16.7% per year over a
      six-year period and 5.9% per year over a seventeen-year period,
      respectively, based upon the nature of their historically stable core
      deposit relationships. Money fund accounts of municipalities are assumed
      to decline at a rate of 20% per year over a five-year period, except for
      short-term municipal deposits that are included in the 0-6 months
      category.
 (6)
    Reflected
      as maturing in each instrument's period of contractual maturity.
 (7)
    Other
      assets and liabilities are shown according to their contractual payment
      schedule or a reasonable estimate thereof. Demand deposits, excluding
      short-term municipal deposits, are assumed to decline at a rate of 9.1%
      per year over an eleven-year period based upon the nature of their
      historically stable core deposit relationships. Short-term municipal
      deposits are included in the 0-6 months category.
 (8)
    Total
      assets minus total liabilities and equity.
 (9)
    Total
      assets as a percentage of total liabilities and equity.
  40
  STATE BANCORP, INC. AND SUBSIDIARIES
  Report
of Independent Registered Public Accounting Firm
 
 
 Board
of Directors and Stockholders of
 State
Bancorp, Inc.
 New
Hyde Park, New York
 
 We
have audited the accompanying consolidated balance sheets of State Bancorp, Inc.
and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of income, cash flows, and stockholders' equity
and comprehensive income (loss) for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 In
our opinion, such financial statements present fairly, in all material respects,
the financial position of State Bancorp, Inc. and subsidiaries as of December
31, 2004 and 2003, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
 We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in *Internal
Control—Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report, dated March 11, 2005, expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
  
  Philadelphia,
PA
 March
11, 2005
  41
  STATE BANCORP, INC. AND SUBSIDIARIES
  Consolidated
Balance Sheets
 December
31, 2004 and 2003
 
 2004
    
    2003**ASSETS:**Cash
      and due from banks
    
    $
    32,934,976
    
    $
    56,762,269Securities
      purchased under agreements to resell
    
    
    41,000,000
    
    
    91,000,000Total
      cash and cash equivalents
    
    
    73,934,976
    
    
    147,762,269Securities
      held to maturity (estimated fair value of $29,949,000 in 2004 and $55,231,959
      in 2003)
    
    
    29,990,384
    
    
    55,065,400Securities
      available for sale—at estimated fair value
    
    
    512,699,498
    
    
    511,964,686Loans
      (net of allowance for probable loan losses of $12,020,443 in 2004 and$10,732,078 in 2003)
    
    
    766,170,785
    
    
    700,484,056Bank
      premises and equipment—net
    
    
    6,491,365
    
    
    7,083,848Bank
      owned life insurance
    
    
    25,879,180
    
    
    —Other
      assets
    
    
    22,124,779
    
    
    18,640,104**TOTAL
      ASSETS**
    
    $
    1,437,290,967
    
    $
    1,441,000,363**LIABILITIES:**Deposits:Demand
    
    $
    294,912,979
    
    $
    265,691,712Savings
    
    
    657,315,486
    
    
    688,717,586Time
    
    
    317,405,613
    
    
    261,877,605Total
      deposits
    
    
    1,269,634,078
    
    
    1,216,286,903Federal
      funds purchased
    
    
    —
    
    
    10,000,000Securities
      sold under agreements to repurchase
    
    
    —
    
    
    31,601,147Other
      borrowings
    
    
    32,266,489
    
    
    50,714,149Junior
      subordinated debentures
    
    
    20,620,000
    
    
    20,000,000Payable—securities
      purchases
    
    
    —
    
    
    8,612,652Accrued
      expenses, taxes and other liabilities
    
    
    13,720,558
    
    
    9,073,990Total
      liabilities
    
    
    1,336,241,125
    
    
    1,346,288,841**COMMITMENTS
      AND CONTINGENT LIABILITIES****STOCKHOLDERS’
      EQUITY:**Preferred
      stock, $0.01 par value, authorized 250,000 shares; 0 shares
      issued
    
    
    —
    
    
    —Common
      stock, $5.00 par value, authorized 20,000,000 shares; issued
      9,994,822 shares in 2004 and 9,846,853 shares in 2003;outstanding 9,068,827 shares in 2004 and 8,967,102 shares in
      2003
    
    
    49,974,110
    
    
    46,889,775Surplus
    
    
    63,014,247
    
    
    53,544,877Retained
      earnings
    
    
    4,008,970
    
    
    5,189,907Treasury
      stock (925,995 shares in 2004 and 837,858 shares in 2003)
    
    
    (15,468,528
    )
    
    (13,481,356
    )Accumulated
      other comprehensive (loss) income, net of taxes of $(323,915) in 2004and $1,380,618 in 2003
    
    
    (478,957
    )
    
    2,568,319Total
      stockholders’ equity
    
    
    101,049,842
    
    
    94,711,522**TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY**
    
    $
    1,437,290,967
    
    $
    1,441,000,363See
      Notes to Consolidated Financial Statements.
  42
  STATE BANCORP, INC. AND SUBSIDIARIES
  Consolidated
      Statements of IncomeFor
      the Years Ended December 31, 2004, 2003 and 20022004
    
    2003
    
    2002INTEREST
      INCOME:Interest
      and fees on loans
    
    $
    49,195,179
    
    $
    44,401,518
    
    $
    43,491,358Federal
      funds sold and securities purchased under agreements to resell
    
    
    354,616
    
    
    444,902
    
    
    532,335Securities
      held to maturity and securities available for sale:Tax-exempt
      states and political subdivisions
    
    
    2,790,461
    
    
    3,029,829
    
    
    3,620,202Mortgage-backed
      securities
    
    
    9,668,812
    
    
    8,201,341
    
    
    11,771,292Government
      Agency securities
    
    
    6,244,454
    
    
    7,109,489
    
    
    6,585,093Other
    
    
    1,783,584
    
    
    1,495,797
    
    
    1,132,164Total
      interest income
    
    
    70,037,106
    
    
    64,682,876
    
    
    67,132,444INTEREST
      EXPENSE:Time
      certificates of deposit of $100,000 or more
    
    
    2,867,815
    
    
    2,469,498
    
    
    5,247,854Other
      deposits and temporary borrowings
    
    
    8,873,434
    
    
    8,497,565
    
    
    9,886,464Junior
      subordinated debentures
    
    
    1,059,304
    
    
    567,914
    
    
    104,989Total
      interest expense
    
    
    12,800,553
    
    
    11,534,977
    
    
    15,239,307Net
      interest income
    
    
    57,236,553
    
    
    53,147,899
    
    
    51,893,137PROVISION
      FOR PROBABLE LOAN LOSSES
    
    
    4,506,000
    
    
    3,935,004
    
    
    3,560,000Net
      interest income after provision for probable loan losses
    
    
    52,730,553
    
    
    49,212,895
    
    
    48,333,137OTHER
      INCOME:Service
      charges on deposit accounts
    
    
    2,278,718
    
    
    1,617,718
    
    
    1,478,932Net
      security gains
    
    
    2,149,588
    
    
    5,841,972
    
    
    1,696,450Income
      from bank owned life insurance
    
    
    879,180
    
    
    —
    
    
    —Other
      operating income
    
    
    1,743,439
    
    
    1,683,233
    
    
    1,302,233Total
      other income
    
    
    7,050,925
    
    
    9,142,923
    
    
    4,477,615Income
      before operating expenses
    
    
    59,781,478
    
    
    58,355,818
    
    
    52,810,752OPERATING
      EXPENSES:Salaries
      and other employee benefits
    
    
    23,897,728
    
    
    22,691,938
    
    
    19,917,969Occupancy
    
    
    4,001,184
    
    
    3,852,847
    
    
    3,312,111Equipment
    
    
    1,463,855
    
    
    1,560,448
    
    
    1,366,314Legal
    
    
    2,858,970
    
    
    3,862,538
    
    
    3,546,470Marketing
      and advertising
    
    
    1,001,210
    
    
    1,415,725
    
    
    2,123,772Credit
      and collection
    
    
    748,285
    
    
    1,371,048
    
    
    1,117,573Audit
      and assessment
    
    
    1,222,149
    
    
    774,587
    
    
    579,793Other
      operating expenses
    
    
    5,849,849
    
    
    5,559,950
    
    
    5,513,360Total
      operating expenses
    
    
    41,043,230
    
    
    41,089,081
    
    
    37,477,362INCOME
      BEFORE INCOME TAXES
    
    
    18,738,248
    
    
    17,266,737
    
    
    15,333,390PROVISION
      FOR INCOME TAXES
    
    
    5,362,239
    
    
    5,251,564
    
    
    4,030,779NET
      INCOME
    
    $
    13,376,009
    
    $
    12,015,173
    
    $
    11,302,611BASIC
      EARNINGS PER COMMON SHARE
    
    $
    1.48
    
    $
    1.35
    
    $
    1.27DILUTED
      EARNINGS PER COMMON SHARE
    
    $
    1.44
    
    $
    1.32
    
    $
    1.24CASH
      DIVIDENDS PAID PER COMMON SHARE
    
    $
    0.56
    
    $
    0.52
    
    $
    0.49WEIGHTED-AVERAGE
      NUMBER OF SHARES—BASIC
    
    
    9,023,180
    
    
    8,899,112
    
    
    8,926,160WEIGHTED-AVERAGE
      NUMBER OF SHARES—DILUTED
    
    
    9,316,655
    
    
    9,134,663
    
    
    9,083,055See
      Notes to Consolidated Financial Statements.
  43
  STATE BANCORP, INC. AND SUBSIDIARIES
  Consolidated
      Statements of Cash FlowsFor
      the Years Ended December 31, 2004, 2003 and 20022004
    
    2003
    
    2002OPERATING
      ACTIVITIES:Net
      income
    
    $
    13,376,009
    
    $
    12,015,173
    
    $
    11,302,611Adjustments
      to reconcile net income to net cash provided by operating activities:Provision
      for probable loan losses
    
    
    4,506,000
    
    
    3,935,004
    
    
    3,560,000Depreciation
      and amortization of bank premises and equipment
    
    
    1,519,631
    
    
    1,615,482
    
    
    1,302,171Amortization
      of intangibles
    
    
    36,137
    
    
    36,137
    
    
    36,137Deferred
      income tax (benefit) expense
    
    
    (864,304
    )
    
    483,954
    
    
    (325,625
    )Amortization
      of net premium on securities
    
    
    6,009,576
    
    
    7,556,686
    
    
    4,589,186Net
      security gains
    
    
    (2,149,588
    )
    
    (5,841,972
    )
    
    (1,696,450
    )Income
      from bank owned life insurance
    
    
    (879,180
    )
    
    —
    
    
    —Amortization
      of unearned compensation
    
    
    —
    
    
    82,601
    
    
    228,307(Increase)
      decrease in other assets
    
    
    (1,712,992
    )
    
    7,097,236
    
    
    (5,534,137
    )Increase
      in accrued expenses, taxes and other liabilities
    
    
    4,482,342
    
    
    876,463
    
    
    2,412,334Net
      cash provided by operating activities
    
    
    24,323,631
    
    
    27,856,764
    
    
    15,874,534INVESTING
      ACTIVITIES:Proceeds
      from maturities of securities held to maturity
    
    
    85,060,524
    
    
    41,694,886
    
    
    65,400Purchases
      of securities held to maturity
    
    
    (59,985,000
    )
    
    (70,000,000
    )
    
    (26,425,500
    )Proceeds
      from sales of securities available for sale
    
    
    302,733,658
    
    
    724,880,417
    
    
    530,598,586Proceeds
      from maturities of securities available for sale
    
    
    243,884,912
    
    
    319,785,591
    
    
    172,346,644Purchases
      of securities available for sale
    
    
    (563,817,323
    )
    
    (959,282,050
    )
    
    (1,010,578,695
    )Increase
      in loans, net
    
    
    (70,192,729
    )
    
    (96,730,703
    )
    
    (71,556,073
    )Purchases
      of bank premises and equipment—net
    
    
    (927,148
    )
    
    (819,563
    )
    
    (2,761,462
    )Increase
      in bank owned life insurance
    
    
    (25,000,000
    )
    
    —
    
    
    —Net
      cash used in investing activities
    
    
    (88,243,106
    )
    
    (40,471,422
    )
    
    (408,311,100
    )FINANCING
      ACTIVITIES:(Decrease)
      increase in demand and savings deposits
    
    
    (2,180,833
    )
    
    239,765,843
    
    
    206,219,063Increase
      (decrease) in time deposits
    
    
    55,528,008
    
    
    (170,505,448
    )
    
    56,097,983(Decrease)
      increase in Federal funds purchased
    
    
    (10,000,000
    )
    
    5,200,000
    
    
    4,800,000(Decrease)
      increase in securities sold under agreements to repurchase
    
    
    (31,601,147
    )
    
    (18,381,853
    )
    
    49,983,000(Decrease)
      increase in other borrowings
    
    
    (18,447,660
    )
    
    (1,951,495
    )
    
    33,566,053Proceeds
      from issuance of junior subordinated debentures
    
    
    620,000
    
    
    10,000,000
    
    
    10,000,000Cash
      dividends paid
    
    
    (5,050,091
    )
    
    (4,565,273
    )
    
    (4,384,828
    )Proceeds
      from shares issued under the dividend reinvestment plan
    
    
    2,461,066
    
    
    2,812,209
    
    
    1,782,382Proceeds
      from stock options exercised
    
    
    719,650
    
    
    436,103
    
    
    222,644Proceeds
      from shares issued under the Directors' Stock Plan
    
    
    30,361
    
    
    17,226
    
    
    —Purchases
      of treasury stock
    
    
    (1,987,172
    )
    
    (1,037,240
    )
    
    (5,372,967
    )Net
      cash (used in) provided by financing activities
    
    
    (9,907,818
    )
    
    61,790,072
    
    
    352,913,330NET
      (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (73,827,293
    )
    
    49,175,414
    
    
    (39,523,236
    )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    147,762,269
    
    
    98,586,855
    
    
    138,110,091CASH
      AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    73,934,976
    
    $
    147,762,269
    
    $
    98,586,855SUPPLEMENTAL
      DATA:Interest
      paid
    
    $
    12,214,917
    
    $
    11,808,391
    
    $
    15,218,785Income
      taxes paid
    
    $
    5,699,219
    
    $
    5,551,010
    
    $
    3,361,200Transfer
      from loans to OREO
    
    $
    —
    
    $
    2,650,000
    
    $
    —Adjustment
      to unrealized net gain or loss on securities available for sale
    
    $
    (3,990,792
    )
    $
    (4,563,553
    )
    $
    11,967,144Dividends
      declared but not paid as of year end
    
    $
    1,360,298
    
    $
    1,196,071
    
    $
    1,113,946
 See
Notes to Consolidated Financial Statements.
  44
  STATE BANCORP, INC. AND SUBSIDIARIES
  Consolidated
Statements of Stockholders' Equity and Comprehensive Income (Loss)
 For
the Years Ended December 31, 2004, 2003 and 2002
 
 AccumulatedOther
    
    
    
    TotalCommon
    
    
    
    Retained
    
    Treasury
    
    Comprehensive
    
    Unearned
    
    Stockholders’
    
    ComprehensiveStock
    
    Surplus
    
    Earnings
    
    Stock
    
    (Loss)
      Income
    
    Compensation
    
    Equity
    
    Income
      (Loss)Balance,
      January 1, 2002
    
    $
    41,170,595
    
    $
    39,202,494
    
    $
    5,588,315
    
    $
    (7,071,149
    )
    $
    (2,427,503
    )
    $
    (174,323
    )
    $
    76,288,429Comprehensive
      income:Net
      income
    
    
    
    
    
    
    
    
    11,302,611
    
    
    
    
    
    
    
    
    
    
    
    11,302,611
    
    $
    11,302,611Other
      comprehensive income, net of tax:Unrealized
      holding gains during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,756,480Reclassification
      for gains included in net income (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,110,876
    )Total
      other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,645,604
    
    
    
    
    
    7,645,604
    
    
    7,645,604Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,948,215Cash
      dividend ($.50 per share)
    
    
    
    
    
    
    
    
    (4,414,379
    )
    
    
    
    
    
    
    
    
    
    
    (4,414,379
    )5%
      stock dividend (389,246 shares at market value)
    
    
    1,946,230
    
    
    5,110,800
    
    
    (7,057,030
    )
    
    
    
    
    
    
    
    
    
    
    —Shares
      issued under the dividend reinvestment plan(111,296
      shares at 95% of market value)
    
    
    556,480
    
    
    1,225,902
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,782,382Stock
      options exercised
    
    
    145,090
    
    
    77,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222,644Treasury
      stock purchased
    
    
    
    
    
    
    
    
    
    
    
    (5,372,967
    )
    
    
    
    
    
    
    
    (5,372,967
    )Amortization
      of unearned compensation
    
    
    
    
    
    98,079
    
    
    
    
    
    
    
    
    
    
    
    130,228
    
    
    228,307Balance,
      December 31, 2002
    
    
    43,818,395
    
    
    45,714,829
    
    
    5,419,517
    
    
    (12,444,116
    )
    
    5,218,101
    
    
    (44,095
    )
    
    87,682,631Comprehensive
      income:Net
      income
    
    
    
    
    
    
    
    
    12,015,173
    
    
    
    
    
    
    
    
    
    
    
    12,015,173
    
    $
    12,015,173Other
      comprehensive loss, net of tax:Unrealized
      holding gains during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    898,631Reclassification
      for gains included in net income (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,730,124
    )Cash
      flow hedges (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    181,711Total
      other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,649,782
    )
    
    
    
    
    (2,649,782
    )
    
    (2,649,782
    )Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9,365,391Cash
      dividend ($.52 per share)
    
    
    
    
    
    
    
    
    (4,647,399
    )
    
    
    
    
    
    
    
    
    
    
    (4,647,399
    )5%
      stock dividend (401,978 shares at market value)
    
    
    2,009,890
    
    
    5,587,494
    
    
    (7,597,384
    )Shares
      issued under the dividend reinvestment plan(158,239
      shares at 95% of market value)
    
    
    791,195
    
    
    2,021,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,812,209Stock
      options exercised
    
    
    265,510
    
    
    170,593
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    436,103Stock
      issued under Directors’ Stock Plan
    
    
    4,785
    
    
    12,441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,226Treasury
      stock purchased
    
    
    
    
    
    
    
    
    
    
    
    (1,037,240
    )
    
    
    
    
    
    
    
    (1,037,240
    )Amortization
      of unearned compensation
    
    
    
    
    
    38,506
    
    
    
    
    
    
    
    
    
    
    
    44,095
    
    
    82,601Balance,
      December 31, 2003
    
    
    46,889,775
    
    
    53,544,877
    
    
    5,189,907
    
    
    (13,481,356
    )
    
    2,568,319
    
    
    —
    
    
    94,711,522Comprehensive
      income:Net
      income
    
    
    
    
    
    
    
    
    13,376,009
    
    
    
    
    
    
    
    
    
    
    
    13,376,009
    
    $
    13,376,009Other
      comprehensive loss, net of tax:Unrealized
      holding losses during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,348,301
    )Reclassification
      for gains included in net income (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,423,771
    )Cash
      flow hedges (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (275,204
    )Total
      other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,047,276
    )
    
    
    
    
    (3,047,276
    )
    
    (3,047,276
    )Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    10,328,733Cash
      dividend ($.58 per share)
    
    
    
    
    
    
    
    
    (5,214,318
    )
    
    
    
    
    
    
    
    
    
    
    (5,214,318
    )5%
      stock dividend (427,776 shares at market value)
    
    
    2,138,880
    
    
    7,203,748
    
    
    (9,342,628
    )
    
    
    
    
    
    
    
    
    
    
    —Shares
      issued under the dividend reinvestment plan(110,744
      shares at 95% of market value)
    
    
    553,720
    
    
    1,907,346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,461,066Stock
      options exercised
    
    
    385,475
    
    
    334,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    719,650Stock
      issued under Directors’ Stock Plan
    
    
    6,260
    
    
    24,101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,361Treasury
      stock purchased
    
    
    
    
    
    
    
    
    
    
    
    (1,987,172
    )
    
    
    
    
    
    
    
    (1,987,172
    )**Balance,
      December 31, 2004**
    
    ****$
    ****49,974,110
    
    $
    63,014,247
    
    $
    4,008,970
    
    $
    (15,468,528
    )
    $
    (478,957
    )
    $
    —
    
    $
    101,049,842
 
 See Notes
to Consolidated Financial Statements.
 
