**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-K**





x ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      fiscal year ended **December
      31, 2006**


Commission
      File No. 0-14874





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


THE
      SECURITIES EXCHANGE ACT OF 1934





**STATE
      BANCORP, INC.**


(Exact
      name of registrant as specified in its charter)





New
                York
            11-2846511(State
                or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
                Employer Identification No.)699
                Hillside AvenueNew
                Hyde Park, N.Y.
            11040(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant's
      telephone number, including area code: (516)
      437-1000





Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act:


Common
      Stock ($5.00 par value)


(Title
      of
      Class)





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes  ̈ No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes  ̈ No x





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


Yes
x No
 ̈





Indicate
      by check mark if disclosure or delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statement
      incorporated by reference in Part III of this Form 10-K or any amendment of
      this
      Form 10-K.  ̈





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


Large
                accelerated filer ̈
            Accelerated
                filerx
            Non-accelerated
                filer ̈





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


Yes  ̈ No x





As
      of
      June 30, 2006, there were 11,149,998 shares of common stock outstanding and
      the
      aggregate market value of common stock of State Bancorp, Inc. held by
      nonaffiliates was approximately $192,449,000 as computed using the closing
      market price of the stock of $17.26 reported by the NASDAQ National Market
      on
      June 30, 2006.





As
      of
      February 26, 2007, there were 13,653,594 outstanding shares of State Bancorp,
      Inc. common stock **.**
















**STATE
      BANCORP, INC.**


**Annual
      Report on Form 10-K**


**For
      the Year Ended December 31, 2006**





**Table
      of Contents**





Documents
                Incorporated by ReferencePART
                I
            Item
                1.
            BusinessItem
                1A.
            Risk
                FactorsItem
                1B.
            Unresolved
                Staff CommentsItem
                2.
            PropertiesItem
                3.
            Legal
                ProceedingsItem
                4.
            Submission
                of Matters to a Vote of Security
                HoldersPART
                II
            Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity SecuritiesItem
                6.
            Selected
                Financial DataItem
                7.
            Management's
                Discussion and Analysis of Financial Condition
                and Results of OperationsItem
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                RiskItem
                8.
            Financial
                Statements and Supplementary
                DataItem
                9.
            Changes
                in and Disagreements with Accountants on
                Accounting and Financial DisclosureItem
                9A.
            Controls
                and ProceduresItem
                9B.
            Other
                InformationPART
                III
            Item
                10.
            Directors,
                Executive Officers and Corporate
                GovernanceItem
                11.
            Executive
                CompensationItem
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder MattersItem
                13.
            Certain
                Relationships and Related Transactions, and
                Director IndependenceItem
                14.
            Principal
                Accounting Fees and
                ServicesPART
                IV
            Item
                15.
            Exhibits,
                Financial Statement
                SchedulesSignatures





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**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the 2007 Proxy Statement to be filed on or about March 31, 2007 (the “2007
      Proxy”) are incorporated herein by reference in this Annual Report on Form 10-K
      in response to items under Part III.








**PART
      I**








**ITEM1.**
            **BUSINESS**





**General**





State
      Bancorp, Inc. (the “Company”), a one-bank holding company headquartered in New
      Hyde Park, New York, was formed on June 24, 1986. The Company operates as the
      parent for its wholly owned subsidiary, State Bank of Long Island (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,
      entities formed in 2002 and 2003, respectively, to issue trust preferred
      securities. The Bank conducts a general banking business focused on the small
      to
      mid-sized business, municipal and consumer markets in Long Island and Queens,
      New York. The Bank, through a strategy of measured, orderly growth emphasizing
      high-quality personal service, has grown to be the largest independent
      commercial bank headquartered on Long Island. The income of the Company is
      derived through the operations of the Bank and its subsidiaries, SB Portfolio
      Management Corp. (“SB Portfolio”), SB Financial Services Corp. (“SB Financial”),
      New Hyde Park Leasing Corporation (“NHPL”) and its subsidiaries, P.W.B. Realty,
      L.L.C. (“PWB”) and State Title Agency, LLC, Studebaker-Worthington Leasing Corp.
      (“SWLC”) and SB ORE Corp.





At
      December 31, 2006, the Company, on a consolidated basis, had total assets of
      approximately $1.8 billion, total deposits of approximately $1.6 billion, and
      stockholders' equity of approximately $104 million. Unless the context otherwise
      requires, references herein to the Company include the Company and its
      subsidiaries on a consolidated basis.





The
      Bank
      provides a full range of banking services to customers located primarily in
      Nassau, Suffolk and Queens Counties. The Bank serves its customer base through
      sixteen full-service branches in those counties and a lending center in Jericho,
      NY. The Bank’s deposit products include checking, savings, time, money market
      and IRA accounts. The Bank offers secured and unsecured commercial and consumer
      loans. Additional **** credit
      services offered include commercial mortgage loans, construction mortgage loans,
      letters of credit, equipment leasing, other commercial installment loans and
      lines of credit, home equity lines of credit, residential mortgage loans and
      auto and other personal loans. In addition, the Bank provides safe deposit
      services, merchant credit card services, access to annuity products and mutual
      funds and a consumer debit card with membership in a national ATM network.
      Through an alliance with U.S. Trust Company, the Bank also offers its customers
      access to financial planning and wealth management services. The Bank also
      offers its customers on-line banking, bill payment and cash management services.
      The Bank’s strategy of establishing and maintaining long-term customer
      relationships has contributed to its relatively stable core deposit base.





The
      Bank
      has various operating subsidiaries. NHPL owns 51% of PWB, which was formed
      in
      2002 to own the Bank’s branch premises located in Port Washington, New York. It
      also owns 51% of State Title Agency, LLC, formed in 2004, to provide an
      opportunity for the Bank to offer title insurance for commercial transactions.
      NHPL, PWB and State Title Agency, LLC, are not material in terms of
      contributions to the Company’s results of operations. The Bank owns 100% of SB
      ORE Corp., formed in 1994 to hold foreclosed property. In 1998, the Bank
      established SB Portfolio and SB Financial, two wholly owned Delaware-based
      subsidiaries. SB Portfolio holds and manages a portfolio of fixed income
      investments while SB Financial provides balance sheet management services such
      as interest rate risk modeling and asset/liability management reporting along
      with general advisory services to the Company and its subsidiaries. The Bank’s
      leasing activity is primarily conducted by SWLC (acquired in 2001) which has
      over thirty years of nationwide business equipment leasing
      experience.





Neither
      the Company nor any of its direct or indirect subsidiaries is dependent upon
      a
      single customer or very few customers. No material amount of deposits is
      obtained from a single depositor. The Bank does not rely on foreign sources
      of
      funds or income and the Bank does not have any foreign commitments, with the
      exception of letters of credit issued on behalf of several of its customers.
      The
      Bank's nature and conduct of business have remained substantially unchanged
      since year-end 2005.





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The
      Company expects that compliance with provisions regulating environmental
      controls will have no material effect upon the capital, expenditures, earnings
      or competitive position of the Company. The Company operates in the banking
      industry and management considers the Company to be aggregated in one reportable
      operating segment. The Bank has not experienced any material seasonal
      fluctuations in its business. The Company has not had material expenditures
      for
      research and development. The Company employed 371 full-time and part-time
      officers and employees as of December 31, 2006.





The
      Company’s Internet address is www.statebankofli.com .
      The
      Company makes available on its website, free of charge, its periodic and current
      reports, proxy and information statements and other information we file with
      the
      Securities and Exchange Commission (“SEC”) and amendments thereto as soon as
      reasonably practicable after the Company files such material with, or furnishes
      such material to, the SEC, as applicable. Unless specifically incorporated
      by
      reference, the information on our website is not part of this annual report.
      Such reports are also available on the SEC’s website at www.sec.gov, or at the
      SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC, 20549.
      Information may be obtained on the operation of the Public Reference Room by
      calling the SEC at 1-800-SEC-0330.





**Market
      Area and Competition**





The
      Company considers its business to be highly competitive in its market areas.
      The
      Company vies with local, regional and national depository financial institutions
      and other businesses with respect to its lending services and in attracting
      deposits, including commercial banks, savings banks, insurance companies, credit
      unions, money market funds and affiliates of consumer goods manufacturers.
      Although the Bank is considerably smaller in size than many of these
      institutions operating in its market areas, it has demonstrated the ability to
      compete effectively with them.





Our
      competition for loans comes principally from commercial banks, savings
      institutions, mortgage banking firms, credit unions, finance companies,
      insurance companies and brokerage and investment banking firms. Our most direct
      competition for deposits comes from commercial banks, savings banks, savings
      and
      loan associations and credit unions. We face additional competition for deposits
      from short-term money market funds and other corporate and government securities
      funds and from brokerage firms and insurance companies.





The
      Company’s current market area consists of Nassau, Suffolk and Queens Counties in
      New York. The Company believes that there are a significant number of small
      to
      mid-size businesses in its current market area that seek a locally-based
      commercial bank that can offer a broad array of financial products and services.
      Many of these businesses have been displaced as a result of recent bank mergers
      in the area. Given the variety of financial products and services offered by
      the
      Company, its focus on customer service, and its local management, the Company
      believes that it can better serve the growing needs of both new and existing
      customers in its current market areas.




The
      Company’s current markets have attractive per capita income and median household
      income demographics. ESRI, a leading provider of demographic data, has projected
      that per capita income between 2006 and 2011 in Nassau, Suffolk and Queens
      Counties will grow by 24.5%, 24.9% and 21.7%, respectively. The 2006 median
      household income for these three counties are an impressive $90,227, $81,248
      and
      $53,351, respectively. Nassau County’s 2006 median household income is the tenth
      highest in the United States. Although these three counties are mature in terms
      of population growth, residents of these counties continue to experience
      favorable income trends.




The
      Company believes that the projected economic growth in its current market area
      will provide it with significant opportunities to continue to grow. The Company
      expects that strong growth in these market areas will create a need for all
      types of commercial expansion opportunities as well as retail services. These
      developments should provide the Company with significant future banking and
      lending opportunities.




**Competitive
      Strengths**





The
      Company believes that the following business strengths differentiate the Company
      from its peers:




·
            **History
                of Strong Earnings.**Until 2005, the Company had achieved 34 consecutive years of record
                earnings. The Company’s strong historical earnings have been driven by its
                impressive net interest margin. For the year ended December 31, 2006
                and
                the year ended December 31, 2005, the Company’s net interest margin was
                4.01% and 4.17%, respectively. The Company’s strong margin results from
                its stable low-cost core deposit base coupled with a business mix
                which
                emphasizes high-yielding commercial loans, commercial mortgages and
                equipment leases.





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The
      Company’s 2005 earnings were adversely affected by a January 2006 verdict
      rendered against the Company related to the activities of Island Mortgage
      Network, Inc. (“IMN”) and certain related companies that had deposit
      relationships with the Bank. The Company recorded a $74.2 million expense
      related to IMN in its 2005 financial statements and, as a result, reported
      a
      $36.5 million loss for that year. During 2006, the Company continued to incur
      additional expenses related to the IMN warehouse lender litigation. On January
      24, 2007, the Bank entered into a settlement agreement finally resolving the
      last of the IMN warehouse lender claims. See discussion of the IMN litigation
      that follows under “Legal Proceedings.” The amount of the settlement payment was
      less than the Company’s related litigation reserve of $77 million, resulting in
      a credit, net of ongoing IMN-related legal fees incurred, of $6.2 million for
      all IMN-related matters in 2006 compared to IMN-related expenses of $82.8
      million in 2005. The Company reported net income of $11.5 million in 2006 as
      a
      result of this credit and other positive factors including an increase in net
      interest income and a reduction in the provision for loan and lease losses.
      Offsetting these positive factors were a modest reduction in non-interest income
      and a higher provision for income taxes in 2006 related to the Bank’s Delaware
      subsidiaries. See discussion that follows under “Legal
      Proceedings.”




·
            **Largest
                Independent Commercial Bank Headquartered on Long Island.**The
                Bank is the largest independent commercial bank headquartered on
                Long
                Island, with a network of 16 branches stretching from the Three Village
                area, located in Suffolk County, to Long Island City, Queens, New
                York.
                According to data published by the Federal Deposit Insurance Corporation
                (the “FDIC”), the Company’s deposit market share increased in each of the
                counties in which it operates from June 30, 2005 to June 30, 2006,
                the
                latest dates for which deposit data is available. Based on total
                deposits
                as of June 30, 2006, the Company’s market share in Nassau, Suffolk and
                Queens Counties was 1.72%, 1.51% and 0.21%,
                respectively.




·
            **Strong
                Credit Quality.**The Company emphasizes a strong credit culture based on traditional
                credit
                measures and underwriting standards. The results of the Company’s
                continued focus on credit quality are evidenced by a ratio of
                non-performing assets to total loans and leases of 0.22% at December
                31,
                2006 and 0.34% at December 31, 2005 and a net charge-offs to average
                total
                loans and leases ratio of 0.19% for the year ended December 31, 2006
                and a
                net recoveries to average total loans and leases ratio of 0.01% for
                the
                year ended December 31, 2005. At December 31, 2006 and December 31,
                2005,
                the Company held no other real estate owned (“OREO”) and there were no
                restructured accruing loans and
                leases.




·
            **New
                President and Chief Operating Officer.**On
                November 7, 2006, the Board appointed Thomas M. O’Brien as President and
                Chief Operating Officer of the Company and the Bank, effective
                immediately. In addition, the Board announced that Thomas F. Goldrick,
                Jr., Chairman and Chief Executive Officer of the Company and the
                Bank, had
                informed the Board of his intention to step down as Chief Executive
                Officer in 2007, at which time he will be succeeded as Chief Executive
                Officer by Mr. O’Brien.




Mr.
      O’Brien, 55, was President and Chief Executive Officer of Atlantic Bank of New
      York when it was acquired by New York Community Bancorp, Inc. in 2006. Mr.
      O’Brien began his banking career in 1977 at North Side Savings Bank. He was
      appointed Chief Executive Officer in 1984 at age 33. In 1986, he led North
      Side’s initial public offering. Mr. O’Brien joined North Fork Bancorporation,
      Inc. as Vice Chairman and a member of the board of directors in 1996 in
      conjunction with North Fork’s acquisition of North Side. In 2000, Mr. O’Brien
      joined Atlantic Bank of New York as President and Chief Executive Officer and
      a
      member of the board of directors.




**Supervision
      and Regulation**




***General***





The
      Company is registered as a bank holding company under the Bank Holding Company
      Act of 1956 (the “BHCA”), and is therefore subject to supervision and
      examination by the Board of Governors of the Federal Reserve System ("FRB").
      The
      Bank’s deposits are insured by the FDIC. The Bank is subject to the regulation
      and supervision and examination of the New York Banking Department (the "Banking
      Department") and the FDIC.





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The
      following summary discussion sets forth certain of the material elements of
      the
      legal and regulatory framework applicable to banks and bank holding companies
      and their subsidiaries. The regulation of banks and bank holding companies
      is
      extremely complex and this summary is qualified in its entirety by reference
      to
      the applicable statutes, regulations and regulatory guidance. Management
      believes the Company is in compliance in all material respects with these laws
      and regulations. A change in applicable statutes and regulations or regulatory
      policy cannot be predicted, but may have a material effect on the business
      of
      the Company and/or the Bank.





Bank
      holding companies and banks are prohibited by law from engaging in unsafe and
      unsound banking practices. Federal and New York State banking laws, regulations
      and policies extensively regulate the Company and the Bank including prescribing
      standards relating to capital, earnings, dividends, the repurchase or redemption
      of shares, loans or extension of credit to affiliates and insiders, internal
      controls, information systems, internal audit systems, loan documentation,
      credit underwriting, asset growth, impaired assets and loan to value ratios.
      Such laws and regulations are intended primarily for the protection of
      depositors, other customers and the federal deposit insurance funds and not
      for
      the protection of security holders. Bank regulatory agencies have broad
      examination and enforcement power over bank holding companies and banks,
      including the power to impose substantial fines, limit dividends and restrict
      operations and acquisitions.





A
      bank
      holding company is required to serve as a source of financial strength to its
      subsidiary depository institutions and to commit all available resources to
      support such institutions in circumstances where it might not do so absent
      such
      policy. Consistent with this “source of strength” policy, the FRB takes the
      position that a bank holding company generally should not maintain a rate of
      cash dividends unless its net income available to common stockholders is
      sufficient to fully fund the dividends and the prospective rate of earnings
      retention appears to be consistent with the company’s capital needs, asset
      quality and overall financial condition. In addition, any loans by the Company
      to the Bank would be subordinate in right of payment to depositors and to
      certain other indebtedness of the Bank.





***Acquisitions***





As
      a bank
      holding company, the Company may not acquire direct or indirect ownership or
      control of more than 5% of the voting shares of any company, including a bank,
      without the prior approval of the FRB, except as specifically authorized under
      the BHCA. Under the BHCA, the Company, subject to the approval of or notice
      to
      the FRB, may acquire shares of non-banking corporations, the activities of
      which
      are deemed by the FRB to be so closely related to banking or managing or
      controlling banks as to be a proper incident thereto.




The
      Change in Bank Control Act prohibits a person or group of persons from acquiring
      "control" of a bank holding company unless the FRB has been notified and has
      not
      objected to the transaction. Under a rebuttable presumption established by
      the
      FRB, the acquisition of 10% or more of a class of voting stock of a bank holding
      company with a class of securities registered under Section 12 of the Exchange
      Act, would, under the circumstances set forth in the presumption, constitute
      acquisition of control of the Company. In addition, any entity is required
      to
      obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the
      case of an acquirer that is a bank holding company) or more of the Company's
      outstanding common stock, or otherwise obtaining control or a "controlling
      influence" over the Company. The New York Banking Law (the “Banking Law”)
      similarly regulates a change in control affecting the Bank and requires the
      approval of the New York State Banking Board or Superintendent of
      Banks.





The
      Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended
      (the “Interstate Banking Act”) generally permits bank holding companies to
      acquire banks in any state, and preempts all state laws restricting the
      ownership by a bank holding company of banks in more than one state. The
      Interstate Banking Act also permits a bank to merge with an out-of-state bank
      and convert any offices into branches of the resulting bank if both states
      have
      not opted out of interstate branching; permits a bank to acquire branches from
      an out-of-state bank if the law of the state where the branches are located
      permits the interstate branch acquisition; and permits banks to establish and
      operate de novo interstate branches whenever the host state opts-in to de novo
      branching. Bank holding companies and banks seeking to engage in transactions
      authorized by the Interstate Banking Act must be adequately capitalized and
      managed. The Banking Law authorizes interstate branching by merger or
      acquisition on a reciprocal basis, and permits the acquisition of a single
      branch without restriction, but does not provide for de novo interstate
      branching.





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***Capital
      Adequacy***




The
      federal bank regulators have adopted risk-based capital guidelines for bank
      holding companies and banks. The minimum ratio of qualifying total capital
      (“Total Capital”) to risk-weighted assets (including certain off-balance sheet
      items) is 8%. At least half of the Total Capital must consist of common stock,
      retained earnings, qualifying noncumulative perpetual preferred stock, minority
      interests in the equity accounts of consolidated subsidiaries and, for bank
      holding companies, a limited amount of non-cumulative perpetual preferred stock,
      trust preferred securities and certain other so-called “restricted core capital
      elements” less most intangibles including goodwill (“Tier 1 Capital”). The
      remainder (“Tier 2 Capital”) may consist of certain other preferred stock,
      certain other capital instruments, and limited amounts of subordinated debt
      and
      the allowance for loan and lease losses. Restricted core capital elements are
      currently limited to 25% of Tier 1 Capital.




In
      addition, the FRB has established minimum guidelines for the “Leverage Ratio” of
      Tier 1 Capital to average total assets for bank holding companies and banks.
      The
      FRB’s guidelines provide for a minimum Leverage Ratio of 3% for bank holding
      companies and banks that meet certain specified criteria, including those having
      the highest supervisory rating. All other banking organizations will be required
      to maintain a Leverage Ratio of at least 4%. At December 31, 2006, the FRB
      had
      not advised the Company of any specific minimum Leverage Ratio applicable to
      it.





The
      FRB
      guidelines also provide that banking organizations experiencing internal growth
      or making acquisitions will be expected to maintain strong capital positions
      substantially above the minimum supervisory levels, without significant reliance
      on intangible assets.





***Prompt
      Corrective Action***





The
      Federal Deposit Insurance Act (“FDIA”) requires, among other things, that
      federal banking regulators take prompt corrective action in respect of
      FDIC-insured depository institutions that do not meet minimum capital
      requirements. The FDIA specifies five capital tiers: “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized,”
and “critically undercapitalized.” A depository institution’s capital tier will
      depend upon how its capital levels compare to various relevant capital measures
      and certain other factors, as established by regulation.





Under
      applicable regulations, an FDIC-insured bank is deemed to be: (i) well
      capitalized if it maintains a Leverage Ratio of at least 5%, a Tier 1 Capital
      Ratio of at least 6% and a Total Capital Ratio of at least 10% and is not
      subject to an order, written agreement, capital directive, or prompt corrective
      action directive to meet and maintain a specific level for any capital measure;
      (ii) adequately capitalized if it maintains a Leverage Ratio of at least 4%
      (or
      a Leverage Ratio of at least 3% if it received the highest supervisory rating
      in
      its most recent report of examination, subject to appropriate federal banking
      agency guidelines, and is not experiencing or anticipating significant growth),
      a Tier 1 Capital Ratio of 4% and a Total Capital Ratio of at least 8% and is
      not
      defined to be well capitalized; (iii) undercapitalized if it has a Leverage
      Ratio of less than 4% (or a Leverage Ratio that is less than 3% if it received
      the highest supervisory rating in its most recent report of examination, subject
      to appropriate federal banking agency guidelines, and is not experiencing or
      anticipating significant growth), a Tier 1 Capital Ratio less than 4% or a
      Total
      Capital Ratio of less than 8% and it does not meet the definition of a
      significantly undercapitalized or critically undercapitalized institution;
      (iv)
      significantly undercapitalized if it has a Leverage Ratio of less than 3%,
      a
      Tier 1 Capital Ratio of less than 3% or a Total Capital Ratio of less than
      6%
      and it does not meet the definition of critically undercapitalized; and (v)
      critically undercapitalized if it maintains a level of tangible equity capital
      of less than 2% of total assets. A bank may be deemed to be in a capitalization
      category that is lower than is indicated by its actual capital position if
      it
      receives an unsatisfactory examination rating. The FDIA imposes progressively
      more restrictive constraints on operations, management and capital
      distributions, depending on the capital category in which an institution is
      classified. A depository institution that is not well capitalized is subject
      to
      certain limitations on brokered deposits.





The
      FDIA
      generally prohibits an FDIC-insured depository institution from making any
      capital distribution (including payment of dividends) or paying any management
      fee to its holding company if the depository institution would thereafter be
      undercapitalized. Undercapitalized depository institutions are subject to
      restrictions on borrowing from the Federal Reserve and to growth limitations,
      and are required to submit a capital restoration plan. For a capital restoration
      plan to be acceptable, any holding company must guarantee the capital plan
      up to
      an amount equal to the lesser of 5% of the depository institution’s assets at
      the time it became undercapitalized and the amount of the capital deficiency
      at
      the time it fails to comply with the plan. In the event of the holding company’s
      bankruptcy, such guarantee would take priority over claims of its general
      unsecured creditors. If a depository institution fails to submit an acceptable
      plan, it is treated as if it is significantly undercapitalized.





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Significantly
      undercapitalized depository institutions may be subject to a number of
      requirements and restrictions, including orders to sell sufficient voting stock
      to become adequately capitalized, requirements to reduce total assets and
      cessation of receipt of deposits from correspondent banks. Critically
      undercapitalized depository institutions are subject to appointment of a
      receiver or conservator.





***Deposit
      Insurance***





Pursuant
      to Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), the FDIC
      established a system for setting deposit insurance premiums based upon the
      risks
      a particular bank or savings association posed to its deposit insurance funds.
      Under the risk-based deposit insurance assessment system, the FDIC assigns
      an
      institution to one of three capital categories based on the institution’s
      financial information as of its most recent quarterly financial report filed
      with the applicable bank regulatory agency prior to the commencement of the
      assessment period. The three capital categories are (1) well-capitalized, (2)
      adequately capitalized and (3) undercapitalized. The FDIC also assigns an
      institution to one of three supervisory subcategories within each capital group.
      The FDIC also assigns an institution to a supervisory subgroup based on a
      supervisory evaluation provided to the FDIC by the institution’s primary federal
      regulator and information that the FDIC determines to be relevant to the
      institution’s financial condition and the risk posed to the deposit insurance
      funds.





An
      institution’s assessment rate depends on the capital category and supervisory
      category to which it is assigned. Under the final risk-based assessment system,
      there are nine assessment risk classifications (i.e., combinations of capital
      groups and supervisory subgroups) to which different assessment rates are
      applied. Assessment rates for deposit insurance currently range from 0 basis
      points to 27 basis points. The capital and supervisory subgroup to which an
      institution is assigned by the FDIC is confidential and may not be disclosed.
      The assessment rates for our BIF assessable deposits are seven (7) basis points.
      If the FDIC determines that assessment rates should be increased, institutions
      in all risk categories could be affected. The FDIC has exercised this authority
      several times in the past and could raise insurance assessment rates in the
      future.





Under
      the
      Deposit Insurance Funds Act of 1996 (“Funds Act”), the assessment base for the
      payments on the bonds (“FICO bonds”) issued in the late 1980’s by the Financing
      Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
      Corporation was expanded to include, beginning January 1, 1997, the deposits
      of
      BIF-insured institutions, such as the Bank. Our total expense in 2006 for
      the assessment for deposit insurance and the FICO payments was $864
      thousand.





Under
      the
      FDIA, the FDIC may terminate the insurance of an institution’s deposits upon a
      finding that the institution has engaged in unsafe or unsound practices, is
      in
      an unsafe or unsound condition to continue operations or has violated any
      applicable law, regulation, rule, order or condition imposed by the FDIC. The
      management of the Company does not know of any practice, condition or violation
      that might lead to termination of deposit insurance.





On
      February 8, 2006, President Bush signed the “Federal Deposit Insurance Reform
      Act of 2005,” or the 2005 Deposit Act, into law. The 2005 Deposit Act contains
      provisions designed to reform and modernize the Federal deposit insurance
      system. Effective in 2006, the 2005 Deposit Act merged the BIF and SAIF into
      the
      new DIF; indexed the current $100,000 deposit insurance limit to inflation
      beginning in 2011 and every succeeding five years; and increased the deposit
      insurance limit for certain retirement accounts to $250,000 and indexed that
      limit to inflation as well. Effective January 1, 2007, the FDIC established
      a
      new risk-based assessment system for determining the deposit insurance
      assessments to be paid by insured depository institutions. The FDIC consolidated
      the previous nine assessment rate categories into four new categories. Base
      assessment rates will range from two to four basis points for Risk Category
      I
      institutions and will be seven basis points for Risk Category II institutions,
      twenty-five basis points for Risk Category III institutions and forty basis
      points for Risk Category IV institutions. For institutions within Risk Category
      I, assessment rates will depend upon a combination of CAMELS component ratings
      and financial ratios, or for large institutions with long-term debt issuer
      ratings, assessment rates will depend on a combination of long-term debt issuer
      ratings and CAMELS component ratings. The FDIC has the flexibility to adjust
      rates, without further notice-and-comment rulemaking, provided that no such
      adjustment can be greater than three basis points from one quarter to the next,
      that adjustments cannot result in rates more than three basis points above
      or
      below the base rates and that rates cannot be negative. Effective January 1,
      2007, the FDIC has set the assessment rates at three basis points above the
      base
      rates. Assessment rates will, therefore, range from five to forty-three basis
      points of deposits. The deposit insurance assessment rates are in addition
      to
      the FICO payments. The FDIC also established 1.25% of estimated insured deposits
      as the designated reserve ratio of the DIF. The FDIC is authorized to change
      the
      assessment rates as necessary, subject to the previously discussed limitations,
      to maintain the required reserve ratio of 1.25%.





8
 ***Table
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The
      FDIC
      also approved a one-time assessment credit to institutions that were in
      existence on December 31, 1996 and paid deposit insurance assessments prior
      to
      that date, or are a successor to such an institution. The Bank is entitled
      to a
      one-time assessment credit which may be used to offset 100% of the 2007 deposit
      insurance assessment, excluding the FICO payments. Any remaining credit can
      be
      used to offset up to 90% of the 2008 deposit insurance assessment. We estimate
      that our credit will fully offset our 2007 deposit insurance assessment as
      well
      as a portion of our 2008 deposit insurance assessment.





***Transactions
      with Affiliates and the Bank***





The
      Bank
      is subject to the affiliate and insider transaction rules set forth in Sections
      23A, 23B, 22(g) and 22(h) of the Federal Reserve Act (“FRA”),
      and Regulation W issued by the Federal Reserve Board (“FRB”). These
      provisions, among other things, prohibit or limit an insured bank from extending
      credit to, or entering into certain transactions with, its affiliates (which
      for
      the Bank would include the Company) and principal stockholders, directors and
      executive officers. The FRB requires depository institutions that are subject
      to
      Sections 23A and 23B to implement policies and procedures to ensure compliance
      with Regulation W regarding transactions with affiliates.





Section
      402 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) prohibits the extension
      of personal loans to directors and executive officers of issuers (as defined
      in
      Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced
      by an insured depository institution, such as the Bank, that are subject to
      the
      insider lending restrictions of Section 22(h) of the FRA.





***Privacy
      Standards***





The
      Bank
      is subject to the FDIC’s regulations implementing the privacy protection
      provisions of the Gramm-Leach-Bliley Act (“Gramm-Leach”). These regulations
      require the Bank to disclose its privacy policy, including identifying with
      whom
      it shares “non-public personal information,” to customers at the time of
      establishing the customer relationship and annually thereafter.





The
      regulations also require the Bank to provide its customers with initial and
      annual notices that accurately reflect its privacy policies and practices.
      In
      addition, the Bank is required to provide its customers with the ability to
      “opt-out” of having the Bank share their non-public personal information with
      unaffiliated third parties before they can disclose such information, subject
      to
      certain exceptions. The implementation of these regulations did not have a
      material adverse effect on the Bank.





The
      Bank
      is subject to regulatory guidelines establishing standards for safeguarding
      customer information. These regulations implement certain provisions of
      Gramm-Leach. The guidelines describe the agencies’ expectations for the
      creation, implementation and maintenance of an information security program,
      which would include administrative, technical and physical safeguards
      appropriate to the size and complexity of the institution and the nature and
      scope of its activities. The standards set forth in the guidelines are intended
      to ensure the security and confidentiality of customer records and information,
      protect against any anticipated threats or hazards to the security or integrity
      of such records and protect against unauthorized access to or use of such
      records or information that could result in substantial harm or inconvenience
      to
      any customer.





***Community
      Reinvestment Act***





Bank
      holding companies and their subsidiary banks are also subject to the provisions
      of the Community Reinvestment Act (“CRA”). Under the terms of the CRA, the FDIC
      (or other appropriate bank regulatory agency) is required, in connection with
      its examination of a bank, to assess such bank’s record in meeting the credit
      needs of the communities served by that bank, including low- and moderate-income
      neighborhoods. Furthermore, such assessment is also required of any bank that
      has applied, among other things, to merge or consolidate with or acquire the
      assets or assume the liabilities of a federally regulated financial institution
      or to open or relocate a branch office. In the case of a bank holding company
      applying for approval to acquire a bank or bank holding company, the FRB will
      assess the record of each subsidiary bank of the applicant bank holding company
      in considering the application. The Banking Law contains provisions similar
      to
      the CRA which are applicable to New York State chartered banks. Bank holding
      companies and their affiliates are prohibited from tying the provision of
      certain services, such as extensions of credit, to other services offered by
      a
      holding company or its affiliates.





***Dividend
      Limitations***





The
      Company’s primary source of income is dividends from the Bank. Certain
      regulatory agencies impose limitations on the declaration of dividends by the
      Bank. Under these limitations, at December 31, 2006, no dividends could be
      declared by the Bank without prior approval of the New York State Superintendent
      of Banks. The Federal banking regulators have adopted risk-based capital and
      leverage guidelines that require the Company’s and the Bank’s capital-to-assets
      ratios meet certain minimum standards. The risk-based capital ratio is
      determined by allocating assets and specified off-balance sheet financial
      instruments into four weighted categories, with higher levels of capital being
      required for the categories perceived as representing greater risk. For a
      further discussion, see the Notes to the Company’s Consolidated Financial
      Statements.





9
 ***Table
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***Anti-Money
      Laundering and the USA Patriot Act***





The
      Company is subject to federal regulations implementing the Uniting and
      Strengthening America by Providing Appropriate Tools Required to Intercept
      and
      Obstruct Terrorism Act of 2001 (“the USA PATRIOT Act”). The USA PATRIOT Act
      amended the Bank Secrecy Act and gave the federal government powers to address
      terrorist threats through enhanced domestic security measures, expanded
      surveillance powers, increased information sharing and other anti-money
      laundering and anti-terrorists financing requirements. The USA PATRIOT Act
      and
      the Bank Secrecy Act and implementing regulations impose affirmative obligations
      on a broad range of financial institutions, including banks, thrifts, brokers,
      dealers, credit unions, money service businesses and others.





Among
      other requirements, the USA PATRIOT Act and the Bank Secrecy Act and
      implementing regulations impose the following requirements with respect to
      financial institutions:


·
            Establishment
                of anti-money laundering programs.


·
            Establishment
                of a program specifying procedures for obtaining identifying information
                from customers seeking to open new accounts (“Customer Identification
                Programs”).


·
            Establishment
                of enhanced due diligence policies, procedures and controls designed
                to
                detect and report money laundering.


·
            Prohibition
                on correspondent accounts for foreign shell banks and compliance
                with
                recordkeeping obligations with respect to correspondent accounts
                of
                foreign banks.


·
            Establishment
                of policies and procedures relating to foreign private banking customers
                and politically exposed persons.





Substantial
      civil and criminal penalties may be imposed for violations of the USA PATRIOT
      Act and the Bank Secrecy Act and implementing regulations. Bank regulators
      may
      also require banks to take costly corrective action. Further, bank regulators
      are directed to consider a financial institution's effectiveness in combating
      money laundering and terrorists financing when ruling on applications for
      approval of proposed corporate transactions.





***Legislative
      and Regulatory Initiatives***





Various
      legislative initiatives are from time to time introduced in Congress, and
      various regulatory initiatives are from time to time introduced, that would
      apply to the Company. The Company cannot determine the ultimate effect that
      any
      such potential legislation or regulations, if adopted, would have upon its
      financial condition or operations.





**Federal
      Securities Laws**


The
      Company’s securities are registered with the Securities and Exchange Commission
      under the Securities Exchange Act of 1934, as amended. As such, the Company
      is
      subject to the information, proxy solicitation, insider trading, and other
      requirements and restrictions of the Securities Exchange Act of
      1934.





**New
      York Business Corporation Law**


The
      Company is incorporated under the laws of the State of New York, and is
      therefore subject to regulation by the State of New York. In addition, the
      rights of the Company’s shareholders are governed by the New York Business
      Corporation Law.





