**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, 2005**
 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 ofincorporation
                  or organization)
              
              (I.R.S.
                  EmployerIdentification
                  No.)
 
 
 699
                  Hillside Avenue
                New
                  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 o 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 o 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 o
 
 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 filero
              Accelerated
                  filerx
              Non-accelerated
                  filero
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o No x
 
 As
        of
        June 30, 2005, there were 11,000,016 shares of common stock outstanding and
        the
        aggregate market value of common stock of State Bancorp, Inc. held by
        nonaffiliates was approximately $207,350,000 as computed using the closing
        market price of the stock of $18.85 reported by the American Stock Exchange
        on
        June 30, 2005.
 
 As
        of
        February 27, 2006, there were 11,087,727 outstanding shares of State Bancorp,
        Inc. common stock.
  
 
 
 
 **STATE
        BANCORP, INC.**
 
 **Annual
        Report on Form 10-K**
 **For
        the Year Ended December 31, 2005**
 
 **Table
        of Contents**
 
 Documents
                  Incorporated by Reference**PART
                  I**Item
                  1.
              BusinessGeneralStatistical
                  InformationItem
                  1A.
              Risk
                  FactorsItem
                  1B.
              Unresolved
                  Staff CommentsItem
                  2.
              PropertiesItem
                  3.
              Legal
                  ProceedingsItem
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders**PART
                  II**Item
                  5.
              Market
                  for Registrant's Common Equity and Related
                  Stockholder MattersItem
                  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 Procedures**PART
                  III**Item
                  10.
              Directors
                  and Executive Officers of the
                  RegistrantItem
                  11.
              Executive
                  CompensationItem
                  12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder MattersItem
                  13.
              Certain
                  Relationships and Related
                  TransactionsItem
                  14.
              Principal
                  Accounting Fees and Services**PART
                  IV**Item
                  15.
              Exhibits,
                  Financial Statement Schedules and Reports on Form
                  8-KSignatures
 
 *Table
              of Contents*
 
 **DOCUMENTS
        INCORPORATED BY REFERENCE**
 
 Portions
        of the 2006 Proxy Statement to be filed on or about March 31, 2006 (the “2006
        Proxy”) are incorporated herein by reference in this Annual Report on Form 10-K
        in response to items under Part III.
 
 
 **PART
        I**
 
 
 **ITEM
                  1.**
              **BUSINESS**
 
 **General**
 
 State
        Bancorp, Inc. (the “Company”), a one-bank holding company, was formed on June
        24, 1986. The Company operates as the parent for its wholly owned subsidiary,
        State Bank of Long Island and subsidiaries (the "Bank"), a New York
        state-chartered commercial bank founded in 1966 and its unconsolidated wholly
        owned subsidiaries, State Bancorp Capital Trust I and II, entities formed
        in
        2002 and 2003, respectively, to issue Trust Preferred securities. These Trust
        Preferred securities are classified as junior subordinated debentures in
        the
        financial statements. The Bank is a New York state chartered commercial bank
        conducting 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 in Nassau County. 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, 2005, the Company, on a consolidated basis, had total assets
        of
        approximately $1.6 billion, total deposits of approximately $1.4 billion,
        and
        stockholders' equity of approximately $56.4 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 the Bank’s relatively stable core deposit base.
 
 The
        Bank
        considers its business to be highly competitive in its market areas. The
        Bank
        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.
 
 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 a
        thirty year history of nationwide equipment leasing.
 
 *Table
              of Contents*
 
 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 2004.
 
 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 368 full-time and part-time
        officers and employees as of December 31, 2005.
 
 The
        Company’s Internet address is www.statebankofli.com .
        The
        Company makes available on its website its annual reports on Form 10-K,
        quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
        thereto as soon as reasonably practicable after the Company files such material
        with, or furnishes such material to, the Securities and Exchange Commission,
        as
        applicable.
 
 **Supervision
        and Regulation**
 
 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 regulation
        by the Federal Reserve Board ("FRB"). The Bank’s deposits are insured by the
        Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to the
        regulation and supervision of the New York Banking Department (the "Banking
        Department") and the FDIC.
 
 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 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.
 
 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. 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 shareholders 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.
 
 *Table
              of Contents*
 
 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.
 
 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.
 
 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, 2005, no dividends could be
        declared by the Bank without prior approval of those regulatory agencies.
        The
        Federal banking regulators have adopted risk-based capital and leverage
        guidelines that require the Company’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.
 