 (1)
    
    Net
      of taxes of $585,574, $2,111,848 and $725,818 in 2002, 2003 and 2004,
      respectively.
 (2)
    
    Net
      of taxes of $120,938 and $(183,164) in 2003 and 2004,
      respectively
  45
  STATE BANCORP, INC. AND SUBSIDIARIES
  Notes
to Consolidated Financial Statements
  1.
SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
 *Organization
and Nature of Operations—* The
consolidated financial statements include the accounts of State Bancorp, Inc.
and its wholly owned subsidiary, State Bank of Long Island (the "Bank"), and its
unconsolidated wholly owned subsidiaries, State Bancorp Capital Trust I and
State Bancorp Capital Trust II. The Bank's consolidated financial statements
include the accounts of its wholly owned subsidiaries, SB Portfolio Management
Corp. ("SB Portfolio"), SB Financial Services Corp. ("SB Financial"), SB ORE
Corp., Studebaker-Worthington Leasing Corp. ("SWLC") and New Hyde Park Leasing
Corporation and its subsidiary,
 P.W.B.
Realty, L.L.C. SB Portfolio and SB Financial are Delaware-based subsidiaries
formed in June 1998. SB Portfolio manages a portfolio of fixed income
investments, and SB Financial provides balance sheet management services with a
focus on interest rate risk management. SWLC is a leasing subsidiary acquired as
of February 1, 2001. State Bancorp, Inc. and subsidiaries are collectively
referred to hereafter as the "Company." All intercompany accounts and
transactions have been eliminated.
 The
Company was incorporated as a bank holding company under the laws of the state
of New York in 1985 to provide consumer, commercial and municipal banking
services to clients located primarily in the Queens, Nassau and Suffolk County
areas. It offers a full range of deposit and loan products through fifteen
full-service branches. In addition, the Company offers merchant credit card
services, access to mutual fund and annuity products and offers a consumer debit
card with membership in a national ATM network.
 *Basis
of Presentation—* The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those estimates.
 The
accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States of America which includes
general practice within the banking industry. The following is a summary of the
more significant accounting and reporting policies:
 *Securities
Held to Maturity and Securities Available for Sale—* At
the time of purchase of a security, the Bank 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 Bank has the
positive intent and ability to hold such securities to maturity. Securities
available for sale are stated at estimated fair value. Unrealized gains and
losses are excluded from income and reported net of tax as accumulated other
comprehensive income (loss) as a separate component of stockholders' equity
until realized. Interest earned on investment securities is included in interest
income. Realized gains and losses on the sale of securities are reported in the
consolidated statements of income and determined using the adjusted cost of the
specific security sold.
 *Income
Recognition—* Interest
on loans is credited to income when earned. The Bank discontinues the accrual of
interest on loans whenever there is reasonable doubt that interest and/or
principal will be collected, or when either principal or interest is 90 days or
more past due and the loan is not well collateralized and in the process of
collection. Income is not accrued for installment loans which are 90 days past
due unless the Bank holds cash collateral. Interest received on nonaccrual loans
is either applied against principal or reported as income, according to
management's judgment as to the collectibility of the principal.
 *Allowance
for Probable Loan Losses* —The
allowance for probable 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 probable loan losses is maintained at a level that,
in the opinion of management, is sufficient to absorb probable losses. To
determine that level, management identifies problem loans based on the financial
condition of the borrower, the value of any collateral and/or guarantor support.
Based upon the resultant risk categories assigned to each loan and the
procedures regarding impairment described below, an appropriate reserve level is
determined. Management also evaluates the quality of, and changes in, the
portfolio, while also taking into consideration the Bank's historical loss
experience, the existing economic climate of the service area in which the Bank
operates, examinations by regulatory authorities, internal reviews and other
evaluations in determining the appropriate allowance balance. While management
utilizes all available information to estimate the adequacy of the allowance for
probable loan losses, 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 economic conditions and other relevant factors.
 Commercial
loans and commercial real estate loans are considered impaired when, based on
current information and events, it is probable that the Company will not be able
to collect all of the principal and interest due under the contractual terms of
the loan. Management considers all nonaccrual loans in excess of $250 thousand
for impairment. Large groups of smaller-balance homogeneous loans, such as
consumer and residential mortgages, are collectively evaluated for impairment.
 The
allowance for probable loan losses related to loans that are impaired includes
reserves which are based upon the expected future cash flows, discounted at the
loan's effective interest rate, or the fair value of the underlying collateral
for collateral-dependent loans, or the observable market price. This evaluation
is inherently subjective as it requires material estimates, including the amount
and timing of future cash flows expected to be received on impaired loans, that
may be susceptible to significant change.
 In
July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance Methodology
and Documentation Issues." SAB No. 102 expresses the SEC staff's views on the
development, documentation and application of a systematic methodology for
determining the allowance for probable loan losses in accordance with accounting
principles generally accepted in the United States of America. Also in July
2001, the Federal banking agencies issued guidance on this topic through the
Federal Financial Institutions Examination Council interagency guidance, "Policy
Statement on Allowance for Loan and Lease Losses Methodologies and Documentation
for Banks and Savings Institutions." In management's opinion, the Company's
methodology and documentation of the allowance for probable loan losses meets
the guidance issued.
  46
  STATE BANCORP, INC. AND SUBSIDIARIES
  *Bank
Premises and Equipment—Net—* Bank
premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation expense is computed on the straight-line method over
the estimated useful lives of the related assets which range from 3 to 40 years.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining terms of the leases.
 *Loan
Origination Fees and Costs—* Certain
loan origination fees and direct origination costs may be capitalized and
recognized as an adjustment of the yield on the related loan.
 *Income
Taxes—* The
Company recognizes deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the Company's consolidated
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
accounting and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. As changes
in tax laws are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
 The
Company's New York state income tax returns are under examination for the years
ended December 31, 1999, 2000 and 2001. At this time, management cannot estimate
the likelihood that the examination will change the tax liability for the years
under examination. As such, no liability has been recognized in the consolidated
balance sheets at December 31, 2004 and 2003.
 *Treasury
Stock—* Stock
held in treasury by the Company is accounted for using the cost method, which
treats stock held in treasury as a reduction to total stockholders' equity.
 *Cash
Dividends—* Cash
dividends per common share have been restated to give retroactive effect to
stock dividends and splits.
 *Stock
Dividends—* Stock
dividends issued are recorded by transferring the aggregate market value of the
shares issued from retained earnings to common stock and surplus. All per share
information, included in the consolidated financial statements and the notes
thereto, has been restated to give retroactive effect to stock dividends.
 *Earnings
Per Common Share—* Basic
earnings per common share is computed based on the weighted-average number of
shares outstanding. Diluted earnings per share is computed based on the
weighted-average number of shares outstanding, increased by the number of common
shares that are assumed to have been purchased with the proceeds from the
exercise of stock options (treasury stock method). These purchases were assumed
to have been made at the average market price of the common stock. The average
market price is based on the average closing price for the common stock.
Retroactive recognition has been given for stock dividends.
 
 For
      the Years Ended December 31,
    
    2004
    
    2003
    
    2002Net
      income
    
    $
    13,376,009
    
    $
    12,015,173
    
    $
    11,302,611Average
      dilutive stockoptions outstanding
    
    
    840,938
    
    
    791,767
    
    
    638,718Average
      exercise price per share
    
    $
    15.09
    
    $
    13.14
    
    $
    11.66Average
      market price
    
    $
    23.17
    
    $
    18.70
    
    $
    15.45Weighted-average
      common sharesoutstanding
    
    
    9,023,180
    
    
    8,899,112
    
    
    8,926,160Increase
      in shares due to exerciseof options—diluted
      basis
    
    
    293,475
    
    
    235,551
    
    
    156,895Adjusted
      shares outstanding—diluted
    
    
    9,316,655
    
    
    9,134,663
    
    
    9,083,055Net
      income per share—basic
    
    $
    1.48
    
    $
    1.35
    
    $
    1.27Net
      income per share—diluted
    
    $
    1.44
    
    $
    1.32
    
    $
    1.24
 
 *Comprehensive
Income (Loss)—* The
Company presents as a component of comprehensive income (loss) the amounts from
transactions and other events which currently are excluded from the statements
of income and are recorded directly to stockholders' equity in accumulated other
comprehensive income (loss), net of taxes.
 *Statements
of Cash Flows—* For
the purpose of presenting the statements of cash flows, the Company considers
Federal funds sold and securities purchased under agreements to resell to be
cash equivalents because such assets are convertible into fixed amounts of cash
within several days of initial purchase. The Company may enter into purchases of
U.S. Treasury, Government Agency and mortgage-backed securities under agreements
to resell.
 *Securities
Sold Under Agreements to Repurchase—* The
Company may utilize borrowings collateralized by U. S. Treasury, Government
Agency and mortgage-backed securities. These funds generally mature within one
to seven days and are reflected on the balance sheet at the amount of the cash
received.
 *Loans
Foreclosed—* Property
acquired through foreclosure (other real estate owned or "OREO") is stated at
the lower of cost or fair value less estimated selling costs. Losses arising at
the time of foreclosure are charged against the allowance for probable loan
losses. Revenues and expenses from operations or changes in the carrying value
of these assets are included in operating expenses.
 *Intangibles—* Intangibles
consist of the excess market value of leases acquired. Intangibles are carried
at cost less accumulated amortization. Amortization is provided over the period
of anticipated benefit (17 to 19 years). Management evaluates the carrying
amount of intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company has not recognized an impairment loss based on this
evaluation.
 *Goodwill—* The
excess of cost over fair value of net assets acquired generated from the
acquisition of SWLC in February 2001, is amortized by the straight-line method
over 20 years. Effective January 1, 2002, goodwill has not been amortized, but
is reviewed annually for impairment and no evidence of impairment has been
identified.
 *Accounting
for Stock Options—* The
Company accounts for stock-based compensation using the intrinsic value method
which recognizes as expense the difference between the market value of the stock
and the exercise price at grant date. The Company discloses the pro forma
effects of accounting for stock-based compensation using the fair value method.
  47
  STATE BANCORP, INC. AND SUBSIDIARIES
  In
December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation—Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This Statement is effective for financial statements
for fiscal years ending after December 15, 2002. The Company adopted SFAS No.
148 as of December 31, 2002, and the impact of such adoption did not have a
material impact on the Company's financial statements.
 The
estimated fair value of options granted during 2004 and 2003 was $5.95 and $4.40
per share, respectively. The Company applies Accounting Principles Board Opinion
("APB") No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its incentive stock
option plans. Had compensation cost for the Company's four plans been determined
at the fair value on the grant dates for awards under those plans, consistent
with the method in SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
 2004
    
    2003
    
    2002Net
      income, as reported
    
    $
    13,376,009
    
    $
    12,015,173
    
    $
    11,302,611Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method for all awards, net of related tax effects
    
    
    (389,441
    )
    
    (278,192
    )
    
    (228,057
    )Pro
      forma net income
    
    $
    12,986,568
    
    $
    11,736,981
    
    $
    11,074,554Earnings
      per share:Basic—as
      reported
    
    $
    1.48
    
    $
    1.35
    
    $
    1.27Basic—pro
      forma
    
    $
    1.44
    
    $
    1.32
    
    $
    1.24Diluted—as
      reported
    
    $
    1.44
    
    $
    1.32
    
    $
    1.24Diluted—pro
      forma
    
    $
    1.39
    
    $
    1.28
    
    $
    1.22
 
 The fair
value of options granted under the Company's incentive stock option plans during
2004, 2003 and 2002 was estimated on the date of grant using the Black-Scholes
Single Option-Pricing Model with the following weighted-average assumptions
used:
 
 2004
    
    2003
    
    2002Dividend
      yield
    
    
    2.5
    %
    
    3.1
    %
    
    3.4
    %Expected
      volatility
    
    
    25.5
    %
    
    28.4
    %
    
    17.7
    %Risk-free
      interest rate
    
    
    3.55
    %
    
    3.38
    %
    
    4.77
    %Expected
      life of options
    
    
    7.3
      years
    
    
    7.4
      years
    
    
    7.3
      years
 
 *Accounting
for Derivatives—* The
Company uses interest rate swap agreements to manage its exposure to
fluctuations in interest rates on a portion of its variable rate commercial loan
portfolio. The agreements qualify as cash flow hedges. Gains and losses in the
fair value of a cash flow hedge are recorded to other comprehensive income for
the effective portion of the hedge and would be reclassified to earnings should
the hedge become ineffective. Amounts to be received under the swap agreement
are recognized as an addition to interest income in the Company's consolidated
statements of income during the period in which they accrue. The Company does
not hold any derivative financial instruments for trading purposes.
 In April
2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," resulting in more consistent reporting of contracts as either
derivatives or hybrid instruments. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003, and should be applied
prospectively. Implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003 should continue to be applied in
accordance with their respective effective dates. The Company's adoption of SFAS
No. 149 as of July 1, 2003, did not have a material impact on the Company's
financial statements.
 At
December 31, 2004 and 2003, the Company is party to two swap agreements with
terms expiring in September 2007 that economically hedge a portion of the
interest rate variability in its portfolio of prime rate loans. The agreements
effectively require the Company to pay prime interest rate and receive a fixed
rate of 6.01% from the counter-party on $50 million of loan assets. The fair
value of the swap agreements was ($440,423) and $350,107, inclusive of accrued
interest of $17,944 and $47,458, at December 31, 2004 and 2003, respectively,
and is contained within other assets in the consolidated balance sheets. For the
twelve months ended December 31, 2004 and 2003, the Company recognized interest
income of $849,701 and $318,250, respectively, under the agreements.
 *Accounting
for Bank Owned Life Insurance—* In
February 2004, the Company purchased $25 million in Bank Owned Life Insurance as
a mechanism for funding current and future employee benefit costs. The Company
is the beneficiary of this policy that insures the lives of certain officers of
its subsidiaries. The Company has recognized the cash surrender value under the
insurance policy as an asset in the consolidated balance sheets. Changes in the
cash surrender value are recorded in other operating income.
 *Recent
Accounting Developments—* In
January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities" which was revised in December 2003 by the
issuance of FIN No. 46(R). The Interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46(R) is effective for the Company for
financial statements issued after December 15, 2003. The Company has
participated in the issue of trust preferred securities through trusts
established for such purpose. Effective December 31, 2003, the Company adopted
this statement requiring the Company to deconsolidate the trust preferred
security trusts. Such adoption did not have a material impact on the Company's
financial statements.
  48
  STATE BANCORP, INC. AND SUBSIDIARIES
  In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
requires that certain financial instruments, which previously could be
designated as equity, now be classified as liabilities on the balance sheet. The
effective date of SFAS No. 150 has been indefinitely deferred by the FASB when
certain criteria are met. Although the Company's trust preferred securities meet
such criteria, the trust preferred securities have been deconsolidated under the
provision of FIN No. 46(R) and reclassified as borrowed funds as of December 31,
2003.
 In
March 2004, the FASB Emerging Issues Task Force ("EITF") reached a consensus
regarding EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The consensus provides guidance for
evaluating whether an investment is other-than-temporarily impaired and was
effective for other-than-temporary impairment evaluations made in reporting
periods beginning after June 15, 2004. However, the guidance contained in
paragraphs 10-20 of this Issue has been delayed by FASB Staff Position ("FSP")
EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1,
‘The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments'," posted September 30, 2004. The delay of the effective date for
paragraphs 10-20 will be superseded concurrent with the final issuance of
proposed FSP EITF Issue 03-1-a, "Implementation Guidance for the Application of
Paragraph 16 of EITF Issue No. 03-1, ‘The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments'."
 The
proposed FSP would provide implementation guidance with respect to debt
securities that are impaired solely due to interest rates and/or sector spreads
and analyzed for other-than-temporary impairment. The disclosures continue to be
effective for the Company's financial statements for fiscal years ending after
December 15, 2003, for investments accounted for under SFAS No. 115.
 The
determination of whether a decline in market value is other-than-temporary is
necessarily a matter of subjective judgment. The timing and amount of any
realized losses reported in the Company's financial statements could vary if
management's conclusions were to change as to whether an other-than-temporary
impairment exists. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer and (3) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. In analyzing an
issuer's financial condition, the Company's management considers whether the
securities are issued by the U.S. Government or its agencies, whether downgrades
by bond rating agencies have occurred and industry analysts' reports. The
Company's management currently conducts impairment evaluations at least on a
quarterly basis and has concluded that, at December 31, 2004, there were no
other-than-temporary impairments of the Company's investment securities. During
2004, the Company recognized a $188,332 after-tax charge to earnings
representing the other-than-temporary impairment of one preferred equity
security.
 