***Interagency
      Guidance on Concentrations in Commercial Real Estate
      Lending***




On
      December 6, 2006, the FRB, OCC and FDIC adopted guidance entitled
“Concentrations in Commercial Real Estate (CRE) Lending, Sound Risk Management
      Practices” (“CRE Guidance”) to address concentrations of commercial real estate
      loans in financial institutions. Although the CRE Guidance does not establish
      specific commercial real estate lending limits, the FRB, OCC and FDIC use the
      following criteria to evaluate whether an institution has a commercial real
      estate concentration risk. An institution may be identified for further
      supervisory analysis if it has experienced rapid growth in commercial real
      estate lending or has notable exposure to a specific type of commercial real
      estate. An institution may also be subject to further supervisory analysis
      if
      its total reported loans for construction, land development and other land
      represent 100 percent or more of that institution’s total capital, or if the
      institution’s total commercial real estate loans represent 300 percent or more
      of its total capital and the outstanding balance of its commercial real estate
      portfolio has increased by 50 percent or more during the prior 36 months. The
      CRE Guidance applies to financial institutions with an accumulation of credit
      concentration exposures and asks that the associations quantify the additional
      risk such exposures may pose. Such quantification should include the
      stratification of the commercial real estate portfolio by, among other things,
      property type, geographic market, tenant concentrations, tenant industries,
      developer concentrations and risk rating. In addition, an institution should
      perform periodic market analyses for the various property types and geographic
      markets represented in its portfolio. Further, an institution with commercial
      real estate concentration risk should also perform portfolio level stress tests
      or sensitivity analysis to quantify the impact of changing economic conditions
      on asset quality, earnings and capital.


10
 ***Table
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            Contents***





**Government
      Monetary Policies and Economic Control**





The
      earnings of the Company and the Bank are affected by the policies of regulatory
      authorities including the FRB and the FDIC. An important function of the Federal
      Reserve System is to regulate the money supply and interest rates. Among the
      instruments used to implement these objectives are open market operations in
      U.S. Government securities, changes in reserve requirements against member
      bank
      deposits and changes in the Federal discount rate. These instruments are used
      in
      varying combinations to influence overall growth and distribution of bank loans,
      investments and deposits and their use may also affect interest rates charged
      on
      loans or paid for deposits. Changes in government monetary policies and economic
      controls could have a material effect on the business of the Bank.





**Statistical
      Information**





Statistical
      information is furnished pursuant to the requirements of Guide 3 (Statistical
      Disclosure by Bank Holding Companies) promulgated under the Securities Exchange
      Act of 1934.





***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,
            
            2006
            
            2005
            
            2004Amortized
            
            Estimated
            
            Amortized
            
            Estimated
            
            Amortized
            
            EstimatedCost
            
            Fair
                Value
            
            Cost
            
            Fair
                Value
            
            Cost
            
            Fair
                ValueTYPE:Obligations
                of states and political subdivisions
            
            $
            14,328
            
            $
            14,251
            
            $
            18,729
            
            $
            18,638
            
            $
            53,247
            
            $
            53,580Mortgage-backed
                securities and collateralized mortgage obligations
            
            
            192,770
            
            
            188,922
            
            
            199,537
            
            
            195,603
            
            
            259,162
            
            
            258,917Government
                Agency securities
            
            
            301,165
            
            
            299,570
            
            
            307,543
            
            
            304,900
            
            
            192,304
            
            
            191,948Corporate
                securities
            
            
            15,179
            
            
            15,027
            
            
            19,307
            
            
            19,049
            
            
            34,330
            
            
            34,212Total
            
            $
            523,442
            
            $
            517,770
            
            $
            545,116
            
            $
            538,190
            
            $
            539,043
            
            $
            538,657





Included
      in the above table are held to maturity securities (amortized cost) totaling
      $6,372, $15,993 and $29,990 at December 31, 2006, 2005 and 2004,
      respectively.





The
      following table presents the maturity distribution and the weighted-average
      yield of the Company's investment portfolio at December 31, 2006 (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.





11
 ***Table
            of
            Contents***




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
            
            $
            7,773
            
            
            5.33
            %
            
            
            
            $
            245
            
            
            2.91
            %
            
            
            
            $
            1,500
            
            
            6.66
            %
            
            
            
            $
            4,733
            
            
            6.33
            %Mortgage-backed
                securities and collateralized mortgage obligations (2)
            
            
            4,471
            
            
            4.43
            
            
            
            
            
            158,332
            
            
            4.39
            
            
            
            
            
            20,269
            
            
            4.52
            
            
            
            
            
            5,850
            
            
            5.40Government
                Agency securities (3)
            
            
            138,033
            
            
            4.44
            
            
            
            
            
            134,759
            
            
            4.87
            
            
            
            
            
            16,841
            
            
            5.21
            
            
            
            
            
            9,948
            
            
            5.00Corporate
                securities
            
            
            2,104
            
            
            4.12
            
            
            
            
            
            12,923
            
            
            4.85
            
            
            
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Total
            
            $
            152,381
            
            
            4.48
            %
            
            
            
            $
            306,259
            
            
            4.62
            %
            
            
            
            $
            38,610
            
            
            4.90
            %
            
            
            
            $
            20,531
            
            
            5.42
            %





(1)
            Fully
                taxable-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*** ***and
      Lease Portfolio***





The
      following table categorizes the Company's loan and lease portfolio for each
      period (in thousands):





At
                December 31,
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Commercial
                and industrial
            
            $
            297,256
            
            $
            297,887
            
            $
            277,172
            
            $
            278,216
            
            $
            243,611Real
                estate - mortgage
            
            
            497,930
            
            
            446,004
            
            
            374,307
            
            
            334,946
            
            
            298,187Real
                estate - construction
            
            
            105,720
            
            
            79,200
            
            
            73,648
            
            
            54,293
            
            
            42,829Lease
                receivables
            
            
            62,649
            
            
            49,151
            
            
            34,844
            
            
            23,962
            
            
            20,041Loans
                to individuals
            
            
            11,315
            
            
            9,401
            
            
            8,724
            
            
            7,843
            
            
            7,385Tax-exempt
                and other
            
            
            8,855
            
            
            10,379
            
            
            9,496
            
            
            11,956
            
            
            8,331Loans
                and leases - net of unearned income
            
            $
            983,725
            
            $
            892,022
            
            $
            778,191
            
            $
            711,216
            
            $
            620,384





The
      following table presents the contractual maturities of selected loans and the
      sensitivities of those loans to changes in interest rates at December 31, 2006
      (in thousands):





One
                Year
            
            One
                Through
            
            Overor
                Less
            
            Five
                Years
            
            Five
                Years
            
            TotalCommercial
                and industrial
            
            $
            189,557
            
            $
            76,570
            
            $
            31,129
            
            $
            297,256Real
                estate - construction
            
            
            56,770
            
            
            48,535
            
            
            415
            
            
            105,720Total
            
            $
            246,327
            
            $
            125,105
            
            $
            31,544
            
            $
            402,976Loans
                maturing after one year with:Fixed
                interest rate
            
            
            
            
            $
            61,960
            
            $
            10,605
            
            $
            72,565Variable
                interest rate
            
            
            
            
            $
            63,145
            
            $
            20,939
            
            $
            84,084





The
      following table presents the Company's non-accrual, past due and restructured
      loans and leases for each period (in thousands):





12
 ***Table
            of
            Contents***




December
                31,
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Non-accrual
                loans and leases
            
            $
            2,177
            
            $
            3,069
            
            $
            5,274
            
            $
            8,666
            
            $
            6,317Loans
                and leases 90 days or more past due and still accruing
                interest
            
            $
            13
            
            $
            281
            
            $
            89
            
            $
            149
            
            $
            129Restructured
                accruing loans and leases
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            $
            107Interest
                income on non-accrual and restructured loans and leases which would
                have
                been recorded under original loan or lease terms
            
            $
            78
            
            $
            (5
            )
            $
            137
            
            $
            372
            
            $
            371Interest
                income on non-accrual and restructured loans and leases recorded
                during
                the period
            
            $
            117
            
            $
            122
            
            $
            31
            
            $
            24
            
            $
            9





***Summary
      of Loan*** ***and
      Lease Loss Experience***





The
      determination of the balance of the allowance for loan and lease losses is
      based
      upon a review and analysis of the Company's loan and lease portfolio.
      Management's review includes monthly analyses of past due and non-accrual loans
      and leases and detailed, periodic loan-by-loan or lease-by-lease analyses.





Based
      on
      current economic conditions, management has determined that the current level
      of
      the allowance for loan and lease losses is adequate in relation to the probable
      incurred losses present in the portfolio. Management considers many factors
      in
      this analysis, among them credit risk grades assigned to commercial, industrial
      and commercial real estate loans, delinquency trends, concentrations within
      segments of the loan and lease portfolio, recent charge-off experience and
      local
      economic conditions.





The
      following table presents an analysis of the Company's allowance for loan and
      lease losses for each period (dollars in thousands):





2006
            
            2005
            
            2004
            
            2003
            
            2002Balance,
                January 1
            
            $
            15,717
            
            $
            12,020
            
            $
            10,732
            
            $
            10,046
            
            $
            9,255Charge-offs:Commercial
                and industrial
            
            
            773
            
            
            505
            
            
            2,957
            
            
            1,960
            
            
            2,721Real
                estate - mortgage
            
            
            -
            
            
            -
            
            
            -
            
            
            1,251
            
            
            -Real
                estate - construction
            
            
            -
            
            
            -
            
            
            193
            
            
            -
            
            
            -Lease
                receivables
            
            
            1,382
            
            
            280
            
            
            250
            
            
            292
            
            
            237Loans
                to individuals
            
            
            18
            
            
            13
            
            
            5
            
            
            50
            
            
            13Total
                charge-offs
            
            
            2,173
            
            
            798
            
            
            3,405
            
            
            3,553
            
            
            2,971Recoveries:Commercial
                and industrial
            
            
            343
            
            
            816
            
            
            171
            
            
            293
            
            
            196Real
                estate - mortgage
            
            
            12
            
            
            16
            
            
            3
            
            
            3
            
            
            1Lease
                receivables
            
            
            13
            
            
            10
            
            
            8
            
            
            1
            
            
            2Loans
                to individuals
            
            
            10
            
            
            3
            
            
            5
            
            
            7
            
            
            3Total
                recoveries
            
            
            378
            
            
            845
            
            
            187
            
            
            304
            
            
            202Net
                charge-offs (recoveries)
            
            
            1,795
            
            
            (47
            )
            
            3,218
            
            
            3,249
            
            
            2,769Provision
                charged to income
            
            
            2,490
            
            
            3,650
            
            
            4,506
            
            
            3,935
            
            
            3,560Balance
                at end of period
            
            $
            16,412
            
            $
            15,717
            
            $
            12,020
            
            $
            10,732
            
            $
            10,046Ratio
                of net charge-offs (recoveries) during the period to average loans
                and
                leases outstanding during the period
            
            
            0.19
            %
            
            (0.01
            %)
            
            0.44
            %
            
            0.50
            %
            
            0.47
            %





The
      following table presents the allocation of the Company's allowance for loan
      and
      lease losses for each period (dollars in thousands):





13
 ***Table
            of
            Contents***




2006
            
            Percent
                of
              Loans
                and
              Leases
                to
              Total
                Loans
              and
                Leases
            
            2005
            
            Percent
                of
              Loans
                and
              Leases
                to
              Total
                Loans
              and
                Leases
            
            2004
            
            Percent
                of
              Loans
                and
              Leases
                to
              Total
                Loans
              and
                Leases
            
            2003
            
            Percent
                of
              Loans
                and
              Leases
                to
              Total
                Loans
              and
                Leases
            
            2002
            
            Percent
                of
              Loans
                and
              Leases
                to
              Total
                Loans
              and
                LeasesCommercial
                and industrial
            
            $
            7,965
            
            
            30.2
            %
            $
            6,929
            
            
            33.4
            %
            $
            5,071
            
            
            35.6
            %
            $
            5,781
            
            
            39.1
            %
            $
            5,370
            
            
            39.3
            %Real
                estate - mortgage
            
            
            5,357
            
            
            50.6
            
            
            4,733
            
            
            50.0
            
            
            3,694
            
            
            48.1
            
            
            3,157
            
            
            47.1
            
            
            3,327
            
            
            48.1Real
                estate - construction
            
            
            577
            
            
            10.7
            
            
            542
            
            
            8.9
            
            
            523
            
            
            9.5
            
            
            306
            
            
            7.6
            
            
            241
            
            
            6.9Lease
                receivables
            
            
            1,072
            
            
            6.4
            
            
            1,578
            
            
            5.5
            
            
            900
            
            
            4.5
            
            
            142
            
            
            3.4
            
            
            113
            
            
            3.2Loans
                to individuals
            
            
            73
            
            
            1.2
            
            
            77
            
            
            1.1
            
            
            38
            
            
            1.1
            
            
            44
            
            
            1.1
            
            
            46
            
            
            1.2Tax-exempt
                and other
            
            
            34
            
            
            0.9
            
            
            47
            
            
            1.1
            
            
            47
            
            
            1.2
            
            
            67
            
            
            1.7
            
            
            47
            
            
            1.3Unallocated
            
            
            1,334
            
            
            -
            
            
            1,811
            
            
            -
            
            
            1,747
            
            
            -
            
            
            1,235
            
            
            -
            
            
            902
            
            
            -Total
            
            $
            16,412
            
            
            100.0
            %
            $
            15,717
            
            
            100.0
            %
            $
            12,020
            
            
            100.0
            %
            $
            10,732
            
            
            100.0
            %
            $
            10,046
            
            
            100.0
            %





***Deposits***





The
      following table presents the average balance and the average rate paid on the
      Company's deposits for each period (dollars in thousands):





2006
            
            2005
            
            2004Average
              Balance
            
            Average
              Rate
            
            Average
              Balance
            
            Average
              Rate
            
            Average
              Balance
            
            Average
              RateNon-interest
                bearing demand deposits
            
            $
            324,551
            
            
            -
            
            $
            310,720
            
            
            -
            
            $
            290,905
            
            
            -Interest-bearing
                transaction accounts
            
            
            220,001
            
            
            2.65
            %
            
            223,101
            
            
            1.53
            %
            
            227,656
            
            
            0.72
            %Money
                market deposit accounts
            
            
            164,325
            
            
            3.14
            
            
            158,746
            
            
            1.69
            
            
            160,461
            
            
            0.74Savings
                deposits
            
            
            272,476
            
            
            2.43
            
            
            321,326
            
            
            1.99
            
            
            273,970
            
            
            0.91Time
                certificates of deposit of $100,000 or more
            
            
            219,723
            
            
            4.52
            
            
            175,495
            
            
            2.85
            
            
            186,590
            
            
            1.54Other
                time deposits
            
            
            289,645
            
            
            4.73
            
            
            114,402
            
            
            3.27
            
            
            81,912
            
            
            2.05Total
            
            $
            1,490,721
            
            
            2.76
            %
            $
            1,303,790
            
            
            1.63
            %
            $
            1,221,494
            
            
            0.81
            %




The
      following table sets forth, by time remaining to maturity, the Company's
      certificates of deposit of $100,000 or more at December 31, 2006 (in
      thousands):





3
                months or less
            
            $
            202,360Over
                3 months through 6 months
            
            
            36,823Over
                6 months through 12 months
            
            
            11,180Over
                12 months
            
            
            6,839Total
            
            $
            257,202


***Short-Term
      Borrowings***





The
      following information is provided on the Bank's short-term borrowings for each
      period (dollars in thousands):





14
 ***Table
            of
            Contents***




2006
              
              2005
              
              2004Balance,
                  December 31 -Securities
                  sold under agreements to repurchase
              
              
              -
              
              
              -
              
              
              -Federal
                  funds purchased
              
              
              -
              
              
              -
              
              
              -Federal
                  Home Loan Bank advances
              
              
              -
              
              $
              18,500
              
              $
              32,000Weighted-average
                  interest rate on balance, December 31 -Securities
                  sold under agreements to repurchase
              
              
              -
              
              
              -
              
              
              -Federal
                  funds purchased
              
              
              -
              
              
              -
              
              
              -Federal
                  Home Loan Bank advances
              
              
              -
              
              
              4.30
              %
              
              2.41
              %Maximum
                  outstanding at any month end -Securities
                  sold under agreements to repurchase
              
              
              -
              
              $
              118,215
              
              $
              123,275Federal
                  funds purchased
              
              $
              15,500
              
              $
              17,000
              
              $
              25,000Federal
                  Home Loan Bank advances
              
              $
              44,000
              
              $
              95,000
              
              $
              122,000Average
                  daily amount outstanding -Securities
                  sold under agreements to repurchase
              
              
              -
              
              $
              16,092
              
              $
              41,652Federal
                  funds purchased
              
              $
              2,997
              
              $
              6,341
              
              $
              7,021Federal
                  Home Loan Bank advances
              
              $
              8,241
              
              $
              47,397
              
              $
              77,390Weighted-average
                  interest rate on average daily amount outstanding -Securities
                  sold under agreements to repurchase
              
              
              -
              
              
              3.18
              %
              
              1.44
              %Federal
                  funds purchased
              
              
              5.01
              %
              
              3.28
              %
              
              1.41
              %Federal
                  Home Loan Bank advances
              
              
              4.76
              %
              
              3.17
              %
              
              1.41
              %





***Selected
      Quarterly Financial Data (Unaudited)***


(dollars
      in thousands, except per share data)





2006
            
            20051st
            
            2nd
            
            3rd
            
            4th
            
            1st
            
            2nd
            
            3rd
            
            4thQuarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter
            
            QuarterInterest
                income
            
            $
            24,082
            
            $
            27,199
            
            $
            26,272
            
            $
            28,936
            
            $
            19,457
            
            $
            20,256
            
            $
            21,033
            
            $
            22,674Interest
                expense
            
            
            9,063
            
            
            10,994
            
            
            11,003
            
            
            13,193
            
            
            4,713
            
            
            5,891
            
            
            6,669
            
            
            7,628Net
                interest income
            
            
            15,019
            
            
            16,205
            
            
            15,269
            
            
            15,743
            
            
            14,744
            
            
            14,365
            
            
            14,364
            
            
            15,046Provision
                for loan and lease losses
            
            
            592
            
            
            815
            
            
            788
            
            
            295
            
            
            1,227
            
            
            1,233
            
            
            594
            
            
            596Net
                interest income after provision for loan and lease losses
            
            
            14,427
            
            
            15,390
            
            
            14,481
            
            
            15,448
            
            
            13,517
            
            
            13,132
            
            
            13,770
            
            
            14,450Other
                income
            
            
            1,476
            
            
            1,433
            
            
            1,409
            
            
            1,373
            
            
            1,215
            
            
            2,081
            
            
            1,268
            
            
            1,247Operating
                expenses (1) (2)
            
            
            11,873
            
            
            12,476
            
            
            12,481
            
            
            796
            
            
            11,209
            
            
            11,074
            
            
            15,188
            
            
            87,170Income
                (loss) before income taxes (1) (2)
            
            
            4,030
            
            
            4,347
            
            
            3,409
            
            
            16,025
            
            
            3,523
            
            
            4,139
            
            
            (150
            )
            
            (71,473
            )Provision
                (benefit) for income taxes (2)
            
            
            1,264
            
            
            1,383
            
            
            1,024
            
            
            12,646
            
            
            874
            
            
            1,130
            
            
            (235
            )
            
            (29,182
            )Net
                income (loss) (1) (2)
            
            $
            2,766
            
            $
            2,964
            
            $
            2,385
            
            $
            3,379
            
            $
            2,649
            
            $
            3,009
            
            $
            85
            
            $
            (42,291
            )Basic
                earnings (loss) per common share
            
            $
            0.25
            
            $
            0.27
            
            $
            0.21
            
            $
            0.29
            
            $
            0.25
            
            $
            0.27
            
            $
            0.00
            
            $
            (3.84
            )Diluted
                earnings (loss) per common share
            
            $
            0.24
            
            $
            0.27
            
            $
            0.20
            
            $
            0.29
            
            $
            0.23
            
            $
            0.27
            
            $
            0.00
            
            $
            (3.84
            )





(1)
      3rd
      and 4th quarter 2005 amounts were negatively impacted by litigation results
      previously disclosed.


(2)  4 th quarter
        2006 amounts were impacted by settlement of litigation and accrual of estimated
        state taxes.


**ITEM
                1A.**
            **RISK
                FACTORS**





The
      following is a summary of risk factors relevant to our operations which should
      be carefully reviewed. These risk factors do not necessarily appear in the
      order
      of importance.





***If
      the Bank’s current capital ratios decline below the regulatory threshold for an
      adequately capitalized institution, we will be considered undercapitalized,
      which will have a material and adverse effect on us.***





15
 ***Table
            of
            Contents***





We
      believe that both the Company and the Bank exceed applicable regulatory capital
      requirements and the Bank meets the requisite capital ratios to be considered
      well-capitalized as of December 31, 2006. If the Bank’s current capital ratios
      decline below the minimum requirements to be considered adequately capitalized,
      the Bank will be considered undercapitalized, which will have a material and
      adverse effect on us. In addition, there can be no assurance that the regulatory
      authorities will agree to treat the Company and the Bank as adequately
      capitalized or that they will not bring enforcement actions or impose
      operational and other restrictions as a result of the current regulatory capital
      of the Company and the Bank, which also may have a material and adverse effect
      on us. Actions by other third parties, including the SEC and the Banking
      Department, may also be brought against the Company and the Bank, which also
      may
      have a material and adverse effect on us.





The
      FDIA
      requires each federal banking agency to take prompt corrective action with
      respect to banks that do not meet minimum capital requirements. Once a bank
      becomes undercapitalized, it is subject to various requirements and
      restrictions, including a prohibition on the payment of capital distributions
      and management fees, restrictions on the growth of the bank’s assets, and a
      requirement for prior regulatory approval of certain expansion proposals. In
      addition, an undercapitalized institution must file a capital restoration plan
      with its principal federal regulator demonstrating how it plans to return to
      capital compliance. In order for the plan to be accepted by the regulator,
      any
      holding company of the bank must guarantee such plan up to certain specified
      limitations.





If
      an
      undercapitalized bank either does not submit a capitalization plan or fails
      in
      any material respect to implement a plan approved by its regulator, the agency
      may impose additional restrictions on the bank. These include, among others,
      requiring the recapitalization or sale of the bank, restricting transactions
      with affiliates, limiting interest rates the bank may pay on deposits, and
      prohibiting any holding company of the bank from making capital distributions
      without the prior approval of the FRB or requiring a holding company to divest
      its subsidiary depository institution or non-depository affiliates. Further,
      even after the bank has attained adequately capitalized status, which we believe
      to be the case with the Company and the Bank, the appropriate federal banking
      agency may, if it determines, after notice and hearing, that the bank is in
      an
      unsafe or unsound condition or has not corrected a deficiency from its most
      recent examination, treat the bank as if it were undercapitalized and subject
      the bank to the regulatory restrictions of such lower
      classification.





In
      addition to measures taken under the prompt corrective action provisions with
      respect to undercapitalized institutions, insured banks and their holding
      companies may be subject to potential enforcement actions by their regulators
      for unsafe and unsound practices in conducting their business or for violations
      of law or regulation, including the filing of a false or misleading regulatory
      report. Enforcement actions under this authority may include the issuance of
      cease and desist orders, the imposition of civil money penalties, the issuance
      of directives to increase capital, formal and informal agreements, or removal
      and prohibition orders against “institution-affiliates parties” (generally bank
      insiders). Further, the FRB may bring an enforcement action against a bank
      holding company either to address undercapitalization in the holding company
      or
      to require the holding company to take measures to remediate undercapitalization
      in a subsidiary.





The
      Company was considered undercapitalized for regulatory purposes as a result
      of
      the IMN litigation adverse jury verdict rendered in January 2006 causing the
      Bank to incur a net operating loss, which was booked in 2005. Though the Company
      and the Bank properly booked the tax impact of the net operating loss under
      accounting principles generally accepted in the United States of America
      (“GAAP”) as a deferred tax asset, regulations of the FDIC and the FRB require
      more restrictive treatment of the deferred tax asset for regulatory capital
      computation purposes than is allowed under GAAP, which caused the Company and
      the Bank to become undercapitalized. We believe that both the Company and the
      Bank exceed applicable regulatory capital requirements and the Bank meets the
      requisite capital ratios to be considered well-capitalized as of December 31,
      2006. See “Item 1, Business-Regulation and Supervision-Capital
      Adequacy.”





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





As
      a bank
      holding company, our principal source of funds is dividends from our
      subsidiaries. These funds are used to service our debt as well as to pay
      expenses and dividends on our common stock. Our non-consolidated interest
      expense on our debt obligations was $2.5 million and $1.5 million and our
      non-consolidated operating expenses were $10,000 and $5,000 in 2006 and 2005,
      respectively. State banking regulations limit, absent regulatory approval,
      the
      Bank’s dividends to us to the lesser of the Bank’s undivided profits and the
      Bank’s retained net income for the current year plus its retained net income for
      the preceding two years (less any required transfers to capital surplus) up
      to
      the date of any dividend declaration in the current calendar year. As a result
      of the net operating loss we incurred in 2005, the Bank is currently required
      to
      obtain advance regulatory approval from the  Banking Department to pay
      dividends to us. The
      Bank
      presently intends to make application for permission to declare dividends when
      deemed appropriate.  However,
      the Company cannot make any assurances that the Bank will, or will be able
      to,
      declare dividends at any specific time in the future.





16
 ***Table
            of
            Contents***





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





Dividend
      payments from the Bank would also be prohibited under the “prompt corrective
      action” regulations of the federal bank regulators if the Bank is, or after
      payment of such dividends would be, undercapitalized under such regulations.
      In
      addition, the Bank is subject to restrictions under federal law that limit
      its
      ability to transfer funds or other items of value to us and our nonbanking
      subsidiaries, including affiliates, whether in the form of loans and other
      extensions of credit, investments and asset purchases, or other transactions
      involving the transfer of value. Unless an exemption applies, these transactions
      by the Bank with us are limited to 10% of the Bank’s capital and surplus and,
      with respect to all such transactions with affiliates in the aggregate, to
      20%
      of the Bank’s capital and surplus. As of December 31, 2006, a maximum of
      approximately $27.0 million was available to us from the Bank according to
      these
      limitations. Moreover, loans and extensions of credit to affiliates generally
      are required to be secured in specified amounts. A bank’s transactions with its
      non-bank affiliates also are required generally to be on arm’s-length terms. We
      do not have any borrowings from the Bank and do not anticipate borrowing from
      the Bank in the future.





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





Another
      source of funding is our Dividend Reinvestment and Stock Purchase Plan (“DRP”),
      which allows existing stockholders to reinvest cash dividends in our common
      stock and/or to purchase additional shares through optional cash investments
      on
      a quarterly basis. Shares are purchased at up to a 5% discount from the current
      market price under either plan option. No assurance can be given that we will
      continue the DRP or that stockholders will make purchases in the
      future.





***We
      may be subject to enforcement action resulting from the payment of the dividend
      on our common stock.***





During
      2006 the Company borrowed funds under a new line of credit facility obtained
      in
      June, 2006 in order to recapitalize the Bank and to facilitate the payment
      of
      our quarterly cash dividend paid in June, 2006. As of December 31, 2006, we
      had
      no borrowings under this facility. The FRB, in a policy statement, has indicated
      that dividend distributions funded through borrowings are disfavored and
      considered an unsafe and unsound banking practice. Although we believe that
      the
      considerations underlying such policy were intended to apply to troubled
      institutions with diminished earning capacity, we nevertheless may be subject
      to
      enforcement action resulting from our payment of this dividend. In the event
      enforcement action is taken, such action could have a material and adverse
      effect on us.





***Tax
      claims may have a material adverse effect on our financial condition, results
      of
      operations and liquidity.***





The
      Company has received a notice of deficiency from the New York State Department
      of Taxation and Finance (the “Tax Department”) with respect to New York State
      franchise tax for the years ended December 31, 1999, 2000 and 2001. The Tax
      Department contends that the Company’s tax liability should be increased by $5.1
      million (including $2.0 million in penalties and interest through December
      2006), and interest continues to accrue for those years. After deducting the
      estimated Federal tax benefit of $1.7 million arising from this, the Company’s
      net tax liability would be approximately $3.4 million. This increase in tax
      is
      based on the Tax Department’s assertion that SB Financial and SB Portfolio (the
“Delaware Subsidiaries”), which are organized and operated entirely outside of
      the State of New York, should be included in the Company’s New York State
      combined banking corporation franchise tax returns (the “Company’s Combined
      Returns”). In support of the deficiency assessment the Tax Department alleged,
*inter alia*, that the transfer of assets to, and the operations of, the
      Delaware Subsidiaries were for tax avoidance purposes only and lack economic
      substance, and that the Delaware Subsidiaries met the statutory requirements
      for
      inclusion of the Delaware Subsidiaries with the Company's income for calculation
      of the Company's New York State taxes. A notice of intention to audit calendar
      years 2002 -2004 has been received from the Tax Department. If the Tax
      Department were to successfully assert the same position for calendar years
      2002
      - 2006, management estimates that the additional tax liability for these years,
      including estimated interest and penalties, would be approximately $5.7 million
      after taking into consideration the estimated Federal tax benefit.





On
      June
      7, 2006 the Company commenced a proceeding in the New York State Division of
      Tax
      Appeals (the “Division of Tax Appeals”) seeking a re-determination of the
      assessed deficiency for the years ended December 31, 1999, 2000 and 2001.
      No assurance can be given as to whether or to what extent we will be required
      to
      pay the amount of the tax liability asserted by the Tax Department, whether
      additional tax will be assessed for years subsequent to calendar year 2001
      or
      whether we will receive any future benefit from the operations of SB Financial
      and SB Portfolio in Delaware and, accordingly, the resulting impact on our
      results of operations, financial condition and liquidity, could be material
      and
      adverse.





17
 ***Table
            of
            Contents***




Following
      a lengthy fourth quarter internal
      management review of the issues involved in this matter, including an assessment
      of the risk of an adverse outcome and a projection of the significant time
      and
      cost to litigate, the Company established a reserve of $10 million for potential
      tax liability during the fourth quarter of 2006. This reserve reflects the
      deficiency notice covering the 1999 - 2001 periods and assumes that the Tax
      Department will likely assert the same claims for the calendar years 2002 -
      2006, although no formal assessment has been received by the Company thus far
      for those periods. The Company disputes the Tax Department’s position and is
      reviewing its administrative and judicial remedies as well as other alternatives
      available to it, including the option of resolving this matter with the Tax
      Department prior to a scheduled hearing with an Administrative Law Judge in
      July
      2007.




***We
      may incur additional costs and experience impaired operating results if we
      are
      unable to retain our key management.***





Thomas
      M.
      O’Brien was named the President and Chief Operating Officer of the Company and
      the Bank on November 7, 2006. Mr. O’Brien and our executive management team,
      along with our board of directors, are in the process of re-evaluating numerous
      aspects of our current business strategy, as well as succession for our senior
      officers. The successful evaluation and the implementation of that strategy
      depend heavily upon the active involvement of Mr. O’Brien and our executive
      management team and the successful identification and recruitment of successors
      for our senior officers, where appropriate. The loss of the services of Mr.
      O’Brien or other senior officers who are part of our succession planning could
      adversely affect our business strategy and could cause us to incur additional
      costs and experience impaired operating results while we seek suitable
      replacements.





***Commercial
      real estate and commercial business loans expose us to increased lending
      risks.***





Commercial
      real estate and commercial and industrial loans comprise a significant portion
      of our loan portfolio. At December 31, 2006, our portfolio of commercial and
      industrial loans totaled approximately $297 million and our commercial real
      estate loans amounted to approximately $404 million, in comparison to total
      loans of $984 million. Commercial loans generally expose a lender to greater
      risk of non-payment and loss than one-to-four family residential mortgage loans
      because repayment of commercial loans often depends on the successful operation
      and cash flow of the borrowers. Such loans also typically involve larger loan
      balances to single borrowers or groups of related borrowers compared to
      one-to-four family residential mortgage loans. Consequently, an adverse
      development with respect to a commercial real estate loan or commercial business
      loan can expose us to a significantly greater risk of loss compared to an
      adverse development with respect to a one-to-four family residential mortgage
      loan or a non-commercial loan. Commercial real estate loans may present special
      lending risks and may expose lenders to unanticipated earnings and capital
      volatility due to adverse changes in the general commercial real estate
      market.





***Our
      credit losses could increase, and our allowance for loan and lease losses may
      not be adequate to cover actual loan and lease
      losses.***





The
      risk
      of nonpayment of loans and leases is inherent in all lending activities and
      nonpayment, if it occurs, may have a material adverse effect on our earnings
      and
      overall financial condition as well as the value of our common stock. A downturn
      in the economy, the real estate market in our market areas or a rapid change
      in
      interest rates could have a negative effect on collateral values and borrowers’
ability to repay. The Bank makes various assumptions and judgments about the
      collectibility of our loan and lease portfolio and provides an allowance for
      loan and lease losses based on a number of factors. If our assumptions are
      wrong, the allowance for loan and lease losses may not be sufficient to cover
      our losses and could require us to charge-off a higher percentage of our loans
      and leases and/or increase our allowance for loan and lease losses, which would
      reduce our income. The amount of future provisions for loan and lease losses
      cannot be determined and may exceed the amounts of past provisions.
      Additionally, federal banking regulators periodically review the allowance
      for
      loan and lease losses. These regulators may require us to increase our provision
      for loan and lease losses or to recognize further charge-offs. Any increase
      in
      the allowance for loan and lease losses could have a negative effect on our
      financial condition and results of operations.





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            Contents***





***Our
      geographic concentration may adversely affect our results of operations if
      business conditions in our market area decline.***





Our
      operations are located almost entirely in New York, with close to 100% of our
      loan portfolio as of December 31, 2006 derived from operations in Nassau,
      Suffolk and Queens Counties. Due to this geographic concentration, our results
      depend largely upon New York economic and business conditions and real estate
      values. Deterioration in economic and business conditions and real estate values
      in our market area could adversely affect the quality of our loan portfolio
      and
      the demand for our products and services, which in turn may adversely affect
      our
      results of operations to a greater extent than if our operations were
      geographically diverse. Even if the economy remains healthy, a sustained
      downturn in New York real estate values would adversely affect our results
      of
      operations.





***Changes
      in economic conditions or interest rates may negatively affect our earnings,
      capital and liquidity.***





The
      results of operations for financial institutions, including the Bank, may be
      materially adversely affected by changes in prevailing local and national
      economic conditions, including declines in real estate market values, rapid
      increases or decreases in interest rates and changes in the monetary and fiscal
      policies of the federal government. Our profitability is heavily influenced
      by
      the spread between the interest rates earned on investments and loans and the
      interest rates paid on deposits and other interest-bearing liabilities.
      Substantially all of our loans are to businesses and individuals in the New
      York
      State Counties of Nassau, Suffolk and Queens and any decline in the economy
      of
      this area could adversely affect our results of operations and financial
      condition. Like most banking institutions, our net interest spread and margin
      will be affected by general economic conditions and other factors that influence
      market interest rates and our ability to respond to changes in such rates.
      At
      any given time, our assets and liabilities may be affected differently by a
      change in interest rates.