 **Government
        Monetary Policies and Economic Control**
 
 The
        earnings of the Company and the Bank are affected by the policies of regulatory
        authorities including the Board of Governors of the Federal Reserve System
        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 Act
        of
        1933.
 
 *Table
              of Contents*
 
 ***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% in 2005, 2004 and 2003. Nonaccruing loans
        are included in the average balances (dollars in thousands):
 
 For
                  the Years Ended December 31,
              
              2005
              
              2004
              
              2003Average
                Balance
              
              Interest
              
              Average
                Rate
              
              Average
                Balance
              
              Interest
              
              Average
                Rate
              
              Average
                Balance
              
              Interest
              
              Average
                RateASSETS:Securities
                  held to maturity and securities available for sale:Taxable
              
              $
              472,663
              
              $
              18,028
              
              
              3.81
              %
              $
              496,087
              
              $
              17,559
              
              
              3.54
              %
              $
              491,989
              
              $
              16,666
              
              
              3.39
              %Tax-exempt
              
              
              54,692
              
              
              2,240
              
              
              4.10
              
              
              114,905
              
              
              3,979
              
              
              3.46
              
              
              81,687
              
              
              4,540
              
              
              5.56Total
                  securities
              
              
              527,355
              
              
              20,268
              
              
              3.84
              
              
              610,992
              
              
              21,538
              
              
              3.53
              
              
              573,676
              
              
              21,206
              
              
              3.70Federal
                  Home Loan Bank and other restricted stock
              
              
              4,139
              
              
              181
              
              
              4.37
              
              
              5,249
              
              
              89
              
              
              1.70
              
              
              3,842
              
              
              128
              
              
              3.33Federal
                  funds sold, securities purchased under agreements to resell and
                  interest-bearing deposits
              
              
              59,000
              
              
              1,740
              
              
              2.95
              
              
              36,618
              
              
              404
              
              
              1.10
              
              
              41,665
              
              
              457
              
              
              1.10Loans
                  (net of unearned income):Taxable
              
              
              824,210
              
              
              61,499
              
              
              7.46
              
              
              727,945
              
              
              48,823
              
              
              6.71
              
              
              645,338
              
              
              44,020
              
              
              6.82Tax-exempt
              
              
              6,120
              
              
              500
              
              
              8.17
              
              
              6,966
              
              
              557
              
              
              8.00
              
              
              6,901
              
              
              572
              
              
              8.29Total
                  loans - net
              
              
              830,330
              
              
              61,999
              
              
              7.47
              
              
              734,911
              
              
              49,380
              
              
              6.72
              
              
              652,239
              
              
              44,592
              
              
              6.84Total
                  interest-earning assets
              
              
              1,420,824
              
              $
              84,188
              
              
              5.93
              %
              
              1,387,770
              
              $
              71,411
              
              
              5.14
              %
              
              1,271,422
              
              $
              66,383
              
              
              5.22
              %Allowance
                  for probable loan losses
              
              
              (14,198
              )
              
              
              
              
              
              
              
              (11,523
              )
              
              
              
              
              
              
              
              (10,610
              )Cash
                  and due from banks
              
              
              48,295
              
              
              
              
              
              
              
              
              49,672
              
              
              
              
              
              
              
              
              45,575Bank
                  premises and equipment - net
              
              
              6,196
              
              
              
              
              
              
              
              
              6,758
              
              
              
              
              
              
              
              
              7,581Other
                  assets
              
              
              56,530
              
              
              
              
              
              
              
              
              50,139
              
              
              
              
              
              
              
              
              41,420Total
                  Assets
              
              $
              1,517,647
              
              
              
              
              
              
              
              $
              1,482,816
              
              
              
              
              
              
              
              $
              1,355,388LIABILITIES
                  AND STOCKHOLDERS' EQUITY:Savings
                  and time deposits:Savings
              