 Information
pertaining to securities with gross unrealized losses at December 31, 2004,
aggregated by investment category and length of time that individual securities
have been in a continuous loss position, follows:
 
 Less
      than 12 Months
    
    12
      Months or Longer
    
    TotalGross
    
    
    
    Gross
    
    
    
    GrossUnrealized
    
    Estimated
    
    Unrealized
    
    Estimated
    
    Unrealized
    
    EstimatedLosses
    
    Fair
      Value
    
    Losses
    
    Fair
      Value
    
    Losses
    
    Fair
      ValueSecurities
      Held to Maturity:Government
      Agency securities
    
    $
    (41,384
    )
    $
    29,949,000
    
    $
    —
    
    $
    —
    
    $
    (41,384
    )
    $
    29,949,000Securities
      Available for Sale:Obligations
      of states and political subdivisions
    
    
    (311,301
    )
    
    32,599,067
    
    
    —
    
    
    —
    
    
    (311,301
    )
    
    32,599,067Government
      Agency securities
    
    
    (481,537
    )
    
    131,183,043
    
    
    —
    
    
    —
    
    
    (481,537
    )
    
    131,183,043Corporate
      securities
    
    
    (142,733
    )
    
    19,287,000
    
    
    —
    
    
    —
    
    
    (142,733
    )
    
    19,287,000Mortgage-backed
      securities and collateralized mortgage obligations
    
    
    (1,116,585
    )
    
    128,728,492
    
    
    (235,878
    )
    
    12,555,592
    
    
    (1,352,463
    )
    
    141,284,084Total
      Securities Available for sale
    
    
    (2,052,156
    )
    
    311,797,602
    
    
    (235,878
    )
    
    12,555,592
    
    
    (2,288,034
    )
    
    324,353,194Total
      Securities
    
    $
    (2,093,540
    )
    $
    341,746,602
    
    $
    (235,878
    )
    $
    12,555,592
    
    $
    (2,329,418
    )
    $
    354,302,194
 
 The
securities that have been in a continuous loss position for 12 months or longer
in the table above may be categorized as either: (1) Adjustable rate
mortgage-backed securities totaling $11,197,806 or (2) Fixed rate
mortgage-backed securities totaling $1,357,786.
 The
market value, and therefore the loss position, for each type of bond responds
differently to market conditions. In management's opinion, those market
conditions are temporary in nature and provide the basis for the Company's
belief that the declines are temporary. The adjustable rate securities have
coupons that reset at some pre-determined point to the then current market
rates. When the coupon is reset to current market rates, the security's market
value also resets, reflecting a current market value and therefore, in all
likelihood, removing any loss conditions.
 Fixed
rate mortgage-backed securities not only respond to changes in interest rates,
but changes in the amount of cash flow as determined by prepayments. When
interest rates fall, mortgage holders are induced to refinance their existing
loans at a lower rate, causing prepayments to occur. This increase in cash flow
effectively reduces the yield on the security and the market will tend to value
those securities lower.
  49
  STATE BANCORP, INC. AND SUBSIDIARIES
  However,
as prepayments abate as a result of a number of factors including higher
interest rates and burnout, the reduced cash flow on a fixed rate
mortgage-backed security effectively raises the yield on the bond and the market
will value higher.
 The
securities that have been in a continuous loss position for 12 months or longer
in the prior table were purchased in an environment of historically low interest
rates and the Company expects the likelihood of an increase in interest rates to
be greater than the likelihood of a decline in interest rates. Higher interest
rates will cause the adjustable mortgage rate securities to reset their coupons
at higher levels and therefore, their market value will increase to reflect the
higher coupon. The Company anticipates a reduction in prepayments on the fixed
rate mortgage-backed securities. The reduced cash flow would increase the yield
and the market value should reflect the higher yield. It is important to note
that every category of security mentioned above will mature at a specified date
and at par value. Any temporary changes in market value due to market rates will
have no impact on the security's ultimate value at maturity.
 Management
of the Company believes the securities are providing an attractive level of
interest income and, as the Bank has access to various alternate liquidity
sources, the ability to hold these securities until maturity exists. The Bank
has no intention now, or in the foreseeable future, of liquidating these
securities; however, they remain classified as "available for sale" and could be
sold, regardless of their market value, should business conditions warrant such
sale.
 In
December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." This
Statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation," and supercedes APB No. 25, "Accounting for Stock Issued to
Employees," and its related implementation guidance. This Statement focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions and is effective for the Company
for financial statements issued after June 15, 2005. The Company's management is
still in the process of evaluating the impact of applying SFAS No. 123(R) on the
Company's financial statements.
 *Reclassifications—* Certain
reclassifications have been made to prior years' amounts to conform them to the
current year's presentation.
  
 2.
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE
 The
amortized cost, gross unrealized gains and losses and estimated fair value of
securities held to maturity and securities available for sale at December 31,
2004 and 2003, are as follows:
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedDecember
      31, 2004
    
    Cost
    
    Gains
    
    Losses
    
    Fair
      ValueSecurities
      Held to Maturity:Government
      Agency securities
    
    $
    29,990,384
    
    $
    —
    
    $
    (41,384
    )
    $
    29,949,000Securities
      Available for Sale:Obligations
      of states and political subdivisions
    
    
    53,247,451
    
    
    644,097
    
    
    (311,301
    )
    
    53,580,247Government
      Agency securities
    
    
    162,313,981
    
    
    165,974
    
    
    (481,537
    )
    
    161,998,418Corporate
      securities
    
    
    38,321,076
    
    
    25,000
    
    
    (142,733
    )
    
    38,203,343Mortgage-backed
      securities and collateralized mortgage obligations
    
    
    259,161,494
    
    
    1,108,459
    
    
    (1,352,463
    )
    
    258,917,490Total
      Securities Available for Sale
    
    
    513,044,002
    
    
    1,943,530
    
    
    (2,288,034
    )
    
    512,699,498Total
      Securities
    
    $
    543,034,386
    
    $
    1,943,530
    
    $
    (2,329,418
    )
    $
    542,648,498
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedDecember
      31, 2003
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair
      ValueSecurities
      Held to Maturity:Obligations
      of states and political subdivisions
    
    $
    65,400
    
    $
    1,559
    
    $
    —
    
    $
    66,959Government
      Agency securities
    
    
    55,000,000
    
    
    165,000
    
    
    —
    
    
    55,165,000Total
      Securities Held to Maturity
    
    
    55,065,400
    
    
    166,559
    
    
    —
    
    
    55,231,959Securities
      Available for Sale:Obligations
      of states and political subdivisions
    
    
    94,528,691
    
    
    3,732,529
    
    
    (114,168
    )
    
    98,147,052Government
      Agency securities
    
    
    91,875,579
    
    
    575,620
    
    
    (2,710
    )
    
    92,448,489Corporate
      securities
    
    
    40,622,586
    
    
    293,805
    
    
    (262,541
    )
    
    40,653,850Mortgage-backed
      securities and collateralized mortgage obligations
    
    
    281,291,542
    
    
    1,005,121
    
    
    (1,581,368
    )
    
    280,715,295Total
      Securities Available for Sale
    
    
    508,318,398
    
    
    5,607,075
    
    
    (1,960,787
    )
    
    511,964,686Total
      Securities
    
    $
    563,383,798
    
    $
    5,773,634
    
    $
    (1,960,787
    )
    $
    567,196,645
  50
  STATE BANCORP, INC. AND SUBSIDIARIES
  The
amortized cost and estimated fair value of securities held to maturity and
securities available for sale at December 31, 2004, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
 
 Amortized
    
    EstimatedCost
    
    Fair
      ValueSecurities
      Held to Maturity:Due
      after ten years
    
    $
    29,990,384
    
    $
    29,949,000Securities
      Available for Sale:Due
      in one year or less
    
    $
    15,199,376
    
    $
    15,175,288Due
      after one year through five years
    
    
    92,178,120
    
    
    91,844,917Due
      after five years through ten years
    
    
    59,605,873
    
    
    59,675,535Due
      after ten years
    
    
    86,899,139
    
    
    87,086,268Subtotal
    
    
    253,882,508
    
    
    253,782,008Mortgage-backed
      securities andcollateralized mortgage obligations
    
    
    259,161,494
    
    
    258,917,490Total
      Securities Available for Sale
    
    $
    513,044,002
    
    $
    512,699,498
 
 In 2004,
2003 and 2002, gross gains of $3,021,312, $6,620,272 and $2,244,632 and gross
losses of $871,724, $778,300 and $548,182, respectively, were realized on the
sale of securities available for sale.
 At
December 31, 2004, the Bank did not own any securities held to maturity or
securities available for sale for any one issuer in excess of 10% of
stockholders' equity.
 Securities
held to maturity and securities available for sale with an amortized cost of
$468,170,086 and $457,978,728 and an estimated fair value of $467,596,442 and
$458,023,812 at December 31, 2004 and 2003, respectively, were pledged for
public deposits, securities sold under agreements to repurchase, other
short-term borrowings and fiduciary purposes.
 
 3.
LOANS—NET
 At
December 31, 2004 and 2003, net loans consisted of the following:
 
 2004
    
    2003Commercial
      and industrial
    
    $
    277,398,958
    
    $
    278,442,678Real
      estate—mortgage
    
    
    374,307,089
    
    
    334,945,969Real
      estate—construction
    
    
    73,648,204
    
    
    54,292,612Lease
      receivables
    
    
    34,844,406
    
    
    23,962,387Loans
      to individuals
    
    
    8,723,662
    
    
    7,843,380Tax
      exempt and other
    
    
    9,496,384
    
    
    11,956,583Gross
      loans
    
    
    778,418,703
    
    
    711,443,609Less:Unearned
      income
    
    
    227,475
    
    
    227,475Allowance
      for probable loan losses
    
    
    12,020,443
    
    
    10,732,078Loans—net
    
    $
    766,170,785
    
    $
    700,484,056
 
 The
Bank's real estate loans and loan commitments are primarily for properties
located throughout Long Island, New York. It is the Bank's policy to spread risk
among a broad range of industries and to monitor concentration and associated
levels of risk on an ongoing basis. As of December 31, 2004 and 2003, the
concentration of loans exceeding 10% of total loans was the Bank's loans
totaling $129,906,000 and $105,766,000, respectively, to real estate operators,
lessors and developers and $112,072,000 and $81,562,000, respectively, to
building construction contractors. Repayment of these loans is dependent in part
upon the overall economic health of the Company's market area and current real
estate values. Credit losses arising from lending transactions in these
industries compare favorably with the Bank's credit loss experience on its
portfolio as a whole. The Bank considers the credit circumstances, the nature of
the project and loan to value ratios for all real estate loans.
 The
Bank makes loans to its directors and executive officers, and other related
parties, in the ordinary course of its business. These loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not bear more than normal credit risk. Loans made to directors and executive
officers, either directly or indirectly, totaled $2,500,139 and $2,034,758 at
December 31, 2004 and 2003, respectively. New loans totaling $905,239 and
$1,890,768 were extended and payments of $439,858 and $864,057 were received
during 2004 and 2003, respectively, on these loans.
 Activity
in the allowance for probable loan losses for the three years ended December 31,
2004 is as follows:
 
 2004
    
    2003
    
    2002Balance,
      January 1
    
    $
    10,732,078
    
    $
    10,045,516
    
    $
    9,255,414Provision
      charged to income
    
    
    4,506,000
    
    
    3,935,004
    
    
    3,560,000Charge-offs,
      net of recoveriesof $187,323, $303,824 and $201,645
    
    
    (3,217,635
    )
    
    (3,248,442
    )
    
    (2,769,898
    )Balance,
      December 31
    
    $
    12,020,443
    
    $
    10,732,078
    
    $
    10,045,516
 
 As of
December 31, 2004, 2003 and 2002, the recorded investment in loans
that are considered to be impaired is summarized below.
 
 2004
    
    2003
    
    2002Amount
      measured using the present value of expected future cash
      flows, discounted at each loan’s  effective interest rate
    
    $
    —
    
    $
    433,088
    
    $
    3,352,079Impaired
      collateral -dependent loans
    
    
    3,275,403
    
    
    7,747,117
    
    
    1,602,115Total
      amount evaluatedas impaired
    
    $
    3,275,403
    
    $
    8,180,205
    
    $
    4,954,194Average
      impaired loan balance
    
    $
    4,579,424
    
    $
    7,814,272
    
    $
    6,486,261Interest
      income recognized onimpaired loans
    
    $
    71,665
    
    $
    67,395
    
    $
    7,903
  51
  STATE BANCORP, INC. AND
SUBSIDIARIES
  As
a result of the Bank's measurement of impaired loans, an allowance for probable
loan losses of approximately $1,492,000 and $2,755,000 was established for
$3,275,403 and $7,267,664 of the total impaired loans at December 31, 2004 and
2003, respectively. No specific allowance was required for the remaining balance
of impaired loans in 2003.
 At
December 31, 2004 and 2003, loans with unpaid principal balances on which the
Bank is no longer accruing interest income were $5,273,807 and $8,665,653,
respectively. Interest income would have been approximately $137,000, $372,000
and $358,000 greater in 2004, 2003 and 2002, respectively, had these loans been
current. Interest income on total nonaccrual loans, which is recorded only when
received, amounted to approximately $31,000, $24,000 and $0 for 2004, 2003 and
2002, respectively.
 At
December 31, 2004 and 2003, there were no restructured loans still accruing
interest. Interest income would have been approximately $3,000 greater in 2002
had restructured accruing loans performed according to their original terms.
 At
December 31, 2004 and 2003, commercial real estate mortgages of $151,439,130 and
$129,842,977, respectively, were pledged at the Federal Home Loan Bank of New
York ("FHLB").
 
 4.
BANK PREMISES AND EQUIPMENT—NET
 At
December 31, 2004 and 2003, Bank premises and equipment consisted of the
following:
 
 AccumulatedDepreciation/
    
    Net
      BookCost
    
    Amortization
    
    ValueDecember
      31, 2004:Building
    
    $
    2,537,344
    
    $
    1,161,351
    
    $
    1,375,993Leasehold
      improvements
    
    
    3,966,258
    
    
    1,548,744
    
    
    2,417,514Furniture
      and fixtures
    
    
    4,924,979
    
    
    3,199,993
    
    
    1,724,986Computer
      equipment and software
    
    
    5,167,025
    
    
    4,194,153
    
    
    972,872Total
    
    $
    16,595,606
    
    $
    10,104,241
    
    $
    6,491,365December
      31, 2003:Building
    
    $
    2,526,651
    
    $
    1,076,300
    
    $
    1,450,351Leasehold
      improvements
    
    
    3,881,030
    
    
    1,296,134
    
    
    2,584,896Furniture
      and fixtures
    
    
    4,695,761
    
    
    2,870,784
    
    
    1,824,977Computer
      equipmentand software
    
    
    4,801,070
    
    
    3,577,446
    
    
    1,223,624Total
    
    $
    15,904,512
    
    $
    8,820,664
    
    $
    7,083,848
 
 Depreciation
expense totaled $1,519,631 and $1,615,482 for the years ended December 31, 2004
and 2003, respectively.
 
 5.
OTHER ASSETS
 At
December 31, 2004 and 2003, other assets consisted of the following:
 
 2004
    
    2003Interest
      receivable—investments
    
    $
    4,048,235
    
    $
    3,114,683Interest
      receivable—loans
    
    
    2,823,627
    
    
    2,463,622Net
      deferred income taxes
    
    
    4,089,815
    
    
    1,520,976Current
      income tax receivable
    
    
    —
    
    
    519,938Prepaid
      expenses
    
    
    1,115,118
    
    
    1,092,332Excess
      market value of leases acquired(net of accumulated amortization of
      $439,654 and $403,517)
    
    
    182,812
    
    
    218,949Goodwill
      (excess of cost over fair valueof assets acquired, net of
      accumulated amortization of $110,000)
    
    
    2,390,924
    
    
    2,390,924Cash
      surrender value of life insurance policies
    
    
    1,621,424
    
    
    1,640,424Customer
      sweep accounts, net balances
    
    
    1,103,000
    
    
    —Other
      real estate owned
    
    
    2,650,000
    
    
    2,650,000Other
    
    
    2,099,824
    
    
    3,028,256Total
    
    $
    22,124,779
    
    $
    18,640,104
 
 6.
LINES OF CREDIT AND BORROWED FUNDS
 At
December 31, 2004 and 2003, correspondent banks extended unsecured lines of
credit aggregating $47,000,000 and $38,450,000, respectively, as well as
$10,000,000 and $10,000,000, respectively, in secured lines, to the Bank for the
purchase of Federal funds and for foreign exchange transactions. Federal funds
purchased and securities sold under agreements to repurchase generally mature
within one to seven days from the transaction date.
 In
addition to the above, the Bank may use a secured line of credit with the FHLB
for overnight funding or on a term basis to match fund asset purchases. Based
upon a multiple of the FHLB stock that the Bank currently owns combined with
approximately $221,000,000 of collateral, including approximately $151,000,000
in commercial real estate mortgages, it currently has pledged at FHLB,
approximately $123,000,000 of this line may be drawn on a term or overnight
basis. The FHLB line is renewed annually.
 As
a result of the acquisition of its leasing subsidiary, SWLC, in February of
2001, another component of the Bank's borrowed funds is obligations under
equipment lease financing that are secured by the underlying
collateral.
  52
  STATE BANCORP, INC. AND SUBSIDIARIES
  The
following summarizes borrowed funds at December 31, 2004 and 2003:
 Weighted-Average
      InterestOutstanding
      at
    
    Average
      Amount
    
    Rate
      on AverageDecember
      31,
    
    Outstanding
    
    Amount
      Outstanding2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Federal
      funds purchased
    