***We
      experience significant competition in our market area, which may reduce our
      customer base.***





There
      is
      significant competition among commercial banks in our market area. In addition,
      as a result of the deregulation of the financial industry, the Bank also
      competes with other providers of financial services such as savings and loan
      associations, credit unions, consumer finance companies, securities firms,
      insurance companies, commercial finance and leasing companies, the mutual funds
      industry, full service brokerage firms and discount brokerage firms, some of
      which are subject to less extensive regulations than we are with respect to
      the
      products and services they provide. Some of our competitors, including certain
      regional bank holding companies that have made acquisitions in our market area,
      have greater resources than we have, including access to capital, and as such,
      may have higher lending limits and may offer other services not offered by
      us.





We
      also
      experience competition from a variety of institutions outside our market area.
      Some of these institutions conduct business primarily over the Internet and
      may
      thus be able to realize certain cost savings and offer products and services
      at
      more favorable rates and with greater convenience to the customer.





***Changes
      in banking laws could have a material adverse effect on
      us.***





We
      are
      extensively regulated under federal and state banking laws and regulations
      that
      are intended primarily for the protection of depositors, federal deposit
      insurance funds and the banking system as a whole. In addition, we are subject
      to changes in federal and state tax laws as well as changes in banking and
      credit regulations, accounting principles and governmental economic and monetary
      policies. We cannot predict whether any of these changes may materially
      adversely affect us. Federal and state banking regulators also possess broad
      powers to take enforcement actions as they deem appropriate. These enforcement
      actions may result in higher capital requirements, higher insurance premiums
      and
      limitations on our activities that could have a material adverse effect on
      our
      business and profitability.





***We
      continually encounter technological change, and may have fewer resources than
      our competitors to continue to invest in technological
      improvements.***





The
      banking industry is undergoing rapid technological changes with frequent
      introductions of new technology-driven products and services. In addition to
      better serving customers, the effective use of technology increases efficiency
      and enables financial institutions to reduce costs. Our future success will
      depend, in part, on our ability to address the needs of our customers by using
      technology to provide products and services that will satisfy customer demands
      for convenience as well as create additional efficiencies in our operations.
      Many competitors have substantially greater resources to invest in technological
      improvements. There can be no assurance that we will be able to effectively
      implement new technology-driven products and services or be successful in
      marketing such products and services to our customers.




**ITEM
              1B.**
            **UNRESOLVED
                STAFF COMMENTS**





None.





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**ITEM
                2.**
            **PROPERTIES**


The
      following table sets forth certain information relating to properties owned
      or
      used in the Company's banking activities at December 31, 2006:




**Location**
            **Owned
                or Leased**
            **Lease
                Expiration Date**
            **Renewal
                Terms****Main
                Office:**699
                Hillside Avenue
            Building
                owned, land leased
            3/27/2009
            One
                ten-year renewal optionNew
                Hyde Park, NY**Executive,
                Lending and****Administrative
                Facilities:**Two
                Jericho Plaza
            Leased
            3/31/2012
            NoneJericho,
                NY**Nassau
                County Branch Offices:**222
                Old Country Road
            Leased
            4/30/2010
            One
                ten-year renewal optionMineola,
                NY
            
            
            and
                two five-year renewal options339
                Nassau Boulevard
            Owned
            N/A
            N/AGarden
                City South, NY501
                North Broadway
            Leased
            10/31/2011
            Two
                twelve-year renewal optionsJericho,
                NY135
                South Street
            Owned
            N/A
            N/AOyster
                Bay, NY2
                Lincoln Avenue
            Leased
            5/31/2008
            NoneRockville
                Centre, NY960
                Port Washington Boulevard
            Leased
            4/24/2012
            Five
                five-year renewal optionsPort
                Washington, NY1055
                Old Country Road
            Leased
            6/30/2015
            Two
                five-year renewal optionsWestbury,
                NY**Suffolk
                County Branch Offices:**27
                Smith Street
            Leased
            10/31/2007
            Two
                five-year renewal optionsFarmingdale,
                NY740
                Veterans Memorial Highway
            Leased
            6/30/2010
            One
                ten-year renewal optionHauppauge,
                NY580
                East Jericho Turnpike
            Leased
            12/31/2008
            NoneHuntington
                Station, NY4250
                Veterans Memorial Highway
            Leased
            12/31/2008
            One
                five-year renewal optionHolbrook,
                NY234
                Route 25A
            Leased
            5/31/2010
            One
                five-year renewal optionEast
                Setauket, NY**Queens
                County Branch Offices:**49-01
                Grand Avenue
            Leased
            4/30/2011
            One
                five-year renewal optionMaspeth,
                NY75-20
                Astoria Boulevard
            Leased
            5/30/2011
            One
                five-year renewal optionJackson
                Heights, NY21-31
                46th Avenue
            Leased
            1/31/2011
            NoneLong
                Island City, NY**Subsidiary
                and Other Facilities:**1403
                Foulk Road
            Leased
            6/30/2007
            One-year
                renewal optionsWilmington,
                DE100
                Jericho Quadrangle
            Leased
            12/31/2009
            NoneJericho,
                NY716
                N. Bethlehem Pike
            Leased
            8/31/2007
            One-year
                renewal optionsLower
                Gwynedd, PA300
                Park Avenue
            Leased
            10/1/2007
            One
                one-year renewal optionNew
                York, NY





The
      fixtures and equipment contained in these operating facilities are owned or
      leased by the Bank. The Company considers that all of its premises, fixtures
      and
      equipment are adequate for the conduct of its business.




20
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**ITEM
                  3.**
              **LEGAL
                  PROCEEDINGS**


***New
      York State Department of Taxation and Finance Notice of
      Deficiency***





The
      Company has received a notice of deficiency from the Tax Department with respect
      to New York State franchise tax for the years ended December 31, 1999, 2000
      and
      2001. The Tax Department contends that the Company’s tax liability should be
      increased by $5.1 million (including $2.0 million in penalties and interest
      through December 2006), and interest continues to accrue for those years. After
      deducting the estimated Federal tax benefit of $1.7 million arising from this,
      the Company’s net tax liability would be approximately $3.4 million as of
      December 31, 2006. This increase in tax is based on the Tax Department’s
      assertion that SB Financial and SB Portfolio, which are organized and operated
      entirely outside of the State of New York, should be included in the Company’s
      New York State combined franchise tax reports. In support of the deficiency
      assessment the Tax Department alleged, *inter alia*, that the transfer of
      assets to, and the operations of, the Delaware Subsidiaries were for tax
      avoidance purposes only and lack economic substance, and that the Delaware
      Subsidiaries met the statutory requirements for inclusion of the Delaware
      Subsidiaries with the Company's income for calculation of the Company's New
      York
      State taxes. If the Tax Department were to successfully assert the same position
      for calendar years 2002 through 2006, management estimates that the additional
      franchise tax liability for these years, including interest and penalties,
      would
      be approximately $5.7 million, after taking into consideration the estimated
      Federal tax benefit. As previously disclosed, the Company has also received
      a
      notice of the Tax Department’s intention to audit the Company’s 2002, 2003 and
      2004 franchise tax returns.





On
      June
      7, 2006 the Company commenced a proceeding in the New York State Division of
      Tax
      Appeals (the “Division of Tax Appeals”) seeking a re-determination of the
      assessed deficiency for the years ended December 31, 1999, 2000 and
      2001.





Discovery
      in the proceeding in the Division of Tax Appeals has not been completed. A
      hearing before an administrative law judge (“ALJ”) is scheduled to occur in July
      of this year. The determination of the ALJ may be appealed to the Tax Appeals
      Tribunal. The Company may contest an adverse decision of the Tax Appeals
      Tribunal in the New York State Supreme Court. The Tax Department may not contest
      the decision of the Tax Appeals Tribunal.





Following
      a lengthy fourth quarter internal management review of the issues involved
      in
      this matter, including an assessment of the risk of an adverse outcome and
      a
      projection of the significant time and cost to litigate, the Company established
      a reserve of $10 million for potential tax liability during the fourth quarter
      of 2006. This reserve reflects the deficiency notice covering the 1999 - 2001
      period and assumes that the Tax Department will likely assert the same claims
      for the calendar years 2002 - 2006, although no formal assessment has been
      received by the Company thus far for those periods. The Company disputes the
      Tax
      Department’s position and is reviewing its administrative and judicial remedies
      as well as other alternatives available to it, including the option of resolving
      this matter with the Tax Department prior to the ALJ hearing.





No
      assurance can be given as to whether or to what extent we will be required
      to
      pay the amount of the tax liability asserted by the Tax Department, whether
      additional tax will be assessed for years subsequent to calendar year 2001
      or
      whether we will receive any future benefit from the operations of SB Financial
      and SB Portfolio in Delaware and, accordingly, the resulting impact on our
      results of operations, financial condition and liquidity, could be material
      and
      adverse.





***Island
      Mortgage Network-Related Litigation***





In
      2001
      and 2002, the Bank and the Company were named (along with other defendants)
      in
      lawsuits related to the Bank's deposit relationship with Island Mortgage
      Network, Inc. (“Island Mortgage” or “IMN”) and its affiliates.





Island
      Mortgage established and maintained dozens of deposit accounts at 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
      warehouse lenders not related to the Bank. The Bank never had a lending
      relationship with Island Mortgage.





On
      June
      30, 2000, the Banking Department 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. In the course of certain bankruptcy cases,
      it was 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 asserted that
      the Bank participated in Island Mortgage’s alleged fraudulent scheme or was
      otherwise liable for losses arising from the bankruptcy of Island Mortgage.





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During
      2006 two Island Mortgage-related litigations remained pending against the Bank
      (and, in one case, the Company). Those litigations are:





HSA
      Residential Mortgage Services of Texas (“RMST”) in HSA Residential Mortgage
      Services of Texas v. State Bank of Long Island, CV-05-3185-JS-WDW, District
      Court for the Eastern District of New York (formerly captioned 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) .
      This
      action involved claims made by three warehouse lenders. As previously reported,
      prior to 2006 the claims of the two warehouse lenders other than RMST were
      settled and all claims of RMST other than its claim of aiding and abetting
      fraud
      were dismissed by the bankruptcy court. A trial on RMST’s aiding and abetting
      fraud claim commenced in the District Court for the Eastern District of New
      York
      on January 3, 2006. On January 30, 2006, the jury rendered a verdict awarding
      $43.9 million in compensatory damages to RMST. The Company recorded a $74.2
      million expense related to this verdict in its 2005 financial statements, which
      reflected the amount of the verdict, prejudgment interest and a claim by RMST
      for legal fees for other IMN-related litigations. During 2006 prejudgment
      interest continued to accrue and the Bank continued to incur litigation
      expenses.   As previously disclosed in a September 28, 2006 Form 8-K
      filing, a post-verdict motion to set aside or modify the verdict was denied.





In
      December 2006, following a fourth quarter review of its alternatives, the Bank
      initiated settlement discussions with RMST. On January 24, 2007, the Bank and
      RMST agreed to settle all of the outstanding claims pursuant to the terms of
      a
      settlement agreement. As of that date, the entry of a formal judgment had been
      postponed, pending resolution of RMST’s claim for damages of approximately $5
      million in legal fees for other IMN-related litigations (included in the above
      $74.2 million). Under the settlement agreement, the Bank agreed to pay RMST
      $65
      million, and this payment was made in full by the Bank on January 24, 2007.
      The
      amount of the settlement payment was less than the Company’s related litigation
      reserve of $77 million, resulting in a credit of $6.2 million in 2006
      IMN-related legal expenses compared to IMN-related legal expenses of $82.8
      million in 2005.





Broward
      Title Co. (“Broward”) v. Alan Jacobs, et al., Adv. Proc. No. 01-8181, Bankruptcy
      Court for the Eastern District of New York . 
      Broward brought three claims against the Bank seeking, in the aggregate, damages
      of approximately $280,000 plus costs and incidental and consequential damages,
      including attorneys' fees.  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 the 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 the Bank in the district court, although it may attempt to do
      so at
      a later date. In the opinion of management, the amount of ultimate liability,
      if
      any, with respect to this case will not materially affect future operations
      and
      will not have a material impact on the Company’s financial
      statements.





It
      remains possible that other parties may attempt to pursue additional claims
      against the Bank related to the Bank’s dealings with IMN, although the Bank, in
      addition to any other defenses, will assert a statute of limitations defense
      against any such additional claims.





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.




**ITEM
                4.**
            **SUBMISSION
                OFMATTERS TO A VOTE OF SECURITY
                HOLDERS**




There
      were no matters submitted to a vote of stockholders during the quarter ended
      December 31, 2006.




22
 ***Table
          of Contents***





**PART
      II**




**ITEM
                5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                MATTERS AND ISSUER PURCHASES OF EQUITY
                SECURITIES**





At
      December 31, 2006, the approximate number of equity stockholders was as
      follows:





Title
      of
      Class: Common Stock


Number
      of
      Record Holders: 1,515





The
      Company’s common stock commenced trading on the NASDAQ National Market under the
      symbol STBC on October 5, 2005. Prior to that date, it traded on the American
      Stock Exchange under the symbol STB. The approximate high and low closing
      prices, with retroactive recognition given for stock dividends and splits,
      for
      the Company’s common stock for the years ended December 31, 2006 and 2005, were
      as follows:





2006
            
            2005High
                Close
            
            Low
                Close
            
            High
                Close
            
            Low
                Close1st
                Quarter
            
            $
            19.02
            
            $
            14.17
            
            $
            23.58
            
            $
            20.962nd
                Quarter
            
            $
            17.26
            
            $
            14.25
            
            $
            21.42
            
            $
            16.923rd
                Quarter
            
            $
            20.90
            
            $
            17.23
            
            $
            20.79
            
            $
            17.544th
                Quarter
            
            $
            20.10
            
            $
            17.20
            
            $
            19.40
            
            $
            16.56








The
      Company’s primary funding sources are dividends from the Bank and proceeds from
      the Dividend Reinvestment and Stock Purchase Plan (“DRP”). Certain regulatory
      agencies impose limitations on the declaration of dividends by the Bank. Under
      these limitations, at December 31, 2006, no dividends could be declared without
      prior approval of the Banking Department. The Bank intends to seek the approval
      of the Banking Department to pay future cash dividends as deemed appropriate.
      The following schedule summarizes the Company’s dividends paid for the years
      ended December 31, 2006 and 2005:





Record
                Date
            Dividend
                Payment Date
            Cash
                Dividends Paid Per Common Share (1)
            Stock
                Dividends/SplitsDecember
                4, 2006
            December
                22, 2006
            $0.15August
                25, 2006
            September
                8, 2006
            $0.15May
                8, 2006
            June
                9, 2006
            $0.15December
                16, 2005
            January
                6, 2006
            $0.15September
                9, 2005
            October
                7, 2005
            $0.15June
                17, 2005
            July
                8, 2005
            $0.13March
                11, 2005
            April
                8, 2005
            $0.13
            6
                for 5 stock split (2)December
                10, 2004
            January
                7, 2005
            $0.12





(1)
            Retroactive
                recognition has been given for stock dividends and
                splits.


(2)
            6
                for 5 stock split effected in a manner similar to a 20% stock
                dividend.




The
      Company did not repurchase any of its common stock during the fourth quarter
      of
      2006. In 1998, the Board authorized a stock repurchase program enabling the
      Company to buy back up to 50,000 shares of its common stock. Subsequently,
      the
      Board authorized increases in the Company’s stock repurchase program that now
      enables the Company to buy back up to a cumulative total of 1.5 million shares
      of its common stock. The repurchases may be made from time to time as market
      conditions permit, at prevailing prices on the open market or in privately
      negotiated transactions. The program may be discontinued at any time. At
      December 31, 2006, 512,348 shares were still available for repurchase under
      the
      existing plan. The Company does not presently expect to repurchase stock in
      2007.





23
 ***Table
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            Contents***





The
      following Performance Graph compares the yearly percentage change in the
      Company’s cumulative total stockholder return on its common stock with the
      cumulative total return of the NASDAQ Market Index and the cumulative total
      returns of eighty-three (83) Northeast NASDAQ Banks.










**ITEM
              6.**
            **SELECTED
                FINANCIAL DATA**





The
      Company's selected financial data for the last five years are set forth below.





24
 ***Table
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            Contents***




As
                  of or for the Fiscal Year Ended December 31,
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002OPERATING
                  RESULTSInterest
                  income
              
              $
              106,489,337
              
              $
              83,420,469
              
              $
              70,037,106
              
              $
              64,682,876
              
              $
              67,132,444Interest
                  expense
              
              $
              44,252,825
              
              $
              24,901,496
              
              $
              12,800,553
              
              $
              11,534,977
              
              $
              15,239,307Net
                  interest income
              
              $
              62,236,512
              
              $
              58,518,973
              
              $
              57,236,553
              
              $
              53,147,899
              
              $
              51,893,137Provision
                  for loan and lease losses
              
              $
              2,489,998
              
              $
              3,650,000
              
              $
              4,506,000
              
              $
              3,935,004
              
              $
              3,560,000Net
                  interest income after provision for loan and lease losses
              
              $
              59,746,514
              
              $
              54,868,973
              
              $
              52,730,553
              
              $
              49,212,895
              
              $
              48,333,137Other
                  income
              
              $
              5,690,766
              
              $
              5,810,464
              
              $
              7,050,925
              
              $
              9,142,923
              
              $
              4,477,615Operating
                  expenses
              
              $
              37,626,469
              
              $
              124,640,683
              
              $
              41,043,230
              
              $
              41,089,081
              
              $
              37,477,362Net
                  income (loss)
              
              $
              11,493,879
              
              $
              (36,548,251
              )
              $
              13,376,009
              
              $
              12,015,173
              
              $
              11,302,611COMMON
                  SHARE DATABasic
                  earnings (loss) per common share (1)
              
              $
              1.02
              
              $
              (3.32
              )
              $
              1.24
              
              $
              1.13
              
              $
              1.06Diluted
                  earnings (loss) per common share (1)
              
              $
              1.00
              
              $
              (3.32
              )
              $
              1.20
              
              $
              1.10
              
              $
              1.04Stock
                  dividends/splits
              
              
              -
              
              
              20
              %(2)
              
              5
              %
              
              5
              %
              
              5
              %Cash
                  dividends per common share (1)
              
              $
              0.45
              
              $
              0.55
              
              $
              0.48
              
              $
              0.44
              
              $
              0.41FINANCIAL
                  POSITIONTotal
                  assets
              
              $
              1,788,722,476
              
              $
              1,598,152,513
              
              $
              1,437,290,967
              
              $
              1,441,000,363
              
              $
              1,362,282,184Total
                  loans and leases (3)
              
              $
              983,724,774
              
              $
              892,021,546
              
              $
              778,191,228
              
              $
              711,216,134
              
              $
              620,383,873Total
                  deposits
              
              $
              1,566,183,479
              
              $
              1,411,573,946
              
              $
              1,269,634,078
              
              $
              1,216,286,903
              
              $
              1,147,026,508Total
                  stockholders' equity
              
              $
              104,140,510
              
              $
              56,422,118
              
              $
              101,049,842
              
              $
              94,711,522
              
              $
              87,682,631Weighted
                  average number of common shares outstanding (1) (4)
              
              
              11,227,278
              
              
              10,996,601
              
              
              10,827,816
              
              
              10,678,935
              
              
              10,711,392OTHER
                  DATAReturn
                  on average total assets
              
              
              0.68
              %
              
              (2.41
              %)
              
              0.90
              %
              
              0.89
              %
              
              0.95
              %Return
                  on average total stockholders' equity
              
              
              18.39
              %
              
              (36.35
              %)
              
              13.75
              %
              
              13.18
              %
              
              13.66
              %Tier
                  I leverage ratio
              
              
              6.30
              %
              
              4.30
              %
              
              7.82
              %
              
              8.08
              %
              
              6.95
              %Net
                  interest margin (FTE)
              
              
              4.01
              %
              
              4.17
              %
              
              4.22
              %
              
              4.31
              %
              
              4.77
              %Operating
                  efficiency ratio (5)
              
              
              54.6
              %(6)
              
              192.5
              %(7)
              
              64.2
              %
              
              70.7
              %
              
              66.0
              %Dividend
                  payout ratio
              
              
              43.94
              %
              
              N/M
              *
              
              38.98
              %
              
              38.68
              %
              
              39.06
              %Average
                  equity to average assets
              
              
              3.71
              %
              
              6.62
              %
              
              6.56
              %
              
              6.73
              %
              
              6.94
              %





(1)
            Retroactive
                recognition has been given for stock dividends and
                splits.


(2)
            6
                for 5 stock split in 2005 effected in a manner similar to a 20% stock
                dividend.


(3)
            Net
                of unearned income and before allowance for loan and lease
                losses.


(4)
            Amount
                used for earnings per common share
                computation.


(5)
            Operating
                expenses divided by the sum of net interest income (FTE) and other
                income
                (excluding net security
                gains/losses).


(6)
            Ratio includes
                $12.1 million reversal of previously accrued IMN-related
                expenses.


(7)
            Ratio includes
                $74.2 million expense accrual related to IMN adverse jury
                verdict.


*
            N/M
                - denotes not meaningful.




25
 ***Table
          of Contents***


**ITEM
                    7.**
                  **MANAGEMENT'S
                      DISCUSSION AND ANALYSIS OF
                      FINANCIAL****CONDITION
                      AND RESULTS OF
                      OPERATIONS**
 
 **Forward
        Looking Statements**
 
 The
        Company’s 2006 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.
        Words such as “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“estimate,” “intend,” “plan,” “project,” “is confident that,” and similar
        expressions are intended to identify these forward looking-statements. These
        forward-looking statements involve risk and uncertainty and a variety of
        factors
        that could cause the Company’s actual results and experience to differ
        materially from the anticipated results or other expectations expressed in
        these
        forward-looking statements. The Company’s ability to predict results or the
        actual effect of future plans or strategies is inherently uncertain. Factors
        that could have a material adverse effect on the operations of the Company
        and
        its subsidiaries include, but are not limited to, changes in: market interest
        rates, general economic conditions, legislative/regulatory changes, monetary
        and
        fiscal policies of the U.S. Government, the quality and composition of the
        loan
        and lease or investment portfolios, demand for loan and lease products, demand
        for financial services in the Company’s primary trade area, litigation, tax and
        other regulatory matters, accounting principles and guidelines, other economic,
        competitive, governmental, regulatory and technological factors affecting
        the
        Company’s operations, pricing and services and those risks detailed in the
        company’s periodic reports filed with the Securities and Exchange Commission
        (“SEC”).
 
 **Executive
        Summary**
 
 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, a New York State chartered commercial bank
        founded
        in 1966, and its unconsolidated wholly-owned subsidiaries, State Bancorp
        Capital
        Trust I and II, 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 Financial Services Corp., Studebaker-Worthington Leasing Corp., New Hyde
        Park
        Leasing Corp. and SB ORE Corp.
 
 The
        Bank
        serves its customer base through sixteen full-service branches and a lending
        center in Jericho, NY. Of the Bank’s branch locations, eight 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 loans,
        construction loans, home equity loans, 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 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, are each wholly
        owned
        subsidiaries of the Bank. 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.
  26
 ***Table
            of Contents***
  Financial
                  performance of State Bancorp, Inc.
              
              
              
              
              
              Over/(dollars
                  in thousands, except per share data)
              
              
              
              
              
              (under)As
                  of or for the years ended December 31,
              
              2006
              
              2005
              
              2005Revenue
                  (1)
              
              $
              67,928
              
              $
              64,329
              
              
              6
              %Operating
                  expenses
              
              $
              37,626
              
              $
              124,641
              
              
              (70
              )%Provision
                  for loan and lease losses
              
              $
              2,490
              
              $
              3,650
              
              
              (32
              )%Net
                  income (loss)
              
              $
              11,494
              
              $
              (36,548
              )
              
              N/M
              (2)Net
                  income (loss) per share - diluted
              
              $
              1.00
              
              $
              (3.32
              )
              
              N/M
              (2)Dividend
                  payout ratio
              
              
              43.94
              %
              
              N/M
              (2)
              
              N/M
              (2)Return
                  on average total stockholders' equity
              
              
              18.39
              %
              
              (36.35
              %)
              
              N/M
              (2)Tier
                  I leverage ratio
              
              
              6.30
              %
              
              4.30
              %
              
              200
              bpTier
                  I risk-weighted capital ratio
              
              
              9.48
              %
              
              6.00
              %
              
              348
              bpTotal
                  risk-weighted capital ratio
              
              
              11.58
              %
              
              7.25
              %
              
              433
              bp
 
 bp
        -
        denotes basis points; 100 bp equals 1%.
 (1)
              Represents
                  net interest income plus total other income. See Revenue of State
                  Bancorp,
                  Inc. table that follows.
 (2)
              N/M
                  - denotes not meaningful.
 
 As
        noted
        elsewhere in this annual report to stockholders, 2006 was a year of great
        change
        for the Company. For the year ended December 31, 2006, the Company recorded
        record levels of loans and leases, deposits and stockholders’ equity. The
        adverse jury verdict in the IMN litigation was rendered on January 30, 2006
        resulting in the establishment of a $74.2 million reserve contributing to
        $83.6
        million in total legal expenses which resulted in a net loss in 2005. Following
        a review of its alternatives, the Company initiated settlement discussions
        in
        December with the plaintiff in this matter. On January 24, 2007, the parties
        agreed to settle all of the outstanding issues pursuant to the terms of a
        settlement agreement. The settlement agreement provided for, among other
        things,
        the payment of $65 million to the plaintiff which was less than the $77.1
        million that had been reserved for this matter. The Company reluctantly
        determined that the time, cost, distraction and significant uncertainty in
        pursuing an appeal necessitated its efforts to settle the dispute in a manner
        as
        favorable to the Company as the circumstances would allow. The Company believes
        that this settlement is in the best long-term interest of its
        stockholders.
 
 The
        Company also strengthened its executive management team during 2006 with
        the
        addition of Thomas M. O’Brien as President and Chief Operating Officer of the
        Company and the Bank in November. Shortly after Mr. O’Brien’s arrival, we
        undertook a successful recapitalization effort culminating in the issuance
        of
        2.25 million shares of common stock in a December 2006 private placement
        which
        raised a total of approximately $36 million after expenses. As of December
        31,
        2006, the Company’s primary subsidiary, the Bank, is once again well capitalized
        by all regulatory standards.
 
 Following
        a lengthy fourth quarter internal management review of the issues related
        to the
        notice of deficiency received by the Company from the Tax Department with
        respect to New York State franchise tax for the years ended December 31,
        1999,
        2000 and 2001, including the risk of an adverse outcome and a projection
        of the
        significant time and cost to litigate, the Company established a reserve
        of $10
        million for this potential tax liability during the fourth quarter of 2006.
        This
        reserve reflects the deficiency notice covering the 1999-2001 period and
        assumes
        that the Tax Department will likely assert the same claims for the calendar
        years 2002-2006, although no formal assessment has been received by the Company
        for those years.
 
 As
        for
        our core operations, the interest rate environment in 2006, marked by an
        inverted yield curve, continued to provide significant challenges for management
        and the Board of Directors throughout the past year. Although the Company’s net
        interest margin declined during 2006, it remained above 4.00% for the year.
        Continued consolidation in the Company’s trade area during the past year coupled
        with liquidity in the capital markets resulted in deposit and loan pricing
        pressures that are not expected to abate during 2007. The Company’s core niche
        of small business, middle market commercial and industrial and municipal
        customers is under siege from an ever expanding array of competitors entering
        the marketplace through de novo branching, acquisitions and strategic alliances.
        The Company remains focused on expanding its core commercial business
        relationships, expense reduction initiatives, capital management and strategies
        to improve non-interest income generation. During 2007, the Company expects
        to
        expand its staff of professional bankers in several areas to achieve the
        foregoing objectives. Industry consolidation continues to provide the Company
        with the opportunity to add experienced, relationship-oriented bankers to
        its
        staff to support future growth and market penetration and the Company expects
        such opportunities will be available in 2007. With many of the issues that
        had
        consumed much of management and the Board’s time now behind us, the Company is
        poised to get back to the basics of commercial banking: loan and lease portfolio
        growth, deposit generation, increased market share, improved operational
        efficiency and enhanced brand building.
  27
 ***Table
            of Contents***
  The
        Company recorded net income of $11.5 million during 2006 versus a net loss
        of
        $36.5 million in 2005. The improvement in net income during 2006 reflects
        the
        final settlement of the IMN warehouse lender litigation, which resulted in
        a net
        IMN-related credit of $6.2 million in 2006 compared to IMN-related expenses
        of
        $82.8 million in 2005. Other factors positively impacting net income during
        2006
        were an increase in net interest income and a reduction in the provision
        for
        loan and lease losses. The 2005 loss resulted from expenses incurred as a
        result
        of the IMN litigation. Basic earnings per common share of $1.02 were recorded
        in
        2006 versus a loss per common share of $3.32 a year ago. Diluted earnings
        per
        common share of $1.00 and a diluted loss per common share of $3.32 were recorded
        in 2006 and 2005, respectively. The primary reason for the 2006 improvement
        in
        net income was an $89.1 million reduction in legal expenses largely related
        to
        the IMN litigation, growth in net interest income and a decline in the provision
        for loan and lease losses. The increase in net interest income resulted from
        an
        expanded interest-earning asset base, primarily through growth in the Bank’s
        portfolio of commercial loans and commercial mortgages as well as leases
        originated at SWLC.
 
 Revenue
                  of State Bancorp, Inc.
              
              
              
              
              
              Over/(dollars
                  in thousands)
              
              
              
              
              
              (under)For
                  the years ended December 31,
              
              2006
              
              2005
              
              2005Net
                  interest income
              
              $
              62,237
              
              $
              58,519
              
              
              6
              %Service
                  charges on deposit accounts
              
              
              2,399
              
              
              2,107
              
              
              14
              %Net
                  security (losses) gains
              
              
              (69
              )
              
              867
              
              
              N/M
              (1)Income
                  from bank owned life insurance
              
              
              1,011
              
              
              1,001
              
              
              1
              %Other
                  operating income
              
              
              2,350
              
              
              1,835
              
              
              28
              %Total
                  revenue
              
              $
              67,928
              
              $
              64,329
              
              
              6
              %
 
 (1)
        N/M -
        denotes not meaningful.
 
 As
        a
        result of the improvement in the Company’s net income in 2006, return on average
        equity improved to 18.39% from (36.35)% a year ago. Return on average assets
        increased to 0.68% in 2006 versus (2.41)% in 2005. However, as a result of
        the
        inverted interest rate yield curve prevalent throughout 2006, the Company’s net
        interest margin (tax-equivalent basis) narrowed by 16 basis points to 4.01%
        from
        4.17% a year ago.
 
 The
        Company’s primary market area of Nassau, Suffolk and Queens Counties, provides
        tremendous opportunity for deposit growth and commercial and industrial lending.
        Well over four million people live and work in the tri-county area and over
        120,000 businesses are located here. The recent softening of the real estate
        market does not appear to have impacted the local economy to any significant
        degree during 2006; however, management and staff at the Company attempt
        to
        monitor this market closely. Loan demand was strong during 2006. The average
        balance of total loans and leases for 2006 increased by 13% versus 2005.
        At
        December 31, 2006 gross loans and leases outstanding were $92 million (or
        10%)
        above the comparable 2005 date. Consumer and business spending supported
        the
        local and national economies during 2006. Real estate values, although below
        the
        peak levels of 2005, continued to provide a “wealth effect” for consumers that
        again supported spending throughout the year. Business expansion showed signs
        of
        improvement in 2006 but still fell victim to the volatility of world events,
        the
        uncertain outlook for interest rates and the continued overall weakness of
        the
        U.S. dollar. Many economists are predicting more pronounced economic expansion
        throughout most areas of the country during 2007 led by the corporate sector,
        a
        key element of the Company’s core business model. The Company enters 2007 poised
        to expand our loan and lease portfolio as the dual challenges of capital
        and IMN
        are now behind us. Management of the Company is, however, aware that any
        economic improvement is inextricably linked to both the outlook for interest
        rates and consumer and business confidence. These issues, coupled with an
        uncertain long-term outlook for local real estate values, may negatively
        impact
        near-term economic growth in the Company’s trade area.
 
 Recognizing
        the economic uncertainty previously noted, we intend to achieve loan and
        lease
        growth of approximately 8% to 10% in the Company’s core competencies of
        commercial and industrial credits, commercial mortgages and equipment leasing
        in
        2007. We expect that spreads will continue to tighten due to competitive
        pressures and the effects of an inverted interest rate yield curve, resulting
        in  a narrowing of our interest rate margin on most loan and lease
        offerings. Funding costs are expected to rise slightly during 2007 as
        competitive pressures are expected to push up deposit rates and the continued
        disintermediation of low cost core deposit balances into CD products remains
        a
        factor. Management expects that, absent a change in the shape of the yield
        curve, the Company’s net interest margin may decline modestly in 2007 from
        current levels.
  28
 ***Table
            of Contents***
  Excluding
        the loan and lease portfolio, asset growth in 2007 may also come from the
        fixed
        income investment portfolio, primarily in the U.S. Government Agency sector.
        The
        Company’s branch network is expected to provide funding to support anticipated
        asset growth. The Company will continue to pursue product delivery and back
        office expense reductions and operating efficiencies along with
        revenue-generating sales initiatives to improve net income. Some of these
        initiatives may result in the occurrence of initial implementation costs
        to
        allow the realization of longer term financial benefits.
 
 **Critical
        Accounting Policies, Judgments and Estimates**
 
 The
        discussion and analysis of the financial condition and results of operations
        of
        the Company are based on the 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 loan and lease losses, income taxes, other-than-temporary impairment
        of
        investment securities and recognition of contingent liabilities. Management
        bases its estimates on historical experience and various other factors and
        assumptions that are believed to be reasonable under the circumstances. These
        form the basis for making judgments on the carrying value of assets and
        liabilities that are not readily apparent from other sources. Actual results
        may
        differ from those estimates under different assumptions or
        conditions.
 
 ***Allowance
        for Loan and Lease Losses***
 
 In
        management's opinion, one of the most critical accounting policies impacting
        the
        Company's financial statements is the evaluation of the allowance for loan
        and
        lease losses. Management carefully monitors the credit quality of the loan
        and
        lease portfolio and, on a quarterly basis, charges off the amounts of those
        loans and leases deemed uncollectible. Management evaluates the fair value
        of
        collateral supporting the impaired loans and leases 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.
  29
 ***Table
            of Contents***
  
 
 Management
        of the Company recognizes that, despite its best efforts to minimize risk
        through a rigorous credit review process, losses will inevitably occur. In
        times
        of economic slowdown, regional or national, the credit risk inherent in the
        Company's loan and lease portfolio will increase. The timing and amount of
        loan
        and lease losses that occur are dependent upon several factors, most notably
        qualitative and quantitative factors about both the micro and macro economic
        conditions as reflected in the loan and lease portfolio and the economy as
        a
        whole. Factors considered in this evaluation include, but are not limited
        to,
        estimated losses from loan and lease and other credit arrangements, general
        economic conditions, changes in credit concentrations or pledged collateral,
        historical loan and lease loss experience and trends in portfolio volume,
        maturity, composition, delinquencies and non-accruals. The allowance for
        loan
        and lease losses is established to absorb loan and lease charge-offs. Additions
        to the allowance are made through the provision for loan and lease losses,
        which
        is a charge to current operating earnings. The adequacy of the provision
        and the
        resulting allowance for loan and lease losses is determined by management's
        continuing review of the loan and lease portfolio, including identification
        and
        review of individual problem situations that may affect a borrower's ability
        to
        repay, delinquency and non-performing loan data, collateral values, regulatory
        examination results and changes in the size and character of the loan and
        lease
        portfolio. Despite
        such a review, the level of the allowance for loan and lease losses remains
        an
        estimate and cannot be precisely determined. Thus,
        an
        increase in the size of the loan and lease portfolio or in any of its components
        could necessitate an increase in the allowance even though credit quality
        and
        problem loan and lease totals may be improving.
 