              $
              703,173
              
              $
              12,476
              
              
              1.77
              %
              $
              662,087
              
              $
              5,326
              
              
              0.80
              %
              $
              615,571
              
              $
              4,386
              
              
              0.71
              %Time
              
              
              289,897
              
              
              8,739
              
              
              3.01
              
              
              268,502
              
              
              4,545
              
              
              1.69
              
              
              305,629
              
              
              5,735
              
              
              1.88Total
                  savings and time deposits
              
              
              993,070
              
              
              21,215
              
              
              2.14
              
              
              930,589
              
              
              9,871
              
              
              1.06
              
              
              921,200
              
              
              10,121
              
              
              1.10Federal
                  funds purchased
              
              
              6,341
              
              
              208
              
              
              3.28
              
              
              7,021
              
              
              99
              
              
              1.41
              
              
              6,778
              
              
              92
              
              
              1.36Securities
                  sold under agreements to repurchase
              
              
              16,092
              
              
              512
              
              
              3.18
              
              
              41,652
              
              
              600
              
              
              1.44
              
              
              17,252
              
              
              222
              
              
              1.29Other
                  borrowed funds
              
              
              47,626
              
              
              1,533
              
              
              3.22
              
              
              77,953
              
              
              1,171
              
              
              1.50
              
              
              29,451
              
              
              532
              
              
              1.81Junior
                  subordinated debentures
              
              
              20,620
              
              
              1,434
              
              
              6.95
              
              
              20,620
              
              
              1,059
              
              
              5.14
              
              
              10,356
              
              
              568
              
              
              5.48Total
                  interest-bearing liabilities
              
              
              1,083,749
              
              
              24,902
              
              
              2.30
              
              
              1,077,835
              
              
              12,800
              
              
              1.19
              
              
              985,037
              
              
              11,535
              
              
              1.17Demand
                  deposits
              
              
              310,720
              
              
              
              
              
              
              
              
              290,905
              
              
              
              
              
              
              
              
              245,840Other
                  liabilities
              
              
              22,644
              
              
              
              
              
              
              
              
              16,816
              
              
              
              
              
              
              
              
              33,356Total
                  liabilities
              
              
              1,417,113
              
              
              
              
              
              
              
              
              1,385,556
              
              
              
              
              
              
              
              
              1,264,233Stockholders'
                  equity
              
              
              100,534
              
              
              
              
              
              
              
              
              97,260
              
              
              
              
              
              
              
              
              91,155Total
                  Liabilities and Stockholders' Equity
              
              $
              1,517,647
              
              
              
              
              
              
              
              $
              1,482,816
              
              
              
              
              
              
              
              $
              1,355,388Net
                  interest income/rate-tax-equivalent basis
              
              
              
              
              
              59,286
              
              
              4.17
              %
              
              
              
              
              58,611
              
              
              4.22
              %
              
              
              
              
              54,848
              
              
              4.31
              %Less
                  tax-equivalent basis adjustment
              
              
              
              
              
              767
              
              
              
              
              
              
              
              
              1,374
              
              
              
              
              
              
              
              
              1,700Net
                  Interest Income
              
              
              
              
              $
              58,519
              
              
              
              
              
              
              
              $
              57,237
              
              
              
              
              
              
              
              $
              53,148
 
 ***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% in 2005, 2004 and 2003. Variances in
        rate/volume relationships have been allocated proportionately to average
        volume
        and average rate as they compare to each other (in thousands):
 
 *Table
              of Contents*
  Year
                  2005 over 2004
              
              Year
                  2004 over 2003Due
                  to Change in:
              
              
              
              Due
                  to Change in:Average
                Volume
              
              Average
                Rate
              
              Net
                  Increase
                (Decrease)
              
              Average
                Volume
              
              Average
                Rate
              
              Net
                  Increase
                (Decrease)INTEREST
                  INCOME:Securities
                  held to maturity and securities available for sale:Taxable
              
              $
              (853
              )
              $
              1,322
              
              $
              469
              
              $
              151
              
              $
              742
              
              $
              893Tax-exempt
              
              
              (2,368
              )
              
              629
              
              
              (1,739
              )
              
              1,485
              
              
              (2,046
              )
              
              (561
              )Total
                  securities
              
              
              (3,221
              )
              
              1,951
              
              
              (1,270
              )
              
              1,636
              
              
              (1,304
              )
              
              332Federal
                  Home Loan Bank and other restricted stock
              
              
              (22
              )
              
              114
              
              
              92
              
              
              37
              
              
              (76
              )
              
              (39
              )Federal
                  funds sold, securities purchased under agreements to resell and
                  interest-bearing deposits
              
              
              357
              
              
              979
              
              
              1,336
              
              
              (56
              )
              
              3
              
              
              (53
              )Loans
                  (net of unearned income):Taxable
              
              
              6,849
              
              
              5,827
              
              
              12,676
              
              
              5,551
              
              
              (748
              )
              