    $
    —
    
    $
    10,000,000
    
    $
    7,021,000
    
    $
    6,778,000
    
    
    1.41
    %
    
    1.36
    %Securities
      sold under agreements to repurchase
    
    $
    —
    
    $
    31,601,147
    
    $
    41,652,000
    
    $
    17,252,000
    
    
    1.44
    %
    
    1.29
    %FHLB—overnight
      and term
    
    $
    32,000,000
    
    $
    50,000,000
    
    $
    77,390,000
    
    $
    27,485,000
    
    
    1.41
    %
    
    1.25
    %Obligations
      under equipment lease financing
    
    $
    266,489
    
    $
    714,149
    
    $
    563,000
    
    $
    1,965,000
    
    
    11.60
    %
    
    9.21
    %
 
 7.
JUNIOR SUBORDINATED DEBENTURES
 On
December 19, 2003, State Bancorp Capital Trust II ("Trust II"), a statutory
trust created under the Delaware Statutory Trust Act that is a subsidiary of the
Company, issued $10,000,000 of capital securities. The coupon rate is
three-month LIBOR plus 285 basis points and is reset quarterly. Trust II's
obligations under the capital securities issued are fully and unconditionally
guaranteed by the Company.
 The
proceeds from the sale of the capital securities of Trust II were utilized by
Trust II to invest in $10,000,000 of junior subordinated debentures of the
Company. The debentures bear a coupon rate of three-month LIBOR plus 285 basis
points and is reset quarterly. The debentures are unsecured and rank subordinate
and junior in right of payment to all indebtedness, liabilities and obligations
of the Company. The debentures represent the sole assets of Trust II. The
Company has the right to optionally redeem the debentures prior to the maturity
date of January 23, 2034, on or after January 23, 2009, at par. Under the
occurrence of certain events, the Company may redeem the debentures in whole or
in part prior to January 23, 2009.
 Trust
II is an unconsolidated wholly owned subsidiary of the Company, has no
independent operations and issued securities that contained the full and
unconditional guarantee of its parent, the Company.
 On
October 29, 2002, State Bancorp Capital Trust I ("Trust I"), a statutory trust
created under the Delaware Statutory Trust Act that is a subsidiary of the
Company, issued $10,000,000 of capital securities. The coupon rate is
three-month LIBOR plus 345 basis points and is reset quarterly. Trust I's
obligations under the capital securities issued are fully and unconditionally
guaranteed by the Company.
 The
proceeds from the sale of the capital securities of Trust I were utilized by
Trust I to invest in $10,000,000 of junior subordinated debentures of the
Company. The debentures bear a coupon rate of three-month LIBOR plus 345 basis
points and is reset quarterly. The debentures are unsecured and rank subordinate
and junior in right of payment to all indebtedness, liabilities and obligations
of the Company. The debentures represent the sole assets of Trust I. The Company
has the right to optionally redeem the debentures prior to the maturity date of
November 7, 2032, on or after November 7, 2007, at par. Under the occurrence of
certain events, the Company may redeem the debentures in whole or in part prior
to November 7, 2007.
 Trust
I is an unconsolidated wholly owned subsidiary of the Company, has no
independent operations and issued securities that contained the full and
unconditional guarantee of its parent, the Company.
 During
2004, the weighted average rate on all of the Company's junior subordinated
debentures was 4.63%.
 
 8.
INCOME TAXES
 The
components of income tax expense for the years ended December 31, 2004, 2003 and
2002, are as follows:
 
 2004
    
    2003
    
    2002Federal:Current
    
    $
    5,845,209
    
    $
    3,950,960
    
    $
    3,877,081Deferred
    
    
    (884,000
    )
    
    517,438
    
    
    (156,556
    )Subtotal
    
    
    4,961,209
    
    
    4,468,398
    
    
    3,720,525State:Current
    
    
    381,334
    
    
    816,650
    
    
    479,323Deferred
    
    
    19,696
    
    
    (33,484
    )
    
    (169,069
    )Subtotal
    
    
    401,030
    
    
    783,166
    
    
    310,254Total
    
    $
    5,362,239
    
    $
    5,251,564
    
    $
    4,030,779
  
 Total
income tax expense was different from the amounts computed by applying the
statutory Federal income tax rate to income before income taxes due to the
following:
 2004
    
    2003
    
    2002%
      of Pretax
    
    
    
    %
      of Pretax
    
    
    
    %
      of PretaxAmount
    
    Income
    
    Amount
    
    Income
    
    Amount
    
    IncomeIncome
      tax expense at statutory rate
    
    $
    6,558,387
    
    
    35.0
    %
    $
    6,043,358
    
    
    35.0
    %
    $
    5,366,687
    
    
    35.0
    %Surtax
      exemption
    
    
    (47,783
    )
    
    (0.3
    )
    
    (172,667
    )
    
    (1.0
    )
    
    (153,334
    )
    
    (1.0
    )(Reduction)
      increase in taxes resulting from:Tax-exempt
      interest on investments,net of interest expense
      disallowed
    
    
    (929,975
    )
    
    (5.0
    )
    
    (1,122,087
    )
    
    (6.5
    )
    
    (1,312,877
    )
    
    (8.6
    )Bank
      owned life insurance
    
    
    (305,471
    )
    
    (1.6
    )
    
    —
    
    
    —
    
    
    —
    
    
    —State
      income tax—net of Federal tax benefit
    
    
    261,692
    
    
    1.4
    
    
    516,890
    
    
    3.0
    
    
    204,768
    
    
    1.3Other
    
    
    (174,611
    )
    
    (0.9
    )
    
    (13,930
    )
    
    (0.1
    )
    
    (74,465
    )
    
    (0.4
    )Income
      tax expense
    
    $
    5,362,239
    
    
    28.6
    %
    $
    5,251,564
    
    
    30.4
    %
    $
    4,030,779
    
    
    26.3
    %
  53
  STATE BANCORP, INC. AND SUBSIDIARIES
  At
December 31, 2004 and 2003, the deferred tax assets and liabilities are composed
of the following:
 
 December
      31,
    
    2004
    
    2003Deferred
      tax assets:Allowance
      for probable loan losses
    
    $
    4,836,576
    
    $
    4,139,830Intangible
      assets
    
    
    198,782
    
    
    303,684AMT
      credits, state NOL and other
    
    
    32,232
    
    
    362,282Subtotal
    
    
    5,067,590
    
    
    4,805,796Deferred
      tax liabilities:Unrealized
      holding loss (gain) on securities available for sale
    
    
    323,915
    
    
    (1,380,618
    )Leasing
      activities
    
    
    (1,301,690
    )
    
    (1,904,202
    )Subtotal
    
    
    (977,775
    )
    
    (3,284,820
    )Net
      deferred tax assets
    
    $
    4,089,815
    
    $
    1,520,976
 
 The
deferred tax assets and liabilities are netted and presented in  a single
amount, which is included in other assets in the accompanying consolidated
balance sheets. The income tax expense associated with net security gains
amounted to $725,818, $2,111,848 and $585,574 in 2004, 2003 and 2002,
respectively.
 
 9.
INCENTIVE STOCK OPTION PLANS
 Under
the terms of the Company's incentive stock option plans adopted in January 1987,
April 1994, February 1999 and February 2002, options have been granted to
certain key personnel that entitle each holder to purchase shares of the
Company's common stock. The option price is the higher of the fair market value
or the book value of the shares at the date of grant. Such options are
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.
 
 
 At
December 31, 2004, 377,683 options for the purchase of 483,710 shares were
exercisable, and 456,224 shares were reserved for possible issuance. All stock
options held by a participant will become immediately exercisable in the event
of a change in control of the Company, as defined in the Company's stock option
plans. A summary of stock option activity follows after giving retroactive
effect to all stock splits and dividends:
 
 Option
      Price
    
    
    
    Weighted-AverageNumber
    
    Number
    
    (Approximate
      Fair
    
    
    
    Exercise
      Priceof
      Options
    
    of
      Shares
    
    Value
      at Date of Grant)
    
    Total
    
    Per
      ShareOutstanding—January
      1, 2002
    
    
    428,075
    
    
    602,744
    
    $
    12.625-$
      23.00
    
    $
    6,697,918
    
    $
    11.11Granted
    
    
    126,850
    
    
    146,727
    
    $
    17.30
    
    
    2,194,505
    
    $
    14.96Exercised
    
    
    (17,093
    )
    
    (32,995
    )
    $
    12.625-$
      17.25
    
    
    (222,644
    )
    $
    6.75Cancelled
      or forfeited
    
    
    (3,250
    )
    
    (3,904
    )
    $
    13.00-$
      17.30
    
    
    (51,359
    )
    $
    13.16Outstanding—December
      31, 2002
    
    
    534,582
    
    
    712,572
    
    $
    12.625-$
      23.00
    
    
    8,618,420
    
    $
    12.09Granted
    
    
    124,900
    
    
    137,639
    
    $
    18.00
    
    
    2,248,200
    
    $
    16.33Exercised
    
    
    (31,856
    )
    
    (57,375
    )
    $
    12.625-$
      23.00
    
    
    (436,103
    )
    $
    7.60Cancelled
      or forfeited
    
    
    (1,200
    )
    
    (1,354
    )
    $
    17.30-$
      18.00
    
    
    (21,180
    )
    $
    15.64Outstanding—December
      31, 2003
    
    
    626,426
    
    
    791,482
    
    $
    13.00-$
      23.00
    
    
    10,409,337
    
    $
    13.14Granted
    
    
    129,100
    
    
    135,551
    
    $
    24.14
    
    
    3,116,474
    
    $
    22.99Exercised
    
    
    (49,074
    )
    
    (79,212
    )
    $
    13.00-$23.00
    
    
    (719,650
    )
    $
    9.08Cancelled
      or forfeited
    
    
    (6,039
    )
    
    (6,883
    )
    $
    13.00-$24.14
    
    
    (111,059
    )
    $
    16.13Outstanding—December
      31, 2004****
    
    
    700,413
    
    
    840,938
    
    $
    13.00-$23.00
    
    $
    12,695,102
    
    $
    15.09
 
 The
following summarizes shares subject to purchase from options outstanding and
exercisable as of December 31, 2004:
 
 Weighted-AverageShares
    
    Remaining
    
    Weighted-Average
    
    Shares
    
    Weighted-AverageRange
      of Exercise Prices
    
    Outstanding
    
    Contractual
      Life
    
    Exercise
      Price
    
    Exercisable
    
    Exercise
      Price$
      7.58-$ 9.90
    
    
    92,116
    
    
    2.5
      years
    
    $
    9.43
    
    
    92,116
    
    $
    9.43$12.34-$14.94
    
    
    408,857
    
    
    4.8
      years
    
    $
    13.25
    
    
    287,254
    
    $
    12.99$15.70-$22.99
    
    
    339,965
    
    
    7.1
      years
    
    $
    18.83
    
    
    104,340
    
    $
    15.93840,938
    
    
    5.5
      years
    
    $
    15.09
    
    
    483,710
    
    $
    12.95
 
 The
following presents information on options exercisable at December 31, 2004, 2003
and 2002:
 
 At
      December 31,
    
    2004
    
    2003
    
    2002Number
      of options exercisable
    
    
    377,683
    
    
    305,866
    
    
    232,629Number
      of shares exercisable
    
    
    483,710
    
    
    419,806
    
    
    347,280Weighted-average
      exercise price
    
    $
    12.95
    
    $
    12.00
    
    $
    11.03
  54
  STATE BANCORP, INC. AND SUBSIDIARIES
  10.
EMPLOYEE BENEFIT PLANS
 The
Bank has an Employee Stock Ownership Plan (the "ESOP") which is a defined
contribution plan covering substantially all full-time employees. Bank
contributions to the ESOP represent a minimum of 3% of an employee's annual
gross compensation. Employees become 20% vested after two years of employment,
with an additional 20% vesting each year. Full vesting takes place upon the
completion of six years of employment. Employee contributions are not permitted.
At December 31, 2004, the ESOP had all of its assets invested in the Company's
common stock. The Bank funds all amounts when due.
 In
conjunction with the Rights Offering in July 1996, the ESOP borrowed $1,200,000
from the Company to purchase 175,330 (adjusted for stock dividends) of the
Company's shares. As such, the Company recorded a deduction from stockholders'
equity to reflect the unearned compensation for the shares. As the unearned
shares were released from collateral and allocated among participants, the
Company recognized compensation expense equal to the current market price of the
shares released. As of December 31, 2003, all shares have been released from
collateral and allocated among participants. Compensation expense of $108,227 is
applicable to the 5,845 shares allocated in 2003. Contributions under the ESOP
charged to operations amounted to $1,382,645, $1,229,019 and $1,144,799 in 2004,
2003 and 2002, respectively.
 The
Bank has a 401(k) Retirement Plan and Trust (the "401(k) Plan"), which covers
substantially all full-time employees. Employees may elect to contribute up to
16% of their annual gross compensation to the 401(k) Plan, and the Bank will
match one-half of the employee's contribution up to a maximum of 3% of the
employee's annual gross compensation. Employees are fully vested in both their
own and the Bank's contributions. Bank contributions under the 401(k) Plan
amounted to $437,757, $408,118 and $322,564 in 2004, 2003 and 2002,
respectively. The Bank funds all amounts when due. At December 31, 2004,
contributions to the 401(k) Plan were invested in bond, equity, money market,
capital appreciation, international equity, emerging markets equity or
diversified funds as directed by each employee.
 During
1995, the Bank adopted nonqualified deferred compensation plans (the "Plans")
for each officer for whom contributions under the ESOP are limited by the
applicable provisions of the Internal Revenue Code. Bank contributions under the
Plans totaled $90,366, $71,221 and $70,773 in 2004, 2003 and 2002,
respectively.
 
 11.
COMMITMENTS AND CONTINGENT LIABILITIES
 *Leases—* The
Bank is obligated under various leases covering certain equipment, branches,
office space and the land on which its head office is built. The minimum
payments under these leases, certain of which contain
escalation clauses, are:
 
 2005
    
    $
    2,516,8022006
    
    
    1,994,6102007
    
    
    1,957,6292008
    
    
    1,936,6922009
    
    
    1,769,442Remainder
      to 2012
    
    
    3,315,386Total
    
    $
    13,490,561
 
 Rent
expense was approximately $2,394,000, $2,281,000 and $2,099,000 for 2004, 2003
and 2002, respectively.
 *Directors'
Incentive Retirement Plan—* The
Company has a Directors' Incentive Retirement Plan for former directors of the
Company who elect to retire after having completed certain minimum service
requirements. Under the retirement plan, directors who elect to retire are
entitled to receive, for a period of five years after such retirement, certain
compensation, as defined in the retirement plan, as long as such director
continues to consult with the Company in an advisory capacity (or, if the
director expires prior to the completion of the consulting period, the
beneficiary or estate designated by the director is entitled to receive such
remaining compensation).
 In 1992,
the Company adopted a new retirement plan, whereby five individuals (four
directors and the secretary to the Board of Directors), who had been eligible to
receive benefits under the old retirement plan, agreed to cancel and surrender
their rights in the old retirement plan in exchange for the terms of the new
retirement plan. The new retirement plan provides for the payment of certain
compensation annually to these five individuals through March 1, 2007. These
individuals must be available to consult with the Company in an advisory
capacity during this period (or, if the director or secretary expires prior to
the completion of the consulting period, the beneficiary or estate designated by
the director or secretary is entitled to receive such remaining compensation).
 *Directors'
Stock Plan—* The
Company approved a Directors' Stock Plan in 1998 for each outside director and
the secretary to the Board of Directors. Pursuant to the plan, on January 1,
1999 and 2000, each participant received an award of share credits for 100
shares of Company Stock. On January 1, 2001, 2002 and 2003, each participant
received an award of 200 share credits. On January 1, 2004, each participant
received an award of share credits calculated as follows: (i) for January 1,
2003 through June 30, 2003, an award of 100 share credits, and (ii) for July 1,
2003 through December 31, 2003, an award of share credits equal in amount to
$7,000 divided by the market value of one share of Stock as of December 31,
2003. Effective as of January 1 of each calendar year starting January 1, 2005,
each participant will be granted an award of share credits in respect of the
preceding year in an amount equal to $14,000 divided by the market value of one
share of Stock as of the last reported sale price during the last calendar year.
All awards are pro-rated where a participant did not serve for all of the
preceding year. After termination of service as a director or secretary, all
awards are paid in shares of stock to the participant, or, in the case of death,
to his or her designated beneficiary or estate. There are remaining 133,725
shares reserved for possible issuance. During 2004 and 2003, 1,252 and 957
shares, respectively, were distributed to retired directors.
  55
  STATE BANCORP, INC. AND SUBSIDIARIES
  During
2004, 2003 and 2002, the Bank charged approximately $243,000, $202,000 and
$128,000, respectively, to operations relating to the retirement and stock
plans.
 *Severance
Commitments—* The
Company has five Executive Severance Plans (the "Plans") for certain key
executives who are full-time employees with the title of Senior Vice President
and above and who are designated as Plan participants by the Board of Directors.
The Plans provide for certain rights accruing to participants in the event of a
termination of the participant's employment within one year after a change in
control of the Company. These rights include a cash payment and the continuation
of certain employee benefits. In addition, all stock options held by a
participant will become immediately exercisable. In the event that the
participant enters into an employment contract, as defined in the Plans, all
rights to the severance payment and other benefits set forth above will
terminate. No amounts have been paid or accrued under the Plans.
 *Pending
Claims and Contingent Liabilities—* The
largest component of the Company's legal expenses relates to ongoing litigation
arising out of the Bank's deposit relationship with Island Mortgage Network,
Inc. ("Island Mortgage" or "IMN") and its affiliates. These expenses totaled
$2.3 million, $3.8 million and $3.3 million in 2004, 2003 and 2002,
respectively. The Company expects to incur additional costs related to this
litigation during 2005; however, these costs are not specifically quantifiable
at this point in time.
 Island
Mortgage established and maintained dozens of deposit accounts at State Bank of
Long Island ("State Bank" or the "Bank") commencing in mid-February 1999 and
continuing through early July 2000. Island Mortgage was principally engaged in
offering and providing mortgages to consumers. Island Mortgage apparently
financed its operations in significant part through the use of loans and/or
revolving lines of credit provided by lenders not related to the Bank. State
Bank never had a lending relationship with Island Mortgage.
 On
June 30, 2000, the Banking Department of the State of New York suspended Island
Mortgage's mortgage banker license. On July 19, 2000, Island Mortgage and its
publicly held parent company, AppOnline.com, Inc., filed a petition under
Chapter 11 of the Bankruptcy Code in the Eastern District of New York.
Subsequently, certain of Island Mortgage's lenders filed an involuntary
bankruptcy petition against Action Abstract, Inc., an entity to which they
apparently had regularly wired funds in connection with their dealings with
Island Mortgage. At the request of the Trustee in the Island Mortgage bankruptcy
case, various bankruptcy cases involving Island Mortgage entities were later
substantively consolidated.
 In
the course of those bankruptcy cases, it has been alleged that Island Mortgage
engaged in a widespread pattern of fraud directed at lenders, title agents,
closing companies and others with whom Island Mortgage regularly dealt. A number
of Island Mortgage's creditors have since asserted that the Bank participated in
Island Mortgage's alleged fraudulent scheme. Currently, there are three Island
Mortgage-related litigations pending in which claims have been asserted against
State Bank (and, in one case, State Bank's parent corporation State Bancorp,
Inc.) Those litigations are:
 —
    *Broward
      Title Co. v. Alan Jacobs, et al.,*Adv.
      Proc. No. 01-8181, Bankruptcy Court for the Eastern District of New York.
      On or about July 9, 2002, Broward's motion to sever its claims against the
      Bank (and certain other defendants) was granted, allowing Broward to
      conduct a non-jury trial of its claims against the remaining defendants in
      the bankruptcy court. Broward's claims against State Bank and those other,
      severed defendants were referred to the United States District Court for
      the Eastern District of New York on or about August 6, 2002. Since that
      time, Broward has not made any affirmative attempts to prosecute its case
      against State Bank in the district court, although it may attempt to do so
      at a later date.
  56
  STATE BANCORP, INC. AND SUBSIDIARIES
  —
    *Household
      Commercial Financial Services, Inc., et al. v. Action Abstract, Inc., et
      al.,*Adv.
      Proc. No. 02-8167, Bankruptcy Court for the Eastern District of New York.
      On or about June 4, 2002, plaintiffs commenced this adversary proceeding
      with respect to State Bank. The Complaint alleges that plaintiffs extended
      lines of credit to, and entered into mortgage purchase agreements with,
      defendant Island Mortgage. According to the Complaint, millions of dollars
      of funds that plaintiffs deposited into State Bank accounts maintained by
      Island Mortgage and its related entities to fund mortgages were
      misappropriated as the result of Island Mortgage's alleged scheme to
      defraud plaintiffs and unjustly enrich defendants. Plaintiffs claim the
      following with respect to State Bank: 1) the Bank aided and abetted the
      allegedly fraudulent scheme perpetrated by Island Mortgage; 2) the Bank
      aided and abetted in a breach of the fiduciary duties an Island Mortgage
      affiliate allegedly owed to plaintiffs; and, 3) the Bank was negligent in
      failing to recognize and act on signs that Island Mortgage was allegedly
      misappropriating the funds plaintiffs advanced to Island Mortgage.
      Plaintiffs claim they are entitled to not less than $52 million, plus
      interest and punitive damages.
 On January 31, 2005, the bankruptcy
      court ruled on State Bank's motion for summary judgment. The plaintiffs'
      claims for negligence and aiding and abetting a breach of fiduciary duty
      were dismissed. The claim for aiding and abetting fraud was not dismissed,
      although the court ruled that one of the plaintiffs (Matrix) could not
      seek damages for the period after June 6, 2000. It is unknown at this time
      whether any of the plaintiffs will seek reconsideration of the summary
      judgment decision by the bankruptcy court or will seek to appeal the
      summary judgment decision to the district court.
 —
    *Moritz,
      et al. v. National Settlement Services Corp., et al.,*Civil
      Action No. 3:00 CV 426 MU, Western District of North Carolina. State Bank
      and the plaintiffs have entered into a binding agreement to settle the
      case for $20 thousand, the money has been paid, and the releases have been
      exchanged and are fully operative. The case is expected to be formally
      dismissed shortly.
 