 Based
        on
        current economic conditions, management has determined that the current level
        of
        the allowance for loan and lease losses is adequate in relation to the probable
        incurred losses present in the portfolio. Management considers many factors
        in
        this analysis, among them credit risk grades assigned to commercial, industrial
        and commercial real estate loans, delinquency trends, concentrations within
        segments of the loan and lease portfolio, recent charge-off experience and
        local
        economic conditions. Commercial loans are assigned credit risk grades using
        a
        scale of one to ten. Allocations for probable incurred losses are made for
        pools
        of similar risk-graded loans. For loans with signs of credit deterioration,
        generally loans in grades seven through ten, allocations range from 4% to
        100%
        of the loan balance and are based on the Company’s historical loss experience
        for the respective grade category and the specific issues relating to the
        problem credit. Non-accrual loans in excess of $250,000 are individually
        evaluated for impairment and are not included in historical risk grade pools.
        Allocations for loans which are performing satisfactorily, generally grades
        one
        through six, are based on the Company’s historical experience for other
        performing loans. Allocations for these loans averaged 0.50% at December
        31,
        2006.
 
 It
        is the
        present intent of management to continue to monitor the level of the allowance
        for loan and lease losses in order to properly reflect its estimate of the
        exposure, if any, represented by fluctuations in the local real estate market
        and the underlying value that that market provides as collateral to certain
        segments of the loan and lease portfolio. In recognition of the economic
        uncertainties previously discussed, the normal risks inherent in any credit
        portfolio and expected growth in the loan and lease portfolio, management
        anticipates that the 2007 provision for loan and lease losses may approximate
        the level recorded in 2006. 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 bank regulatory
        agencies, as an integral part of their examination process, closely review
        the
        allowance for loan and lease losses. Such agencies may require the Company
        to
        recognize additions to the allowance based on their judgment of information
        available to them at the time of their examinations.
  30
 ***Table
            of Contents***
  ***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 has received a notice of deficiency from the Tax Department with
        respect
        to New York State franchise tax for the years ended December 31, 1999, 2000
        and
        2001 described under “Risk Factors.” Following a lengthy fourth quarter internal
        management review of the issues cited in the deficiency notice, including
        an
        assessment of the risk of an adverse outcome and a projection of the time
        and
        cost to litigate, the Company established a reserve of $10 million for this
        potential tax liability in the fourth quarter of 2006. This reserve reflects
        the
        deficiency notice covering the 1999 - 2001 period and assumes that the Tax
        Department will likely assert the same claims for the calendar years 2002
        -
        2006, although no formal assessment has been received by the Company thus
        far
        for that period. The Company disputes the Tax Department’s position and is
        reviewing its administrative and judicial remedies as well as other alternatives
        available to it, including the option of resolving this matter with the Tax
        Department. Management believes that the amount recognized in the 2006 financial
        statements represents the Company's best estimate of the potential liability
        related to this matter based upon the information available to the
        Company.
  No
        assurance can be given as to whether or to what extent we will be required
        to
        pay the amount of the tax liability asserted by the Tax Department, whether
        additional tax will be assessed for years subsequent to calendar year 2001
        or
        whether we will receive any future benefit from the operations of SB Financial
        and SB Portfolio in Delaware and, accordingly, the resulting impact on our
        results of operations, financial condition and liquidity, could be material
        and
        adverse.
  ***Other-Than-Temporary
        Impairment of Investment Securities***
 
 If
        the
        Company deems any investment security’s decline in market value to be
        other-than-temporary, the security is written down to a new cost basis and
        the
        resulting loss is charged against earnings. The determination of whether
        a
        decline in market value is other-than-temporary is necessarily a matter of
        subjective judgment. The timing and amount of any realized losses reported
        in
        the Company’s financial statements could vary if management’s conclusions were
        to change as to whether an other-than-temporary impairment exists. Consideration
        is given to (1) the length of time and the extent to which the fair value
        has
        been less than cost, (2) the financial condition and near-term prospects
        of the
        issuer and (3) the intent and ability of the Company to retain its investment
        in
        the issuer for a period of time sufficient to allow for any anticipated recovery
        in fair value. In analyzing an issuer’s financial condition, the Company’s
        management considers whether the securities are issued by the U.S. Government
        or
        its agencies, whether downgrades by bond rating agencies have occurred and
        industry analysts’ reports. The Company’s management currently conducts
        impairment evaluations at least on a quarterly basis and has concluded that,
        at
        December 31, 2006, there were no other-than-temporary impairments of the
        Company’s investment securities.
 
 ***Recognition
        of Contingent Liabilities***
 
 The
        Company and the Bank are subject to proceedings and claims that arise in
        the
        normal course of business. Management assesses the likelihood of any adverse
        outcomes to these matters as well as potential ranges of probable losses.
        There
        can be no assurance that actual outcomes will not differ from those assessments.
        A liability is recognized in the Company’s consolidated balance sheets if such
        liability is both probable and estimable.
  31
 ***Table
            of Contents***
  **Results
        of Operations and Financial Condition**
 
 **Net
        Interest Income**
 
 ***Distribution
        of Assets, Liabilities and Stockholders’ Equity: Net Interest Income and
        Rates***
 
 The
        following table presents the average daily balances of the Company's assets,
        liabilities and stockholders’ 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%. Non-accruing loans and leases are included
        in the average balances (dollars in thousands):
 
 For
                  the Years Ended December 31,
              
              2006
              
              2005
              
              2004Average
              
              
              
              Average
              
              Average
              
              
              
              Average
              
              Average
              
              
              
              AverageBalance
              
              Interest
              
              Rate
              
              Balance
              
              Interest
              
              Rate
              
              Balance
              
              Interest
              
              RateASSETS:Securities
                  held to maturity and securities available for sale:Taxable
              
              $
              518,940
              
              $
              23,745
              
              
              4.58
              %
              $
              472,663
              
              $
              18,028
              
              
              3.81
              %
              $
              496,087
              
              $
              17,559
              
              
              3.54
              %Tax-exempt
              
              
              15,653
              
              
              733
              
              
              4.68
              
              
              54,692
              
              
              2,240
              
              
              4.10
              
              
              114,905
              
              
              3,979
              
              
              3.46Total
                  securities
              
              
              534,593
              
              
              24,478
              
              
              4.58
              
              
              527,355
              
              
              20,268
              
              
              3.84
              
              
              610,992
              
              
              21,538
              
              
              3.53Federal
                  Home Loan Bank and other restricted stock
              
              
              2,073
              
              
              109
              
              
              5.26
              
              
              4,139
              
              
              181
              
              
              4.37
              
              
              5,249
              
              
              89
              
              
              1.70Federal
                  funds sold, securities purchased under agreements to resell and
                  interest-bearing deposits
              
              
              87,675
              
              
              4,377
              
              
              4.99
              
              
              59,000
              
              
              1,740
              
              
              2.95
              
              
              36,618
              
              
              404
              
              
              1.10Loans
                  and leases (net of unearned income):Taxable
              
              
              931,798
              
              
              77,447
              
              
              8.31
              
              
              824,210
              
              
              61,499
              
              
              7.46
              
              
              727,945
              
              
              48,823
              
              
              6.71Tax-exempt
              
              
              5,223
              
              
              426
              
              
              8.16
              
              
              6,120
              
              
              500
              
              
              8.17
              
              
              6,966
              
              
              557
              
              
              8.00Total
                  loans and leases - net
              
              
              937,021
              
              
              77,873
              
              
              8.31
              
              
              830,330
              
              
              61,999
              
              
              7.47
              
              
              734,911
              
              
              49,380
              
              
              6.72Total
                  interest-earning assets
              
              
              1,561,362
              
              $
              106,837
              
              
              6.84
              %
              
              1,420,824
              
              $
              84,188
              
              
              5.93
              %
              
              1,387,770
              
              $
              71,411
              
              
              5.14
              %Allowance
                  for loan and lease losses
              
              
              (16,579
              )
              
              
              
              
              
              
              
              (14,198
              )
              
              
              
              
              
              
              
              (11,523
              )Cash
                  and due from banks
              
              
              46,215
              
              
              
              
              
              
              
              
              48,295
              
              
              
              
              
              
              
              
              49,672Bank
                  premises and equipment - net
              
              
              6,305
              
              
              
              
              
              
              
              
              6,196
              
              
              
              
              
              
              
              
              6,758Other
                  assets
              
              
              85,337
              
              
              
              
              
              
              
              
              56,530
              
              
              
              
              
              
              
              
              50,139Total
                  Assets
              
              $
              1,682,640
              
              
              
              
              
              
              
              $
              1,517,647
              
              
              
              
              
              
              
              $
              1,482,816LIABILITIES
                  AND STOCKHOLDERS' EQUITY:Savings
                  and time deposits:Savings
              
              $
              656,802
              
              $
              17,600
              
              
              2.68
              %
              $
              703,173
              
              $
              12,476
              
              
              1.77
              %
              $
              662,087
              
              $
              5,326
              
              
              0.80
              %Time
              
              
              509,368
              
              
              23,630
              
              
              4.64
              
              
              289,897
              
              
              8,739
              
              
              3.01
              
              
              268,502
              
              
              4,545
              
              
              1.69Total
                  savings and time deposits
              
              
              1,166,170
              
              
              41,230
              
              
              3.54
              
              
              993,070
              
              
              21,215
              
              
              2.14
              
              
              930,589
              
              
              9,871
              
              
              1.06Federal
                  funds purchased
              
              
              2,997
              
              
              150
              
              
              5.01
              
              
              6,341
              
              
              208
              
              
              3.28
              
              
              7,021
              
              
              99
              
              
              1.41Securities
                  sold under agreements to repurchase
              
              
              -
              
              
              -
              
              
              -
              
              
              16,092
              
              
              512
              
              
              3.18
              
              
              41,652
              
              
              600
              
              
              1.44Other
                  borrowed funds
              
              
              10,392
              
              
              570
              
              
              5.48
              
              
              47,626
              
              
              1,533
              
              
              3.22
              
              
              77,953
              
              
              1,171
              
              
              1.50Subordinated
                  notes
              
              
              5,671
              
              
              516
              
              
              9.10
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Junior
                  subordinated debentures
              
              
              20,620
              
              
              1,787
              
              
              8.67
              
              
              20,620
              
              
              1,434
              
              
              6.95
              
              
              20,620
              
              
              1,059
              
              
              5.14Total
                  interest-bearing liabilities
              
              
              1,205,850
              
              
              44,253
              
              
              3.67
              
              
              1,083,749
              
              
              24,902
              
              
              2.30
              
              
              1,077,835
              
              
              12,800
              
              
              1.19Demand
                  deposits
              
              
              324,551
              
              
              
              
              
              
              
              
              310,720
              
              
              
              
              
              
              
              
              290,905Other
                  liabilities
              
              
              89,751
              
              
              
              
              
              
              
              
              22,644
              
              
              
              
              
              
              
              
              16,816Total
                  liabilities
              
              
              1,620,152
              
              
              
              
              
              
              
              
              1,417,113
              
              
              
              
              
              
              
              
              1,385,556Stockholders'
                  equity
              
              
              62,488
              
              
              
              
              
              
              
              
              100,534
              
              
              
              
              
              
              
              
              97,260Total
                  Liabilities andStockholders'
                  Equity
              
              $
              1,682,640
              
              
              
              
              
              
              
              $
              1,517,647
              
              
              
              
              
              
              
              $
              1,482,816Net
                  interest income/margin -tax-equivalent basis
              
              
              
              
              
              62,584
              
              
              4.01
              %
              
              
              
              
              59,286
              
              
              4.17
              %
              
              
              
              
              58,611
              
              
              4.22
              %Less
                  tax-equivalent basis adjustment
              
              
              
              
              
              347
              
              
              
              
              
              
              
              
              767
              
              
              
              
              
              
              
              
              1,374Net
                  Interest Income
              
              
              
              
              $
              62,237
              
              
              
              
              
              
              
              $
              58,519
              
              
              
              
              
              
              
              $
              57,237
 
 ***Analysis
        of Changes in Net Interest Income***
 
 The
        following table presents a comparative analysis of the changes in the Company'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%. Variances in rate/volume relationships
        have
        been allocated proportionately to average volume and average rate as they
        compare to each other (in thousands):
  32
 ***Table
            of Contents***
  Year
                  2006 over 2005
              
              Year
                  2005 over 2004Due
                  to Change in:
              
              
              
              Due
                  to Change in:Average
              
              Average
              
              Net
                  Increase
              
              Average
              
              Average
              
              Net
                  IncreaseVolume
              
              Rate
              
              (Decrease)
              
              Volume
              
              Rate
              
              (Decrease)INTEREST
                  INCOME:Securities
                  held to maturity and securities available for sale:Taxable
              
              $
              1,881
              
              $
              3,836
              
              $
              5,717
              
              $
              (853
              )
              $
              1,322
              
              $
              469Tax-exempt
              
              
              (1,790
              )
              
              283
              
              
              (1,507
              )
              
              (2,368
              )
              
              629
              
              
              (1,739
              )Total
                  securities
              
              
              91
              
              
              4,119
              
              
              4,210
              
              
              (3,221
              )
              
              1,951
              
              
              (1,270
              )Federal
                  Home Loan Bank and other restricted stock
              
              
              (103
              )
              
              31
              
              
              (72
              )
              
              (22
              )
              
              114
              
              
              92Federal
                  funds sold, securities purchased under agreements to resell and
                  interest-bearing deposits
              
              
              1,087
              
              
              1,550
              
              
              2,637
              
              
              357
              
              
              979
              
              
              1,336Loans
                  and leases (net of unearned income):Taxable
              
              
              8,516
              
              
              7,432
              
              
              15,948
              
              
              6,849
              
              
              5,827
              
              
              12,676Tax-exempt
              
              
              (73
              )
              
              (1
              )
              
              (74
              )
              
              (69
              )
              
              12
              
              
              (57
              )Total
                  loans and leases - net
              
              
              8,443
              
              
              7,431
              
              
              15,874
              
              
              6,780
              
              
              5,839
              
              
              12,619Total
                  Interest Income
              
              
              9,518
              
              
              13,131
              
              
              22,649
              
              
              3,894
              
              
              8,883
              
              
              12,777INTEREST
                  EXPENSE:Savings
                  and time deposits:Savings
              
              
              (871
              )
              
              5,995
              
              
              5,124
              
              
              350
              
              
              6,800
              
              
              7,150Time
              
              
              8,699
              
              
              6,192
              
              
              14,891
              
              
              388
              
              
              3,806
              
              
              4,194Total
                  savings and time deposits
              
              
              7,828
              
              
              12,187
              
              
              20,015
              
              
              738
              
              
              10,606
              
              
              11,344Federal
                  funds purchased
              
              
              (139
              )
              
              81
              
              
              (58
              )
              
              (10
              )
              
              119
              
              
              109Securities
                  sold under agreements to repurchase
              
              
              (256
              )
              
              (256
              )
              
              (512
              )
              
              (518
              )
              
              430
              
              
              (88
              )Other
                  borrowed funds
              
              
              (1,642
              )
              
              679
              
              
              (963
              )
              
              (588
              )
              
              950
              
              
              362Subordinated
                  notes
              
              
              258
              
              
              258
              
              
              516
              
              
              -
              
              
              -
              
              
              -Junior
                  subordinated debentures
              
              
              -
              
              
              353
              
              
              353
              
              
              -
              
              
              375
              
              
              375Total
                  Interest Expense
              
              
              6,049
              
              
              13,302
              
              
              19,351
              
              
              (378
              )
              
              12,480
              
              
              12,102Change
                  in Net Interest Income (Tax-equivalent Basis)
              
              $
              3,469
              
              $
              (171
              )
              $
              3,298
              
              $
              4,272
              
              $
              (3,597
              )
              $
              675
 
 ***2006
        versus 2005***
 
 Net
        interest income, the difference between interest earned on loans and leases
        and
        investments, and interest paid on deposits and borrowed funds, is 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 Federal Reserve Open Market
        Committee (“FOMC”), which periodically adjusts the Federal funds rate, the rate
        at which banks borrow funds from one another on an overnight basis. During
        2006,
        the FOMC increased the Federal funds rate four times from 4.25% to its year-end
        2006 level of 5.25%. Since 2004, the FOMC increased the Fed funds rate 17
        times
        by a total of 425 basis points.
 
 Net
        interest income increased by 6.4% to $62.2 million in 2006. This improvement
        was
        driven by an increase in average interest-earning assets of $141 million
        (10%),
        primarily loans and leases and short-term investments, offset partially by
        a 16
        basis point contraction of the Company’s net interest margin to 4.01% in 2006.
        Growth in commercial loans, commercial mortgages and lease receivables led
        the
        $107 million or 13% increase in average loans and leases outstanding to $937
        million in 2006 versus 2005. The loan and lease growth resulted from the
        Company’s business development activities coupled with the ongoing consolidation
        of banks in the Company’s trade area. Average short-term investments,
        principally reverse repurchase agreements used to collateralize municipal
        balances, increased by $29 million in 2006. Average investment securities
        grew
        by $7 million to $535 million primarily due to a lack of economically
        advantageous reinvestment opportunities due to the inverted yield curve
        prevailing throughout 2006. Cash flows from the Bank’s mortgage-backed portfolio
        and maturing short-term municipal investments were utilized, in part, to
        support
        loan and lease growth. Tax-exempt municipal securities and mortgage-backed
        securities declined by $39 million and $36 million, respectively. Offsetting
        this contraction was an increase of $87 million in U.S. Government Agency
        securities. As of December 31, 2006, the average duration of the Company’s
        investment portfolio was 2.75 years.
  33
 ***Table
            of Contents***
  Average
        interest-earning assets have grown by 10%, 2% and 9% in 2006, 2005 and 2004,
        respectively. Low-cost core deposits, principally demand deposits, savings
        accounts and money market accounts, have funded 63% to 71% of the Company’s
        average interest-earning assets during the past three years. Average core
        deposit balances decreased by $33 million or 3% to $981 million in 2006
        following rates of growth of 6% and 11% in 2005 and 2004, respectively. During
        2006, average core deposit balances represented 66% of total deposits, versus
        78% in 2005 and 2004. The reduction in core deposits in 2006 coupled with
        a very
        successful retail CD campaign accounted for the decline in this funding ratio
        during the past year. As interest rates have risen, customers are no longer
        indifferent about leaving deposits in core accounts versus CDs. During 2006,
        average demand deposit balances grew by $14 million or 5% while average money
        market and NOW accounts increased by $2 million. Average savings deposits
        declined by $49 million or 15% on a year to year basis. This decline resulted
        primarily from an outflow of deposits after the Company ceased indexing a
        portion of this funding source to the three-month T-bill rate. During 2006,
        the
        Company’s fully taxable equivalent (FTE) net interest margin contracted by 16
        basis points to 4.01%, from 4.17% a year ago. The narrower margin resulted
        from
        multiple factors, most notably higher short-term interest rates and an inverted
        yield curve which negatively impacted the Company’s cost of funds. As a result
        of a 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 expanded by 91 basis points to 6.84%. Higher short-term
        interest rates, coupled with the aforementioned shift in the Company’s funding
        mix, resulted in a 107 basis point increase in the average rate paid on the
        Company’s supporting funds to 2.83% in 2006.
 
 The
                  following table summarizes the components of net interest margin
                  (FTE) on
                  a quarterly basis for 2006.4th
                  Qtr
              
              3rd
                  Qtr
              
              2nd
                  Qtr
              
              1st
                  QtrInterest-earning
                  assets:Securities
              
              
              4.64
              %
              
              4.50
              %
              
              4.99
              %
              
              4.19
              %Federal
                  Home Loan Bank and other restricted stock
              
              
              4.53
              %
              
              4.20
              %
              
              7.46
              %
              
              5.10
              %Federal
                  funds sold
              
              
              5.19
              %
              
              5.21
              %
              
              4.86
              %
              
              4.68
              %Securities
                  purchased under agreements to resell
              
              
              5.28
              %
              
              5.21
              %
              
              4.97
              %
              
              4.30
              %Interest-bearing
                  deposits
              
              
              5.95
              %
              
              4.82
              %
              
              4.71
              %
              
              4.72
              %Loans
                  and leases
              
              
              8.46
              %
              
              8.35
              %
              
              8.38
              %
              
              8.03
              %Total
                  interest-earning assets
              
              
              6.93
              %
              
              6.95
              %
              
              6.99
              %
              
              6.49
              %Interest-bearing
                  liabilities:Savings
                  deposits
              
              
              2.86
              %
              
              2.70
              %
              
              2.73
              %
              
              2.44
              %Time
                  deposits
              
              
              4.97
              %
              
              4.75
              %
              
              4.59
              %
              
              4.05
              %Total
                  savings and time deposits
              
              
              3.89
              %
              
              3.62
              %
              
              3.53
              %
              
              3.04
              %Federal
                  funds purchased
              
              
              5.51
              %
              
              5.51
              %
              
              5.34
              %
              
              4.68
              %Other
                  borrowed funds
              
              
              6.59
              %
              
              7.12
              %
              
              7.24
              %
              
              4.62
              %Subordinated
                  notes
              
              
              9.13
              %
              
              9.13
              %
              
              8.89
              %
              
              -
              %Junior
                  subordinated debentures
              
              
              8.97
              %
              
              8.93
              %
              
              8.60
              %
              
              8.16
              %Total
                  interest-bearing liabilities
              
              
              4.02
              %
              
              3.79
              %
              
              3.64
              %
              
              3.18
              %Net
                  interest margin - tax-equivalent basis
              
              
              3.78
              %
              
              4.05
              %
              
              4.17
              %
              
              4.06
              %
 
 Average
        total loans and leases have grown by 13% in each of the past three years.
        At the
        same time that this growth has been achieved, credit quality in the Company’s
        loan and lease portfolio has improved each year. Non-accrual loans and leases
        declined to $2 million or 0.2% of total loans and leases as of December 31,
        2006, the lowest level in 16 years, while the allowance for loan and lease
        losses as a percentage of non-accrual loans and leases has risen to 754%,
        its
        highest level ever.
 
 Despite
        further increases in 2006, short-term rates remained low enough, in both
        absolute and historical terms, to support continued growth in residential
        construction and remodeling and commercial real estate development. Each
        of
        these areas of growth is expected to abate in the next few years only because
        of
        a finite amount of available land in the Bank’s trade area. These factors, along
        with a targeted Queens and Brooklyn calling effort, were the primary reasons
        for
        the growth in the Company’s loan and lease portfolio during the past year.
  34
 ***Table
            of Contents***
  Average
        commercial loans, mortgages and leases grew at rates of 11%, 12% and 36%,
        respectively, in 2006. At December 31, 2006, total gross loans and leases
        outstanding amounted to $984 million, up 10% when compared to the comparable
        2005 date. The year-end loan and lease portfolio was composed of approximately
        47% commercial mortgages, 33% commercial loans, 10% residential mortgages
        and
        home equity lines of credit and 10% all other loans and leases. It is expected
        that the 2007 loan and lease mix will remain, on a percentage basis,
        approximately the same as 2006.
 
 ***2005
        versus 2004***
 
 Net
        interest income increased by 2.2% to $58.5 million during 2005 as the result
        of
        growth in average interest-earning assets of $33 million (up 2%). Growth
        in
        loans and leases and short-term investments accounted for much of the asset
        expansion. Increases in commercial loans, commercial mortgages and lease
        receivables led the $95 million or 13% increase in average loans and leases
        outstanding in 2005 versus 2004. Average investment securities declined by
        $84
        million or 14% due to a lack of economically advantageous reinvestment
        opportunity due to the flat yield curve prevailing throughout 2005. Primarily
        funding the growth in interest-earning assets was a $61 million (6%) increase
        in
        core deposits, representing 78% of total deposits in 2005. Growth in demand
        deposits ($20 million) and savings balances ($41 million) accounted for the
        core
        deposit expansion in 2005. Cash flows from the Company’s mortgage-backed
        securities portfolio and maturing municipal investments were also utilized
        to
        support loan and lease growth.
 
 During
        2005, the Company’s net interest rate margin narrowed slightly to 4.17% from
        4.22% in the prior year. The reduced 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. As a result of a shift in the asset mix to a greater
        dependence on loans and leases as a percentage of total earning assets, the
        Company’s earning asset yield expanded by 79 basis points to 5.93%. Higher
        short-term interest rates, partially offset by continued growth in low-cost
        sources of core funding, resulted in an 84 basis point increase in the average
        rate paid on supporting funds to 1.76% in 2005.
 
 **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. AFS securities 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 perceived short-term price
        inefficiencies by selling them in the near term. The Company did not hold
        any
        trading securities at December 31, 2006 and 2005.
 
 At
        December 31, 2006, the Company held $511 million in AFS securities (99% of
        the
        investment portfolio) at a pre-tax unrealized net loss of $5.7 million versus
        an
        unrealized net loss of $6.9 million at year-end 2005. At year-end 2006, the
        AFS
        portfolio was divided into the following categories: 3% corporate and other
        securities; 3% tax-exempt municipal paper; 57% callable U.S. Government Agency
        securities; and 37% mortgage-backed securities (“MBS”) (mainly FNMA and GNMA
        obligations). The held to maturity portion of the portfolio, which totaled
        $6
        million, was composed entirely of U.S. Government Agency securities.
 
 The
        inversion of the yield curve during the past year only made the existing
        portfolio management challenges even greater. In light of the inverted yield
        curve, along with an upward bias in short-term interest rates, the Company
        maintained its defensive investment posture during 2006. Presented with
        difficult bond market conditions throughout most of the year, a conservative
        portfolio was maintained with the objective of generating cash flow to be
        redeployed opportunistically in a rising rate environment.
 
 The
        Company’s investment policy is conservative in nature and identifies liquidity
        and safety as being 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 designed
        to provide liquidity while managing market risk and avoiding taking on credit
        risk. Market risk can be defined as the sensitivity of the portfolio’s market
        value to changes in the level of interest rates, and is managed, primarily, by
        investing in securities with shorter durations.  A
        security with a shorter duration is preferred to one with a longer duration
        in a
        rising rate environment because the longer the duration of a security, the
        greater the sensitivity of its market value to changes in interest
        rates.
  35
 ***Table
            of Contents***
  Security
        selection is governed by the Company’s investment policy, and serves to
        supplement the Company’s asset/liability position. Securities such as callable
        Government Agency securities, premium MBS issues and floating rate securities
        with an anticipated short average life were purchased during the past year
        with
        the intention of producing cash flow, as well as limiting the sensitivity
        of the
        portfolio’s market value. In addition to attaining a short average life, the
        securities purchased provide incremental yield due to optionality found in
        callable Government Agency securities and prepayment activity inherent in
        MBS
        issues. Cash flow on the portfolio increases in a lower interest rate
        environment and moderately extends in a higher interest rate environment.
        The
        defensive posture of the portfolio, with a continuing emphasis on liquidity
        and
        risk management, is expected to continue for the foreseeable
        future.
 
 The
        Company’s investment portfolio decreased by $20 million at year-end 2006 versus
        the comparable 2005 date primarily as the result of reductions in tax-exempt
        municipal securities (down $4 million), MBS issues (down $6 million), corporate
        securities (down $4 million) and Government Agency securities (down $6 million).
        The Company took advantage of accelerated principal paydowns on MBS issues
        to
        strategically position a portion of the investment portfolio during the year.
        Local, short-term municipal paper is sold throughout the year as part of
        the
        Company’s asset/liability management function.
 
 The
        Government Agency issues that are callable have call periods within two years
        and most have final maturities of less than ten years. The notes are AAA
        credits
        that provide a competitive yield in excess of the Company’s funding cost and are
        eligible to pledge to secure municipal deposits and other borrowings and,
        therefore, are an integral part of the Company’s funding strategy. The MBS
        issues held by the Company have a medium-term average life with most final
        maturities less than twenty years. The Company's portfolio of tax-exempt
        municipal notes decreased as part of a strategic repositioning of the investment
        portfolio in the first half of 2005 in advance of further anticipated upward
        trends in rates. 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
        Company received MBS principal paydowns of $43 million and $62 million in
        2006
        and 2005, respectively. Management expects that the trend toward lower paydowns
        will continue in 2007 due to declining refinance opportunities available
        to the
        consumer in the face of higher forecasted interest rates.
 
 The
        Company’s investment portfolio is low-risk in nature due to its concentration of
        U.S. Government Agency, local municipal notes and AAA-rated MBS issues. As
        of
        December 31, 2006, the MBS portfolio had an average life of approximately
        3.6
        years after adjusting for historical prepayment patterns. Approximately 76%
        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 slow as interest rates rise and, conversely, prepayments
        will increase as interest rates fall. CMOs accounted for 6% of the total
        investment portfolio as of year-end 2006. The Government Agency portfolio
        has
        final maturities ranging from one to ten years and those that are callable
        have
        call dates in 2007 and 2008.
 
 **Summary
        of Loan and Lease Loss Experience and Allowance for Loan and Lease
        Losses**
 
 One
        of
        management's primary objectives is to maintain a high-quality loan and lease
        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 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- and lease- related assets and
        establish an adequate level for the allowance for loan and lease losses.
        An
        outside loan review consultant is also utilized to independently verify the
        loan
        classifications and the adequacy of the allowance for loan and lease losses.
        Management actively seeks to reduce the level of non-performing assets, defined
        as non-accrual loans and leases 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.
 
 As
        illustrated in Table I, the Company’s non-performing assets decreased by $1
        million to $2 million at year-end 2006 versus 2005 following a $5 million
        decrease in 2005 versus 2004. At December 31, 2006, total non-performing
        assets
        as a percentage of loans and leases and other real estate owned amounted
        to 0.2%
        as compared to 0.3% and 1.0% at year-end 2005 and 2004, respectively. The
        Company held one commercial property in other real estate owned at year-end
        2004
        with a carrying value of $3 million. This property was sold during 2005 at
        a
        small gain. The year-end 2006 decline in non-performing assets, as defined
        by
        the Company, resulted from a $1 million decrease in non-accrual loans and
        leases. The reduction in non-accrual loans and leases during 2006 resulted
        from
        the upgrade of several commercial credits to performing status coupled with
        a
        combination of paydowns and charge-offs.
  36
 ***Table
            of Contents***
  Management
        of the Company actively reviews the level and composition of non-performing
        assets  and
        during 2006 continued its strategy of collection and recovery efforts though
        proactive litigation. The decrease in non-performing assets resulted in improved
        coverage ratios at year-end. The allowance for loan and lease losses as a
        percentage of non-accrual loans and leases advanced to 754% from 512% at
        year-end 2005, while the allowance for loan and lease losses as a percentage
        of
        non-accrual loans and leases, restructured accruing loans and leases, and
        loans
        and leases 90 days or more past due and still accruing interest increased
        to
        749% during 2006 from 469% a year ago. At December 31, 2006, the Company
        had no
        restructured accruing loans and leases. Loans and leases in this category
        are
        composed mainly of loans and leases that have demonstrated performance in
        accordance with the terms of their restructure agreements but do not yield
        a
        market rate of interest subsequent to their restructuring. For a further
        description of our methodology for determining the adequacy of the allowance
        for
        loan and lease losses, see “Critical
        Accounting Policies, Judgments and Estimates.”
 
 The
        provision for loan and lease losses totaled $2.5 million in 2006, $3.7 million
        in 2005 and $4.5 million in 2004. The resulting allowance for loan and lease
        losses balance of $16 million at December 31, 2006 amounted to 1.7% of loans
        and
        leases outstanding compared to 1.8% in 2005 and 1.5% in 2004. The increase
        in
        the allowance for loan and lease losses in 2006 is a result of growth in
        the
        overall loan and lease portfolio of $92 million or 10.3% partially offset
        by a
        decrease in the balance of loans graded seven through ten. Loans graded in
        these
        categories represented 5.32% of total loans and leases at December 31, 2006
        compared to 5.97% at December 31, 2005. The impact of a decrease in loans
        graded
        adversely and an improvement in non-accrual loans and leases was somewhat
        offset
        by net charge-offs in 2006.
 
 The
        Company recorded net loan and lease charge-offs of $1.8 million in 2006 versus
        net loan and lease recoveries of $47 thousand in 2005 and net loan and lease
        charge-offs of $3.2 million in 2004. Gross recoveries totaled $378 thousand
        in
        2006 versus $845 thousand in 2005 and $187 thousand in 2004. 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 continued 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 2007 or any
        additional charge-offs that may be required during the year.
 
 The
        Company has no foreign loans outstanding. The concentration of loans exceeding
        10% of total loans was the Bank’s loans totaling $165 million and $132 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 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 and leases 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 and lease repayment
        terms.
  37
 ***Table
            of Contents***
  TABLE
                  I
              
              Analysis
                  of Non-Performing Assets at December 31,(Dollars
                  in thousands)
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Non-accrual
                  loans and leases
              
              $
              2,177
              
              $
              3,069
              
              $
              5,274
              
              $
              8,666
              
              $
              6,317Other
                  real estate
              
              
              -
              
              
              -
              
              
              2,650
              
              
              2,650
              
              
              -Total
                  non-performing assets
              
              $
              2,177
              
              $
              3,069
              
              $
              7,924
              
              $
              11,316
              
              $
              6,317Restructured
                  accruing loans and leases
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              107Loans
                  and leases 90 days or more past due and still accruing
                  interest
              
              $
              13
              
              $
              281
              
              $
              89
              
              $
              149
              
              $
              129Total
                  loans and leases outstanding
              
              $
              983,725
              
              $
              892,022
              
              $
              778,191
              
              $
              711,216
              
              $
              620,384Allowance
                  for loan and lease losses
              
              $
              16,412
              
              $
              15,717
              
              $
              12,020
              
              $
              10,732
              
              $
              10,046Key
                  ratios:Allowance
                  for loan and lease losses as a percent of total loans and
                  leases
              
              
              1.7
              %
              
              1.8
              %
              
              1.5
              %
              
              1.5
              %
              
              1.6
              %Non-accrual
                  loans and leases as a percent of total loans and leases
              
              
              0.2
              %
              
              0.3
              %
              
              0.7
              %
              
              1.2
              %
              
              1.0
              %Non-performing
                  assets (1) as a percent of total loans and leases and other real
                  estate
              
              
              0.2
              %
              
              0.3
              %
              
              1.0
              %
              
              1.6
              %
              
              1.0
              %Allowance
                  for loan and lease losses as a percent of non-accrual loans and
                  leases
              
              
              753.9
              %
              
              512.1
              %
              
              227.9
              %
              
              123.8
              %
              
              159.0
              %Allowance
                  for loan and lease losses as a percent of non-accrual loans and
                  leases,
                  restructured accruing loans and leases, and loans and leases 90
                  days or
                  more past due and still accruing interest
              
              
              749.4
              %
              
              469.2
              %
              
              224.1
              %
              
              121.7
              %
              
              153.3
              %
 
 (1)
        Excludes restructured accruing loans and leases, and loans and leases 90
        days or
        more past due and still accruing interest.
 