              4,803Tax-exempt
              
              
              (69
              )
              
              12
              
              
              (57
              )
              
              5
              
              
              (20
              )
              
              (15
              )Total
                  loans - net
              
              
              6,780
              
              
              5,839
              
              
              12,619
              
              
              5,556
              
              
              (768
              )
              
              4,788Total
                  Interest Income
              
              
              3,894
              
              
              8,883
              
              
              12,777
              
              
              7,173
              
              
              (2,145
              )
              
              5,028INTEREST
                  EXPENSE:Savings
                  and time deposits:Savings
              
              
              350
              
              
              6,800
              
              
              7,150
              
              
              347
              
              
              593
              
              
              940Time
              
              
              388
              
              
              3,806
              
              
              4,194
              
              
              (659
              )
              
              (531
              )
              
              (1,190
              )Total
                  savings and time deposits
              
              
              738
              
              
              10,606
              
              
              11,344
              
              
              (312
              )
              
              62
              
              
              (250
              )Federal
                  funds purchased
              
              
              (10
              )
              
              119
              
              
              109
              
              
              3
              
              
              4
              
              
              7Securities
                  sold under agreements to repurchase
              
              
              (518
              )
              
              430
              
              
              (88
              )
              
              349
              
              
              29
              
              
              378Other
                  borrowed funds
              
              
              (588
              )
              
              950
              
              
              362
              
              
              742
              
              
              (103
              )
              
              639Junior
                  subordinated debentures
              
              
              -
              
              
              375
              
              
              375
              
              
              529
              
              
              (38
              )
              
              491Total
                  Interest Expense
              
              
              (378
              )
              
              12,480
              
              
              12,102
              
              
              1,311
              
              
              (46
              )
              
              1,265Change
                  in Net Interest Income (Tax-equivalent Basis)
              
              $
              4,272
              
              $
              (3,597
              )
              $
              675
              
              $
              5,862
              
              $
              (2,099
              )
              $
              3,763
 
 ***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,
              
              2005
              
              2004
              
              2003Amortized
                Cost
              
              Estimated
                Fair
                  Value
              
              Amortized
                Cost
              
              Estimated
                Fair
                  Value
              
              Amortized
                Cost
              
              Estimated
                Fair
                  ValueTYPE:Obligations
                  of states and political subdivisions
              
              $
              18,729
              
              $
              18,638
              
              $
              53,247
              
              $
              53,580
              
              $
              94,594
              
              $
              98,214Mortgage-backed
                  securities and collateralized mortgage obligations
              
              
              199,537
              
              
              195,603
              
              
              259,162
              
              
              258,917
              
              
              281,291
              
              
              280,715Government
                  Agency securities
              
              
              307,543
              
              
              304,900
              
              
              192,304
              
              
              191,948
              
              
              146,876
              
              
              147,614Corporate
                  securities
              
              
              19,307
              
              
              19,049
              
              
              34,330
              
              
              34,212
              
              
              36,714
              
              
              36,745Total
              
              $
              545,116
              
              $
              538,190
              
              $
              539,043
              
              $
              538,657
              
              $
              559,475
              
              $
              563,288
 
 The
        following table presents the maturity distribution and the weighted-average
        yield of the Company's investment portfolio at December 31, 2005 (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.
 
 *Table
              of Contents*
  MaturingWithin
                One
                  Year
              
              After
                  One but
                Within
                  Five Years
              
              After
                  Five but
                Within
                  Ten Years
              
              After
                Ten
                  YearsAmount
              
              Yield
              (1)
              Amount
              
              Yield
              (1)
              Amount
              
              Yield
              (1)
              Amount
              
              Yield
              (1)TYPE:Obligations
                  of states and political subdivisions
              
              $
              12,823
              
              
              4.17
              %
              $
              372
              
              
              2.85
              %
              $
              700
              
              
              7.46
              %
              $
              4,743
              
              
              6.33
              %Mortgage-backed
                  securities and collateralized mortgage obligations (2)
              
              
              6,582
              
              
              4.56
              
              
              167,747
              
              
              3.66
              
              
              21,274
              
              
              4.35
              
              
              -
              
              
              -Government
                  Agency securities (3)
              