 A
separate Island Mortgage-related litigation, *Alan
M. Jacobs, as Chapter 11 Trustee v. State Bank of Long Island,* Adv.
Proc. No. 02-8157, Bankruptcy Court for the Eastern District of New York, was
settled in mid-2004. Pursuant to the settlement agreement, approved by the court
on June 8, 2004, the Bank paid the Island Mortgage estates $223 thousand, while
at the same time the Bank was authorized to, and did, exercise its right to
set-off $123 thousand from accounts that Island mortgage maintained at the Bank.
The parties have exchanged general releases, and all of Island Mortgage's
accounts at the Bank have been closed
 The
Bank is defending these lawsuits vigorously, and management believes that the
Bank has substantial defenses to the claims that have been asserted. However,
the ultimate outcome of these lawsuits cannot be predicted with certainty. It
also remains possible that other parties may pursue additional claims against
the Bank related to the Bank's dealings with IMN and its affiliates. The Bank's
legal fees and expenses will continue to be significant, and those costs, in
addition to any costs associated with settling the IMN-related litigations or
satisfying any adverse judgments, could have a material adverse effect on the
Bank's results of operations or financial position.
 In
addition to the litigations noted above, the Company and the Bank are subject to
other 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
 *Other—* The Bank
is required to maintain balances with the Federal Reserve Bank of New York to
satisfy reserve requirements. These balances averaged approximately $4,237,000
and $824,000 in 2004 and 2003, respectively.
 
 12.
STATE BANCORP, INC. (PARENT COMPANY ONLY)
 Certain
condensed financial information follows (dollars in thousands):
 
 December
      31,
    
    2004
    
    2003BALANCE
      SHEETAssets:Cash
    
    $
    411
    
    $
    1,216Dividends
      receivable and other assets
    
    
    2,150
    
    
    2,060Investment
      in the Bank
    
    
    120,437
    
    
    113,077Investment
      in the Trusts
    
    
    626
    
    
    623Total
      Assets
    
    $
    123,624
    
    $
    116,976Liabilities:Junior
      subordinated debentures
    
    $
    20,620
    
    $
    20,620Dividends
      payable and other liabilities
    
    
    1,954
    
    
    1,644Total
      Liabilities
    
    
    22,574
    
    
    22,264Stockholders'
      Equity:Preferred
      stock
    
    
    —
    
    
    —Common
      stock
    
    
    49,974
    
    
    46,890Surplus
    
    
    63,014
    
    
    53,545Retained
      earnings
    
    
    4,009
    
    
    5,190Treasury
      stock
    
    
    (15,468
    )
    
    (13,481
    )Accumulated
      other comprehensive (loss)income, net of taxes
    
    
    (479
    )
    
    2,568Total
      Stockholders' Equity
    
    
    101,050
    
    
    94,712Total
      Liabilities and Stockholders' Equity
    
    $
    123,624
    
    $
    116,976
  57
  STATE BANCORP, INC. AND SUBSIDIARIES
  For
      the Years Ended December 31,
    
    2004
    
    2003
    
    2002INCOME
      STATEMENTDividends
      from the Bank, net of expenses
    
    $
    7,209
    
    $
    6,642
    
    $
    8,409Interest
      expense on junior subordinateddebentures
    
    
    1,088
    
    
    583
    
    
    108Equity
      in the undistributed earningsof the Bank and the Trusts
    
    
    7,255
    
    
    5,956
    
    
    3,002Net
      Income
    
    $
    13,376
    
    $
    12,015
    
    $
    11,303CASH
      FLOWSOperating
      Activities:Net
      income
    
    $
    13,376
    
    $
    12,015
    
    $
    11,303Increase
      in other assets
    
    
    (90
    )
    
    (258
    )
    
    (194
    )Increase
      in other liabilities
    
    
    310
    
    
    103
    
    
    164Equity
      in the undistributed earningsof the Bank and the Trusts
    
    
    (7,255
    )
    
    (5,956
    )
    
    (3,002
    )Net
      cash provided by operating activities
    
    
    6,341
    
    
    5,904
    
    
    8,271Financing
      Activities:Cash
      dividends paid
    
    
    (5,050
    )
    
    (4,565
    )
    
    (4,385
    )Junior
      subordinated debentures
    
    
    —
    
    
    10,310
    
    
    10,310Proceeds
      from issuance of common stock
    
    
    3,211
    
    
    3,266
    
    
    2,005Capital
      contribution to the Bank
    
    
    (3,346
    )
    
    (13,002
    )
    
    (10,463
    )Capital
      contribution to the Trusts
    
    
    26
    
    
    (295
    )
    
    (313
    )Payment
      to repurchase common stock
    
    
    (1,987
    )
    
    (1,037
    )
    
    (5,373
    )Net
      cash used in financing activities
    
    
    (7,146
    )
    
    (5,323
    )
    
    (8,219
    )Net
      Changes in Cash
    
    $
    (805
    )
    $
    581
    
    $
    52
 
 13.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
 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.
 The
Bank's use of derivative financial instruments, i.e., interest rate swaps,
exposes it to credit risk. This credit exposure relates to possible losses that
would be recognized if the counterparties fail to perform their obligations
under the contracts. To mitigate this credit exposure, the Bank deals only with
counterparties of good credit standing and requires the exchange of collateral
over a certain credit threshold. At December 31, 2004 and 2003, the Bank is
party to two interest rate swap agreements to manage its exposure to
fluctuations in interest rates on $50 million of variable rate commercial loans.
 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
December 31, 2004 and 2003, commitments to originate loans and commitments under
unused lines of credit for which the Bank is obligated amounted to approximately
$251,502,000 and $226,840,000, respectively.
 Letters
of credit are conditional commitments issued by the Bank guaranteeing payments
of drafts in accordance with the terms of the letter of credit agreements.
Commercial letters of credit are used primarily to facilitate trade or commerce
and are also issued to support public and private borrowing arrangements, bond
financing and similar transactions. Collateral may be required to support
letters of credit based upon management's evaluation of the creditworthiness of
each customer. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Most letters of credit expire within one year. At December 31, 2004 and 2003,
the Bank had letters of credit outstanding of approximately $13,398,000 and
$13,960,000, respectively. At December 31, 2004, the uncollateralized portion
was approximately $2,908,000.
 
 14.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 Fair
value estimates are made as of a specific point in time based on the
characteristics of financial instruments and market information. Where
available, quoted market prices are used. However, markets do not exist for a
portion of the Company's financial instruments and, as a result, fair value
estimates require judgments regarding future cash flows. These judgments are
subjective in nature, involve uncertainties and therefore may change
significantly at future measurement dates. The fair value information that
follows is intended to supplement, but not replace, the basic consolidated
financial statements and other traditional financial data presented throughout
this report. The calculation of estimated fair values is based on market
conditions at December 31, 2004 and 2003 and is not reflective of current or
future fair values. Furthermore, the value of long-term relationships with
depositors is not reflected. The value of those relationships is significant.
 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 Short-Term Investments—* For cash
and short-term investments (due from banks, Federal funds sold, securities
purchased under agreements to resell, accrued interest receivable and certain
other short-term assets), the carrying amount is a reasonable estimate of fair
value.
  58
  STATE BANCORP, INC. AND SUBSIDIARIES
  *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.
 *Loans—* The fair
value of loans is estimated by discounting the expected future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
 *Deposits—* The fair
value of demand deposits, savings accounts and time deposits is the amount
payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the interest rate swap rates of
similar term points.
 *Junior
Subordinated Debentures—* The fair
value of junior subordinated debentures is estimated using the interest rate
swap rates of similar term and repricing points and spreads of equivalent new
issues.
 *Other
Short-Term Liabilities—* Other
short-term liabilities (Federal funds purchased, securities sold under
agreements to repurchase, accrued interest payable and certain other short-term
liabilities) are considered to have fair values equal to their carrying amounts
due to their short-term nature. These instruments are presented in the table
below as other short-term liabilities.
 *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.
 
 The
estimated fair values of the Company's financial instruments are as follows (in
thousands):
 December
      31,
    
    2004
    
    2003Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair
      Value
    
    Amount
    
    Fair
      ValueFinancial
      assets:Cash
      and short-term investments
    
    $
    81,922
    
    $
    81,922
    
    $
    154,386
    
    $
    154,386Securities
      held to maturity and securities available for sale
    
    
    542,690
    
    
    542,648
    
    
    567,030
    
    
    567,197Loans—net
      of the allowance for probable loan losses
    
    
    766,171
    
    
    766,454
    
    
    700,484
    
    
    706,223Total
    
    $
    1,390,783
    
    $
    1,391,024
    
    $
    1,421,900
    
    $
    1,427,806Financial
      liabilities:Deposits
    
    $
    1,269,634
    
    $
    1,268,852
    
    $
    1,216,287
    
    $
    1,217,180Junior
      subordinated debentures
    
    
    20,620
    
    
    21,157
    
    
    20,000
    
    
    20,221Other
      short-term liabilities
    
    
    32,905
    
    
    32,905
    
    
    91,920
    
    
    91,920Total
    
    $
    1,323,159
    
    $
    1,322,914
    
    $
    1,328,207
    
    $
    1,329,321
 
 15.
REGULATORY MATTERS
 Dividends
paid by the Company are subject to restrictions by certain regulatory agencies.
Under these restrictions, approximately $14,828,000 was available for payment of
dividends at December 31, 2004, without prior approval of those regulatory
agencies.
 The
Company and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under the
capital adequacy guidelines and the regulatory framework for prompt corrective
action, 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 regulators about components, risk
weightings 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 regulations, to risk-weighted assets and of
Tier I capital to average assets as shown in the following table. Management
believes, as of December 31, 2004, that the Company and the Bank meet all
capital adequacy requirements to which they are subject.
  59
  STATE BANCORP, INC. AND SUBSIDIARIES
  As
of December 31, 2004, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank's
category. The Company's and the Bank's capital amounts (in thousands) and ratios
are as follows:
 
 To
      Be Well-CapitalizedFor
      Capital
    
    Under
      PromptActual
    
    Adequacy
      Purposes
    
    Corrective
      Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs
      of December 31, 2004:Tier
      I Capital to Total Adjusted AverageAssets
      (Leverage):The
      Company
    
    $
    118,955
    
    
    7.82
    %
    $
    60,847
    
    
    4.00
    %
    
    N/A
    
    
    N/AThe
      Bank
    
    $
    118,342
    
    
    7.79
    %
    $
    60,766
    
    
    4.00
    %
    $
    75,958
    
    
    5.00
    %Tier
      I Capital to Risk-Weighted Assets:The
      Company
    
    $
    118,955
    
    
    12.46
    %
    $
    38,188
    
    
    4.00
    %
    
    N/A
    
    
    N/AThe
      Bank
    
    $
    118,342
    
    
    12.41
    %
    $
    38,144
    
    
    4.00
    %
    $
    57,216
    
    
    6.00
    %Total
      Capital to Risk-Weighted Assets:The
      Company
    
    $
    130,894
    
    
    13.71
    %
    $
    76,379
    
    
    8.00
    %
    
    N/A
    
    
    N/AThe
      Bank
    
    $
    130,263
    
    
    13.66
    %
    $
    76,289
    
    
    8.00
    %
    $
    95,361
    
    
    10.00
    %As
      of December 31, 2003:Tier
      I Capital to Total Adjusted AverageAssets
      (Leverage):The
      Company
    
    $
    109,534
    
    
    8.08
    %
    $
    54,225
    
    
    4.00
    %
    
    N/A
    
    
    N/AThe
      Bank
    
    $
    107,899
    
    
    7.97
    %
    $
    54,153
    
    
    4.00
    %
    $
    67,691
    
    
    5.00
    %Tier
      I Capital to Risk-Weighted Assets:The
      Company
    
    $
    109,534
    
    
    12.26
    %
    $
    35,737
    
    
    4.00
    %
    
    N/A
    
    
    N/AThe
      Bank
    
    $
    107,899
    
    
    12.09
    %
    $
    35,699
    
    
    4.00
    %
    $
    53,548
    
    
    6.00
    %Total
      Capital to Risk-Weighted Assets:The
      Company
    
    $
    120,266
    
    
    13.46
    %
    $
    71,481
    
    
    8.00
    %
    
    N/A
    
    
    N/AThe
      Bank
    
    $
    118,631
    
    
    13.29
    %
    $
    71,411
    
    
    8.00
    %
    $
    89,263
    
    
    10.00
    %
  60
  STATE BANCORP, INC. AND SUBSIDIARIES
  Statistical
Information
 
 DISTRIBUTION
OF ASSETS, LIABILITIES AND STOCKHOLDER'S EQUITY: NET INTEREST INCOME AND RATES
 The
following table presents the average daily balances of the Bank's assets,
liabilities and stockholder's equity, together with an analysis of net interest
earnings and average rates, for each major category of interest-earning assets
and interest-bearing liabilities. Interest and average rates are computed on a
fully taxable-equivalent basis, adjusted for certain disallowed interest expense
deductions, using a tax rate of 34% in 2004, 2003, and 2002. Nonaccruing loans
are included in the average balances (dollars in thousands):
 
 For
      the Years Ended December 31,
    
    2004
    
    2003
    
    2002**Average**
    
    
    
    **Average**
    
    Average
    
    
    
    Average
    
    Average
    
    
    
    Average**Balance**
    
    **Interest**
    
    **Rate**
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateASSETS:Securities
      held to maturity andsecurities
      available for sale:Taxable
    
    $
    501,336
    
    $
    17,648
    
    
    3.52
    %
    $
    495,831
    
    $
    16,794
    
    
    3.39
    %
    $
    421,171
    
    $
    19,469
    
    
    4.62
    %Tax-exempt
    
    
    114,905
    
    
    3,979
    
    
    3.46
    
    
    81,687
    
    
    4,540
    
    
    5.56
    
    
    93,321
    
    
    5,492
    
    
    5.89Total
      securities
    
    
    616,241
    
    
    21,627
    
    
    3.51
    
    
    577,518
    
    
    21,334
    
    
    3.69
    
    
    514,492
    
    
    24,961
    
    
    4.85Federal
      funds sold, securitiespurchased
      under agreementsto
      resell and interest-bearingdeposits
    
    
    36,618
    
    
    404
    
    
    1.10
    
    
    41,665
    
    
    457
    
    
    1.10
    
    
    33,762
    
    
    552
    
    
    1.63Loans
      (net of unearned income):Taxable
    
    
    727,945
    
    
    48,823
    
    
    6.71
    
    
    645,338
    
    
    44,020
    
    
    6.82
    
    
    575,975
    
    
    43,060
    
    
    7.48Tax-exempt
    
    
    6,966
    
    
    557
    
    
    8.00
    
    
    6,901
    
    
    572
    
    
    8.29
    
    
    7,835
    
    
    656
    
    
    8.37Total
      loans—net
    
    
    734,911
    
    
    49,380
    
    
    6.72
    
    
    652,239
    
    
    44,592
    
    
    6.84
    
    
    583,810
    
    
    43,716
    
    
    7.49Total
      interest-earning assets
    
    
    1,387,770
    
    $
    71,411
    
    
    5.14
    %
    
    1,271,422
    
    $
    66,383
    
    
    5.22
    %
    
    1,132,064
    
    $
    69,229
    
    
    6.12
    %Allowance
      for probable loan losses
    
    
    (11,523
    )
    