 **Other
        Income**
 
 ***2006
        versus 2005***
  Other
        income decreased by 2.1% in 2006 when compared to 2005, largely as a result
        of
        lower net security gains. The decline in net security gains was offset in
        part
        by growth in service charges on deposits and other operating income. Income
        from
        Bank Owned Life Insurance (“BOLI”) also improved nominally in 2006.
 
 Return
        item charges represent the Company’s most significant recurring source of other
        income. These fees increased by 20.5% in 2006 versus 2005 as the result of
        increased collection opportunities in the past year. Although higher short-term
        interest rates resulted in more careful cash management by much of the Bank’s
        customer base, the overall collection rate by commercial and retail relationship
        managers improved in 2006, thereby increasing fees collected. Management
        of the
        Bank is committed to improving the collection rate again during 2007 to enhance
        this important source of fee income. Other service charges on deposits,
        principally account activity fees, increased by 3.5% in 2006 after being
        flat in
        2005 versus 2004.
 
 During
        2006, the Company recorded $69 thousand in net security losses primarily
        due to
        sales of local municipal notes. This compares to net gains of $867 thousand
        in
        2005 and $2.1 million in 2004 as the result of the sale of selected securities
        to achieve certain portfolio restructuring goals.
 
 Other
        operating income improved by $515 thousand or 28.1% in 2006 following an
        increase of 5.2% in 2005. Growth in several categories accounted for the
        improvement, principally growth in letter of credit fees, financial products
        (customer swap) fees, merchant services income, sweep account fees and income
        from the Bank’s participation in the Certificate of Deposit Account Registry
        Service (“CDARS”) program. Somewhat offsetting these positive factors were lower
        collection and foreign exchange, cash management and annuity commission fees.
        The continued expansion of the Company’s commercial, municipal and professional
        services customer base resulted in improved sales of products such as merchant
        card processing, debit cards, CDARS and the Bank’s sweep program during 2006.
        Another growing source of fee income is the Bank’s customer swap program.
        Customer rate swaps, arranged through a third party financial intermediary,
        allow Bank customers to achieve their goal of price certainty through a fixed
        rate, long-term loan product while the Bank is, at the same time, able to
        more
        effectively manage its asset/liability structure through a variable rate
        asset.
        This product has been well received by both customers and relationship managers
        as it allows the Bank to satisfy customer needs on loan deals that were
        previously turned away based on unfavorable product terms, principally final
        maturity.
  38
 ***Table
            of Contents***
  ***2005
        versus 2004***
 
 Other
        income decreased by 17.6% in 2005 when compared to 2004, primarily the result
        of
        lower net security gains. During 2005, the Company recorded $867 thousand
        in net
        security gains versus $2.1 million in 2004. Excluding the impact of net security
        transactions in each year, other income totaled $4.9 million in 2005, up
        0.9%
        versus 2004. This nominal improvement resulted from growth in other operating
        income (up 5.2%) and BOLI (up 13.8%) during 2005. Increases in mortgage loan
        sale fees, customer swap fees, merchant services income and income from the
        Bank’s title agency subsidiary, State Title Agency, LLC accounted for the
        improvement in other income. Somewhat offsetting these positive factors were
        lower return item charges, foreign exchange fees, letter of credit fees and
        reduced annuity commission income. The improvement in BOLI income resulted
        from
        the timing of that asset’s purchase in February 2004 versus a full year of
        income in 2005.
 
 Return
        item charges represent the Company’s most significant recurring source of other
        income. These fees declined by 12.0% in 2005 versus 2004 as the result of
        fewer
        collection opportunities in the past year. The significant increase in
        short-term interest rates resulted in more careful cash management by much
        of
        the Bank’s customer base. While the overall collection rate by commercial and
        retail relationship managers improved slightly in 2005, a smaller amount
        of fees
        available for collection offset the higher collection rate. Other service
        charges on deposits, principally account activity fees, were essentially
        flat in
        2005 (up 0.4%) after experiencing growth of 25.0% in 2004.
 
 During
        2005, the Company recorded $867 thousand in net security gains as the result
        of
        selected sales of investment securities, mainly 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 $2.1 million in 2004.
 
 **Operating
        Expenses**
 
 ***2006
        versus 2005***
 
 Total
        operating expenses decreased by $87.0 million to $37.6 million in 2006 from
        a
        year ago. An $89.1 million reduction in legal expenses accounted for this
        decline. Higher levels of salaries and employee benefits, increased occupancy,
        marketing and advertising, credit and collection and growth in audit and
        assessment fees partially offset the lower level of legal expenses in 2006.
        The
        largest component of the Company’s legal expenses relates to ongoing litigation
        arising out of the Bank’s deposit relationship with Island Mortgage and its
        affiliates. The Company entered into a final settlement agreement with the
        plaintiff in the final pending warehouse lender litigation ( *HSA
        Residential Mortgage Services of Texas v. State Bank of Long
        Island* )
        on
        January 24, 2007. In 2005, the Company recorded a $74.2 million expense related
        to the financial impact of the adverse jury verdict, including pre-judgment
        interest and certain other costs, in this litigation. The January 2007
        settlement, totaling $65 million, resulted in a $12.1 million reversal of
        the
        previously accrued compensatory damages and related interest thereon during
        the
        fourth quarter of 2006. Consequently, total legal expenses, including non
        IMN-related expenses, amounted to a $5.5 million credit in 2006 versus an
        expense of $83.6 million in 2005. IMN legal expenses totaled $82.8 million
        and
        $2.3 million in 2005 and 2004, respectively. See “Legal
        Proceedings.”
  39
 ***Table
            of Contents***
  Operating
                  expenses of State Bancorp, Inc.
              
              
              
              
              
              Over/(dollars
                  in thousands)
              
              
              
              
              
              (under)For
                  the years ended December 31,
              
              2006
              
              2005
              
              2005Salaries
                  and other employee benefits
              
              $
              27,095
              
              $
              26,205
              
              
              3
              %Occupancy
              
              
              4,968
              
              
              4,733
              
              
              5
              %Equipment
              
              
              1,227
              
              
              1,389
              
              
              (12
              )%Legal
              
              
              (5,544
              )
              
              83,584
              
              
              N/M
              (1)Marketing
                  and advertising
              
              
              1,743
              
              
              1,232
              
              
              41
              %Credit
                  and collection
              
              
              829
              
              
              660
              
              
              26
              %Audit
                  and assessment
              
              
              1,558
              
              
              1,346
              
              
              16
              %Other
                  operating expenses
              
              
              5,750
              
              
              5,492
              
              
              5
              %Total
                  operating expenses
              
              $
              37,626
              
              $
              124,641
              
              
              (70
              )%
 
 (1)
        N/M -
        denotes not meaningful.
 
 As
        noted
        in the table above, salaries and other employee benefits increased by $890
        thousand (3.4%) during 2006 as the result of staff expansion coupled with
        higher
        medical and equity compensation costs. The addition of staff in several support
        areas of the Bank and the opening of a new branch in Westbury accounted for
        much
        of the Company’s growth in staff in 2006. Increased health care costs, FICA and
        payroll tax expenses, and equity compensation awards also added to the growth
        in
        salaries and benefits costs during 2006. Also contributing to the growth
        in
        operating expenses during 2006 were higher levels of occupancy costs, marketing
        and advertising expenses, credit and collection costs, audit and assessment
        fees
        and other operating expenses. Occupancy costs grew by 5.0% as the result
        of the
        new Westbury branch, higher utility costs and increased real estate taxes
        incurred during 2006. Marketing and advertising expenses increased by 41.5%
        as
        the result of additional Bank product promotions and the opening of a new
        branch. Credit and collection fees increased by 25.7% primarily due to costs
        associated with an expansion of the Bank’s home equity loan program. Audit and
        assessment costs grew by 15.7% related to increased FDIC deposit insurance
        fees.
        Other operating expenses increased by 4.7% as the result of higher costs
        in
        several categories, most notably stationery and supplies, telecommunications
        costs, computer software maintenance and consulting fees. Partially offsetting
        the foregoing increases was an 11.7% reduction in equipment expenses due
        to
        lower depreciation costs in 2006. Excluding all IMN-related expenses (and
        the
        related 2006 credit) in both 2006 and 2005 would have resulted in a year
        over
        year cost increase of 4.8% in 2006 versus 2005.
 
 Excluding
        IMN-related costs, the growth in total operating expenses recorded by the
        Company during 2006 is reflective of the Company’s recent trend as it has
        expanded its branch network and corporate infrastructure during the past
        five
        years. Management continues to pursue a 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%. This goal can only be accomplished through
        a
        combination of revenue growth and strict expense control in all areas. The
        expansion of staff and branch facilities in recent years, along with growth
        in
        both the lending area and operational support functions, has resulted in
        rates
        of operating expense growth above corporate targets. We anticipate that
        investment in additional staff and facilities will be required in order to
        grow
        top-line revenue in 2007. However, we also will conduct an extensive review
        of all business lines in 2007 in an effort to improve efficiencies and allocate
        capital only to those areas that meet pre-determined performance metrics.
        Management is assessing various strategies with respect to operating efficiency,
        cost control and revenue growth. Improvements in operating efficiency may
        entail
        restructuring-type charges in 2007 as various strategies are considered and
        implemented. Expense control measures, including strict guidelines with respect
        to increases in base and supplementary compensation for current staff, will
        continue to be observed on an ongoing basis.
 
 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 was 54.6% in 2006. As a result of the
        adverse IMN jury verdict, the Company’s 2005 operating efficiency ratio is not
        statistically meaningful for analytical purposes. Excluding IMN
        settlement-related credits and expenses, the Company’s operating efficiency
        ratios would have been 63.7% and 64.6% in 2006 and 2005, respectively.
 
 Occupancy
        expenses totaled $5.0 million in 2006, an increase of 5.0% when compared
        to
        2005. This increase resulted from a combination of higher rental expenses,
        increased utility expenses and higher real estate taxes. The increase in
        rental
        costs in 2006 (up 6.1%) resulted principally from the opening of the Westbury
        branch in January 2006. Real estate taxes rose by 12.4% in 2006 when compared
        to
        the prior year as the result of higher commercial property tax rates assessed
        on
        the Company’s branches, including Westbury, in 2006. Utility costs rose by 16.0%
        from year to year. Maintenance and repair costs declined by 14.9%, primarily
        the
        result of a lower level of snow removal costs during the winter of 2005/06.
        Occupancy costs are expected to rise at a similar rate in 2007 as the projected
        rates of growth in utilities, real estate taxes and maintenance costs offset
        the
        reduced rate of growth in rental expense forecast for the coming year.
  40
 ***Table
            of Contents***
  Equipment
        expenses decreased by 11.7% to $1.2 million in 2006 as the result of a reduction
        in computer equipment depreciation related to the Company’s mainframe system.
        Also contributing to this decrease were lower computer software depreciation
        and
        lower equipment maintenance insurance costs. Management of the Company expects
        equipment expenses to increase moderately in 2007 as additional technology
        initiatives are expected to be funded and additional equipment purchased
        to
        support the projected growth in staff.
 
 Legal
        expenses, as previously noted, decreased by $89.1 million during 2006. Excluding
        IMN-related expenses, the Company’s legal expenses amounted to $661 thousand in
        2006 and $784 thousand in 2005. Management of the Company expects that corporate
        legal expenses will increase during 2007 as the result of additional regulations
        currently in place and pending, specifically related to proxy statement
        disclosure and various SEC filings.
 
 Marketing
        and advertising costs increased by $511 thousand (41.5%) during 2006 when
        compared to 2005. This growth resulted principally from additional product
        specific promotions and advertising and marketing related to the new branch
        opened in 2006.
 
 Credit
        and collection costs grew by $169 thousand (25.7%) in 2006 versus 2005.
        Additional costs associated with growth in the Company’s residential mortgage
        and home equity line of credit program accounted for the growth in this expense
        category. Reduced expenses associated with loan collection work, principally
        due
        to continued improvement in the overall quality of the loan and lease portfolio,
        partially offset these cost increases.
 
 Audit
        and
        assessment fees increased by $212 thousand or 15.7% in 2006 versus 2005 as
        a
        result of higher FDIC deposit insurance costs. Audit and assessment expenses
        have increased by approximately 27% over the past two years as higher costs
        associated with SOX compliance and FDIC insurance have been borne by the
        Company. It is expected that costs in this category will decline in 2007
        as a
        result of the lower projected FDIC costs, due in part to an expense credit
        to be
        used to offset a significant portion of 2007 deposit insurance fees, coupled
        with a lower FDIC assessment rate due to the improved capital position of
        the
        Bank.
 
 Other
        operating expenses increased by 4.7% to $5.8 million in 2006 versus 2005.
        This
        growth resulted from increases in several expense categories, most notably
        director compensation costs, stationery and supplies, consulting fees and
        computer software expenses. Somewhat offsetting these factors were reductions
        in
        several expense categories, mainly other real estate expenses and meeting
        and
        seminar costs. 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.
 
 ***2005
        versus 2004***
 
 Operating
        expenses increased by $83.6 million to $124.6 million during 2005 due primarily
        to costs associated with the adverse jury verdict in the IMN litigation.
        Legal
        expenses grew by $80.7 million in 2005 versus 2004. The Company recorded
        a
        non-recurring expense of $74.2 million in the fourth quarter of 2005 as a
        result
        of compensatory damages, pre-judgment interest and other costs associated
        with
        the verdict in the January 2006 trial. Total IMN-related expenses were $82.8
        million in 2005 including legal defense costs and settlements. In addition
        to
        the growth in legal costs, higher levels of salaries and employee benefits
        costs, occupancy, marketing and advertising and audit and assessment expenses
        also contributed to the growth in expenses during 2005. Reductions in equipment
        and credit and collection costs were recorded in 2005 when compared to 2004.
 
 Salaries
        and employee benefits costs increased by $2.3 million (9.7%) in 2005 versus
        2004
        as the result of staff expansion coupled with higher medical and pension
        costs.
        The growth in staff resulted from the establishment of the Professional Services
        Group (“PSG”) in 2004 and the addition of several commercial lenders in 2005.
        Increased health care, FICA expenses, and related increases in 401(k) and
        employee stock ownership plan contributions also added to the growth in this
        category.
  41
 ***Table
            of Contents***
  Occupancy
        costs grew by 18.3% in 2005 to $4.7 million due principally to additional
        space
        occupied by PSG in New York City, higher utility costs and increased maintenance
        and repair expenses. Real estate taxes rose very modestly in 2005 when compared
        to the prior year as the result of nominally higher commercial property tax
        rates assessed on the Company’s branches in 2005. Building and leasehold
        depreciation grew by 12.3% as the result of additional depreciable tenant
        improvements during 2005 while utility costs rose by 15.8% from year to year.
        Maintenance and repair costs grew by 30.9%, primarily the result of snow
        removal
        costs during the winter of 2004/05.
 
 Equipment
        expenses decreased by 5.1% to $1.4 million in 2005 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.
 
 Marketing
        and advertising costs increased by 23.1% during 2005. This growth resulted
        principally from additional corporate branding efforts coupled with product
        specific promotions. A more targeted approach to event sponsorships during
        2005
        based on customer profitability, coupled with a reduction in promotions-related
        expenses served to offset somewhat the Company’s other initiatives.
 
 Credit
        and collection costs declined by 11.8% in 2005 versus 2004. This improvement
        was
        the result of a significant reduction in loan collection work resulting from
        fewer non-performing assets due to an improvement in portfolio credit quality.
        Also contributing to this decline were lower costs associated with credit
        reports and credit checks as the result of a reduced level of residential
        mortgage refinancing activity in 2005.
 
 Audit
        and
        assessment fees increased by $124 thousand or 10.1% in 2005 versus 2004 as
        a
        result of higher costs associated with the implementation of the Sarbanes
        Oxley
        Act (“SOX”).
 
 Other
        operating expenses decreased by 6.1% to $5.5 million in 2005 when compared
        to
        2004. This resulted from reductions in several expense categories, most notably
        other real estate expenses, director compensation costs and correspondent
        bank
        service charges. Other real estate expenses, specifically real estate taxes
        paid, decreased during 2005 as a commercial property foreclosed on during
        2003
        was sold during the year at a small gain. Somewhat offsetting these positive
        factors were increases in several expense categories, mainly meetings and
        seminars, travel and entertainment and FDIC and Banking Department assessment
        expenses.
 
 **Effective
        Income Tax Rate**
 
 ***2006
        versus 2005 and 2004***
 
 An
        income
        tax provision of $16.3 million was recorded in 2006 as compared to an income
        tax
        benefit of $27.4 million in 2005 and an income tax provision of $5.4 million
        in
        2004. The 2005 tax credit resulted from the loss recorded by the Company
        during
        2005. 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 an MTA surcharge of 17% on New York State
        taxes paid. The Company’s overall effective tax rate (for those years that a tax
        provision was recorded) was 58.7% and 28.6% in 2006 and 2004,
        respectively.
 
 The
        increase in 2006’s effective tax rate was due to a $10 million New York State
        tax reserve related to an audit by the Tax Department coupled with a
        significantly lower level of tax-exempt income in 2006. For a description
        of
        this audit and the related notice of deficiency received from the Tax
        Department, see “Legal Proceedings.” The effective tax rate in 2006 without the
        additional reserve approximates 35%. Tax-exempt income totaled $800 thousand
        in
        2006 as compared to $2 million in 2005. Management of the Company anticipates
        that the consolidated 2007 effective tax rate will approximate 35% -
        40%.
 
 **Off-Balance
        Sheet Arrangements**
 
 The
        Bank
        is a party to financial instruments with off-balance sheet risk in the normal
        course of business to meet the financing needs of its customers. These financial
        instruments include commitments to extend credit and standby and documentary
        letters of credit. Those instruments involve, to varying degrees, elements
        of
        credit risk in excess of the amount recognized in the consolidated financial
        statements. The Bank uses the same credit policies in making commitments
        and
        conditional obligations as it does for on-balance sheet
        instruments.
  42
 ***Table
            of Contents***
  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, 2006 and 2005, commitments to originate loans and commitments
        under
        unused lines of credit for which the Bank is obligated amounted to approximately
        $326,277,000 and $283,947,000, respectively. Approximately $276,651,000 and
        $256,018,000 of these commitments were at variable rates and $49,626,000
        and
        $27,929,000 were at fixed rates at December 31, 2006 and 2005, respectively.
        At
        December 31, 2006 and 2005, the fixed rate commitments had interest rates
        ranging from approximately 5.05% to 8.57% and 4.25% to 7.75%,
        respectively.
 
 Letters
        of credit are conditional commitments guaranteeing payments of drafts in
        accordance with the terms of the letter of credit agreements. Commercial
        letters
        of credit are used primarily to facilitate trade or commerce and are also
        issued
        to support public and private borrowing arrangements, bond financing and
        similar
        transactions. Collateral may be required to support letters of credit based
        upon
        management’s evaluation of the creditworthiness of each customer. The credit
        risk involved in issuing letters of credit is essentially the same as that
        involved in extending loan facilities to customers. Most letters of credit
        expire within one year. At December 31, 2006 and 2005, the Bank had letters
        of
        credit outstanding of approximately $16,808,000 and $14,644,000, respectively.
        At December 31, 2006, the uncollateralized portion was approximately
        $2,263,000.
 
 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. The Bank executes customer interest rate
        swap
        transactions together with offsetting interest rate swap transactions with
        institutional dealers.  At December 31, 2006 and 2005, the total gross
        notional amount of swap transactions outstanding was $40,900,000 and $9,550,000,
        respectively. The increase in 2006 resulted from four additional customer
        swap
        transactions.
 
 The
        Bank
        was party to two swap agreements that economically hedged a portion of the
        interest rate variability in its portfolio of prime rate loans. The agreements
        effectively required the Bank to pay prime interest rate and receive a fixed
        rate of 6.01% from the counterparty on $50 million of loan assets. Effective
        April 20, 2005, the Bank terminated these two interest rate swap agreements
        in
        support of enhancing its interest rate sensitivity position.  The cost to
        unwind the swap agreements totaled $899,000 which is being reclassified as
        a
        reduction in interest income using the straight-line method over the remaining
        original term (to September 2007) of the interest rate swaps in accordance
        with
        SFAS No. 133. The amount included in accumulated other comprehensive income
        (loss), is $180,000 and $396,000 as of December 31, 2006 and 2005, respectively.
        For the twelve months ended December 31, 2006 and 2005, the Company recognized
        expenses associated with unwinding the swap agreements, of $360,000 and
        $170,000, respectively, 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 2007, $2.9 million; in 2008, $2.8 million; in
        2009,
        $2.6 million; in 2010, $2.2 million; in 2011, $1.6 million; and the remainder
        to
        2015, $900 thousand.
  43
 ***Table
            of Contents***
  **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, 2006.
 
 Payments
                  due by period (in thousands)Less
                  than
              
              
              
              
              
              More
                  than
              
              FootnoteContractual
                  Obligations
              
              Total
              
              1
                  year
              
              1-3
                  years
              
              3-5
                  years
              
              5
                  years
              
              referenceLeases
                  covering various equipment, branches, office space and
                  land
              
              $
              13,018
              
              $
              2,933
              
              $
              5,353
              
              $
              3,847
              
              $
              885
              
              
              12Time
                  deposits
              
              
              627,595
              
              
              561,920
              
              
              42,485
              
              
              23,190
              
              
              -
              
              
              6Obligations
                  under equipment leasefinancing
              
              
              56
              
              
              27
              
              
              29
              
              
              -
              
              
              -
              
              
              7Subordinated
                  notes
              
              
              10,000
              
              
              -
              
              
              -
              
              
              -
              
              
              10,000
              
              
              8Junior
                  subordinated debentures
              
              
              20,620
              
              
              -
              
              
              -
              
              
              -
              
              
              20,620
              
              
              8IMN
                  warehouse lender litigation settlement
              
              
              65,000
              
              
              65,000
              
              
              -
              
              
              -
              
              
              -
              
              
              12Total
              
              $
              736,289
              
              $
              629,880
              
              $
              47,867
              
              $
              27,037
              
              $
              31,505
 
 **Capital
        Resources**
 
 The
        strength of the Company’s capital position has provided the platform for its
        historically 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 2005, the Company's capital
        was
        negatively impacted by the net loss recorded principally as a result of the
        IMN
        jury verdict. On December 21, 2006, the Company consummated a private placement
        transaction pursuant to which the Company issued 2,250,000 shares of its
        common
        stock, par value $5.00 per share, to certain accredited investors. The offering
        price for the shares was $16.75 per share, except in the case of 53,700 shares
        sold to Mr. O’Brien, for whom the price per share was $18.63, the closing bid
        price of the Company’s common stock on December 18, 2006, which is considered to
        be the market value of the common stock for purposes of Mr. O’Brien’s purchase
        in accordance with The NASDAQ Global Market listing requirements. The gross
        proceeds of the offering were approximately $37.8 million. The net proceeds
        of
        the offering, after deducting commissions and expenses, were approximately
        $36.5
        million. The offering was made in reliance upon the exemption from registration
        provided in Section 4(2) of the Securities Act of 1933, as amended (“Securities
        Act”) and Rule 506 of Regulation D promulgated thereunder. Each of the investors
        represented to the Company that it is an accredited investor, as defined
        by Rule
        501 promulgated under the Securities Act, and certificates representing
        purchased shares of common stock issued in connection with the offering will
        contain appropriate legends to reflect the restrictions on transfer imposed
        by
        the Securities Act. At December 31, 2006, stockholders' equity totaled $104.1
        million versus $56.4 million at year-end 2005. The Company declared $5.1
        million
        in dividends during 2006. The Company did not repurchase any shares of common
        stock during 2006 under the existing stock repurchase plan. Under the Board
        of
        Directors’ current stock repurchase authorization, management may repurchase up
        to 512,348 additional shares if market conditions warrant. This action will
        only
        occur if management feels that the purchase will be at prices that are accretive
        to earnings per share and is the most efficient use of Company capital. The
        Company does not presently expect to repurchase stock in 2007. During
        2006, the Company received $3.3 million from the reinvestment of dividends
        by stockholders participating in the Company’s dividend reinvestment
        plan.
 
 During
        the second quarter of 2006, the Company issued $10 million of 8.25% subordinated
        notes due June 15, 2013. The notes were sold in a private placement and qualify
        as Tier II capital for the Company.
 
 Internal
        capital generation, defined as earnings less cash dividends paid on common
        stock, is the primary catalyst expected to support 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.
  44
 ***Table
            of Contents***
  The
        Company’s two unconsolidated Delaware trust subsidiaries currently have
        outstanding a total of $20 million in trust preferred securities which currently
        qualify as Tier I capital of the Company for regulatory capital purposes.
        The
        securities each bear an interest rate tied to three-month LIBOR and are each
        redeemable by the Company in whole or in part after five years or earlier
        under
        certain circumstances. The average rate on all trust preferred securities
        outstanding was 8.24% during 2006 and 6.49% during 2005. As of year-end 2006
        and
        2005, the Company’s Tier I capital to total adjusted average assets ratios were
        6.30% and 4.30%, respectively.
 
 Although
        the Company may be dependent on Bank dividends to pay the trust preferred
        interest, and the Bank may not be able to declare dividends, the trust preferred
        issues allow for up to two extension periods of 20 consecutive months each
        during which time payment of interest may be deferred by the Company. As
        such,
        the Company would not be in default if it were unable to pay interest on
        these
        junior subordinated debentures.
 
 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. Cash dividends on the Company’s common stock amounted to $0.45 per
        share in 2006.
 
 
 
 The
        Company’s primary source of income is dividends from the Bank. Dividend payments
        from the Bank are subject to regulatory limitations, generally based on capital
        levels and current and retained earnings, imposed by regulatory agencies
        with
        authority over the Bank. The ability of the Bank to declare dividends is
        also
        subject to its profitability, financial condition, capital expenditures and
        other cash flow requirements. Currently, based on a New York State dividend
        restriction law, the Bank is prohibited from declaring dividends without
        advance
        regulatory approval and it is unknown whether such approval will be granted.
        The
        Bank presently intends to make application for permission to declare dividends
        when deemed appropriate. However, the Company cannot make any assurances
        that
        the Bank will, or will be able to, declare dividends at any specific time
        in the
        future.
 
 The
        Company’s dividend reinvestment 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 up
        to a
        5% discount from the current market price under either plan option. During
        2006
        and 2005, $3.3 million and $2.8 million, respectively, were added to
        stockholders' equity through plan participation. Approximately 22% of the
        Company’s cash dividends were reinvested in 2006 under this plan, and since
        inception, approximately $19.4 million in additional equity has been added
        through plan participation. Management anticipates continued future growth
        in
        equity through the program.
  45
 ***Table
            of Contents***
  The
        Company and its subsidiaries are subject to various regulatory capital
        requirements administered by the FRB and the FDIC. 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, 2006 capital position
        as outlined in Table II, the Bank's capital ratios exceed the minimum levels
        established for an adequately-capitalized institution and exceed the minimum
        requirements under FDICIA. The Bank’s Tier I Leverage, Tier I
        Capital/Risk-Weighted Assets and Total Capital to Risk-Weighted Assets ratios
        exceed the minimum requirements for a well - capitalized institution at the
        same
        date. 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. See “Supervision and Regulation.” The
        Company has no current plans or commitments for capital utilization or
        expenditures that would affect its current capital position or would impact
        its
        future financial performance.
 
 TABLE
                  II
              
              
              
              
              
              
              
              
              
              RegulatoryCriteria
                  for aWell-Regulatory
              
              The
                  Bank's Ratios as of December 31,
              
              CapitalizedMinimum
              
              2006
              
              2005
              
              2004
              
              InstitutionLeverage
                  ratio - Tier I Capital to Total Adjusted Average Assets
              
              
              3.00
                  - 5.00
              %
              
              6.69
              %
              
              4.27
              %
              
              7.79
              %
              
              5.00
              %Tier
                  I Capital/Risk-Weighted Assets
              
              
              4.00
              %
              
              10.07
              %
              
              5.96
              %
              
              12.41
              %
              
              6.00
              %Total
                  Capital/Risk-Weighted Assets
              
              
              8.00
              %
              
              11.32
              %
              
              7.21
              %
              
              13.66
              %
              
              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 and 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.
 
 The
        Company’s primary sources of funds are cash provided by deposits, proceeds from
        maturities and sales of securities available for sale and cash provided by
        operating activities. In 2006, the Company also issued common stock in a
        private
        placement.
  46
 ***Table
            of Contents***
  Deposits
        increased by $155 million in 2006 and $142 million in 2005. The growth in
        deposits in 2006 was due to two successful retail CD campaigns while the
        increase in 2005 was due to growth in core deposits and retail and jumbo
        CDs.
 
 During
        2006 and 2005, proceeds from maturities of securities available for sale
        totaled
        $139 million and $179 million, respectively. Proceeds from sales of securities
        available for sale were $162 million in 2006 and $311 million in 2005. The
        Company’s investment portfolio includes a significant amount of short-term
        tax-exempt securities which are purchased to support the Company’s municipal
        banking business. These securities typically mature in less than one year
        and
        are often sold prior to maturity.
 
 In
        2006,
        the Company issued 2.25 million shares of common stock in a private placement
        and received $36 million in cash, net of issuance costs.
 
 The
        Company’s primary uses of funds are for the origination of loans and the
        purchase of investment securities. For the years ended December 31, 2006
        and
        2005, the Company originated $93 million and $114 million, respectively,
        net of
        principal paydowns. The Company did not purchase any loans in 2006 or 2005.
        The
        Company purchased securities available for sale totaling $291 million and
        $513
        million in 2006 and 2005, respectively. The reduction in securities purchased
        in
        2006 resulted from the inverted U.S. Treasury yield curve which limited
        opportunity to invest at an acceptable spread to the Company’s marginal cost of
        funds.
 
 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 $82 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 $170 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, with prior
        regulatory approval, also access the brokered deposit market for funding.
        As of
        year-end 2006, the Company had no brokered deposits outstanding. At December
        31,
        2005, brokered deposits totaling $15 million were utilized as a source of
        funds
        by the Company.
 
 Asset
        liquidity is provided by short-term investments and the marketability of
        securities available for sale. At December 31, 2006, the Company had $671million
        in such liquid assets. The Company's loan and lease portfolio and investment
        securities are of high quality and mixed maturity, providing an excellent
        source
        of internal liquidity through maturities and periodic repayments of principal.
        At year-end 2006, approximately $695 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 lease and investment portfolios are
        typically utilized to reduce the Company’s borrowed funds position and/or to
        fund loan and lease 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.
 
 In
        February 2004, the Bank purchased $25 million in BOLI. The Bank is the
        beneficiary of this policy that insures the lives of certain senior officers
        of
        the Bank and its subsidiaries. Distributions are made to the Bank only upon
        the
        death of an insured officer in accordance with the underlying policy.
        Accordingly, the BOLI held by the Bank does not generate regular cash flows
        for
        reinvestment.
 
 Management
        believes that the Company's funding sources, including dividends from the
        Bank,
        and the Bank's funding sources will be adequate to meet future liquidity
        requirements.
  47
 ***Table
            of Contents***
  **ITEM7A.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK**
 
 **Asset/Liability
        Management and Market Risk**
 
 The
        process by which financial institutions manage interest-earning assets and
        funding sources under different 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 of up to two years. These simulations are used
        to
        determine whether corrective action may be warranted or required in order
        to
        adjust the overall interest rate risk profile of the Company. Asset and
        liability management strategies may also involve the use of instruments such
        as
        interest rate swaps to hedge interest rate risk. Management performs simulation
        analysis to assess the Company’s asset/liability position on a dynamic repricing
        basis using software developed by a well known industry vendor. Simulation
        modeling applies alternative interest rate scenarios to the Company’s balance
        sheet to estimate the related impact on net interest income. The use of
        simulation modeling assists management in its continuing efforts to achieve
        earnings stability in a variety of interest rate environments.
 
 The
        Company's asset/liability and interest rate risk management policy limits
        interest rate risk exposure to -12% and -15% of the base case net interest
        income for net earnings at risk at the 12-month and 24-month time horizons,
        respectively. Net earnings at risk is the potential adverse change in net
        interest income arising from up to +/- 200 basis point change in interest
        rates
        ramped over a 12 month period, and measured over a 24 month time horizon.
        The
        Company’s December 31, 2006 balance sheet is held flat over the 24 month time
        horizon with all principal cash flows assumed to be reinvested in similar
        products and term points at the simulated market interest rates.
 
 %
                  Change in Net Interest Income12
                  Month Interest Rate RampsDecember
                  31, 2006Basis
                  PointsTime
                  Horizon
              
              Down
                  200
              
              Down
                  100
              
              Base
                  Flat
              
              Up
                  100
              
              Up
                  200Year
                  One
              
              
              0.4
              %
              
              0.7
              %
              
              0.0
              %
              
              -0.8
              %
              
              -2.5
              %Year
                  Two
              
              
              6.0
              %
              
              6.9
              %
              
              6.2
              %
              
              5.6
              %
              
              3.6
              %
  Management
        also monitors equity value at risk as a percentage of market value of portfolio
        equity (“MVPE”). The Company’s MVPE is the difference between the market value
        of its interest-sensitive assets and the market value of its interest-sensitive
        liabilities. MVPE at risk is the potential adverse change in the present
        value
        (market value) of total equity arising from an immediate hypothetical shock
        in
        interest rates. Management uses scenario analysis on a static basis to assess
        its equity value at risk by modeling MVPE under various interest rate shock
        scenarios.
 
 When
        modeling MVPE at risk, management recognizes the high degree of subjectivity
        when projecting long-term cash flows and reinvestment rates, and therefore
        uses
        MVPE at risk as a relative indicator of interest rate risk. Accordingly,
        the
        Company does not set policy limits over MVPE at risk.
  48
 ***Table
            of Contents***
  MVPE
                  VariabilityImmediate
                  Interest Rate ShocksDecember
                  31, 2006Basis
                  PointsDown
                  200
              
              Down
                  100
              
              Base
                  Flat
              
              Up
                  100
              
              Up
                  200%
                  Change in MVPE (1)
              
              
              -0.4
              %
              
              0.6
              %
              
              0.0
              %
              
              -2.0
              %
              
              -5.1
              %MVPE
                  Ratio
              
              
              13.0
              %
              
              13.3
              %
              
              13.4
              %
              
              13.1
              %
              
              12.6
              %(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.
  49
 ***Table
            of
            Contents***


**ITEM
                8.**
            **FINANCIALSTATEMENTSAND SUPPLEMENTARY
                DATA**





**Report
      of Independent Registered Public Accounting Firm on Financial
      Statements**





Board
      of
      Directors and Stockholders


State
      Bancorp, Inc.


New
      Hyde
      Park, New York




We
        have
        audited the accompanying consolidated balance sheets of State Bancorp, Inc.
        as
        of December 31, 2006 and 2005, 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, 2006. 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, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of State Bancorp, Inc. as
      of
      December 31, 2006 and 2005, and the results of its operations and its cash
      flows
      for each of the three years in the period ended December 31, 2006, in conformity
      with U.S. generally accepted accounting principles.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of State Bancorp, Inc.’s
      internal control over financial reporting as of December 31, 2006, based on
      criteria established in Internal Control - Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission and our report
      dated March 13, 2007 expressed an unqualified opinion thereon.








Crowe
      Chizek and Company LLC





Livingston,
      New Jersey


March
      13,
      2007


50
 ***Table
          of Contents***




**CONSOLIDATED
                BALANCE SHEETS**December
                31, 2006 and 20052006
            
            2005ASSETS:Cash
                and due from banks
            
            $
            46,210,873
            
            $
            49,652,118Federal
                funds sold
            
            
            29,000,000
            
            
            -Securities
                purchased under agreements to resell
            
            
            131,000,000
            
            
            39,500,000Total
                cash and cash equivalents
            
            
            206,210,873
            
            
            89,152,118Securities
                held to maturity (estimated fair value of $6,361,036 in 2006 and
                $15,944,500 in 2005)
            
            
            6,372,080
            
            
            15,992,882Securities
                available for sale - at estimated fair value
            
            
            511,408,685
            
            
            522,245,615Federal
                Home Loan Bank and other restricted stock
            
            
            1,708,343
            
            
            2,516,743Loans
                and leases (net of allowance for loan and lease losses of $16,411,925
                in
                2006 and $15,716,960 in 2005)
            
            
            967,312,849
            
            
            876,304,586Bank
                premises and equipment - net
            
            
            6,043,450
            
            
            6,171,005Bank
                owned life insurance
            
            
            27,891,017
            
            
            26,879,935Net
                deferred income taxes
            
            
            36,665,263
            
            
            37,457,832Other
                assets
            
            
            25,109,916
            
            
            21,431,797TOTAL
                ASSETS
            
            $
            1,788,722,476
            
            $
            1,598,152,513LIABILITIES:Deposits:Demand
            
            $
            316,618,448
            
            $
            333,073,091Savings
            
            
            621,969,615
            
            
            693,822,626Time
            
            
            627,595,416
            
            
            384,678,229Total
                deposits
            
            
            1,566,183,479
            
            
            1,411,573,946Other
                borrowings
            
            
            56,400
            
            
            18,614,296Subordinated
                notes
            
            
            10,000,000
            
            
            -Junior
                subordinated debentures
            
            
            20,620,000
            
            
            20,620,000Accrued
                legal expenses
            
            
            66,050,208
            
            
            77,729,137Accrued
                income taxes
            
            
            9,013,155
            
            
            -Other
                accrued expenses and liabilities
            
            
            12,658,724
            
            
            13,193,016Total
                liabilities
            
            
            1,684,581,966
            
            
            1,541,730,395COMMITMENTS
                AND CONTINGENT LIABILITIESSTOCKHOLDERS'
                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 14,604,203
                shares in 2006 and 12,019,426 shares in 2005; outstanding 13,616,551
                shares in 2006 and 11,031,774 shares in 2005
            
            
            73,021,015
            
            
            60,097,130Surplus
            
            
            83,767,505
            
            
            56,424,544Retained
                deficit
            
            
            (32,158,439
            )
            
            (38,601,709
            )Treasury
                stock (987,652 shares in 2006 and 2005)
            
            
            (16,646,426
            )
            
            (16,646,426
            )Accumulated
                other comprehensive loss (net of taxes of ($2,118,436) in 2006 and
                ($2,686,335) in 2005)
            
            
            (3,843,145
            )
            
            (4,851,421
            )Total
                stockholders' equity
            
            
            104,140,510
            
            
            56,422,118TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            1,788,722,476
            
            $
            1,598,152,513




*See
      Notes to Consolidated Financial Statements.*


51
 ***Table
          of Contents***




**CONSOLIDATED
                STATEMENTS OF INCOME**For
                the Years Ended December 31, 2006, 2005 and 20042006
            
            2005
            
            2004INTEREST
                INCOME:Interest
                and fees on loans and leases
            
            $
            77,737,172
            
            $
            61,836,169
            
            $
            49,195,179Federal
                funds sold and securities purchased under agreements to
                resell
            
            
            4,319,772
            
            
            1,613,849
            
            
            354,616Securities
                held to maturity - taxable
            
            
            412,737
            
            
            537,926
            
            
            1,879,710Securities
                held to maturity - tax-exempt
            
            
            -
            
            
            -
            
            
            1,439Securities
                available for sale - taxable
            
            
            23,314,553
            
            
            17,561,509
            
            
            15,337,083Securities
                available for sale - tax-exempt
            
            
            500,617
            
            
            1,614,016
            
            
            2,789,022Securities
                available for sale - dividends
            
            
            95,861
            
            
            76,500
            
            
            391,003Dividends
                on Federal Home Loan Bank and other restricted stock
            
            
            108,625
            
            
            180,500
            
            
            89,054Total
                interest income
            
            
            106,489,337
            
            
            83,420,469
            
            
            70,037,106INTEREST
                EXPENSE:Deposits
            
            
            41,230,176
            
            
            21,214,704
            
            
            9,871,241Temporary
                borrowings
            
            
            719,720
            
            
            2,253,112
            
            
            1,870,008Subordinated
                notes
            
            
            515,764
            
            
            -
            
            
            -Junior
                subordinated debentures
            
            
            1,787,165
            
            
            1,433,680
            
            
            1,059,304Total
                interest expense
            
            
            44,252,825
            
            
            24,901,496
            
            
            12,800,553Net
                interest income
            
            
            62,236,512
            
            
            58,518,973
            
            
            57,236,553PROVISION
                FOR LOAN AND LEASE LOSSES
            
            
            2,489,998
            
            
            3,650,000
            
            
            4,506,000Net
                interest income after provision for loan and lease losses
            
            
            59,746,514
            
            
            54,868,973
            
            
            52,730,553OTHER
                INCOME:Service
                charges on deposit accounts
            
            
            2,398,992
            
            
            2,107,546
            
            
            2,278,718Net
                security (losses) gains
            
            
            (69,475
            )
            
            867,208
            
            
            2,149,588Income
                from bank owned life insurance
            
            
            1,011,081
            
            
            1,000,755
            
            
            879,180Other
                operating income
            
            
            2,350,168
            
            
            1,834,955
            
            
            1,743,439Total
                other income
            
            
            5,690,766
            
            
            5,810,464
            
            
            7,050,925Income
                before operating expenses
            
            
            65,437,280
            
            
            60,679,437
            
            
            59,781,478OPERATING
                EXPENSES:Salaries
                and other employee benefits
            
            
            27,094,530
            
            
            26,204,886
            
            
            23,897,728Occupancy
            
            
            4,968,083
            
            
            4,733,005
            
            
            4,001,184Equipment
            
            
            1,226,505
            
            
            1,388,794
            
            
            1,463,855Legal
            
            
            (5,543,603
            )
            
            83,583,980
            
            
            2,858,970Marketing
                and advertising
            
            
            1,743,341
            
            
            1,232,172
            
            
            1,001,210Credit
                and collection
            
            
            829,521
            
            
            660,022
            
            
            748,285Audit
                and assessment
            
            
            1,557,693
            
            
            1,346,064
            
            
            1,222,149Other
                operating expenses
            
            
            5,750,399
            
            
            5,491,760
            
            
            5,849,849Total
                operating expenses
            
            
            37,626,469
            
            
            124,640,683
            
            
            41,043,230INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            27,810,811
            
            
            (63,961,246
            )
            
            18,738,248PROVISION
                (BENEFIT) FOR INCOME TAXES
            
            
            16,316,932
            
            
            (27,412,995
            )
            
            5,362,239NET
                INCOME (LOSS)
            
            
            11,493,879
            
            
            (36,548,251
            )
            
            13,376,009OTHER
                COMPREHENSIVE INCOME (LOSS), NET
            
            
            1,008,276
            
            
            (4,372,464
            )
            
            (3,047,276
            )TOTAL
                COMPREHENSIVE INCOME (LOSS)
            
            $
            12,502,155
            
            $
            (40,920,715
            )
            $
            10,328,733BASIC
                EARNINGS (LOSS) PER COMMON SHARE
            
            $
            1.02
            
            $
            (3.32
            )
            $
            1.24DILUTED
                EARNINGS (LOSS) PER COMMON SHARE
            
            $
            1.00
            
            $
            (3.32
            )
            $
            1.20WEIGHTED
                AVERAGE NUMBER OF SHARES - BASIC
            
            
            11,227,278
            
            
            10,996,601
            
            
            10,827,816WEIGHTED
                AVERAGE NUMBER OF SHARES - DILUTED
            
            
            11,486,982
            
            
            10,996,601
            
            
            11,179,986





*See
      Notes to Consolidated Financial Statements.*


52
 ***Table
          of Contents***




**CONSOLIDATED
                STATEMENTS OF CASH FLOWS**For
                the Years Ended December 31, 2006, 2005 and 2004
            
            2006
            
            2005
            
            2004OPERATING
                ACTIVITIES:Net
                income (loss)
            
            $
            11,493,879
            
            $
            (36,548,251
            )
            $
            13,376,009Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Provision
                for loan and lease losses
            
            
            2,489,998
            
            
            3,650,000
            
            
            4,506,000Depreciation
                and amortization of bank premises and equipment
            
            
            1,130,716
            
            
            1,429,278
            
            
            1,519,631Amortization
                of intangibles
            
            
            36,137
            
            
            36,137
            
            
            36,137Deferred
                income tax expense (benefit)
            
            
            224,670
            
            
            (31,005,600
            )
            
            (864,304
            )Amortization
                of net premium on securities
            
            
            1,129,688
            
            
            3,435,779
            
            
            6,009,576Net
                security losses (gains)
            
            
            69,475
            
            
            (867,208
            )
            
            (2,149,588
            )Net
                gains on sales of other real estate owned ("OREO")
            
            
            -
            
            
            (43,903
            )
            
            -Income
                from bank owned life insurance
            
            
            (1,011,081
            )
            
            (1,000,755
            )
            
            (879,180
            )Stock-based
                compensation expense
            
            
            119,584
            
            
            36,389
            
            
            -Increase
                in other assets
            
            
            (3,354,256
            )
            
            (6,284,601
            )
            
            (1,712,992
            )(Decrease)
                increase in accrued expenses, taxes and other liabilities
            
            
            (1,543,815
            )
            
            76,905,643
            
            
            4,482,342Net
                cash provided by operating activities
            
            
            10,784,995
            
            
            9,742,908
            
            
            24,323,631INVESTING
                ACTIVITIES:Proceeds
                from maturities of securities held to maturity
            
            
            16,000,000
            
            
            19,997,544
            
            
            85,060,524Purchases
                of securities held to maturity
            
            
            (6,355,173
            )
            
            (5,992,500
            )
            
            (59,985,000
            )Proceeds
                from sales of securities available for sale
            
            
            162,149,456
            
            
            311,306,545
            
            
            302,733,658Proceeds
                from maturities of securities available for sale
            
            
            139,493,132
            
            
            179,411,568
            
            
            229,223,404Purchases
                of securities available for sale
            
            
            (290,812,672
            )
            
            (513,364,937
            )
            
            (549,073,823
            )Decrease
                (increase) in Federal Home Loan Bank and other restricted
                stock
            
            
            808,400
            
            
            1,474,600
            
            
            (81,992
            )Increase
                in loans and leases - net
            
            
            (93,498,261
            )
            
            (113,783,801
            )
            
            (70,192,729
            )Proceeds
                from sales of OREO
            
            
            -
            
            
            2,693,903
            
            
            -Purchases
                of bank premises and equipment - net
            
            
            (1,003,162
            )
            
            (1,108,917
            )
            
            (927,148
            )Increase
                in bank owned life insurance
            
            
            -
            
            
            -
            
            
            (25,000,000
            )Net
                cash used in investing activities
            
            
            (73,218,280
            )
            
            (119,365,995
            )
            
            (88,243,106
            )FINANCING
                ACTIVITIES:(Decrease)
                increase in demand and savings deposits
            
            
            (88,307,654
            )
            
            74,667,252
            
            
            (2,180,833
            )Increase
                in time deposits
            
            
            242,917,187
            
            
            67,272,616
            
            
            55,528,008Decrease
                in Federal funds purchased
            
            
            -
            
            
            -
            
            
            (10,000,000
            )Decrease
                in securities sold under agreements to repurchase
            
            
            -
            
            
            -
            
            
            (31,601,147
            )Decrease
                in other borrowings
            
            
            (18,557,896
            )
            
            (13,652,193
            )
            
            (18,447,660
            )Proceeds
                from issuance of subordinated notes
            
            
            10,000,000
            
            
            -
            
            
            -Proceeds
                from issuance of junior subordinated debentures
            
            
            -
            
            
            -
            
            
            620,000Cash
                dividends paid
            
            
            (6,706,859
            )
            
            (5,766,476
            )
            
            (5,050,091
            )Proceeds
                from shares issued under private placement
            
            
            36,542,406
            
            
            -
            
            
            -Proceeds
                from shares issued under the dividend reinvestment plan
            
            
            3,313,558
            
            
            2,841,412
            
            
            2,461,066Proceeds
                from shares issued pursuant to compensation awards
            
            
            247,768
            
            
            655,516
            
            
            719,650Proceeds
                from shares issued under the Directors' Stock Plan
            
            
            43,530
            
            
            -
            
            
            30,361Purchases
                of treasury stock
            
            
            -
            
            
            (1,177,898
            )
            
            (1,987,172
            )Net
                cash provided by (used in) financing activities
            
            
            179,492,040
            
            
            124,840,229
            
            
            (9,907,818
            )NET
                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            117,058,755
            
            
            15,217,142
            
            
            (73,827,293
            )CASH
                AND CASH EQUIVALENTS AT BEGINNING OF YEAR
            
            
            89,152,118
            
            
            73,934,976
            
            
            147,762,269CASH
                AND CASH EQUIVALENTS AT END OF YEAR
            
            $
            206,210,873
            
            $
            89,152,118
            
            $
            73,934,976SUPPLEMENTAL
                DATA:Interest
                paid
            
            $
            43,227,466
            
            $
            24,619,835
            
            $
            12,214,917Income
                taxes paid
            
            $
            5,231,690
            
            $
            5,459,406
            
            $
            5,699,219Adjustment
                to unrealized net gain or loss on securities available for
                sale
            
            $
            1,216,175
            
            $
            (6,533,252
            )
            $
            (3,990,792
            )Dividends
                declared but not paid as of year-end
            
            $
            -
            
            $
            1,656,251
            
            $
            1,360,298





*See
      Notes to Consolidated Financial Statements.*


53
 ***Table
            of
            Contents***




**CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                (LOSS)**For
                the Years Ended December 31, 2006, 2005 and 2004Retained
            
            
            
            Accumulated
                Other
            
            TotalCommon
            
            
            
            Earnings
            
            Treasury
            
            Comprehensive
            
            Stockholders'
            
            ComprehensiveStock
            
            Surplus
            
            (Deficit)
            
            Stock
            
            Income
                (Loss)
            
            Equity
            
            Income
                (Loss)Balance,
                January 1, 2004
            
            $
            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)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (1,166,591
            )Reclassification
                for gains included in net income (2)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (1,423,771
            )Cash
                flow hedges (3)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (456,914
            )Total
                other comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,047,276
            )
            
            (3,047,276
            )
            
            (3,047,276
            )Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            $
            10,328,733Cash
                dividend ($.48 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 (77,095 shares)
            
            
            385,475
            
            
            334,175
            
            
            -
            
            
            -
            
            
            -
            
            
            719,650Stock
                issued under Directors' Stock Plan (1,252 shares)
            
            
            6,260
            
            
            24,101
            
            
            -
            
            
            -
            
            
            -
            
            
            30,361Treasury
                stock purchased (88,137 shares)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,987,172
            )
            
            -
            
            
            (1,987,172
            )Balance,
                December 31, 2004
            
            
            49,974,110
            
            
            63,014,247
            
            
            4,008,970
            
            
            (15,468,528
            )
            
            (478,957
            )
            
            101,049,842Comprehensive
                loss:Net
                loss
            
            
            -
            
            
            -
            
            
            (36,548,251
            )
            
            -
            
            
            -
            
            
            (36,548,251
            )
            $
            (36,548,251
            )Other
                comprehensive loss, net of tax:Unrealized
                holding losses during the period (1)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (3,686,286
            )Reclassification
                for gains included in net income (2)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (565,118
            )Cash
                flow hedges (3)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            (121,060
            )Total
                other comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,372,464
            )
            
            (4,372,464
            )
            
            (4,372,464
            )Total
                comprehensive loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            $
            (40,920,715
            )Cash
                dividend ($.55 per share)
            
            
            -
            
            
            -
            
            
            (6,062,428
            )
            
            -
            
            
            -
            
            
            (6,062,428
            )6
                for 5 stock split (1,832,949 shares)
            
            
            9,164,745
            
            
            (9,164,745
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Shares
                issued under the dividend reinvestment plan (131,901 shares at 95%
                of
                market value)
            
            
            659,505
            
            
            2,181,907
            
            
            -
            
            
            -
            
            
            -
            
            
            2,841,412Stock
                options exercised (59,754 shares)
            
            
            298,770
            
            
            356,746
            
            
            -
            
            
            -
            
            
            -
            
            
            655,516Accelerated
                vesting of stock options
            
            
            -
            
            
            36,389
            
            
            -
            
            
            -
            
            
            -
            
            
            36,389Treasury
                stock purchased (61,657 shares)
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,177,898
            )
            
            -
            
            
            (1,177,898
            )Balance,
                December 31, 2005
            
            
            60,097,130
            
            
            56,424,544
            
            
            (38,601,709
            )
            
            (16,646,426
            )
            
            (4,851,421
            )
            
            56,422,118Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            11,493,879
            
            
            -
            
            
            -
            
            
            11,493,879
            
            $
            11,493,879Other
                comprehensive income, net of tax:Unrealized
                holding gains during the period (1)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            748,973Reclassification
                for losses included in net income (2)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            43,159Cash
                flow hedges (3)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            216,144Total
                other comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,008,276
            
            
            1,008,276
            
            
            1,008,276Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            $
            12,502,155Shares
                issued under private placement (2,250,000 shares)
            
            
            11,250,000
            
            
            25,292,406
            
            
            -
            
            
            -
            
            
            -
            
            
            36,542,406Cash
                dividend ($.45 per share)
            
            
            -
            
            
            -
            
            
            (5,050,609
            )
            
            -
            
            
            -
            
            
            (5,050,609
            )Shares
                issued under the dividend reinvestment plan (203,167 shares at 95%
                of
                market value)
            
            
            1,015,835
            
            
            2,297,723
            
            
            -
            
            
            -
            
            
            -
            
            
            3,313,558Stock
                options exercised (21,223 shares)
            
            
            106,115
            
            
            141,653
            
            
            -
            
            
            -
            
            
            -
            
            
            247,768Vesting
                of non-qualified stock options
            
            
            -
            
            
            29,800
            
            
            -
            
            
            -
            
            
            -
            
            
            29,800Restricted
                stock awards (107,540 shares)
            
            
            537,700
            
            
            (447,916
            )
            
            -
            
            
            -
            
            
            -
            
            
            89,784Stock
                issued under Directors' Stock Plan (2,847 shares)
            
            
            14,235
            
            
            29,295
            
            
            -
            
            
            -
            
            
            -
            
            
            43,530Balance,
                December 31, 2006
            
            $
            73,021,015
            
            $
            83,767,505
            
            $
            (32,158,439
            )
            $
            (16,646,426
            )
            $
            (3,843,145
            )
            $
            104,140,510(1)
                Net of taxes of ($674,613), ($1,979,758) and $397,727 in 2004, 2005
                and
                2006, respectively.(2)
                Net of taxes of $725,818, $302,090 and ($26,316) in 2004, 2005 and
                2006,
                respectively.(3)
                Net of taxes of ($304,103), ($80,572) and $143,856 in 2004, 2005
                and 2006,
                respectively.





*See
      Notes to Consolidated Financial Statements.*


54
 ***Table
            of
            Contents***




**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"). 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 subsidiaries,
      P.W.B. Realty, L.L.C. and State Title Agency, LLC. 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.





***Use
      of Estimates*** - 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
      allowance for loan and lease losses, fair values of financial instruments,
      litigation liabilities and tax contingencies are particularly subject to
      change.





***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.





Declines
      in the fair value of securities below their cost that are other than temporary
      are reflected as realized losses. In estimating other-than-temporary losses,
      management considers: (1) the length of time and extent that fair value has
      been
      less than cost, (2) the financial condition and near term prospects of the
      issuer and (3) the Company’s ability and intent to hold the security for a
      period sufficient to allow for any anticipated recovery in fair
      value.





***Income
      Recognition*** *-* Interest
      on loans and leases is credited to income when earned. The Bank discontinues
      the
      accrual of interest on loans and leases 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 or lease 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 and leases is either applied
      against principal or reported as income, according to management's judgment
      as
      to the collectibility of the principal.





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


55
 ***Table
          of Contents***


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 and leases,
      such as consumer and residential mortgages, are collectively evaluated for
      impairment.





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




***Bank
      Premises and Equipment - Net*** - Land
      is carried at cost. 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 10 years for furniture and equipment and 30 years for
      premises and related components. Leasehold improvements are amortized over
      the
      shorter of their estimated useful lives or the remaining terms of the
      leases.





***Loan
      and Lease Origination Fees and Costs*** -
      Certain loan and lease origination fees and direct origination costs are
      capitalized and recognized as an adjustment of the yield on the related loan
      or
      lease.





***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.





***Treasury
      Stock*** *-* Stock
      held in treasury by the Company is reported as a reduction to total
      stockholders’ equity.




***Stock
      Dividends and Splits*** *-* Stock
      dividends issued are recorded by transferring the aggregate market value of
      the
      shares issued from retained earnings to common stock and surplus. Stock splits
      are recorded by transferring the aggregate par value of the shares issued from
      surplus to common stock. All per share information, included in the consolidated
      financial statements and the notes thereto, has been restated to give
      retroactive effect to stock dividends and splits.





***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 and the vesting of restricted stock awards. 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 and splits. For
      periods in which a loss is reported, the impact of stock options is not
      considered as the result would be anti-dilutive.


56
 ***Table
          of Contents***




For
                the Years Ended December 31,
            
            2006
            
            2005
            
            2004Net
                income (loss)
            
            $
            11,493,879
            
            $
            (36,548,251
            )
            $
            13,376,009Average
                dilutive stock options outstanding
            
            
            745,091
            
            
            N/A
                *
            
            
            1,009,126Average
                exercise price per share
            
            $
            11.46
            
            
            N/A
                *
            
            $
            12.57Average
                market price
            
            $
            17.29
            
            
            N/A
                *
            
            $
            19.31Weighted
                average common shares outstanding
            
            
            11,227,278
            
            
            10,996,601
            
            
            10,827,816Increase
                in shares due to exercise of options - diluted basis
            
            
            259,704
            
            
            N/A
                *
            
            
            352,170Adjusted
                common shares outstanding - diluted
            
            
            11,486,982
            
            
            10,996,601
            
            
            11,179,986Net
                income (loss) per share - basic
            
            $
            1.02
            
            $
            (3.32
            )
            $
            1.24Net
                income (loss) per share - diluted
            
            $
            1.00
            
            $
            (3.32
            )
            $
            1.20





*
      N/A -
      denotes not applicable.





***Comprehensive
      Income (Loss)*** ** -
      Comprehensive income (loss) consists of net income (loss) and other
      comprehensive income (loss). Other comprehensive income (loss) includes
      unrealized gains and losses on securities available for sale and cash flow
      hedges which are also recognized as separate components of equity.





***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. Carrying value
      in
      excess of net fair value at the time of foreclosure is charged against the
      allowance for loan and lease 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. 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 reviewed annually for impairment and
      no
      evidence of impairment has been identified.





***Accounting
      for Stock-Based Compensation*** -
      Prior
      to January 1, 2006, the Company accounted for its stock-based employee
      compensation under the recognition and measurement principles of Accounting
      Principles Board (“APB”) Opinion No. 25, “ Accounting
      for Stock Issued to Employees,” and
      related interpretations. No stock-based employee compensation cost is reflected
      in the income statements for periods ended December 31, 2005, or before.
      Effective January 1, 2006, the Company adopted Statement of Financial Accounting
      Standards (“SFAS”) No. 123(R), “ Share-based
      Payment, ” on
      a
      modified prospective basis with the cost of any subsequent grants of stock-based
      compensation to be reflected in the income statement at that time in accordance
      with SFAS No. 123(R). For 2006, adopting this standard resulted in a reduction
      of income before income taxes of $119,584, a reduction in net income of $78,925
      and no change in basic or diluted earnings per share.


57
 ***Table
          of Contents***


Prior
      to
      January 1, 2006, employee compensation expense was reported using the intrinsic
      value method; therefore, no stock-based compensation cost is reflected in net
      income for the years ending December 31, 2005 and 2004. The following table
      illustrates the effect on net income and earnings per share if expense was
      measured using the fair value recognition provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation,” ** for
      the
      years ending December 31, 2005 and 2004.




2005
              
              2004Net
                  (loss) income, as reported
              
              $
              (36,548,251
              )
              $
              13,376,009Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (1,141,636
              )
              
              (389,441
              )Pro
                  forma net (loss) income
              
              $
              (37,689,887
              )
              $
              12,986,568(Loss)
                  earnings per share:Basic
                  - as reported
              
              $
              (3.32
              )
              $
              1.24Basic
                  - pro forma
              
              $
              (3.43
              )
              $
              1.20Diluted
                  - as reported
              
              $
              (3.32
              )
              $
              1.20Diluted
                  - pro forma
              
              $
              (3.43
              )
              $
              1.16





***Accounting
      for Derivatives*** *-* ****** From
      time
      to time, the Bank may execute customer interest rate swap transactions together
      with offsetting interest rate swap transactions with institutional
      dealers.  The swaps are marked to market with changes in fair value
      recognized as other income.  For the twelve months ended December 31, 2006,
      2005 and 2004, income associated with these swaps was not material to the
      financial statements. At December 31, 2006 and 2005, the total gross notional
      amount of swap transactions outstanding was $40,900,000 and $9,550,000,
      respectively. The customer swap program enables the Bank to originate loans
      that
      have longer maturity terms without incurring the associated interest rate risk.
      The Company does not hold any derivative financial instruments for trading
      purposes.





The
      Bank
      was party to two swap agreements that economically hedged a portion of the
      interest rate variability in its portfolio of prime rate loans. The agreements
      effectively required the Bank to pay prime interest rate and receive a fixed
      rate of 6.01% from the counterparty on $50 million of loan assets. Effective
      April 20, 2005, the Bank terminated these two interest rate swap agreements
      in
      support of enhancing its interest rate sensitivity position.  The cost to
      unwind the swap agreements totaled $899,000 which is being reclassified as
      a
      reduction in interest income using the straight-line method over the remaining
      original term of the interest rate swaps in accordance with SFAS No. 133. The
      amount remaining to be amortized is $300,000. The amount included in accumulated
      other comprehensive income (loss), is $180,120 and $396,264 as of December
      31,
      2006 and 2005, respectively. For the twelve months ended December 31, 2006
      and
      2005, the Company recognized expenses associated with unwinding the swap
      agreements of $360,000 and $169,882, respectively, under the
      agreements.





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





***Retirement
      Plans*** -
      Employee 401(k) expense is the amount of matching contributions. Deferred
      compensation plan expense allocates the benefits over years of
      service.





***Loss
      Contingencies*** - Loss
      contingencies, including claims and legal actions arising in the ordinary course
      of business, are recorded as liabilities when the likelihood of loss is probable
      and an amount or range of loss can be reasonably estimated.





***Dividend
      Restriction*** **-** Banking
      regulations require maintaining certain capital levels and may limit the
      dividends paid by the bank to the holding company or by the holding company
      to
      stockholders. (See the “Regulatory
      Matters” note
      for more specific disclosure.)


58
 ***Table
          of Contents***


***Fair
      Value of Financial Instruments*** - Fair
      values of financial instruments are estimated using relevant market information
      and other assumptions, as more fully disclosed in a separate note. Fair value
      estimates involve uncertainties and matters of significant judgment regarding
      interest rates, credit risk, prepayments and other factors, especially in the
      absence of broad markets for particular items. Changes in assumptions or in
      market conditions could significantly affect the estimates.





***Operating
      Segments*** - While
      the chief decision-makers monitor the revenue streams of the various products
      and services, the identifiable segments are not material and operations are
      managed and financial performance is evaluated on a Company-wide basis.
      Accordingly, all of the financial service operations are considered by
      management to be aggregated in one reportable operating segment.





***Effect
      of Recently Issued Accounting Standards on the Financial
      Statements*** *-* In
      September 2006, the Securities and Exchange Commission (“SEC”) released Staff
      Accounting Bulletin (“SAB”) 108. SAB 108 permits the Company to adjust for the
      cumulative effect of immaterial errors relating to prior years in the carrying
      amount of assets and liabilities as of the beginning of the current fiscal
      year, with an offsetting adjustment to the opening balance of
      retained earnings in the year of adoption. SAB 108 also requires the
      adjustment of any prior quarterly financial statements within the fiscal year
      of
      adoption for the effects of such errors on the quarters when the information
      is
      next presented. Such adjustments do not require previously filed reports with
      the SEC to be amended. The adoption of SAB 108 had no effect on the Company’s
      consolidated financial statements for the year ending December 31,
      2006.





In
      September 2006, the Financial
      Accounting Standards Board (“ FASB”)
      issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair
      value, establishes a framework for measuring fair value and expands disclosures
      about fair value measurements. This Statement establishes a fair value hierarchy
      about the assumptions used to measure fair value and clarifies assumptions
      about
      risk and the effect of a restriction on the sale or use of an asset. The
      standard is effective for fiscal years beginning after November 15, 2007. The
      Company has not completed its evaluation of the impact of the adoption of this
      standard.





In
      September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,
      “Accounting for Deferred Compensation and Postretirement Benefit Aspects of
      Endorsement Split-Dollar Life Insurance Arrangements.” This issue requires that
      a liability be recorded during the service period when a split-dollar life
      insurance agreement continues after participants’ employment or retirement. The
      required accrued liability will be based on either the post-employment benefit
      cost for the continuing life insurance or based on the future death benefit
      depending on the contractual terms of the underlying agreement. This issue
      is
      effective for fiscal years beginning after December 15, 2007. The Company does
      not believe the adoption of this issue will have a material impact on the
      consolidated financial statements.





In
      September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,
      “Accounting for Purchases of Life Insurance - Determining the Amount That Could
      Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting
      for
      Purchases of Life Insurance).” ** This
      issue requires that a policyholder consider contractual terms of a life
      insurance policy in determining the amount that could be realized under the
      insurance contract. It also requires that if the contract provides for a greater
      surrender value if all individual policies in a group are surrendered at the
      same time, that the surrender value be determined based on the assumption that
      policies will be surrendered on an individual basis. Lastly, the issue discusses
      whether the cash surrender value should be discounted when the policyholder
      is
      contractually limited in its ability to surrender a policy. This issue is
      effective for fiscal years beginning after December 15, 2006. The Company does
      not believe the adoption of this issue will have a material impact on the
      consolidated financial statements.





In
      July
      2006, the FASB released Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes -
      an
      interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a
      recognition threshold and measurement attribute for a tax position taken or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. The Company has determined that the adoption
      of FIN 48 will not have a material effect on the consolidated financial
      statements.




In
      March
      2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial
      Assets-an amendment of FASB Statement No. 140.” This Statement provides the
      following: 1) revised guidance on when a servicing asset and servicing liability
      should be recognized; 2) requires all separately recognized servicing assets
      and
      servicing liabilities to be initially measured at fair value, if practicable;
      3)
      permits the Company to elect to measure servicing assets and servicing
      liabilities at fair value at each reporting date and report changes in fair
      value in earnings in the period in which the changes occur; 4) upon initial
      adoption, permits a onetime reclassification of available-for-sale securities
      to
      trading securities for securities which are identified as offsetting the
      Company's exposure to changes in the fair value of servicing assets or
      liabilities that a servicer elects to subsequently measure at fair value; and
      5)
      requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the Company’s financial statements and
      additional footnote disclosures. This standard is effective as of the beginning
      of the Company's first fiscal year that begins after September 15, 2006 with
      the
      effects of initial adoption being reported as a cumulative-effect adjustment
      to
      retained earnings. Management does not expect the adoption of this statement
      to
      have a material impact on its consolidated financial
      statements.


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In
      February 2006, the FASB issued Statement No. 155, “Accounting for Certain Hybrid
      Financial Instruments-an amendment to FASB Statements No. 133 and 140.” This
      Statement permits fair value re-measurement for any hybrid financial
      instruments, clarifies which instruments are subject to the requirements of
      Statement No. 133 and establishes a requirement to evaluate interests in
      securitized financial assets and other items. The new standard is effective
      for
      financial assets acquired or issued after the beginning of the Company's first
      fiscal year that begins after September 15, 2006. Management does not expect
      the
      adoption of this statement to have a material impact on its consolidated
      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,
      2006 and 2005, are as follows:


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 ***Table
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Gross
            
            GrossAmortized
            
            Unrealized
            
            Unrealized
            
            EstimatedCost
            
            Gains
            
            Losses
            
            Fair
                ValueDecember
                31, 2006Securities
                Held to Maturity:Government
                Agency securities
            
            $
            6,372,080
            
            $
            -
            
            $
            (11,044
            )
            $
            6,361,036Securities
                Available for Sale:Obligations
                of states and political subdivisions
            
            
            14,327,627
            
            
            194
            
            
            (76,533
            )
            
            14,251,288Government
                Agency securities
            
            
            294,793,218
            
            
            201,199
            
            
            (1,785,614
            )
            
            293,208,803Corporate
                securities
            
            
            15,179,296
            
            
            -
            
            
            (152,776
            )
            
            15,026,520Mortgage-backed
                securities and collateralized mortgage obligations
            
            
            192,770,125
            
            
            96,265
            
            
            (3,944,316
            )
            
            188,922,074Total
                SecuritiesAvailable
                for Sale
            
            
            517,070,266
            
            
            297,658
            
            
            (5,959,239
            )
            
            511,408,685Total
                Securities
            
            $
            523,442,346
            
            $
            297,658
            
            $
            (5,970,283
            )
            $
            517,769,721December
                31, 2005Securities
                Held to Maturity:Government
                Agency securities
            
            $
            15,992,882
            
            $
            1,591
            
            $
            (49,973
            )
            $
            15,944,500Securities
                Available for Sale:Obligations
                of states and political subdivisions
            
            
            18,728,632
            
            
            18,514
            
            
            (108,996
            )
            
            18,638,150Government
                Agency securities
            
            
            291,550,547
            
            
            7,530
            
            
            (2,603,275
            )
            
            288,954,802Corporate
                securities
            
            
            19,306,974
            
            
            -
            
            
            (257,435
            )
            
            19,049,539Mortgage-backed
                securities and collateralized mortgage obligations
            
            
            199,537,218
            
            
            81,930
            
            
            (4,016,024
            )
            
            195,603,124Total
                SecuritiesAvailable
                for Sale
            
            
            529,123,371
            
            
            107,974
            
            
            (6,985,730
            )
            
            522,245,615Total
                Securities
            
            $
            545,116,253
            
            $
            109,565
            
            $
            (7,035,703
            )
            $
            538,190,115




The
      amortized cost and estimated fair value of securities held to maturity and
      securities available for sale at December 31, 2006, by contractual maturity,
      are
      shown in the following table. 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.