    
    
    
    
    
    
    (10,610
    )
    
    
    
    
    
    
    
    (9,920
    )1,376,247
    
    
    
    
    
    
    
    
    1,260,812
    
    
    
    
    
    
    
    
    1,122,144Cash
      and due from banks
    
    
    49,672
    
    
    
    
    
    
    
    
    45,575
    
    
    
    
    
    
    
    
    38,740Bank
      premises and equipment—net
    
    
    6,758
    
    
    
    
    
    
    
    
    7,581
    
    
    
    
    
    
    
    
    7,482Other
      assets
    
    
    48,176
    
    
    
    
    
    
    
    
    35,111
    
    
    
    
    
    
    
    
    23,814Total
      Assets
    
    $
    1,480,853
    
    
    
    
    
    
    
    $
    1,349,079
    
    
    
    
    
    
    
    $
    1,192,180LIABILITIES
      ANDSTOCKHOLDER’S
      EQUITY:Savings
      and time deposits:Savings
    
    $
    662,087
    
    $
    5,326
    
    
    0.80
    %
    $
    615,571
    
    $
    4,386
    
    
    0.71
    %
    $
    411,630
    
    $
    3,704
    
    
    0.90
    %Time
    
    
    268,502
    
    
    4,545
    
    
    1.69
    
    
    305,629
    
    
    5,735
    
    
    1.88
    
    
    408,176
    
    
    9,600
    
    
    2.35Total
      savings and time deposits
    
    
    930,589
    
    
    9,871
    
    
    1.06
    
    
    921,200
    
    
    10,121
    
    
    1.10
    
    
    819,806
    
    
    13,304
    
    
    1.62Federal
      funds purchased
    
    
    7,021
    
    
    99
    
    
    1.41
    
    
    6,778
    
    
    92
    
    
    1.36
    
    
    3,716
    
    
    69
    
    
    1.86Securities
      sold underagreements
      to repurchase
    
    
    41,652
    
    
    600
    
    
    1.44
    
    
    17,252
    
    
    222
    
    
    1.29
    
    
    46,104
    
    
    864
    
    
    1.87Other
      borrowed funds
    
    
    77,953
    
    
    1,171
    
    
    1.50
    
    
    29,450
    
    
    532
    
    
    1.81
    
    
    28,339
    
    
    897
    
    
    3.17Total
      interest-bearing liabilities
    
    
    1,057,215
    
    
    11,741
    
    
    1.11
    
    
    974,680
    
    
    10,967
    
    
    1.13
    
    
    897,965
    
    
    15,134
    
    
    1.69Demand
      deposits
    
    
    290,905
    
    
    
    
    
    
    
    
    245,840
    
    
    
    
    
    
    
    
    198,793Other
      liabilities
    
    
    15,473
    
    
    
    
    
    
    
    
    32,493
    
    
    
    
    
    
    
    
    11,581Total
      liabilities
    
    
    1,363,593
    
    
    
    
    
    
    
    
    1,253,013
    
    
    
    
    
    
    
    
    1,108,339Stockholder’s
      equity
    
    
    117,260
    
    
    
    
    
    
    
    
    96,066
    
    
    
    
    
    
    
    
    83,841Total
      Liabilities andStockholder’s
      Equity
    
    $
    1,480,853
    
    
    
    
    
    
    
    $
    1,349,079
    
    
    
    
    
    
    
    $
    1,192,180Net
      interest income/rate—tax-equivalent
      basis
    
    
    
    
    
    59,670
    
    
    4.30
    %
    
    
    
    
    55,416
    
    
    4.36
    %
    
    
    
    
    54,095
    
    
    4.78
    %Less
      tax-equivalent basis adjustment
    
    
    
    
    
    1,374
    
    
    
    
    
    
    
    
    1,700
    
    
    
    
    
    
    
    
    2,097Net
      Interest Income
    
    
    
    
    $
    58,296
    
    
    
    
    
    
    
    $
    53,716
    
    
    
    
    
    
    
    $
    51,998
  61
  STATE BANCORP, INC. AND SUBSIDIARIES
  ANALYSIS
OF CHANGES IN NET INTEREST INCOME
 The
following table presents a comparative analysis of the changes in the Bank's
interest income and interest expense due to the changes in the average volume
and the average rates earned on interest-earning assets and due to the changes
in the average volume and the average rates paid on interest-bearing
liabilities. Interest and average rates are computed on a fully
taxable-equivalent basis, adjusted for certain disallowed interest expense
deductions, using a tax rate of 34% in 2004, 2003 and 2002. Variances in
rate/volume relationships have been allocated proportionately to average volume
and average rate as they compare to each other (in thousands):
 
 Year
      2004 over 2003
    
    Year
      2003 over 2002Due
      to Change in:
    
    
    
    Due
      to Change in:Average
    
    Average
    
    Net
      Increase
    
    Average
    
    Average
    
    Net
      (Decrease)Volume
    
    Rate
    
    (Decrease)
    
    Volume
    
    Rate
    
    IncreaseINTEREST
      INCOME:Securities
      held to maturity and securities available for sale:Taxable
    
    $
    188
    
    $
    666
    
    $
    854
    
    $
    3,083
    
    $
    (5,758
    )
    $
    (2,675
    )Tax-exempt
    
    
    1,485
    
    
    (2,046
    )
    
    (561
    )
    
    (658
    )
    
    (294
    )
    
    (952
    )Total
      securities
    
    
    1,673
    
    
    (1,380
    )
    
    293
    
    
    2,425
    
    
    (6,052
    )
    
    (3,627
    )Federal
      funds sold, securities purchased under agreements toresell and
      interest-bearing deposits
    
    
    (56
    )
    
    3
    
    
    (53
    )
    
    112
    
    
    (207
    )
    
    (95
    )Loans
      (net of unearned income):Taxable
    
    
    5,551
    
    
    (748
    )
    
    4,803
    
    
    4,923
    
    
    (3,963
    )
    
    960Tax-exempt
    
    
    5
    
    
    (20
    )
    
    (15
    )
    
    (77
    )
    
    (7
    )
    
    (84
    )Total
      loans—net
    
    
    5,556
    
    
    (768
    )
    
    4,788
    
    
    4,846
    
    
    (3,970
    )
    
    876Total
      Interest Income
    
    
    7,173
    
    
    (2,145
    )
    
    5,028
    
    
    7,383
    
    
    (10,229
    )
    
    (2,846
    )INTEREST
      EXPENSE:Savings
      and time deposits:Savings
    
    
    347
    
    
    593
    
    
    940
    
    
    1,566
    
    
    (884
    )
    
    682Time
    
    
    (659
    )
    
    (531
    )
    
    (1,190
    )
    
    (2,142
    )
    
    (1,723
    )
    
    (3,865
    )Total
      savings and time deposits
    
    
    (312
    )
    
    62
    
    
    (250
    )
    
    (576
    )
    
    (2,607
    )
    
    (3,183
    )Federal
      funds purchased
    
    
    3
    
    
    4
    
    
    7
    
    
    45
    
    
    (22
    )
    
    23Securities
      sold under agreements to repurchase
    
    
    349
    
    
    29
    
    
    378
    
    
    (428
    )
    
    (214
    )
    
    (642
    )Other
      borrowed funds
    
    
    742
    
    
    (103
    )
    
    639
    
    
    34
    
    
    (399
    )
    
    (365
    )Total
      Interest Expense
    
    
    782
    
    
    (8
    )
    
    774
    
    
    (925
    )
    
    (3,242
    )
    
    (4,167
    )Change
      in Net Interest Income (Tax-equivalent Basis)
    
    $
    6,391
    
    $
    (2,137
    )
    $
    4,254
    
    $
    8,308
    
    $
    (6,987
    )
    $
    1,321
 
 INVESTMENT
PORTFOLIO
 The
following table presents the amortized cost and estimated fair value of held to
maturity and available for sale securities held by the Company for each period
(in thousands):
 
 At
      December 31,
    
    2004
    
    2003
    
    2002Amortized
    
    Estimated
    
    Amortized
    
    Estimated
    
    Amortized
    
    EstimatedCost
    
    Fair
      Value
    
    Cost
    
    Fair
      Value
    
    Cost
    
    Fair
      ValueTYPE:Obligations
      of states and political subdivisions
    
    $
    53,247
    
    $
    53,580
    
    $
    94,594
    
    $
    98,214
    
    $
    80,119
    
    $
    83,045Mortgage-backed
      securities and collateralized mortgage obligations
    
    
    259,162
    
    
    258,917
    
    
    281,291
    
    
    280,715
    
    
    288,081
    
    
    291,135Government
      Agency securities
    
    
    192,304
    
    
    191,948
    
    
    146,876
    
    
    147,614
    
    
    204,468
    
    
    206,549Corporate
      securities
    
    
    38,321
    
    
    38,203
    
    
    40,623
    
    
    40,654
    
    
    28,733
    
    
    28,883Total
    
    $
    543,034
    
    $
    542,648
    
    $
    563,384
    
    $
    567,197
    
    $
    601,401
    
    $
    609,612
  62
  STATE BANCORP, INC. AND SUBSIDIARIES
  The
following table presents the maturity distribution and the weighted-average
yield of the Company's investment portfolio at December 31, 2004 (dollars in
thousands). The yield information does not give effect to changes in estimated
fair value of investments available for sale that are reflected as a component
of stockholders' equity.
 
 MaturingWithin
    
    After
      One but
    
    After
      Five but
    
    AfterOne
      Year
    
    Within
      Five Years
    
    Within
      Ten Years
    
    Ten
      YearsAmount
    
    Yield
      (1)
    
    Amount
    
    Yield
      (1)
    
    Amount
    
    Yield
      (1)
    
    Amount
    
    Yield
      (1)TYPE:Obligations
      of states and political subdivisions
    
    $
    15,175
    
    
    2.11%
      $
    
    
    9,102
    
    
    5.08
    %
    $
    14,336
    
    
    6.81
    %
    $
    14,967
    
    
    6.87
    %Mortgage-backed
      securities and collateralizedmortgage obligations (2)
    
    
    7,124
    
    
    3.76
    
    
    234,672
    
    
    3.18
    
    
    17,121
    
    
    3.32
    
    
    —
    
    
    —Government
      Agency securities (3)
    
    
    98,303
    
    
    3.21
    
    
    78,688
    
    
    3.67
    
    
    —
    
    
    —
    
    
    14,998
    
    
    3.30Corporate
      securities
    
    
    10,025
    
    
    4.72
    
    
    24,187
    
    
    4.77
    
    
    —
    
    
    —
    
    
    3,991
    
    
    2.09Total
    
    $
    130,627
    
    
    3.23
    %
    $
    346,649
    
    
    3.45
    %
    $
    31,457
    
    
    4.91
    %
    $
    33,956
    
    
    4.73
    %
 
 (1)
    Fully
      tax-equivalent basis using a tax rate of 34%.
 (2)
    Assumes
      maturity dates pursuant to average lives as determined by constant
      prepayment rates.
 (3)
    Excluding
      zero-coupon securities, assumes coupon yields for securities past their
      call dates and not bought at a discount; yields to call for securities not
      past their call dates and not bought at a discount; and yields to maturity
      for securities purchased at a discount. For zero-coupon securities,
      assumes yields to call.
 
 LOAN
PORTFOLIO
 The
following table categorizes the Company's loan portfolio for each period (in
thousands):
 
 December
      31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Commercial
      and industrial
    
    $
    277,399
    
    $
    278,443
    
    $
    243,626
    
    $
    246,245
    
    $
    229,251Real
      estate—mortgage
    
    
    374,307
    
    
    334,946
    
    
    298,187
    
    
    252,968
    
    
    233,589Real
      estate—construction
    
    
    73,648
    
    
    54,293
    
    
    42,829
    
    
    16,258
    
    
    17,642Lease
      receivables (1)
    
    
    34,844
    
    
    23,962
    
    
    20,041
    
    
    18,231
    
    
    —Loans
      to individuals
    
    
    8,724
    
    
    7,843
    
    
    7,385
    
    
    7,514
    
    
    5,729Tax-exempt
      and other
    
    
    9,496
    
    
    11,956
    
    
    8,331
    
    
    10,465
    
    
    10,864Gross
      loans
    
    
    778,418
    
    
    711,443
    
    
    620,399
    
    
    551,681
    
    
    497,075Less:
      unearned income
    
    
    227
    
    
    227
    
    
    15
    
    
    83
    
    
    83Loans—net
      of unearned income
    
    $
    778,191
    
    $
    711,216
    
    $
    620,384
    
    $
    551,598
    
    $
    496,992
 (1)
Included in total commercial and industrial loans prior to 2001.
 
 The
following table presents the maturities of selected loans and the sensitivities
of those loans to changes in interest rates at December 31, 2004
 (in
thousands):
 
 One
      Year
    
    One
      Through
    
    Overor
      Less
    
    Five
      Years
    
    Five
      Years
    
    TotalCommercial
      and industrial
    
    $
    183,073
    
    $
    69,939
    
    $
    24,387
    
    $
    277,399Real
      estate—construction
    
    
    40,914
    
    
    32,276
    
    
    458
    
    
    73,648Total
    
    $
    223,987
    
    $
    102,215
    
    $
    24,845
    
    $
    351,047Loans
      maturing after one year with:Fixed
      interest rate
    
    
    
    
    $
    36,264
    
    $
    5,692
    
    $
    41,956Variable
      interest rate
    
    
    
    
    $
    65,951
    
    $
    19,153
    
    $
    85,104
 
 The
following table presents the Company’s nonaccrual, past due and restructured
loans for each period (in thousands):
  December
      31,
    
    2004
    
    2003
    
    2002
    
    2001
    
    2000Nonaccrual
      loans
    
    $
    5,274
    
    $
    8,666
    
    $
    6,317
    
    $
    8,920
    
    $
    10,736Loans
      90 days or more past due and still accruing interest
    
    $
    89
    
    $
    149
    
    $
    129
    
    $
    405
    
    $
    3,542Restructured
      accruing loans
    
    $
    —
    
    $
    —
    
    $
    107
    
    $
    284
    
    $
    406Interest
      income on nonaccrual and restructured loans which would havebeen
      recorded under original loan terms
    
    $
    137
    
    $
    372
    
    $
    371
    
    $
    720
    
    $
    638Interest
      income on nonaccrual and restructured loans recordedduring the
      period
    
    $
    31
    
    $
    24
    
    $
    9
    
    $
    27
    
    $
    85
 
 SUMMARY
OF LOAN LOSS EXPERIENCE
 The
determination of the balance of the allowance for probable loan losses is based
upon a review and analysis of the Company's loan portfolio and reflects an
amount which, in management's judgment, is adequate to provide for probable
future losses. Management's review includes monthly analyses of past due and
nonaccrual loans and detailed, periodic loan-by-loan analyses.
  63
  STATE BANCORP, INC. AND SUBSIDIARIES
  The
principal factors considered by management in determining the adequacy of the
allowance are the growth and composition of the loan portfolio, historical loss
experience, the level of nonperforming loans, economic conditions, the value and
adequacy of collateral and the current level of the allowance. While management
utilizes all available information to estimate the adequacy of the allowance for
probable loan losses, 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 economic conditions and other relevant factors.
 The
following table presents an analysis of the Company's allowance for probable
loan losses for each period (dollars in thousands):
  2004
    
    2003
    
    2002
    
    2001
    
    2000Balance,
      January 1
    
    $
    10,732
    
    $
    10,046
    
    $
    9,255
    
    $
    9,207
    
    $
    7,107Adjustments
    
    
    —
    
    
    —
    
    
    —
    
    
    542(1
    )
    
    —Charge-offs:Commercial
      and industrial
    
    
    2,957
    
    
    1,960
    
    
    2,721
    
    
    4,021
    
    
    868Real
      estate—mortgage
    
    
    —
    
    
    1,251
    
    
    —
    
    
    —
    
    
    21Real
      estate—construction
    
    
    193
    
    
    —
    
    
    —
    
    
    —
    
    
    500Lease
      receivables (2)
    
    
    250
    
    
    292
    
    
    237
    
    
    190
    
    
    —Loans
      to individuals
    
    
    5
    
    
    50
    
    
    13
    
    
    44
    
    
    20Total
      charge-offs
    
    
    3,405
    
    
    3,553
    
    
    2,971
    
    
    4,255
    
    
    1,409Recoveries:Commercial
      and industrial
    
    
    171
    
    
    293
    
    
    196
    
    
    137
    
    
    237Real
      estate—mortgage
    
    
    3
    
    
    3
    
    
    1
    
    
    4
    
    
    8Lease
      receivables (2)
    
    
    8
    
    
    1
    
    
    2
    
    
    6
    
    
    —Loans
      to individuals
    
    
    5
    
    
    7
    
    
    3
    
    
    14
    
    
    14Total
      recoveries
    
    
    187
    
    
    304
    
    
    202
    
    
    161
    
    
    259Net
      charge-offs
    
    
    3,218
    
    
    3,249
    
    
    2,769
    
    
    4,094
    
    
    1,150Provision
      charged to income
    
    
    4,506
    
    
    3,935
    
    
    3,560
    
    
    3,600
    
    
    3,250Balance
      at end of period
    
    $
    12,020
    
    $
    10,732
    
    $
    10,046
    
    $
    9,255
    
    $
    9,207Ratio
      of net charge-offs during the period to average loans outstanding
      during the period
    
    
    0.44
    %
    
    0.50
    %
    
    0.47
    %
    
    0.75
    %
    
    0.24
    %
 (1)
    Opening
      balance of allowance for probable loan losses of acquired leasing company.
 (2)
    Included
      in commercial and industrial loans prior to 2001.
 
 The
following table presents the allocation of the Company’s allowance for probable
loan losses for each period (dollars in thousands):
 
 Percent
      of
    
    
    
    Percent
      of
    
    
    
    Percent
      of
    
    
    
    Percent
      of
    
    
    
    Percent
      ofLoans
      to
    
    
    
    Loans
      to
    
    
    
    Loans
      to
    
    
    
    Loans
      to
    
    
    
    Loans
      toTotal
    
    
    
    Total
    
    
    
    Total
    
    
    
    Total
    
    
    
    Total2004
    
    Loans
    
    ****2003
    
    Loans
    
    2002
    
    Loans
    
    2001
    
    Loans
    
    2000
    
    LoansCommercial
      and industrial
    
    $
    5,071
    
    
    35.6
    %
    $
    5,781
    
    
    39.1
    %
    $
    5,370
    
    
    39.3
    %
    $
    5,828
    
    
    44.6
    %
    $
    6,355
    
    
    46.1
    %Real
      estate—mortgage
    
    
    3,694
    
    
    48.1
    
    
    3,157
    
    
    47.1
    
    
    3,327
    
    
    48.1
    
    
    2,366
    
    
    45.9
    
    
    2,118
    
    
    47.0Real
      estate—construction
    
    
    523
    
    
    9.5
    
    
    306
    
    
    7.6
    
    
    241
    
    
    6.9
    
    
    98
    
    
    2.9
    
    
    282
    
    
    3.5Lease
      receivables (1)
    
    
    900
    
    
    4.5
    
    
    142
    
    
    3.4
    
    
    113
    
    
    3.2
    
    
    110
    
    
    3.3
    
    
    —
    
    
    —Loans
      to individuals
    
    
    38
    
    
    1.1
    
    
    44
    
    
    1.1
    
    
    46
    
    
    1.2
    
    
    49
    
    
    1.4
    
    
    34
    
    
    1.2Tax-exempt
      and other
    
    
    47
    
    
    1.2
    
    
    67
    
    
    1.7
    
    
    47
    
    
    1.3
    
    
    63
    
    
    1.9
    
    
    62
    
    
    2.2Unallocated
    
    
    1,747
    
    
    —
    
    
    1,235
    
    
    —
    
    
    902
    
    
    —
    
    
    741
    
    
    —
    
    
    356
    
    
    —Total
    
    $
    12,020
    
    
    100.0
    %
    $
    10,732
    
    
    100.0
    %
    $
    10,046
    
    
    100.0
    %
    $
    9,255
    
    
    100.0
    %
    $
    9,207
    
    
    100.0
    %
 (1)
    
    Included
      in total commercial and industrial loans prior to 2001.
 
 DEPOSITS
 The
following table presents the average balance and the average rate paid on the
Company's deposits for each period (dollars in thousands):
 
 2004
    
    2003
    
    2002Average
    
    Average
    
    Average
    
    Average
    
    Average
    
    AverageBalance
    
    Rate
    
    Balance
    
    Rate
    
    Balance
    
    RateDemand
      deposits
    
    $
    290,905
    
    
    —
    %
    $
    245,840
    
    
    —
    %
    $
    198,793
    
    
    —
    %Interest-bearing
      transaction accounts
    
    
    227,656
    
    
    0.72
    
    
    193,678
    
    
    0.59
    
    
    119,854
    
    
    0.52Money
      market deposit accounts
    
    
    160,461
    
    
    0.74
    
    
    152,130
    
    
    0.64
    
    
    122,302
    
    
    0.93Savings
      deposits
    
    
    273,970
    
    
    0.91
    
    
    269,763
    
    
    0.84
    
    
    169,474
    
    
    1.14Time
      certificates of deposit of $100,000 or more
    
    
    186,590
    
    
    1.54
    
    
    183,587
    
    
    1.34
    
    
    274,215
    
    
    1.91Other
      time deposits
    
    
    81,912
    
    
    2.05
    
    
    122,042
    
    
    2.68
    
    
    133,961
    
    
    3.25Total
    
    $
    1,221,494
    
    
    0.81
    %
    $
    1,167,040
    
    
    0.87
    %
    $
    1,018,599
    
    
    1.31
    %
  64
  STATE BANCORP, INC. AND SUBSIDIARIES
  The
following table sets forth, by time remaining to maturity, the Company's
certificates of deposit of $100,000 or more at December 31, 2004
 
 (in
      thousands):3
      months or less
    
    $
    195,302Over
      3 months through 6 months
    
    
    22,408Over
      6 months through 12 months
    
    
    18,003Over
      12 months
    
    
    18,373Total
    
    $
    254,086
  RETURN
ON EQUITY AND ASSETS
 The
following table presents the Company's return on average stockholders' equity
and assets, the dividend payout ratio and the average equity to average assets
ratio for each period. The calculations are based on recorded assets and give
effect to the changes in fair value of securities available for sale.
 
 2004
    
    2003
    
    2002Return
      on average total assets
    
    
    0.90
    %
    
    0.89
    %
    
    0.95
    %Return
      on average total stockholders' equity
    
    
    13.75
    %
    
    13.18
    %
    
    13.66
    %Dividend
      payout ratio
    
    
    38.98
    %
    
    38.68
    %
    
    39.06
    %Average
      equity to average assets
    
    
    6.56
    %
    
    6.73
    %
    
    6.94
    %
 
 SHORT-TERM
BORROWINGS
 The
following information is provided on the Bank's short-term borrowings for each
period (dollars in thousands):
 
 2004
    
    2003
    
    2002Balance,
      December 31—Securities
      sold under agreements to repurchase
    
    $
    —
    
    $
    31,601
    
    $
    49,983Federal
      funds purchased
    
    $
    —
    
    $
    10,000
    
    $
    4,800Federal
      Home Loan Bank advances
    
    $
    32,000
    
    $
    50,000
    
    $
    50,000Weighted-average
      interest rate on balance, December 31—Securities
      sold under agreements to repurchase
    
    
    —
    %
    
    1.20
    %
    
    1.45
    %Federal
      funds purchased
    
    
    —
    %
    
    1.25
    %
    
    1.13
    %Federal
      Home Loan Bank advances
    
    
    2.41
    %
    
    1.04
    %
    
    1.35
    %Maximum
      outstanding at any month end—Securities
      sold under agreements to repurchase
    
    $
    123,275
    
    $
    36,669
    
    $
    158,365Federal
      funds purchased
    
    $
    25,000
    
    $
    31,450
    
    $
    24,300Federal
      Home Loan Bank advances
    
    $
    122,000
    
    $
    76,000
    
    $
    94,000Average
      daily amount outstanding—Securities
      sold under agreements to repurchase
    
    $
    41,652
    
    $
    17,252
    
    $
    46,104Federal
      funds purchased
    
    $
    7,021
    
    $
    6,778
    
    $
    3,716Federal
      Home Loan Bank advances
    
    $
    77,390
    
    $
    27,485
    
    $
    23,056Weighted-average
      interest rate on average daily amount outstanding—Securities
      sold under agreements to repurchase
    
    
    1.44
    %
    
    1.29
    %
    
    1.87
    %Federal
      funds purchased
    
    
    1.41
    %
    
    1.36
    %
    
    1.86
    %Federal
      Home Loan Bank advances
    
    
    1.41
    %
    
    1.25
    %
    
    1.81
    %
 
 **SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)**
 (dollars
in thousands)
 2004
    
    20031st
    
    2nd
    
    3rd
    
    4th
    
    ****1st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterInterest
      income
    
    $
    16,101
    
    $
    17,258
    
    $
    18,098
    
    $
    18,580
    
    $
    17,021
    
    $
    16,496
    
    $
    15,381
    
    $
    15,785Interest
      expense
    
    
    2,871
    
    
    2,787
    
    
    3,318
    
    
    3,824
    
    
    3,404
    
    
    3,294
    
    
    2,353
    
    
    2,484Net
      interest income
    
    
    13,230
    
    
    14,471
    
    
    14,780
    
    
    14,756
    
    
    13,617
    
    
    13,202
    
    
    13,028
    
    
    13,301Provision
      for probable loan losses
    
    
    1,077
    
    
    1,086
    
    
    1,152
    
    
    1,191
    
    
    984
    
    
    984
    
    
    984
    
    
    983Net
      interest income after provisionfor
      probable loan losses
    
    
    12,153
    
    
    13,385
    
    
    13,628
    
    
    13,565
    
    
    12,633
    
    
    12,218
    
    
    12,044
    
    
    12,318Other
      income
    
    
    3,703
    
    
    1,305
    
    
    1,516
    
    
    526
    
    
    2,705
    
    
    2,494
    
    
    3,096
    
    
    848Operating
      expenses
    
    
    10,286
    
    
    9,978
    
    
    10,426
    
    
    10,353
    
    
    11,457
    
    
    9,833
    
    
    10,102
    
    
    9,697Income
      before income taxes
    
    
    5,570
    
    
    4,712
    
    
    4,718
    
    
    3,738
    
    
    3,881
    
    
    4,879
    
    
    5,038
    
    
    3,469Provision
      for income taxes
    
    
    1,675
    
    
    1,347
    
    
    1,345
    
    
    995
    
    
    1,104
    
    
    1,478
    
    
    1,614
    
    
    1,056Net
      income
    
    $
    3,895
    
    $
    3,365
    
    $
    3,373
    
    $
    2,743
    
    $
    2,777
    
    $
    3,401
    
    $
    3,424
    
    $
    2,413Basic
      earnings per common share (1)
    
    $
    0.43
    
    $
    0.38
    
    $
    0.37
    
    $
    0.30
    
    $
    0.31
    
    $
    0.39
    
    $
    0.38
    
    $
    0.27Diluted
      earnings per common share (1)
    
    $
    0.42
    
    $
    0.36
    
    $
    0.36
    
    $
    0.30
    
    $
    0.30
    
    $
    0.38
    
    $
    0.38
    
    $
    0.26
 (1)
    Retroactive
      recognition has been given for stock dividends.
  65
  STATE BANCORP, INC. AND SUBSIDIARIES
  Market
Data
  The
Company's common stock is traded on the American Stock Exchange under the symbol
STB. The approximate high and low closing prices for the Company's common stock
for the years ended December 31, 2004, 2003 and 2002, were as
follows:
 
 2004
    
    2003
    
    2002High
      Close
    
    Low
      Close
    
    High
      Close
    
    Low
      Close
    
    High Close
    
    Low
      Close1st
      Quarter
    
    $
    26.03
    
    $
    23.80
    
    $
    20.02
    
    $
    17.88
    
    $
    17.82
    
    $
    15.252nd
      Quarter
    
    
    25.70
    
    
    20.20
    
    
    20.35
    
    
    18.31
    
    
    19.20
    
    
    16.953rd
      Quarter
    
    
    24.12
    
    
    19.96
    
    
    22.31
    
    
    19.57
    
    
    18.35
    
    
    15.614th
      Quarter
    
    
    28.19
    
    
    21.21
    
    
    24.50
    
    
    19.53
    
    
    19.70
    
    
    16.75
 
 The
following schedule summarizes the Company’s dividends paid for the years ended
December 31, 2004, 2003 and 2002:
 
 Cash
      DividendsDividend
    Paid
      Per Common
    StockRecord
      Date
    Payment
      Date
    Share
      (1)
    DividendsDecember
      12, 2003
    January
      9, 2004
    $0.13March
      12, 2004
    April
      9, 2004
    0.14June
      11, 2004
    July
      9, 2004
    0.14
    5%September
      10, 2004
    October
      8, 2004
    0.15December
      13, 2002
    January
      10, 2003
    $0.13March
      14, 2003
    April
      11, 2003
    0.13June
      13, 2003
    July
      11, 2003
    0.13
    5%September
      12, 2003
    October
      10, 2003
    0.13December
      14, 2001
    January
      11, 2002
    $0.12March
      15, 2002
    April
      12, 2002
    0.12June
      14, 2002
    July
      5, 2002
    0.12
    5%September
      13, 2002
    October
      11, 2002
    0.13
 
 (1)
Retroactive recognition has been given for stock dividends.
  66
  STATE BANCORP, INC. AND SUBSIDIARIES
  Board
of Directors and Executive Officers
 Effective
March 1, 2005
 
 STATE
BANCORP, INC. AND STATE BANK OF LONG ISLAND
 
 **Board
of Directors**
 
 Thomas
F. Goldrick, Jr.
 *Chairman
and Chief Executive Officer State Bancorp, Inc. and State Bank of Long Island*
 
 J.
Robert Blumenthal
 *Retired,
President, Harwyn Enterprises, Inc.*
 
 Thomas
E. Christman
 *Adjunct
Professor of Finance, St. John's University*
 
 Arthur
Dulik, Jr.
 *Chief
Financial Officer, ALTANA Pharma US, Inc.*
 
 K.
Thomas Liaw
 *Chairman
and Professor of Finance St. John's University*
 
 Gerard
J. McKeon
 *Retired,
The New York Racing Association*
 
 Richard
W. Merzbacher
 *President,
State Bank of Long Island Vice Chairman, State Bancorp, Inc.*
 
 Joseph
F. Munson
 *Managing
Member, High Point Partners, LLC*
 
 John
F. Picciano
 *Senior
Partner, Picciano & Scahill, P.C.*
 
 Daniel
T. Rowe
 *President,
State Bancorp, Inc.Vice Chairman, State Bank of Long Island*
 
 Suzanne
H. Rueck
 *Director,
New Hyde Park Inn*
 
 Andrew
J. Simons
 *Associate
Dean, St. John's University School of Law*
 
 Jeffrey
S. Wilks
 *Vice
President and Director of New Business Development Spiegel Associates*
 
 **Directors
Emeritus**
 
 Dr.
Frank E. Picciano
 *Chairman
Emeritus*
 
 John
A. McAuley
 *Chairman
Emeritus*
 
 Gary
Holman
 *Vice
Chairman Emeritus*
 
 STATE
BANCORP, INC.
 
 **Officers**
 
 **Office
of the Chairman**
 
 Thomas
F. Goldrick, Jr.
 *Chairman
and Chief Executive Officer*
 
 Daniel
T. Rowe
 *President*
 
 Richard
W. Merzbacher
 *Vice
Chairman*
 
 Brian
K. Finneran
 *Secretary/Treasurer*
 
 Janice
Clark
 *Assistant
Secretary*
 
 STATE
BANK OF LONG ISLAND
 
 **Executive
Officers**
 
 **Office
of the Chairman**
 
 Thomas
F. Goldrick, Jr.
 *Chairman
and Chief Executive Officer*
 
 Richard
W. Merzbacher
 *President*
 
 Daniel
T. Rowe
 *Vice
Chairman*
 
 Frederick
C. Braun, III
 *Executive
Vice President and Senior Lending Officer*
 
 Brian
K. Finneran
 *Executive
Vice President and Chief Financial Officer*
 
 Kenneth
M. Scheriff
 *Executive
Vice President*
  67
  STATE BANCORP, INC. AND SUBSIDIARIES
  State
Bank of Long Island—Officers
 Effective
March 1, 2005
 
 **Financial
      Group**
      
      Theresa
      DiVittorio, CPA
      *Senior
      Vice President and*
      *Chief
      Risk Officer*
      
      Mary
      Ann P. DiLorenzo
      *Vice
      President*
      
      Philip
      J. Nardella, CPA
      *Vice
      President and Assistant Comptroller*
      
      Thomas
      C. Padden
      *Vice
      President*
      
      Carol
      J. Bergmann
      *Assistant
      Vice President and*
      *Assistant
      Secretary*
      
      Steven
      Karaman
      *Assistant
      Vice President*
      
      Carrie
      A. Sliss
      *Assistant
      Finance Officer*
      
      **Bank
      Operations/Facilities**
      
      Raymond
      D. Wagner
      *First
      Vice President*
      
      Maureen
      McTiernan
      *Vice
      President*
      
      Jennie
      DiFilippi
      *Assistant
      Vice President*
      
      Joseph
      Crispino
      *Security
      Investigations Officer*
      Valerie
      Stewart
      *Bank
      Operations Officer*
      Mary
      Alfo
      *Assistant
      Bank Operations Officer*
      
      **Management
      Information**
      **Systems
      and Data Processing**
      
      Susanne
      Pheffer
      *Senior
      Vice President*
      
      Joseph
      M. McNeill
      *First
      Vice President*
      
      Diane
      T. Beck
      *Vice
      President*
      
      Janine
      M. Specht
      *Assistant
      Vice President*
      
      Nathan
      Jones
      *Technology
      Officer*
      
      Diana
      Whelan
      *Data
      Processing Officer*
      
      Elizabeth
      A. Zona
      *Technology
      Officer*
      
      Wayne
      J. Badke
      *Assistant
      Technology Officer*
      
      Barry
      K. Horne, Jr.
      *Assistant
      Technology Officer*
      
      Gaetano
      Thomas Lasorsa
      *Assistant
      Technology Officer*
    **Human
      Resources**
      
      Mary
      E. Durkin
      *First
      Vice President and Director of*
      *Human
      Resources and Training*
      
      Stephen
      N. Pedersen
      *Assistant
      Vice President,*
      *Branch
      Training Specialist*
      
      **Marketing**
      
      John
      McWhirk
      *Vice
      President and Director of Marketing*
      *and
      Product Development*
      
      Scott
      Burkhardt
      *Marketing
      Officer*
      
      Natalie
      Crowley
      *Marketing
      Officer*
      
      **Branch
      Administration**
      
      Thomas
      A. Arnone
      *Senior
      Vice President*
      
      Lucy
      Mazany
      *First
      Vice President and District Manager*
      
      Rosalie
      Mottola
      *First
      Vice President and District Manager*
      
      Ann
      Marie Tarantino
      *Vice
      President*
      
      Kevin
      J. Carroll
      *Assistant
      Vice President*
      
      Karen
      M. Williams
      *Assistant
      Vice President*
      
      Robert
      E. Insalaco
      *Branch
      Administration Officer*
      
      Donna
      Gerard
      *Assistant
      Branch Administration Officer*
      
      **Sales
      / New Business**
      **Development**
      
      Douglas
      W. Vergith
      *First
      Vice President*
      
      Ronald
      M. Dubin
      *Vice
      President and*
      *Business
      Development Officer*
      
      Rocco
      Reda
      *Vice
      President and*
      *Business
      Development Officer*
      
      Peter
      J. Yovine
      *Vice
      President and*
      *Business
      Development Officer*
      
      Cara
      Maloney
      *Assistant
      Vice President*
      
      Joseph
      Rainone
      *Branch
      Investment Officer*
    **New
      Hyde Park Branch**
      