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Amortized
            
            EstimatedCost
            
            Fair
                ValueSecurities
                Held to Maturity:Due
                after one year through five years
            
            $
            3,946,437
            
            $
            3,940,125Due
                after ten years
            
            
            2,425,643
            
            
            2,420,911Total
                Securities Held to Maturity
            
            
            6,372,080
            
            
            6,361,036Securities
                Available for Sale:Due
                in one year or less
            
            
            107,041,231
            
            
            106,347,493Due
                after one year through five years
            
            
            139,778,230
            
            
            138,955,992Due
                after five years through ten years
            
            
            47,520,060
            
            
            47,480,224Due
                after ten years
            
            
            29,960,620
            
            
            29,702,902Subtotal
            
            
            324,300,141
            
            
            322,486,611Mortgage-backed
                securities and collateralized mortgage obligations
            
            
            192,770,125
            
            
            188,922,074Total
                Securities Available for Sale
            
            
            517,070,266
            
            
            511,408,685Total
                Securities
            
            $
            523,442,346
            
            $
            517,769,721




In
      2006,
      2005 and 2004, gross gains of $53,435, $1,112,134 and $3,021,312 and gross
      losses of $122,910, $244,926 and $871,724, respectively, were realized on the
      sale of securities available for sale.





At
      December 31, 2006, the Company owned no securities held to maturity and no
      securities available for sale for one issuer, other than the U.S. Government
      and
      its agencies, in excess of 10% of stockholders’ equity. At December 31, 2005,
      the Company did hold such securities. The issuer was TPREF Funding LTD and
      the
      available-for-sale securities had an amortized cost of $10,050,202 and an
      estimated fair value of $9,850,000.





Securities
      held to maturity and securities available for sale with an amortized cost of
      $470,676,153 and $508,116,789 and an estimated fair value of $465,525,300 and
      $501,525,645 at December 31, 2006 and 2005, respectively, were pledged for
      public deposits, securities sold under agreements to repurchase and other
      short-term borrowings.





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, 2006, there were no
      other-than-temporary impairments of the Company’s investment securities.





Information
      pertaining to securities with gross unrealized losses at December 31, 2006
      and
      2005, aggregated by investment category and length of time that individual
      securities have been in a continuous loss position, follows:


62
 ***Table
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Less
                than 12 Months
            
            12
                Months or Longer
            
            TotalGross
                Unrealized Losses
            
            Estimated
                Fair Value
            
            Gross
                Unrealized Losses
            
            Estimated
                Fair Value
            
            Gross
                Unrealized Losses
            
            Estimated
                Fair ValueDecember
                31, 2006Securities
                held to maturity:Government
                Agency securities
            
            $
            (11,044
            )
            $
            6,361,036
            
            $
            -
            
            $
            -
            
            $
            (11,044
            )
            $
            6,361,036Securities
                available for sale:Obligations
                of states and political subdivisions
            
            
            (27,791
            )
            
            7,203,512
            
            
            (48,742
            )
            
            4,732,582
            
            
            (76,533
            )
            
            11,936,094Government
                Agency securities
            
            
            (65,247
            )
            
            46,013,294
            
            
            (1,720,367
            )
            
            217,008,389
            
            
            (1,785,614
            )
            
            263,021,683Corporate
                securities
            
            
            (1
            )
            
            2,012,780
            
            
            (152,775
            )
            
            12,011,740
            
            
            (152,776
            )
            
            14,024,520Mortgage-backed
                securities and collateralized mortgage obligations
            
            
            (55,191
            )
            
            24,855,918
            
            
            (3,889,125
            )
            
            141,565,475
            
            
            (3,944,316
            )
            
            166,421,393Total
                securities available for sale
            
            
            (148,230
            )
            
            80,085,504
            
            
            (5,811,009
            )
            
            375,318,186
            
            
            (5,959,239
            )
            
            455,403,690Total
                securities
            
            $
            (159,274
            )
            $
            86,446,540
            
            $
            (5,811,009
            )
            $
            375,318,186
            
            $
            (5,970,283
            )
            $
            461,764,726December
                31, 2005Securities
                held to maturity:Government
                Agency securities
            
            $
            (49,973
            )
            $
            14,947,500
            
            $
            -
            
            $
            -
            
            $
            (49,973
            )
            $
            14,947,500Securities
                available for sale:Obligations
                of states and political subdivisions
            
            
            (80,749
            )
            
            13,360,765
            
            
            (28,247
            )
            
            3,026,730
            
            
            (108,996
            )
            
            16,387,495Government
                Agency securities
            
            
            (1,283,825
            )
            
            186,387,521
            
            
            (1,319,450
            )
            
            94,559,752
            
            
            (2,603,275
            )
            
            280,947,273Corporate
                securities
            
            
            (9,982
            )
            
            7,042,140
            
            
            (247,453
            )
            
            12,007,400
            
            
            (257,435
            )
            
            19,049,540Mortgage-backed
                securities and collateralized mortgage obligations
            
            
            (1,271,888
            )
            
            91,561,270
            
            
            (2,744,136
            )
            
            95,865,250
            
            
            (4,016,024
            )
            
            187,426,520Total
                securities available for sale
            
            
            (2,646,444
            )
            
            298,351,696
            
            
            (4,339,286
            )
            
            205,459,132
            
            
            (6,985,730
            )
            
            503,810,828Total
                securities
            
            $
            (2,696,417
            )
            $
            313,299,196
            
            $
            (4,339,286
            )
            $
            205,459,132
            
            $
            (7,035,703
            )
            $
            518,758,328




The
      securities that have been in a continuous loss position for 12 months or longer
      at December 31, 2006 are categorized as: (1) adjustable rate mortgage-backed
      securities totaling $47,368,591, (2) fixed rate mortgage-backed securities
      totaling $94,196,884, (3) fixed rate U.S. Government Agency securities totaling
      $217,008,389, (4) fixed rate corporate debt securities totaling $12,011,740
      and
      (5) fixed rate municipal securities totaling $4,732,582.





The
      market value, and therefore the loss position, for each type of security respond
      differently to market conditions. In management’s opinion, those market
      conditions are temporary in nature and provide the basis for the Company’s
      belief that the declines are temporary. The 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.





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





The
      securities that have been in a continuous loss position for 12 months or longer
      at December 31, 2006 were purchased in an environment of historically low
      interest rates and the Company expects the likelihood of a small increase in
      interest rates during 2007 to be moderately greater than the likelihood of
      a
      decline in interest rates. Higher interest rates will cause the adjustable
      rate
      securities to reset their coupons at higher levels and therefore their market
      values will increase to reflect the higher coupons. The market value of fixed
      rate securities will increase in either a falling interest rate environment
      or
      with the passage of time as the securities approach maturity date. 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, management intends to hold these securities for the foreseeable future.
      However, those classified as “available for sale” could be sold, regardless of
      their market value, should business conditions warrant such sale.


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**3.
      Loans and Leases - Net**





At
      December 31, 2006 and 2005, net loans and leases consisted of the
      following:





2006
            
            2005Commercial
                and industrial
            
            $
            297,255,659
            
            $
            297,886,701Real
                estate - mortgage
            
            
            497,930,047
            
            
            446,003,667Real
                estate - construction
            
            
            105,720,534
            
            
            79,200,268Lease
                receivables
            
            
            62,648,964
            
            
            49,151,369Loans
                to individuals
            
            
            11,314,608
            
            
            9,400,585Tax
                exempt and other
            
            
            8,854,962
            
            
            10,378,956Loans
                and leases - net of unearned income
            
            
            983,724,774
            
            
            892,021,546Less:
                Allowance for loan and lease losses
            
            
            16,411,925
            
            
            15,716,960Loans
                and leases - net
            
            $
            967,312,849
            
            $
            876,304,586




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, 2006 and 2005, the
      concentration of loans exceeding 10% of total loans was the Bank’s loans
      totaling $164,963,000 and $164,642,000, respectively, to real estate operators,
      lessors and developers and $131,891,000 and $120,477,000, 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. Loans made to directors and executive
      officers, either directly or indirectly, totaled $2,742,441 and $2,922,810
      at
      December 31, 2006 and 2005, respectively. New loans totaling $1,327,448 and
      $1,224,721 were extended and payments of $1,507,817 and $802,050 were received
      during 2006 and 2005, respectively, on these loans.





Activity
      in the allowance for loan and lease losses for the three years ended December
      31, 2006 is as follows:





2006
            
            2005
            
            2004Balance,
                January 1
            
            $
            15,716,960
            
            $
            12,020,443
            
            $
            10,732,078Provision
                charged to income
            
            
            2,489,998
            
            
            3,650,000
            
            
            4,506,000Charge-offs,
                net of recoveries of $377,680, $844,750and $187,323
            
            
            (1,795,033
            )
            
            46,517
            
            
            (3,217,635
            )Balance,
                December 31
            
            $
            16,411,925
            
            $
            15,716,960
            
            $
            12,020,443




As
      of
      December 31, 2006, 2005 and 2004, the recorded investment in loans and leases
      that are considered to be impaired is summarized below.


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 ***Table
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2006
              
              2005
              
              2004Amount
                  measured using the present value of expected future cash flows,
                  discounted
                  at each loan's and lease's effective interest rate
              
              $
              -
              
              $
              -
              
              $
              -Impaired
                  collateral-dependent loans and leases
              
              
              1,490,677
              
              
              1,471,128
              
              
              3,275,403Total
                  amount evaluated as impaired
              
              $
              1,490,677
              
              $
              1,471,128
              
              $
              3,275,403Average
                  impaired loan and lease balance
              
              $
              3,035,134
              
              $
              2,012,540
              
              $
              4,579,424Interest
                  income recognized on impaired loans and leases
              
              $
              236,499
              
              $
              115,623
              
              $
              71,665




As
      a
      result of the Bank’s measurement of impaired loans and leases, an allowance for
      loan and lease losses of approximately $775,000 and $734,000 was established
      for
      $1,490,677 and $1,471,128 of the total impaired loans and leases at December
      31,
      2006 and 2005, respectively.





At
      December 31, 2006 and 2005, loans and leases with unpaid principal balances
      on
      which the Bank is no longer accruing interest income were $2,177,456 and
      $3,068,808, respectively. Interest income would have been approximately $78,000
      and $137,000 greater in 2006 and 2004 respectively, had these loans and leases
      been current. Interest income was approximately $5,000 greater in 2005 than
      it
      would have been had these loans and leases been current. Interest income on
      total non-accrual loans and leases, which is recorded only when received,
      amounted to approximately $117,000, $122,000 and $31,000 for 2006, 2005 and
      2004, respectively. At December 31, 2006, 2005 and 2004, there were no
      restructured loans and leases still accruing interest. At December 31, 2006
      and
      2005, loans and leases 90 days or more past due and still accruing interest
      totaled $13,258 and $281,107, respectively.





At
      December 31, 2006 and 2005, commercial real estate mortgages of $175,513,714
      and
      $155,588,328, respectively, were pledged at the Federal Home Loan Bank of New
      York (“FHLB”).





**4.
      Bank Premises and Equipment - Net**





At
      December 31, 2006 and 2005, Bank premises and equipment consisted of the
      following:




AccumulatedDepreciation/
            
            Net
                BookCost
            
            Amortization
            
            ValueDecember
                31, 2006:Building
            
            $
            2,697,059
            
            $
            1,334,994
            
            $
            1,362,065Leasehold
                improvements
            
            
            4,764,904
            
            
            2,227,467
            
            
            2,537,437Furniture
                and fixtures
            
            
            5,167,936
            
            
            3,717,139
            
            
            1,450,797Computer
                equipment and software
            
            
            4,615,487
            
            
            3,922,336
            
            
            693,151Total
            
            $
            17,245,386
            
            $
            11,201,936
            
            $
            6,043,450December
                31, 2005:Building
            
            $
            2,592,950
            
            $
            1,241,131
            
            $
            1,351,819Leasehold
                improvements
            
            
            4,176,434
            
            
            1,866,511
            
            
            2,309,923Furniture
                and fixtures
            
            
            5,164,429
            
            
            3,544,110
            
            
            1,620,319Computer
                equipment and software
            
            
            5,270,633
            
            
            4,381,689
            
            
            888,944Total
            
            $
            17,204,446
            
            $
            11,033,441
            
            $
            6,171,005





Depreciation
      expense totaled $1,130,716, $1,429,278 and $1,519,631 for the years ended
      December 31, 2006, 2005 and 2004, respectively.


65
 ***Table
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**5.
      Other Assets**





At
      December 31, 2006 and 2005, other assets consisted of the
      following:





2006
            
            2005Interest
                receivable - investments
            
            $
            5,113,015
            
            $
            4,813,303Interest
                receivable - loans and leases
            
            
            5,306,326
            
            
            4,283,013Current
                income tax receivable
            
            
            -
            
            
            1,832,138Prepaid
                expenses
            
            
            1,151,032
            
            
            1,256,963Excess
                market value of leases acquired (net of accumulated amortization
                of
                $511,928 and $475,791)
            
            
            110,538
            
            
            146,675Goodwill
                (excess of cost over fair value of assets acquired, net of accumulated
                amortization of $110,000)
            
            
            2,390,924
            
            
            2,390,924Cash
                surrender value of life insurance policies
            
            
            1,650,581
            
            
            1,683,787Overnight
                sweep accounts receivable, net
            
            
            -
            
            
            807,305Receivable
                - security called
            
            
            5,068,750
            
            
            -Other
            
            
            4,318,750
            
            
            4,217,689Total
            
            $
            25,109,916
            
            $
            21,431,797








**6.
      Deposits**





At
      December 31, 2006 and 2005, certificates of deposit of $100 thousand or more
      were $257,201,671 and $249,959,842, respectively. Scheduled maturities of all
      certificates of deposit are as follows:





2007
            
            $
            561,919,7802008
            
            
            38,258,1212009
            
            
            4,226,6712010
            
            
            10,409,4752011
            
            
            12,781,369Total
            
            $
            627,595,416








There
      were no brokered certificates of deposit at December 31, 2006. At December
      31,
      2005, brokered certificates of deposit totaled $14,920,000.





**7.
      Lines Of Credit and Borrowed Funds**





At
      December 31, 2006 and 2005, correspondent banks extended unsecured lines of
      credit aggregating $82,000,000 and $67,000,000, respectively, as well as
      $10,000,000 in secured lines at December 31, 2005, 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 $267,000,000 of collateral, including approximately $176,000,000
      in commercial real estate mortgages, it currently has pledged at FHLB,
      approximately $170,000,000 of this line may be drawn on a term or overnight
      basis. The FHLB line is renewed annually.





On
      June
      6, 2006, the Company entered into a Revolving Credit Agreement (the “Credit
      Agreement”) with a correspondent bank. Under the Credit Agreement, the
      correspondent bank has made available to the Company a revolving line of credit
      of up to $10,000,000. At December 31, 2006, no amount was outstanding under
      the
      Credit Agreement. All amounts outstanding under the Credit Agreement will bear
      interest at a rate equal to LIBOR plus 160 basis points and will be due and
      payable on January 31, 2008. The Credit Agreement provides for certain
      customary affirmative and negative covenants and events of default, including
      but not limited to limitations on other encumbrances, other indebtedness,
      mergers, acquisitions, asset sales, and investments, as well as maintenance
      of
      the following financial ratios (measured quarterly beginning June 30,
      2006).


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Maximum
                Ratio of non-performing assets to Loans plus other real estate
                owned
            
            
            1.35
            %Minimum
                Ratio of Loan Loss Reserves to Gross Loans
            
            
            1.25
            %Minimum
                Tier 1 Capital Ratio
            
            
            4.00
            %Minimum
                Total Risk-weighted Capital Ratio
            
            
            8.00
            %Minimum
                Tier 1 Leverage Ratio
            
            
            4.00
            %





As
      security for its obligations under the Credit Agreement, the Company agreed
      to
      pledge all of the outstanding capital stock of the Bank.





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.





The
      following summarizes borrowed funds at December 31, 2006 and 2005:





Outstanding
                at December 31,
            
            Average
                Amount Outstanding
            
            Weighted-Average
                Interest Rate on Average Amount Outstanding2006
            
            2005
            
            2006
            
            2005
            
            2006
            
            2005Federal
                funds purchased
            
            
            -
            
            
            -
            
            $
            2,997,000
            
            $
            6,341,000
            
            
            5.01
            %
            
            3.28
            %Securities
                sold under agreements to repurchase
            
            
            -
            
            
            -
            
            
            -
            
            $
            16,092,000
            
            
            -
            
            
            3.18
            %FHLB
                - overnight and term
            
            
            -
            
            $
            18,500,000
            
            $
            8,241,000
            
            $
            47,397,000
            
            
            4.76
            %
            
            3.17
            %Secured
                revolving line of credit
            
            
            -
            
            
            -
            
            $
            2,060,000
            
            
            -
            
            
            8.02
            %
            
            -Obligations
                under equipment lease financing
            
            $
            56,400
            
            $
            114,296
            
            $
            91,000
            
            $
            229,000
            
            
            13.74
            %
            
            12.37
            %





For
      securities sold under agreements to repurchase, the following table provides
      additional information:





2006
            
            2005Maximum
                outstanding at any month end
            
            
            -
            
            $
            118,215,000Weighted-average
                interest rate on balance, December 31,
            
            
            -
            
            
            -







Of
      the
      total borrowed funds outstanding at December 31, 2006, required payments of
      $27,219 and $29,181 will be made in 2007 and 2008, respectively.





**8.
      Subordinated Notes and Junior Subordinated Debentures**





In
      2006,
      the Company issued $10,000,000 in aggregate principal amount of its 8.25%
      Subordinated Notes due June 15, 2013 (the “Notes”) pursuant to a purchase
      agreement, dated June 6, 2006, between the Company and the initial purchaser
      named therein. The Notes were issued pursuant to an Indenture, dated as of
      June
      8, 2006, by and between the Company and Wilmington Trust Company, as trustee
      (the “Indenture”). The Notes are unsecured and rank subordinate and junior to
      all of the Company’s senior indebtedness to the extent and in the manner set
      forth in the Indenture. Interest on the Notes is payable semi-annually in
      arrears at an annual rate of 8.25% on June 15 and December 15 of each year,
      beginning December 15, 2006. The Notes will mature on June 15, 2013 and are
      not
      redeemable before that date. The net proceeds from the sale of the Notes, after
      deducting offering expenses and the initial purchaser’s discount, were
      approximately $9,450,000 and qualify as Tier II capital for the Company. The
      Company contributed proceeds from the offering to the Bank whick qualified
      as
      Tier I Capital. The Notes have not been registered under the Securities Act
      of
      1933, as amended, or any state securities laws, and may not be offered or sold
      in the United States absent registration or an applicable exemption from
      registration requirements.





In
      2003,
      State Bancorp Capital Trust II (“Trust II”), subsidiary of the Company and a
      statutory trust created under the Delaware Statutory Trust Act, 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 which 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.


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In
      2002,
      State Bancorp Capital Trust I (“Trust I”), subsidiary of the Company and a
      statutory trust created under the Delaware Statutory Trust Act, 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 which 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
      and II are unconsolidated wholly owned subsidiaries of the Company, have no
      independent operations and issued securities that contained the full and
      unconditional guarantee of its parent, the Company. Although
      the Company may be dependent on Bank dividends to pay the trust preferred
      interest, and the Bank may not be able to declare dividends, the subordinated
      debentures allow for up to two extension periods of 20 consecutive months each
      during which time payment of interest may be deferred by the Company. As such,
      the Company would not be in default if it were unable to pay interest on the
      subordinated debentures. During
      2006, the weighted-average rate on all of the Company’s junior subordinated
      debentures was 8.24%.





**9.
      Income Taxes**





The
      components of income tax expense for the years ended December 31, 2006, 2005
      and
      2004, are as follows:





2006
            
            2005
            
            2004Federal:Current
            
            $
            5,572,340
            
            $
            6,083,611
            
            $
            5,845,209Deferred
            
            
            (594,418
            )
            
            (26,407,049
            )
            
            (884,000
            )Subtotal
            
            
            4,977,922
            
            
            (20,323,438
            )
            
            4,961,209State:Current
            
            
            10,519,922
            
            
            (2,491,006
            )
            
            381,334Deferred
            
            
            819,088
            
            
            (4,598,551
            )
            
            19,696Subtotal
            
            
            11,339,010
            
            
            (7,089,557
            )
            
            401,030Total
            
            $
            16,316,932
            
            $
            (27,412,995
            )
            $
            5,362,239








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:


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2006
            
            2005
            
            2004%
                of
            
            
            
            %
                of
            
            
            
            %
                ofPretax
            
            
            
            Pretax
            
            
            
            PretaxAmount
            
            Income
            
            Amount
            
            Income
            
            Amount
            
            IncomeIncome
                tax expense at statutory rate
            
            $
            9,733,784
            
            
            35.0
            %
            $
            (22,386,436
            )
            
            (35.0
            %)
            $
            6,558,387
            
            
            35.0
            %Surtax
                exemption
            
            
            (278,108
            )
            
            (1.0
            )
            
            639,612
            
            
            1.0
            
            
            (47,783
            )
            
            (0.3
            )(Reduction)
                increase in taxes resulting from:Tax-exempt
                interest on investments, net of interest expense
                disallowed
            
            
            (250,115
            )
            
            (0.9
            )
            
            (507,109
            )
            
            (0.8
            )
            
            (929,975
            )
            
            (5.0
            )Bank
                owned life insurance
            
            
            (343,768
            )
            
            (1.2
            )
            
            (340,257
            )
            
            (0.5
            )
            
            (305,471
            )
            
            (1.6
            )State
                income tax - net of Federal tax benefit
            
            
            7,483,746
            
            
            26.9
            
            
            (4,679,108
            )
            
            (7.3
            )
            
            261,692
            
            
            1.4Other
            
            
            (28,607
            )
            
            (0.1
            )
            
            (139,697
            )
            
            (0.2
            )
            
            (174,611
            )
            
            (0.9
            )Income
                tax expense
            
            $
            16,316,932
            
            
            58.7
            %
            $
            (27,412,995
            )
            
            (42.8
            %)
            $
            5,362,239
            
            
            28.6
            %





At
      December 31, 2006 and 2005, the deferred tax assets and liabilities are composed
      of the following:





December
                31,
            
            2006
            
            2005Deferred
                tax assets:Litigation
                judgment
            
            $
            25,131,905
            
            $
            30,382,623Franchise
                tax audit
            
            
            3,400,000
            
            
            -Allowance
                for loan and lease losses
            
            
            6,352,892
            
            
            6,068,820Intangible
                assets
            
            
            12,034
            
            
            105,245Bank
                premises and equipment
            
            
            266,982
            
            
            -Unrealized
                holding loss on securities available for sale
            
            
            2,118,436
            
            
            2,686,335Other
            
            
            765,279
            
            
            -Subtotal
            
            
            38,047,528
            
            
            39,243,023Deferred
                tax liabilities:Leasing
                activities
            
            
            (830,943
            )
            
            (1,567,785
            )Equity
                compensation plans
            
            
            (305,529
            )
            
            -Other
            
            
            (245,793
            )
            
            (217,406
            )Subtotal
            
            
            (1,382,265
            )
            
            (1,785,191
            )Net
                deferred tax assets
            
            $
            36,665,263
            
            $
            37,457,832








The
      deferred tax assets and liabilities are netted and presented in a single amount
      as net deferred income taxes in the accompanying consolidated balance sheets.
      The Company believes that it is more likely than not that it will realize the
      value of the net deferred tax asset as the Company expects to have sufficient
      future taxable income. The income tax (benefit) expense associated with net
      security (losses) gains amounted to ($26,316), $302,090 and $725,818 in 2006,
      2005 and 2004, respectively.





The
      Company has received a notice of deficiency from the New York State Department
      of Taxation and Finance (the “Tax Department”) with respect to New York State
      franchise tax for the years ended December 31, 1999, 2000 and 2001. The Tax
      Department contends that the Company’s tax liability should be increased by $5.1
      million (including $2.0 million in penalties and interest through December
      2006), and interest continues to accrue for those years. After deducting the
      estimated Federal tax benefit of $1.7 million arising from this, the Company’s
      net tax liability would be approximately $3.4 million. This increase in tax
      is
      based on the Tax Department’s assertion that SB Financial and SB Portfolio,
      which are organized and operated entirely outside of the State of New York,
      should be included in the Company’s New York State combined franchise tax
      reports. In support of the deficiency assessment the Tax Department alleged,
      *inter alia*, that the transfer of assets to, and the operations of, the
      Delaware Subsidiaries were for tax avoidance purposes only and lack economic
      substance, and that the Delaware Subsidiaries met the statutory requirements
      for
      inclusion of the Delaware Subsidiaries with the Company's income for calculation
      of the Company's New York State taxes. If the Tax Department were to
      successfully assert the same position for calendar years 2002 through 2006,
      management estimates that the additional franchise tax liability for these
      years, including interest and penalties, would be approximately $5.7 million,
      after taking into consideration the estimated Federal tax benefit. As previously
      disclosed, the Company has also received a notice of the Tax Department’s
      intention to audit the Company’s 2002, 2003 and 2004 franchise tax
      returns.





On
      June
      7, 2006 the Company commenced a proceeding in the New York State Division of
      Tax
      Appeals (the “Division of Tax Appeals”) seeking a re-determination of the
      assessed deficiency for the years ended December 31, 1999, 2000 and
      2001.




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Discovery
      in the proceeding in the Division of Tax Appeals has not been completed. A
      hearing before an administrative law judge (“ALJ”) is anticipated to occur in
      July of this year. The determination of the ALJ may be appealed to the Tax
      Appeals Tribunal. The Company may contest an adverse decision of the Tax Appeals
      Tribunal in the New York State Supreme Court. The Tax Department may not contest
      the decision of the Tax Appeals Tribunal.





Following
      a lengthy fourth quarter internal management review of the issues involved
      in
      this matter, including an assessment of the risk of an adverse outcome and
      a
      projection of the significant time and cost to litigate, the Company established
      a reserve of $10 million for potential tax liability during the fourth quarter
      of 2006. This reserve reflects the deficiency notice covering the 1999 - 2001
      period and assumes that the Tax Department will likely assert the same claims
      for the calendar years 2002 - 2006, although no formal assessment has been
      received by the Company thus far for those periods. The Company disputes the
      Tax
      Department’s position and is reviewing its administrative and judicial remedies
      as well as other alternatives available to it, including the option of resolving
      this matter with the Tax Department prior to the ALJ hearing. Management
      believes that the amount recognized in the 2006 financial statements represents
      the Company's best estimate of the potential liability related to this matter
      based upon the information available to the Company.





No
      assurance can be given as to whether or to what extent we will be required
      to
      pay the amount of the tax liability asserted by the Tax Department, whether
      additional tax will be assessed for years subsequent to calendar year 2001
      or
      whether we will receive any future benefit from the operations of SB Financial
      and SB Portfolio in Delaware and, accordingly, the resulting impact on our
      results of operations, financial condition and liquidity, could be material
      and
      adverse.




**10.
      Stock-Based Compensation**





***Incentive
      Stock Options*** - 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 were
      exercisable commencing one year from the date of grant, at the rate of 25%
      per
      year, and expire within ten years from the date of grant.





In
      December 2005, the Company’s Board of Directors approved the accelerated vesting
      of certain incentive stock options previously granted under the 1994 Incentive
      Stock Option Plan, 1999 Incentive Stock Option Plan and Stock Option Plan (2002) (the
      “2002 Plan”) (together, the “Plans”). Such approval accelerated the vesting of all unvested
      incentive stock options granted under the Plans. As a result of the
      acceleration, unvested options to purchase approximately 399,388 shares of
      the
      Company’s common stock became fully vested and immediately exercisable. The
      affected stock options had exercise prices ranging from $12.45 to $22.63 per
      share and a weighted average exercise price of $18.77. The affected options
      included 89,523 options held by the Company’s executive officers. This
      acceleration was effective as of December 13, 2005. Based upon the December
      13,
      2005 closing price of the Company’s common stock of $18.35 per share, the
      Company recorded a one-time pre-tax charge of $36,389 in 2005 as a result of
      the
      acceleration.





No
      incentive stock options were granted during 2006. The estimated fair value
      of
      options granted during 2005 and 2004 was $7.62 and $5.95 per share,
      respectively. The fair value of options granted under the Company’s incentive
      stock option plans during 2005 and 2004 was estimated on the date of grant
      using
      the Black-Scholes option pricing model with the following weighted-average
      assumptions used:





2005
            
            2004Dividend
                yield
            
            
            2.4
            %
            
            2.5
            %Expected
                volatility
            
            
            28.3
            %
            
            25.5
            %Risk-free
                interest rate
            
            
            3.88
            %
            
            3.55
            %Expected
                life of options
            
            
            7.3
                years
            
            
            7.3
                years


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At
      December 31, 2006, incentive stock options for the purchase of 1,039,715 shares
      were outstanding and exercisable. The total intrinsic value of options exercised
      for the twelve months ended December 31, 2006, 2005 and 2004 is $139,058,
      $753,465 and $1,198,272, respectively. The tax benefit realized from options
      exercised for the twelve months ended December 31, 2006, 2005 and 2004 is
      $30,703, $63,457 and $28,458, respectively. The total intrinsic value of
      exercisable shares at December 31, 2006, is $5,566,780. A summary of stock
      option activity follows after giving retroactive effect to all stock dividends
      and splits:





Weighted-AverageNumber
            
            Exercise
                Priceof
                Shares
            
            Per
                ShareOutstanding
                -January
                1, 2004
            
            
            949,172
            
            $
            10.97Granted
            
            
            162,658
            
            $
            19.16Exercised
            
            
            (95,019
            )
            $
            7.57Cancelled
                or forfeited
            
            
            (8,260
            )
            $
            13.45Outstanding
                -December
                31, 2004
            
            
            1,008,551
            
            $
            12.59Granted
            
            
            165,119
            
            $
            22.63Exercised
            
            
            (68,055
            )
            $
            9.63Cancelled
                or forfeited
            
            
            (15,086
            )
            $
            17.04Outstanding
                -December
                31, 2005
            
            
            1,090,529
            
            $
            14.23Granted
            
            
            -
            
            
            -Exercised
            
            
            (21,223
            )
            $
            11.67Cancelled
                or forfeited
            
            
            (29,591
            )
            $
            14.96Outstanding
                -December
                31, 2006
            
            
            1,039,715
            
            $
            14.25




The
      following summarizes shares subject to purchase from incentive stock options
      outstanding and exercisable as of December 31, 2006:





Weighted-AverageShares
            
            Remaining
            
            Weighted-Average
            
            Shares
            
            Weighted-AverageRange
                of Exercise Prices
            
            Outstanding
            
            Contractual
                Life
            
            Exercise
                Price
            
            Exercisable
            
            Exercise
                Price$8.25
                - $10.33
            
            
            356,991
            
            
            3.5
                years
            
            $
            9.86
            
            
            356,991
            
            $
            9.86$10.34
                - $13.61
            
            
            375,480
            
            
            4.8
                years
            
            $
            12.98
            
            
            375,480
            
            $
            12.98$19.16
                - $22.63
            
            
            307,244
            
            
            7.6
                years
            
            $
            20.92
            
            
            307,244
            
            $
            20.921,039,715
            
            
            5.2
                years
            
            $
            14.25
            
            
            1,039,715
            
            $
            14.25








***Restricted
      Stock Awards*** - At the
      Company’s Annual Meeting of Stockholders held on April 25, 2006, shareholders of
      the Company approved the adoption of the Company’s 2006 Equity Compensation Plan (the
      “2006 Plan”). The 2006 Plan is an amendment and restatement of the Company’s
      2002 Plan to expand the types of equity compensation awards that the Company
      can
      make to its employees. Under the 2006 Plan, the Company can award options,
      stock
      appreciation rights (“SARs”), restricted stock, performance units and
      unrestricted stock. The 2006 Plan also allows the Company to make awards
      conditional upon attainment of vesting conditions and performance targets.





In
      September 2006, the Company awarded 23,928 shares of restricted stock to certain
      key employees subject to the participant’s continued employment with the
      Company. The restricted stock vests in full on the third anniversary of the
      award date. The Company recognizes compensation expense over the vesting period
      at the fair market value of the shares on the award date. I f
      a
      participant’s service terminates for any reason other than death or disability,
      then the participant shall forfeit to the Company any shares acquired by the
      participant pursuant to the restricted stock award which remain subject to
      vesting conditions. The total remaining unearned
      compensation cost related to nonvested shares of restricted stock is $437,580
      to
      be expensed over the vesting period. For the year ended December 31, 2006,
      $39,784 was recognized as compensation expense.


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A
      summary
      of restricted stock activity follows:





Number
            
            Weighted-Averageof
                Shares
            
            Price
                Per ShareNonvested
                - January 1, 2006
            
            
            -
            
            
            -Granted
            
            
            23,928
            
            $
            19.95Vested
            
            
            -
            
            
            -Nonvested
                - December 31, 2006
            
            
            23,928
            
            $
            19.95








At
      December 31, 2006, 398,245 shares were reserved for possible issuance of awards
      of options,
      SARs, restricted stock, performance units and unrestricted stock .





***Non-Plan
      Stock-Based Compensation*** ** -
      In
      November 2006, non-qualified stock options and restricted stock awards were
      granted to Thomas M. O’Brien, the Company’s and the Bank’s President and Chief
      Operating Officer (“COO”), pursuant to the terms of his employment agreement.
      The non-qualified stock options to purchase 164,745 shares have an exercise
      price of $17.84 and will vest 20% per year over five years. The estimated fair
      value of the options was $5.42 per share and was estimated on the date of grant
      using the Black-Scholes option pricing model with the following weighted-average
      assumptions used: 1) dividend yield 3.32%, 2) expected volatility 34.7%, 3)
      risk-free interest rate 4.57% and 4) expected life of options 7.3 years. At
      December 31, 2006, none of these options was exercised or
      exercisable.





The
      restricted stock totals 83,612 shares and was awarded at an average price of
      $17.94 to be vested in 20 equal quarterly installments over five years. A
      summary of restricted stock activity follows:





Number
            
            Weighted-Averageof
                Shares
            
            Price
                Per ShareNonvested
                - January 1, 2006
            
            
            -
            
            
            -Granted
            
            
            83,612
            
            $
            17.94Vested
            
            
            (4,181
            )
            
            17.94Nonvested
                - December 31, 2006
            
            
            79,431
            
            $
            17.94








The
      total
      remaining unearned compensation cost related to nonvested options and shares
      of
      restricted stock awarded to Mr. O’Brien is $2,314,200 to be expensed over the
      vesting period. For the year ended December 31, 2006, $79,800 was recognized
      as
      compensation expense. The non-qualified stock options and the restricted stock
      awards were not issued as part of any of the Company’s registered stock-based
      compensation plans.





**11.
      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, 2006, the ESOP had all of its assets invested in the Company's
      common stock. The Bank funds all amounts when due. At December 31, 2006 and
      2005, the number of shares of stock held by the ESOP, all of which have been
      allocated to employees, totaled 1,314,021 and 1,157,991, respectively. None
      of
      the allocated shares are subject to a repurchase obligation. Contributions
      under
      the ESOP charged to operations amounted to $1,446,286, $1,587,241 and $1,382,645
      in 2006, 2005 and 2004, 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% (or up to 35% for employees with annual earnings less than $100,000) 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
      $481,683, $477,251 and $437,757 in 2006, 2005 and 2004, respectively. The Bank
      funds all amounts when due. At December 31, 2006, contributions to the 401(k)
      Plan were invested in various bond, equity, money market or diversified funds
      as
      directed by each employee.


72
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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 $63,729, $112,471 and $90,366 in 2006, 2005 and 2004,
      respectively.





**12.
      Commitments and Contingent Liabilities**





***Leases*** - The
      Company 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:





2007
            
            $
            2,932,9522008
            
            
            2,764,7342009
            
            
            2,588,4652010
            
            
            2,180,7042011
            
            
            1,665,941Remainder
                to 2015
            
            
            884,890Total
            
            $
            13,017,686








Rent
      expense was approximately $3,098,000, $2,907,000 and $2,394,000 for 2006, 2005
      and 2004, 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 were to die 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 were to die 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 the Company’s common 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 to 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 149,616 shares reserved for possible issuance. During 2006, 2,847
      shares were distributed to retired directors. No shares were distributed during
      2005.




During
      2006, 2005 and 2004, the Bank charged approximately $267,000, $99,000 and
      $243,000, respectively, to operations relating to the Directors' Retirement
      and
      Stock Plans.





***Severance
      Commitments*** - The
      Company has 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-based compensation awards
      held by a participant will become fully vested. 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.


73
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***Employment
      Agreement*** **** -
      Effective November 6, 2006, the Company and the Bank have entered into an
      employment agreement with Thomas M. O’Brien for a term of five years. The
      employment agreement provides for him to continue as the President and COO
      of
      the Bank and the Company until such time as the incumbent Chief Executive
      Officer (“CEO”) relinquishes the CEO title, at which time he will become the CEO
      of the Company and the Bank. During the term of the agreement, Mr. O’Brien will
      also serve on the Board of Directors of the Company and the Board of Directors
      of the Bank. Mr. O’Brien receives an annual base salary of $50,000 and a signing
      bonus of restricted stock equal to $1,500,000. The restricted stock will vest
      in
      20 equal quarterly installments over five years. Mr. O’Brien will be
      eligible for annual incentive awards with a target annual bonus of $225,000.
      Mr.
      O’Brien was also granted non-qualified stock options to purchase 164,745 shares
      at an exercise price of $17.84 per share vesting 20% per year over five years.
      The options have a 10 year term. The stock-based awards were not made under
      the
      terms of the Company’s 2006 Equity Compensation Plan.





In
      the
      event that Mr. O’Brien’s employment is terminated without cause or he resigns
      with good reason in the absence of a change in control, he is entitled to
      receive a cash severance payment equal to two times the sum of the most recent
      year’s incentive award and base salary rate, all stock options and restricted
      stock awards vest and life and health insurance is continued until age 65.
      If he
      is terminated without cause or resigns with good reason following a change
      in
      control, he is entitled to receive a cash severance payment equal to three
      times the sum of annual salary plus target bonus amount, the most recent year’s
      annual incentive is paid, all stock options and restricted stock awards vest
      and
      life insurance is continued until age 65. Vesting of stock options and
      restricted stock will be accelerated in the event of death and will continue
      to
      vest as if employment had not terminated in the event of disability. No cash
      severance payments are due in the event of termination of employment as a result
      of death, disability, discharge with cause or voluntary resignation without
      good
      reason.





For
      the
      year ended December 31, 2006, $79,800 was recognized as compensation expense
      for
      the non-qualified stock options and the restricted stock awards.





***Pending
      Claims and Contingent Liabilities*** *-* The
      Company has received a notice of deficiency from the New York State Department
      of Taxation and Finance (the “Tax Department”) with respect to New York State
      franchise tax for the years ended December 31, 1999, 2000 and 2001. See Note
      9,
      Income Taxes.





In
      2001
      and 2002, the Bank and the Company were named (along with other defendants)
      in
      lawsuits related to the Bank's deposit relationship with Island Mortgage
      Network, Inc. (“Island Mortgage” or “IMN”) and its affiliates.





Island
      Mortgage established and maintained dozens of deposit accounts at 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
      warehouse lenders not related to the Bank. The Bank never had a lending
      relationship with Island Mortgage.





On
      June
      30, 2000, the New York State Banking Department 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. In the course
      of
      certain bankruptcy cases, it was 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 asserted that the Bank participated in Island Mortgage’s
      alleged fraudulent scheme or was otherwise liable for losses arising from the
      bankruptcy of Island Mortgage.





During
      2006 two Island Mortgage-related litigations remained pending against the Bank
      (and, in one case, the Company). Those litigations are:





HSA
      Residential Mortgage Services of Texas (“RMST”) in HSA Residential Mortgage
      Services of Texas v. State Bank of Long Island, CV-05-3185-JS-WDW, District
      Court for the Eastern District of New York (formerly captioned 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) .
      This
      action involved claims made by three warehouse lenders. As previously reported,
      prior to 2006 the claims of the two warehouse lenders other than RMST were
      settled and all claims of RMST other than its claim of aiding and abetting
      fraud
      were dismissed by the bankruptcy court. A trial on RMST’s aiding and abetting
      fraud claim commenced in the District Court for the Eastern District of New
      York
      on January 3, 2006. On January 30, 2006, the jury rendered a verdict awarding
      $43.9 million in compensatory damages to RMST. The Company recorded a $74.2
      million expense related to this verdict in its 2005 financial statements, which
      reflected the amount of the verdict, prejudgment interest and a claim by RMST
      for legal fees for other IMN-related litigations. During 2006 prejudgment
      interest continued to accrue and the Bank continued to incur litigation
      expenses.   As previously disclosed in a September 28, 2006 Form 8-K
      filing, a post-verdict motion to set aside or modify the verdict was denied.


74
 ***Table
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In
      December 2006, following a fourth quarter review of its alternatives, the Bank
      initiated settlement discussions with RMST. On January 24, 2007, the Bank and
      RMST agreed to settle all of the outstanding claims pursuant to the terms of
      a
      settlement agreement. As of that date, the entry of a formal judgment had been
      postponed, pending resolution of RMST’s claim for damages of approximately $5
      million in legal fees for other IMN-related litigations (included in the above
      $74.2 million). Under the settlement agreement, the Bank agreed to pay RMST
      $65
      million, and this payment was made in full by the Bank on January 24, 2007.
      The
      amount of the settlement payment was less than the Company’s related litigation
      reserve of $77 million, resulting in a credit of $6.2 million in 2006
      IMN-related legal expenses compared to IMN-related legal expenses of $82.8
      million in 2005.





Broward
      Title Co. (“Broward”) v. Alan Jacobs, et al., Adv. Proc. No. 01-8181, Bankruptcy
      Court for the Eastern District of New York . 
      Broward brought three claims against the Bank seeking, in the aggregate, damages
      of approximately $280,000 plus costs and incidental and consequential damages,
      including attorneys' fees.  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 the 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 the Bank in the district court, although it may attempt to do
      so at
      a later date. In the opinion of management, the amount of ultimate liability,
      if
      any, with respect to this case will not materially affect future operations
      and
      will not have a material impact on the Company’s financial
      statements.





It
      remains possible that other parties may attempt to pursue additional claims
      against the Bank related to the Bank’s dealings with IMN, although the Bank, in
      addition to any other defenses, will assert a statute of limitations defense
      against any such additional claims.





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
      $2,641,000 and $2,486,000 in 2006 and 2005, respectively.


75
 ***Table
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**13.
      State Bancorp, Inc. (Parent Company Only)**





Certain
      condensed financial information follows (dollars in thousands):





December
                31,
            
            2006
            
            2005BALANCE
                SHEETAssets:Cash
            
            $
            2,581
            
            $
            483Dividends
                receivable and other assets
            
            
            1,467
            
            
            2,384Investment
                in the Bank
            
            
            131,002
            
            
            75,926Investment
                in the Trusts
            
            
            629
            
            
            628Total
                Assets
            
            $
            135,679
            
            $
            79,421Liabilities:Subordinated
                notes
            
            $
            10,000
            
            $
            -Junior
                subordinated debentures
            
            
            20,620
            
            
            20,620Dividends
                payable and other liabilities
            
            
            918
            
            
            2,379Total
                Liabilities
            
            
            31,538
            
            
            22,999Stockholders'
                Equity:Preferred
                stock
            
            
            -
            
            
            -Common
                stock
            
            
            73,021
            
            
            60,097Surplus
            
            
            83,767
            
            
            56,424Retained
                deficit
            
            
            (32,158
            )
            
            (38,602
            )Treasury
                stock
            
            
            (16,646
            )
            
            (16,646
            )Accumulated
                other comprehensive loss,net of taxes
            
            
            (3,843
            )
            
            (4,851
            )Total
                Stockholders' Equity
            
            
            104,141
            
            
            56,422Total
                Liabilities and Stockholders' Equity
            
            $
            135,679
            
            $
            79,421  76
 ***Table
            of
            Contents***




For
                the years ended December 31,
            
            2006
            
            2005
            
            2004INCOME
                STATEMENTDividends
                from the Bank, net of expenses
            
            $
            5,083
            
            $
            8,557
            
            $
            7,209Interest
                expense on temporary borrowings
            
            
            165
            
            
            -
            
            
            -Interest
                expense on subordinated notes
            
            
            516
            
            
            -
            
            
            -Interest
                expense on junior subordinated debentures
            
            
            1,839
            
            
            1,474
            
            
            1,088Equity
                in the undistributed earnings (loss)of the Bank and the
                Trusts
            
            
            8,931
            
            
            (43,631
            )
            
            7,255Net
                Income (Loss)
            
            $
            11,494
            
            $
            (36,548
            )
            $
            13,376CASH
                FLOWSOperating
                Activities:Net
                income (loss)
            
            $
            11,494
            
            $
            (36,548
            )
            $
            13,376Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Stock-based
                compensation expense
            
            
            120
            
            
            -
            
            
            -Decrease
                (increase) in other assets
            
            
            917
            
            
            (234
            )
            
            (90
            )Increase
                in other liabilities
            
            
            195
            
            
            425
            
            
            310Equity
                in the undistributed (earnings) loss of the Bank and the
                Trusts
            
            
            (8,931
            )
            
            43,631
            
            
            (7,255
            )Net
                cash provided by operating activities
            
            
            3,795
            
            
            7,274
            
            
            6,341Financing
                Activities:Proceeds
                from issuance of subordinated notes
            
            
            10,000
            
            
            -
            
            
            -Cash
                dividends paid
            
            
            (6,707
            )
            
            (5,766
            )
            
            (5,050
            )Proceeds
                from issuance of common stock
            
            
            40,147
            
            
            3,497
            
            
            3,211Capital
                contribution to the Bank
            
            
            (45,188
            )
            
            (3,794
            )
            
            (3,346
            )Capital
                contribution from the Trusts
            
            
            51
            
            
            39
            
            
            26Payment
                to repurchase common stock
            
            
            -
            
            
            (1,178
            )
            
            (1,987
            )Net
                cash used in financing activities
            
            
            (1,697
            )
            
            (7,202
            )
            
            (7,146
            )Net
                Changes in Cash
            
            $
            2,098
            
            $
            72
            
            $
            (805
            )








**14.
      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.





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, 2006 and 2005, commitments to originate loans and leases and
      commitments under unused lines of credit for which the Bank is obligated
      amounted to approximately $326,277,000 and $283,947,000, respectively.
      Approximately $276,651,000 and $256,018,000 of these commitments were at
      variable rates and $49,626,000 and $27,929,000 were at fixed rates at December
      31, 2006 and 2005, respectively. At December 31, 2006 and 2005, the fixed rate
      commitments had interest rates ranging from approximately 5.05% to 8.57% and
      4.25% to 7.75%, respectively.


77
 ***Table
          of Contents***


Letters
      of credit are conditional commitments guaranteeing payments of drafts in
      accordance with the terms of the letter of credit agreements. Commercial letters
      of credit are used primarily to facilitate trade or commerce and are also issued
      to support public and private borrowing arrangements, bond financing and similar
      transactions. Collateral may be required to support letters of credit based
      upon
      management’s evaluation of the creditworthiness of each customer. The credit
      risk involved in issuing letters of credit is essentially the same as that
      involved in extending loan and lease facilities to customers. Most letters
      of
      credit expire within one year. At December 31, 2006 and 2005, the Bank had
      letters of credit outstanding of approximately $16,808,000 and $14,644,000,
      respectively. At December 31, 2006, the uncollateralized portion was
      approximately $2,263,000.





The
      use
      of derivative financial instruments, i.e. interest rate swaps, is an exposure
      to
      credit risk. This credit exposure relates to possible losses that would be
      recognized if the counterparties fail to perform their obligations under the
      contracts. To mitigate this credit exposure, only counterparties of good credit
      standing are utilized and the exchange of collateral over a certain credit
      threshold is required. From time to time, customer interest rate swap
      transactions together with offsetting interest rate swap transactions with
      institutional dealers may be executed.  At
      December 31, 2006 and 2005, the total gross notional amount of swap transactions
      outstanding was $40,900,000 and $9,550,000, respectively.





**15.
      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, 2006 and 2005 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 and Accrued Interest
      Receivable*** *-* For cash
      and short-term investments (due from banks, Federal funds sold, securities
      purchased under agreements to resell and certain other short-term assets) and
      accrued interest receivable, the carrying amount is a reasonable estimate of
      fair value.





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





***Federal
      Home Loan Bank and Other Restricted Stock*** -
      For
      Federal Home Loan Bank and other restricted stock, the carrying amount is a
      reasonable estimate of fair value.





***Loans
      and Leases*** *-* The fair
      value of loans and leases is estimated by discounting the expected future cash
      flows using the current rates at which similar loans and leases 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.





***Subordinated
      Notes and Junior Subordinated Debentures*** - The
      fair value of subordinated notes and junior subordinated debentures is estimated
      using the interest rate swap rates of similar term and repricing points and
      spreads of equivalent new issues.


78
 ***Table
          of Contents***


***Short-Term
      Liabilities and Accrued Interest Payable*** *-* Short-term liabilities (Federal funds purchased, securities sold under
      agreements to repurchase and certain other short-term liabilities) and accrued
      interest payable are considered to have fair values equal to their carrying
      amounts due to their short-term nature.





The
      estimated fair values of the Company's financial instruments are as follows
      (in
      thousands):





At
                December 31,
            
            2006
            
            2005Carrying
            
            Estimated
            
            Carrying
            
            EstimatedAmount
            
            Fair
                Value
            
            Amount
            
            Fair
                ValueFinancial
                assets:Cash
                and short-term investments
            
            $
            207,362
            
            $
            207,362
            
            $
            90,409
            
            $
            90,409Accrued
                interest receivable
            
            
            10,419
            
            
            10,419
            
            
            9,096
            
            
            9,096Securities
                held to maturity
            
            
            6,372
            
            
            6,361
            
            
            15,993
            
            
            15,945Securities
                available for sale
            
            
            511,409
            
            
            511,409
            
            
            522,245
            
            
            522,245Federal
                Home Loan Bank and other restricted stock
            
            
            1,708
            
            
            1,708
            
            
            2,517
            
            
            2,517Loans
                and leases - net of the allowance for loan and lease
                losses
            
            
            967,313
            
            
            956,463
            
            
            876,305
            
            
            866,542Total
            
            $
            1,704,583
            
            $
            1,693,722
            
            $
            1,516,565
            
            $
            1,506,754Financial
                liabilities:Deposits
            
            $
            1,566,183
            
            $
            1,565,924
            
            $
            1,411,574
            
            $
            1,410,601Subordinated
                notes
            
            
            10,000
            
            
            10,308
            
            
            -
            
            
            -Junior
                subordinated debentures
            
            
            20,620
            
            
            20,947
            
            
            20,620
            
            
            21,133Accrued
                interest payable
            
            
            2,212
            
            
            2,212
            
            
            1,187
            
            
            1,187Short-term
                liabilities
            
            
            -
            
            
            -
            
            
            18,500
            
            
            18,500Total
            
            $
            1,599,015
            
            $
            1,599,391
            
            $
            1,451,881
            
            $
            1,451,421








**16.
      Regulatory Matters**





Dividends
      declared by the Company and the Bank are subject to restrictions by certain
      regulatory agencies. Under these restrictions, at December 31, 2006, no
      dividends could be declared by the Bank 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. At year-end
      2005, the Company and the Bank were undercapitalized. One of the
      recapitalization measures taken by the Company was the December 2006 completion
      of a private placement of 2.25 million shares of common stock that raised a
      total of $36 million after expenses. We
      believe that both the Company and the Bank exceed applicable regulatory capital
      requirements and that the Bank meets the requisite capital ratios to be
      well-capitalized as of December 31, 2006. There
      are
      no conditions or events subsequent to that date that management believes have
      changed the Company’s or the Bank’s capital adequacy. The Company’s and the
      Bank’s capital amounts (in thousands) and ratios are as
      follows:


79
 ***Table
          of Contents***




Actual
            
            For
                Capital
              Adequacy
              Purposes
            
            To
                Be Well-
              Capitalized
                Under
              Prompt
                Corrective
              Action
                ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            RatioAs
                of December 31, 2006:Tier
                I Capital to Total AdjustedAverage
                Assets (Leverage):The
                Company
            
            $
            111,764
            
            
            6.30
            %
            $
            70,953
            
            
            4.00
            %
            
            N/A
            
            
            N/AThe
                Bank
            
            $
            118,625
            
            
            6.69
            %
            $
            70,904
            
            
            4.00
            %
            $
            88,629
            
            
            5.00
            %Tier
                I Capital to Risk-Weighted Assets:The
                Company
            
            $
            111,764
            
            
            9.48
            %
            $
            47,166
            
            
            4.00
            %
            
            N/A
            
            
            N/AThe
                Bank
            
            $
            118,625
            
            
            10.07
            %
            $
            47,111
            
            
            4.00
            %
            $
            70,666
            
            
            6.00
            %Total
                Capital to Risk-Weighted Assets:The
                Company
            
            $
            136,524
            
            
            11.58
            %
            $
            94,333
            
            
            8.00
            %
            
            N/A
            
            
            N/AThe
                Bank
            
            $
            133,368
            
            
            11.32
            %
            $
            94,221
            
            
            8.00
            %
            $
            117,777
            
            
            10.00
            %As
                of December 31, 2005:Tier
                I Capital to Total AdjustedAverage
                Assets (Leverage):The
                Company
            
            $
            66,665
            
            
            4.30
            %
            $
            61,960
            
            
            4.00
            %
            
            N/A
            
            
            N/AThe
                Bank
            
            $
            66,169
            
            
            4.27
            %
            $
            61,931
            
            
            4.00
            %
            $
            77,413
            
            
            5.00
            %Tier
                I Capital to Risk-Weighted Assets:The
                Company
            
            $
            66,665
            
            
            6.00
            %
            $
            44,474
            
            
            4.00
            %
            
            N/A
            
            
            N/AThe
                Bank
            
            $
            66,169
            
            
            5.96
            %
            $
            44,445
            
            
            4.00
            %
            $
            66,667
            
            
            6.00
            %Total
                Capital to Risk-Weighted Assets:The
                Company
            
            $
            80,586
            
            
            7.25
            %
            $
            88,948
            
            
            8.00
            %
            
            N/A
            
            
            N/AThe
                Bank
            
            $
            80,080
            
            
            7.21
            %
            $
            88,889
            
            
            8.00
            %
            $
            111,111
            
            
            10.00
            %








**ITEM9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**





Not
      applicable.








**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**





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





There
      were no changes to the Company's internal control over financial reporting
      as
      defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act that
      occurred in the fourth quarter of 2006 that have materially affected, or are
      reasonably likely to materially affect, the Company's internal control over
      financial reporting.


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          of Contents***


**Management’s
      Report on Internal Control over Financial Reporting**





The
      management of State Bancorp, Inc. (the “Company’) is responsible for
      establishing and maintaining effective internal control over financial reporting
      as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
      of
      1934. The Company’s internal control over financial reporting is designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles in the United States of America.





The
      internal control over financial reporting includes those policies and procedures
      that:





·
            Pertain
                to the maintenance of records that, in reasonable detail, accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                Company.




·
            Provide
                reasonable assurance that the transactions are recorded as necessary
                to
                permit preparation of financial statements in accordance with the
                generally accepted accounting principles in the United States of
                America,
                and that our receipts and expenditures are being made only in accordance
                with authorizations of the Company’s management and directors;
                and





·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of our assets that could
                have
                a material effect on the financial statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Management
      assessed the effectiveness of the Company’s internal control over financial
      reporting for financial presentations as of December 31, 2006. In making this
      assessment, management used the criteria set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission as described in Internal
      Control - Integrated Framework. Based on this assessment, management concluded
      that the Company maintained effective internal control over financial reporting
      presented in conformity with generally accepted accounting principles in the
      United States of America as of December 31, 2006.





The
      Company’s independent registered public accounting firm has audited and issued
      their report on management’s assessment of the Company’s internal control over
      financial reporting, which appears below.





Thomas
      F.
      Goldrick, Jr.


Chairman
      and Chief Executive Officer


State
      Bancorp, Inc.





Brian
      K.
      Finneran


Secretary/Treasurer


(Principal
      Financial Officer)


State
      Bancorp, Inc.




81


Report
      of Independent Registered Public
      Accounting Firm on Internal Control over Financial Reporting 
 We
        have
        audited management's assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting, that State Bancorp,
        Inc.
        maintained effective internal control over ** financial
        reporting as of December 31, 2006 based on ** criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission. State Bancorp, Inc.'s
        management is responsible for maintaining effective internal control over
        financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting. Our responsibility is to express an opinion
        on
        management's assessment and an opinion on the effectiveness of the Company's
        internal control over financial reporting based on our audit.
 
 We
        conducted our audit 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 effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management's assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
  A
        company's internal control over financial reporting is a process designed
        to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company's internal control
        over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial statements.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
 
 In
        our
        opinion, management's assessment that State Bancorp, Inc. maintained effective
        internal control over financial reporting as of December 31, 2006, is fairly
        stated, in all material respects, based on criteria established in Internal
        Control—Integrated Framework issued by the Committee of Sponsoring Organizations
        of the Treadway Commission. Also in our opinion, State Bancorp, Inc. maintained,
        in all material respects, effective internal control over financial reporting
        as
        of December 31, 2006, based on ** criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission.
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheets of State
        Bancorp, Inc. as of December 31, 2006 and 2005, 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,
        2006
        and our report dated March 13, 2007 expressed an unqualified opinion on those
        consolidated financial statements.
 
 Crowe
        Chizek and Company LLC
 
 Livingston,
        New Jersey
 March
        13,
        2007


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            Contents***




**ITEM
                9B.**
            **OTHER
                INFORMATION**





None








**PART
      III**








**ITEM
                10.**
            **DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE
                GOVERNANCE**





Incorporated
      herein by reference is the Company's 2007 Proxy. The identification of the
      directors of the Company may be found under “Election of Directors.” The
      identification of the executive officers of the Company may be found under
      "Executive Officers." There exists no family relationship between any director
      and executive officer. Disclosure of the Audit Committee financial expert may
      be
      found under “Corporate Governance.” Compliance with section 16(a) of the
      Exchange Act may be found under “Section 16(a) Beneficial Ownership Reporting
      Compliance.” The Company has a Code of Business Conduct and Ethics that applies
      to all employees, officers and directors of the Company and its direct and
      indirect subsidiaries, as well as a Code of Ethics for the Chief Executive
      and
      Senior Financial Officers, and they are posted on the Company's website at www.statebankofli.com .


83
 ***Table
          of Contents***


**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**





Incorporated
      herein by reference is the Company's 2007 Proxy. Executive compensation may
      be
      found under “Management Remuneration.”








**ITEM
                12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND****MANAGEMENT
                AND RELATED STOCKHOLDER
                MATTERS**





Incorporated
      herein by reference is the Company's 2007 Proxy. Security ownership of certain
      beneficial owners and management may be found under “Security Ownership of
      Management.”





Additionally,
      information about the Company’s equity compensation plans are as
      follows:





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
              (a)
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
                ($)
              (b)
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))
              (c)Equity
                compensation plans approved by security holders
            
            
            1,039,715
            
            
            14.25
            
            
            398,245Equity
                compensation plans not approved by security holders (1)
            
            
            185,154
            
            
            17.84
            
            
            149,616Total
            
            
            1,224,869
            
            
            14.50
            
            
            547,861





(1)
      Of
      the total amounts in column (a) and (c), 20,409 and 149,616 represent deferred
      share credits and remaining shares reserved for possible issuance, respectively,
      under the Directors’ Stock Plan (the “Plan”). The Plan provides that in the
      event of any merger, reorganization, consolidation, recapitalization, stock
      split, stock dividend or other change in corporate structure affecting the
      Company’s stock, the aggregate number of share credits which may be awarded
      under the Plan and the number of share credits subject to the awards already
      granted shall be increased or decreased proportionately, as the case may be.
      Of
      the total amount in column (a), 164,745 represents non-qualified stock options
      granted to Mr. O’Brien pursuant to the terms of his employment agreement. The
      amount in column (b) represents the exercise price of the options granted to
      Mr.
      O’Brien. For a further discussion, see the Notes to the Company’s Consolidated
      Financial Statements.








**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE**





Incorporated
      herein by reference is the Company's 2007 Proxy. Certain relationships and
      related transactions may be found under “Certain Relationships and Related
      Transactions” and “Election of Directors.”




**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTING FEES AND
                SERVICES**





Incorporated
      herein by reference is the Company's 2007 Proxy. Audit fees, audit-related
      fees,
      tax fees and all other fees may be found under “Audit Fees.” Pre-approval
      policies and procedures may be found under “Corporate
      Governance.”


84
 ***Table
          of Contents***


**PART
      IV**








**ITEM15.**
            **EXHIBITS,
                FINANCIAL STATEMENT
                SCHEDULES**





The
      Report of Independent Registered Public Accounting Firm, the Consolidated
      Financial Statements and the Notes to Consolidated Financial Statements may
      be
      found in Part II, Item 8 of this 10-K. As to any schedules omitted, they are
      not
      applicable or the required information is shown in the Consolidated Financial
      Statements or the Notes thereto.





**Exhibits:**


Upon
      payment of the Company’s reasonable expenses, State Bancorp, Inc. will furnish
      any exhibit upon written request of the stockholder directly to the Secretary
      of
      the Company, State Bancorp, Inc., 699 Hillside Avenue, New Hyde Park, NY
      11040.





**No.**
            **Item**
            **Method
                of Filing**(3)
            Articles
                of incorporation and By-Lawsa)Certificate
                of Incorporation
            Incorporated
                by reference from Exhibit 3.1.1 to the Company’s June 30, 2006 Form
                10-Q.a)(i)
                Certificate of Correction
            Incorporated
                by reference from Exhibit 3.1.2 to the Company’s June 30, 2006 Form
                10-Q.a)(ii)
                Certificate of Amendment
            Incorporated
                by reference from Exhibit 3.1.3 to the Company’s June 30, 2006 Form
                10-Q.b)By-Laws,
                as amended
            Incorporated
                by reference from Exhibit 3b to the Company's June 30, 2003 Form
                10-Q.(4)
            Instruments
                defining the rights ofsecurity
                holders
            Pages
                22-28 of the above referenced Registration Statement.a)Form
                of Registration Rights Agreement
            Incorporated
                by reference from Exhibit 4.1 to the Company’s December 21, 2006 Form
                8-K.(10)
            Material
                contractsa)Deferred
                Compensation Arrangements
            Incorporated
                by reference from exhibit 10a to the Company's December 31, 2004
                Form 10-K.a)(i)
                Form of April 2004 Agreement Relating to Deferred Compensation
                Agreements
            Incorporated
                by reference from exhibit 10a (i) to the Company's
                December 31, 2004 Form 10-K.a)(ii)
                Form of Supplemental Employee Retirement Agreement
            Incorporated
                by reference from exhibit 10a (ii) to the Company's
                December 31, 2004 Form 10-K.a)(iii)
                Form of Deferred Compensation Agreement
            Incorporated
                by reference from exhibit 10a (iii) to the Company's
                December 31, 2004 Form 10-K.a)(iv)
                Form of Deferred Compensation Agreement
            Incorporated
                by reference from exhibit 10a (iv) to the Company's
                December 31, 2004 Form 10-K.b)(i)
                Directors' Incentive Retirement Plan
            Incorporated
                by reference from exhibit 10c to the Company's December 31, 1986
                Form 10-K.b)(ii)
                Agreements of participants surrendering their rights under the directors'
                incentive retirement plan.
            Incorporated
                by reference from exhibit 10b (ii) to the Company's December 31,
                1992 Form
                10-K.


85
 ***Table
          of Contents***




**No.**
            **Item**
            **Method
                of Filing**b)(iii)
                Agreements of participants modifying agreements described in item
                b)
                (ii)
            Incorporated
                by reference from exhibit 10b (iii) to the Company’s December 31, 1995
                Form 10-K.c)1987
                Incentive Stock Option Plan, as amended
            Incorporated
                by reference from exhibit 10c to the Company's December 31, 1991
                Form 10-K.d)(i)
                1994 Incentive Stock Option Plan
            Incorporated
                by reference from exhibit 10d to the Company's December 31, 1993
                Form
                10-K.d)(ii)
                Amendment No. 1 to 1994 Incentive Stock Option Plan
            Incorporated
                by reference from exhibit 10.1 to the Company’s December 19, 2005 Form
                8-K.e)(i)
                Change of control agreement no. 1, as amended
            Incorporated
                by reference from exhibit 99.1 to the Company’s October 3, 2006 Form
                8-K.e)(ii)
                Change of control agreement no. 2, as amended
            Incorporated
                by reference from exhibit 99.2 to the Company’s October 3, 2006 Form
                8-K.e)(iii)
                Change of control agreement no. 3, as amended
            Incorporated
                by reference from exhibit 99.3 to the Company’s October 3, 2006 Form
                8-K.e)(iv)
                Change of control agreement no. 4, as amended
            Incorporated
                by reference from exhibit 99.4 to the Company’s October 3, 2006 Form
                8-K.e)(v)
                Change of control agreement no. 5, as amended
            Incorporated
                by reference from exhibit 99.5 to the Company’s October 3, 2006 Form
                8-K.f)State
                Bank of Long Island 401(k)Retirement
                Plan and Trust
            Incorporated
                by reference from exhibit 10g to the Company's December 31, 1987
                Form 10-K.g)State
                Bancorp, Inc. Employee Stock Ownership Plan
            Incorporated
                by reference from exhibit 10g to the Company's December 31, 1987
                Form 10-K.h)Deferred
                Compensation Agreement
            See
                Exhibit (10) a).i)(i)
                1999 Incentive Stock Option Plan
            Incorporated
                by reference from exhibit 10i to the Company’s December 31, 1998 Form
                10-K.i)(ii)
                Amendment No. 1 to 1999 Incentive Stock Option Plan
            Incorporated
                by reference from exhibit 10.2 to the Company’s December 19, 2005 Form
                8-K.j)(i)
                1998 Directors’ Stock Plan
            Incorporated
                by reference from exhibit 10j to the Company’s December 31, 1999Form
                10-K.j)(ii)
                1998 Directors’ Stock Plan Amendment No. 1
            Incorporated
                by reference from exhibit 10j to the Company’s December 31, 2000Form
                10-K.j)(iii)
                1998 Directors’ Stock Plan Amendment No. 2
            Incorporated
                by reference from exhibit 10j (iii) to the Company’s June 30, 2003 Form
                10-Q.k)Stock
                Option Plan (2002)
            Incorporated
                by reference from exhibit 10k to the Company’s December 31, 2002 Form
                10-K.l)Incentive
                Award Plan
            Incorporated
                by reference from exhibit 10 l) to the Company’s February 18, 2005 Form
                8-K.m)          
                Employment Agreement
            Incorporated
                by reference from exhibit 10 (m) to the Company’s November 7, 2006 Form
                8-K.


86
 ***Table
          of Contents***




**No.**
            **Item**
            **Method
                of Filing**m)(i)
                Nonqualified Stock Option Agreement
            Incorporated
                by reference from exhibit 10 (m)(i) to the Company’s November 15, 2006
                Form 8-K.m)(ii)
                Restricted Stock Award Agreement
            Incorporated
                by reference from exhibit 10 (m)(ii) to the Company’s November 21, 2006
                Form 8-K/A.n)2006
                Equity Compensation Plan
            Incorporated
                by reference from appendix 1 to the Company’s Proxy Statement filed on
                March 23, 2006.(14)
            a)Code
                of Ethics for Chief Executive and Senior Financial
                Officers
            Incorporated
                by reference from exhibit 14a to the Company’s December 31, 2003 Form
                10-K.b)Code
                of Business Conduct and Ethics, as amended
            Incorporated
                by reference from exhibit 14b to the Company’s December 31, 2005 Form
                10-K.(16.1)
            Letter
                re change in certifying accountant
            Incorporated
                by reference from exhibit 16.1 to the Company’s August 18, 2005 Form
                8-K.(23)
            Consent
                of Independent Registered Public Accounting Firm
            Filed
                herein.(24)
            Power
                of Attorney
            Filed
                herein.(31.1)
            Certification
                of principal executive officer pursuant to Rule 13a-14(a) or 15d-14(a)
                of
                the Securities Exchange
              Act
                of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002
            Filed
                herein.(31.2)
            Certification
                of principal financial officer pursuant to Rule 13a-14(a) or 15d-14(a)
                of
                the Securities Exchange
              Act
                of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002
            Filed
                herein.(32)
            Certification
                pursuant to 18 U.S.C.Section
                1350, as adopted pursuantto
                Section 906 of the Sarbanes-OxleyAct
                of 2002
            Filed
                herein.


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**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15d of the Securities Exchange Act of
      1934,
      the registrant has duly caused this report to be signed on its behalf by the
      undersigned.





STATE
                BANCORP, INC.By:
            /s/
                Thomas F. Goldrick, Jr., ChairmanThomas
                F. Goldrick, Jr., ChairmanDate:
            March
                16, 2007





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and on the
      dates indicated.





Signature
            Title
            Date/s/
                Thomas F. Goldrick, Jr.
            Chairman
                of the Board
            3/16/07Thomas
                F. Goldrick, Jr.
            (Chief
                Executive Officer)/s/
                Thomas M. O’Brien
            President
                and
            3/16/07Thomas
                M. O’Brien
            Chief
                Operating Officer/s/
                Daniel T. Rowe
            Vice
                Chairman and
            3/16/07Daniel
                T. Rowe
            Chief
                Administrative Officer/s/
                Richard W. Merzbacher
            Vice
                Chairman
            3/16/07Richard
                W. Merzbacher/s/
                Brian K. Finneran
            Secretary/Treasurer
            3/16/07Brian
                K. Finneran
            (Principal
                Financial Officer)Thomas
                E. Christman*
            DirectorArthur
                Dulik, Jr.*
            DirectorK.
                Thomas Liaw*
            DirectorGerard
                J. McKeon*
            DirectorJoseph
                F. Munson*
            DirectorJohn
                F. Picciano*
            DirectorSuzanne
                H. Rueck*
            DirectorAndrew
                J. Simons*
            DirectorJeffrey
                S. Wilks*
            Director





*By:
            /s/
                Brian K. Finneran


Brian
                K. Finneran


Attorney-in-fact


March
                16, 2007






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