      Richard
      A. DeMartino
      *Vice
      President*
      
      Rosemary
      A. DiMario
      *Branch
      Banking Officer*
      
      Barbara
      Nilsen
      *Branch
      Banking Officer*
      
      Rina
      Miletic
      *Branch
      Operations Officer*
      
      D.
      Shantie Singh
      *Branch
      Operations Officer*
      
      **Garden
      City South Branch**
      
      Paul
      R. Cronen
      *Assistant
      Vice President*
      
      Dawn
      White
      *Branch
      Operations Officer*
      
      **Rockville
      Centre Branch**
      
      Ann
      Goulding
      *Assistant
      Vice President*
      
      **County
      Seat Branch**
      
      Timothy
      P. McCue
      *Assistant
      Vice President*
      
      Maria
      Careccia
      *Branch
      Operations Officer*
      
      **Port
      Washington Branch**
      
      June
      Alleyne
      *Assistant
      Vice President*
      
      Nelson
      Lee
      *Branch
      Banking Officer*
      
      **Farmingdale
      Branch**
      
      Catherine
      R. Indimine
      *Assistant
      Vice President*
      
      Lisa
      Ramos-Lopez
      *Branch
      Operations Officer*
      
      **Jericho
      Branch**
      
      Alba
      Spinelli
      *Vice
      President*
      
      Joan
      C. Mizrachi
      *Branch
      Operations Officer*
      
      **Oyster
      Bay Branch**
      
      Diane
      E. Grochocki
      *Assistant
      Vice President*
      
      Maria
      Circosta
      *Branch
      Operations Officer*
      
      **Hauppauge
      Branch**
      
      Savina
      Indelicato
      *Assistant
      Vice President*
      
      Abigail
      Clohessy
      *Branch
      Operations Officer*
    **Huntington
      Branch**
      
      Kevin
      Asher
      *Assistant
      Vice President*
      
      Lisa
      A. Pandolfo
      *Branch
      Banking Officer*
      
      Helen
      M. Gilfedder
      *Branch
      Operations Officer*
      
      **MacArthur
      Branch**
      
      Iris
      Taibbi
      *Assistant
      Vice President*
      
      Clare
      M. O’Shaughnessy
      *Branch
      Operations Officer*
      
      **Three
      Village Branch**
      
      Olga
      B. Belleau
      *Assistant
      Vice President*
      
      Donna
      Allen
      *Branch
      Operations Officer*
      
      **Maspeth
      Branch**
      
      Robert
      Vollkommer
      *Assistant
      Vice President*
      
      Carrie
      Martorana
      *Branch
      Operations Officer*
      
      **Long
      Island City Branch**
      
      Traude
      Kump
      *Vice
      President*
      
      Patricia
      Blanco
      *Branch
      Operations Officer*
      
      **Municipal
      Finance**
      
      Robert
      J. Valli
      *Senior
      Vice President and Director of*
      *Municipal
      Finance and Community*
      *Relations*
      
      Michael
      P. Locorriere
      *First
      Vice President*
      
      Kenneth
      A. Messina
      *First
      Vice President*
      
      John
      P. Rom
      *Vice
      President*
      
      Hazel
      F. McCord
      *Municipal
      Finance Officer*
  68
  STATE BANCORP, INC. AND SUBSIDIARIES
  State
Bank of Long Island—Officers
  **Commercial
      Lending Group**
      
      Charles
      A. Hoffman
      *Senior
      Vice President*
      
      Robert
      J. Nicols
      *Senior
      Vice President*
      
      William
      H. Tucker
      *Senior
      Vice President*
      
      Jean-ann
      Yngstrom
      *Senior
      Vice President*
      
      Jeffrey
      N. Barber
      *First
      Vice President*
      
      James
      T. Burns
      *First
      Vice President*
      
      Kevin
      T. Hennessy
      *First
      Vice President*
      
      Fred
      A. Heruth
      *First
      Vice President*
      
      William
      H. Mausert
      *First
      Vice President*
      
      Richard
      J. O’Brien
      *First
      Vice President*
      
      Michael
      O’Leary
      *First
      Vice President*
      
      Thomas
      Scott Swain
      *First
      Vice President*
      
      Patrick
      M. Demery
      *Vice
      President*
      
      Bonnie
      Dougherty
      *Vice
      President*
    John
      Governale
      *Vice
      President*
      
      Lori
      D. Keller
      *Vice
      President*
      
      Robert
      Kiernan
      *Vice
      President*
      
      Daniel
      G. Lehan
      *Vice
      President*
      
      Philip
      Leone
      *Vice
      President and*
      *Business
      Development Officer*
      
      Stephen
      B. Mischo
      *Vice
      President*
      
      Jeffrey
      B. Reid
      *Vice
      President*
      
      Kathleen
      M. Stanley
      *Vice
      President*
      
      William
      Vrana
      *Vice
      President*
      
      Maria
      Billiris
      *Assistant
      Vice President*
      
      Craig
      Goldstein
      *Assistant
      Vice President*
      
      Karyn
      F. Rodriguez
      *Assistant
      Vice President*
      
      Joseph
      Sacco
      *Assistant
      Vice President*
      
      Christopher
      Van Bell
      *Assistant
      Vice President*
      
      Frederick
      Zwikelmaier
      *Assistant
      Vice President*
    Karen
      DaRocha
      *Commercial
      Loan Officer*
      
      Michele
      Klampfer
      *Commercial
      Loan Officer*
      
      Raffaella
      Palazzo
      *Commercial
      Loan Officer*
      
      Joan
      Kuehne
      *Assistant
      Loan Administration Officer*
      
      **Consumer
      Loan Department**
      
      Jean
      M. Cassese
      *Vice
      President*
      
      John
      J. McEniry
      *Vice
      President*
      
      Joseph
      Noviello
      *Assistant
      Consumer Loan Officer*
      
      **Loan
      Operations Group**
      
      Geraldine
      Harden
      *Vice
      President*
      
      Siu
      Chan
      *Assistant
      Vice President*
      
      Joann
      Riccobaldi-Cozzani
      *Loan
      Operations Officer*
      
      **Professional
      Services Group**
      
      Glenn
      Crisafi
      *Senior
      Vice President-Managing Director*
      
      Steven
      Biegelsen
      *First
      Vice President*
      
      Jacob
      Ivry
      *First
      Vice President*
      
      Tara
      Rice
      *First
      Vice President*
    **Office
      of the Chairman**
      
      Janice
      Clark
      *Assistant
      Secretary*
      
      Valerie
      McCarthy
      *Executive
      Staff Assistant*
      
      Denise
      Sterzel
      *Executive
      Staff Assistant*
      
      Vernon
      E. Westfall
      *Public
      Relations Coordinator*
      
      **Corporate
      Communications**
      
      Deborah
      A. Kendric, CPA
      *Vice
      President and Director of Corporate*
      *Communications*
      
      **SB
      Portfolio Management Corp.**
      
      Matthew
      T. Novak
      *President
      and Director*
      
      **SB
      Financial Services Corp.**
      
      Matthew
      T. Novak
      *President
      and Director*
      
      Carl
      S. Nadwodny
      *First
      Vice President*
      
      **Studebaker-Worthington**
      **Leasing
      Corp.**
      
      Kenneth
      M. Paston
      *President
      and Director*
      
      Anthony
      Campisciano
      *Vice
      President*
  
 Advisory
Board
 
 Henry
      Alpert,*President*
      *Spartan
      Petroleum Corp.*
      
      Andrew
      C. Andron,*President*
      *Century
      21 Andron Realty*
      
      Maureen
      Appel,*Headmistress*
      *Connelly
      School of the Holy Child*
      
      Thomas
      C. Catalano, Jr.,*Partner*
      *Donohue,
      McGahan and Catalano*
      
      Salvatore
      Catania,*Secretary*
      *Murray
      M. Braunstein, Inc.*
      
      Anthony
      J. Demasco,*CPA,
      Partner*
      *Demasco,
      Sena & Jahelka LLP*
      
      Monroe
      Diefendorf, Jr.,*President*
      *Diefendorf
      Capital Planning Associates*
      
      John
      C. Dugan,*PT,
      OCS, NCS,*
      *GCS*
      *Farmingdale
      Physical Therapy Associates*
      
      Debbie
      C. Eichen*,
      CPA*
      *Eichen
      & DiMeglio, P.C.*
      
      Fred
      H. Fellows,*President*
      *Fibre
      Materials Co., Inc.*
    Ronald
      F. Friedenthal
      *Independent
      Insurance Broker*
      
      Frank
      Giorgio, Jr.,*Esq.*
      *Giorgio,
      DePoto & Principe, LLP*
      
      George
      Goettelmann, Jr.,
      *President*
      *A.
      E. Goettelmann & Co.*
      
      Kermit
      Gordon
      *Kermit
      Enterprises*
      
      Henry
      P. Greve,*CPA*
      *Cohen,
      Greve & Co., CPA, P.C.*
      
      Joseph
      M. Gunning,*President*
      *Gunning
      Business Machines*
      
      Anne
      S. Hadlock,*CPA*
      *Consultant*
      
      Jean
      A. Hegler,*Attorney*
      *Brosnan
      & Hegler, LLP*
      
      Edward
      Heil
      *Independent
      Network Group*
      
      Conrad
      P. Homler,*CPA*
      *Homler
      & Homler*
    Seymour
      Katchen,*CPA*
      *Palmetto,
      Mollo & Co.*
      
      Michael
      Katz,*President*
      *Decor
      Moulding & Supply*
      
      Robert
      F. Kearns,*Chairman*
      *Suppress
      X-S*
      
      Owen
      Kilgannon,*CPA*
      *Giambalvo,
      Kilgannon & Giammarese*
      
      Thomas
      J. Killeen,*Partner*
      *Farrell
      Fritz, P.C.*
      
      Carol
      Konner,*President*
      *Konner
      Development Corp.*
      
      Patrick
      McAllister
      *Great
      Eastern Printing Co.*
      
      Frederick
      J. Meyer
      *Mullooly,
      Jeffrey, Rooney & Flynn*
      
      Robert
      E. Meyer
      *Robert
      E. Meyer Real Estate Appraisals*
      
      Donald
      Monti,*President*
      *Concorde
      Management Services, Inc.*
    Dominick
      Nuzzi
      *Allegiance
      International, Inc.*
      
      John
      J. Nuzzi
      *Nuzzi
      Fuel Co.*
      
      James
      F. O’Brien,*Attorney*
      *Law
      Offices of James F. O’Brien*
      
      Peter
      N. Paternostro,*CPA,
      Partner*
      *Paternostro
      & DeFreitas & Co., LLP*
      
      Charles
      Peluso,*CPA*
      *Margolin,
      Winer & Evens*
      
      Charles
      W. Schwing,*Consultant*
      *Schwing
      Electrical Supply Corp.*
      
      Fred
      Scott,*Chairman*
      *State
      Bank of Long Island Advisory Board*
      
      Ralph
      Somma,*President*
      *Brueton
      Industries, Inc.*
      
      Charles
      I. Steinberg,*President*
      *Financial
      Pacesetters, Inc.*
      
      Matthew
      C. Wilkoff,*Vice
      President*
      *Gerald
      J. Wilkoff, Inc.*
  69
  STATE BANCORP, INC. AND SUBSIDIARIES
  Locations
 
 **Main
      Office**
      
      699
      Hillside Avenue
      New
      Hyde Park, NY 11040-2512
      (516)
      465-2200
      
      **Lending
      Facility**
      
      Two
      Jericho Plaza
      Jericho,
      NY 11753-1683
      (516)
      465-2300
      
      **Nassau
      County**
      
      County
      Seat Office
      222
      Old Country Road
      Mineola,
      NY 11501
      (516)
      240-6200
      
      Garden
      City South Office
      339
      Nassau Boulevard
      Garden
      City South, NY 11530-5313
      (516)
      481-3900
      
      Jericho
      Office
      501
      North Broadway
      Jericho,
      NY 11753-2107
      (516)
      822-4000
      
      Oyster
      Bay Office
      135
      South Street
      Oyster
      Bay, NY 11771-2283
      (516)
      922-0200
    Rockville
      Centre Office
      2
      Lincoln Avenue
      Rockville
      Centre, NY 11570-5724
      (516)
      678-6000
      
      Port
      Washington Office
      960
      Port Washington Boulevard
      Port
      Washington, NY 11050
      (516)
      495-7600
      
      **Suffolk
      County**
      
      Farmingdale
      Office
      27
      Smith Street
      Farmingdale,
      NY 11735-1022
      (631)
      847-3900
      
      Hauppauge
      Office
      740
      Veterans Memorial Highway
      Hauppauge,
      NY 11788-1231
      (631)
      979-0700
      
      Huntington
      Office
      580
      East Jericho Turnpike
      Huntington
      Station, NY 11746-7378
      (631)
      271-5900
      
      MacArthur
      Airport Office
      4250
      Veterans Memorial Highway
      Holbrook,
      NY 11741-4001
      (631)
      630-0500
    Three
      Village Office
      234
      Route 25A
      East
      Setauket, NY 11733-2890
      (631)
      941-3000
      
      **Queens
      County**
      
      Maspeth
      Office
      49-01
      Grand Avenue
      Maspeth,
      NY 11378
      (718)
      416-1400
      
      Bulova
      Corporate Center
      75-20
      Astoria Boulevard
      Jackson
      Heights, NY 11370
      (718)
      426-2200
      
      Long
      Island City Office
      21-31
      46th Avenue
      Long
      Island City, NY 11101
      (718)
      361-9800
      
      Queens
      Regional Office
      75-20
      Astoria Boulevard
      Jackson
      Heights, NY 11370
      (718)
      426-4600
    **Subsidiary
      Locations**
      SB
      Portfolio Managment Corp.
      1403
      Foulk Road, Suite 102
      Wilmington,
      DE 19803
      (302)
      479-5936
      
      SB
      Financial Services Corp.
      1403
      Foulk Road, Suite 102
      Wilmington,
      DE 19803
      (302)
      479-7534
      
      SB
      ORE Corp.
      699
      Hillside Avenue
      New
      Hyde Park, NY 11040
      (516)
      465-2200
      
      New
      Hyde Park Leasing
      Corporation
      699
      Hillside Avenue
      New
      Hyde Park, NY 11040
      (516)
      465-2200
      
      Studebaker-Worthington
      Leasing
      Corp.
      100
      Jericho Quadrangle
      Jericho,
      NY 11753
      (516)
      938-5460
      
      **Internet
      Address**
      www.statebankofli.com
      
      **Touch
      24-**
      **24
      Hour Telephone Banking**
      1-866-STATEBK
      (Toll Free)
      1-866-782-8325
  70
  STATE
BANCORP, I NC. AND SUBSIDIARIES
 CORPORATE
INFORMATION
  **EXECUTIVE
      OFFICES**
    
    **STOCK
      LISTING**699
      Hillside Avenue
    
    State
      Bancorp, Inc. is traded on the American Stock Exchange under the symbol
      STB. Price information appears in the*Wall
      Street Journal, New York Times*and
      other newspapers under StateBcp. At December 31, 2004, the total number of
      holders of record of State Bancorp, Inc.’s common stock was
      1,471.New
      Hyde Park, NY 11040-2512Tel:
      (516) 437-1000(516)
      465-2200Fax:
      (516) 437-10322
      Jericho PlazaJericho,
      NY 11753-1683
    
    **S****TOCKHOLDER
      ACCOUNT INQUIRIES**Tel:
      (516) 465-2300
    
    To
      expedite changes of address or registration, consolidation of accounts and
      there placement of stock certificates or dividend checks, stockholders
      should contact the Company’s registrar and transfer agent
      directly:Fax:
      (516) 465-6700**ANNUAL
      MEETING OF STOCKHOLDERS**State
      Bancorp, Inc.’s Annual Stockholders’ Meeting will beheld on Tuesday, April
      26, 2005 at 10:00 a.m. at the New Hyde Park Inn, New Hyde Park,
      N.Y.
    
    Wells
      Fargo Shareowner Services161
      North Concord ExchangeSouth
      St. Paul, MN 55075-1139**INVESTOR
      RELATIONS**
    
    (800)
      468-9716Stockholders,
      security analysts and others seeking information about State Bancorp, Inc.
      should contact**FDIC
      RULES AND REGULATIONS**,Brian
      K. Finneran
    
    **PART
      350.4(d)**Chief
      Financial Officer
    
    This
      statement has not been reviewed, or confirmed for accuracy or relevance,
      by the Federal Deposit Insurance Corporation.(516)
      465-2251e-mail:
      Bfinneran@statebankofli.comCopies
      of thefinancial
      publications, including the Annual Report on Form 10-K filed with the
      Securities and Exchange Commission, are available without charge by
      accessing the Investor Relations page of the Company’s website at
      www.statebankofli.com or upon written request to::
    
    **INDEPENDENT
      AUDITORS**Deloitte
      & Touche LLP1700
      Market StreetPhiladelphia,
      PA 19103-3984**COUNSEL**Lamb
      & Barnosky, LLPDeborah
      A. Kendric
    
    534
      Broadhollow RoadVice
      President and Director
    
    Melville,
      NY 11747-9034of
      Corporate CommunicationsState
      Bank of Long Island2
      Jericho Plaza,Jericho,
      NY 11753
 **VIEW
      YOUR COMMON STOCK ACCOUNT ONLINE**
      
      Wells
      Fargo Shareowner Services, the transfer agent for the Company’s common
      stock, makes available to shareholders an Internet
      Service:www.shareowneronline.com. Shareowner Online is a web-enabled
      real-time service, available 24 hours a day, 7 days per week. This service
      provides shareholders of record with the ability to:
      
      •
      View account balances
      • View
      certificate, book-entry and payment history
      •
      View, print or request Form 1099
      •
      Request duplicate statements
      •
      Perform address changes
      
      Activating
      your account is easy. Go to www.shareowneronline.com and click on "HERE".
      Next, simply click on the box titled “first time visitor”, then click on
      “new member sign-up” and follow the instructions found on the “first time
      visitor new member registration” page. You will be prompted to select a
      Personal Identification Number (PIN) and you will also need your account
      number, which is found on your dividend check or dividend reinvestment
      statement.
      
      For questions about your account, call
      1-800-468-9716.
                    STATEBANCORP,
      INC.Corporate Office699 Hillside AvenueNew Hyde Park, NY 11040-2512(516) 465-2200