              
              35,170
              
              
              3.87
              
              
              196,343
              
              
              3.89
              
              
              22,656
              
              
              3.95
              
              
              50,779
              
              
              3.84Corporate
                  securities
              
              
              -
              
              
              -
              
              
              19,049
              
              
              5.01
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
              
              $
              54,575
              
              
              4.02
              %
              $
              383,511
              
              
              3.84
              %
              $
              44,630
              
              
              4.20
              %
              $
              55,522
              
              
              4.05
              %
 
 (1)
              Fully
                  tax-equivalent basis using a tax rate of
                  34%.
 (2)
              Assumes
                  maturity dates pursuant to average lives as determined by constant
                  prepayment rates.
 (3)
              Excluding
                  zero-coupon securities, assumes coupon yields for securities past
                  their
                  call dates and not bought at a discount; yields to call for securities
                  not
                  past their call dates and not bought at a discount; and yields
                  to maturity
                  for securities purchased at a discount. For zero-coupon securities,
                  assumes yields to call.
 
 ***Loan
        Portfolio***
 
 The
        following table categorizes the Company's loan portfolio for each period
        (in
        thousands):
 
 At
                  December 31,
              
              2005
              
              2004
              
              2003
              
              2002
              
              2001Commercial
                  and industrial
              
              $
              297,887
              
              $
              277,172
              
              $
              278,216
              
              $
              243,611
              
              $
              246,162Real
                  estate - mortgage
              
              
              446,004
              
              
              374,307
              
              
              334,946
              
              
              298,187
              
              
              252,968Real
                  estate - construction
              
              
              79,200
              
              
              73,648
              
              
              54,293
              
              
              42,829
              
              
              16,258Lease
                  receivables
              
              
              49,151
              
              
              34,844
              
              
              23,962
              
              
              20,041
              
              
              18,231Loans
                  to individuals
              
              
              9,401
              
              
              8,724
              
              
              7,843
              
              
              7,385
              
              
              7,514Tax-exempt
                  and other
              
              
              10,379
              
              
              9,496
              
              
              11,956
              
              
              8,331
              
              
              10,465Loans
                  - net of unearned income
              
              
              892,022
              
              
              778,191
              
              
              711,216
              
              
              620,384
              
              
              551,598
 
 The
        following table presents the maturities of selected loans and the sensitivities
        of those loans to changes in interest rates at December 31, 2005 (in
        thousands):
 
 One
                  Year
                or
                  Less
              
              One
                  Through
                Five
                  Years
              
              Over
                Five
                  Years
              
              TotalCommercial
                  and industrial
              
              $
              200,428
              
              $
              72,393
              
              $
              25,066
              
              $
              297,887Real
                  estate - construction
              
              
              50,372
              
              
              28,389
              
              
              439
              
              
              79,200Total
              
              $
              250,800
              
              $
              100,782
              
              $
              25,505
              
              $
              377,087Loans
                  maturing after one year with:Fixed
                  interest rate
              
              
              
              
              $
              47,126
              
              $
              6,730
              
              $
              53,856Variable
                  interest rate
              
              
              
              
              $
              53,656
              
              $
              18,775
              
              $
              72,431
 
 The
        following table presents the Company's nonaccrual, past due and restructured
        loans for each period (in thousands):
 
 December
                  31,
              
              2005
              
              2004
              
              2003
              
              2002
              
              2001Nonaccrual
                  loans
              
              $
              3,069
              
              $
              5,274
              
              $
              8,666
              
              $
              6,317
              
              $
              8,920Loans
                  90 days or more past due and still accruing interest
              
              $
              281
              
              $
              89
              
              $
              149
              
              $
              129
              
              $
              405Restructured
                  accruing loans
              
              
              -
              
              
              -
              
              
              -
              
              $
              107
              
              $
              284Interest
                  income on nonaccrual and restructured loans which would have been
                  recorded
                  under original loan terms
              
              $
              (5
              )
              $
              137
              
              $
              372
              
              $
              371
              
              $
              720Interest
                  income on nonaccrual and restructured loans recorded during the
                  period
              
              $
              122
              
              $
              31
              
              $
              24
              
              $
              9
              
              $
              27
 
 *Table
              of Contents*
 
 ***Summary
        of Loan Loss Experience***
 
 The
        determination of the balance of the allowance for probable loan losses is
        based
        upon a review and analysis of the Company's loan portfolio. Management's
        review
        includes monthly analyses of past due and nonaccrual loans and detailed,
        periodic loan-by-loan analyses.
 
 Based
        on
        current economic conditions, management has determined that the current level
        of
        the allowance for probable loan 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 portfolio, recent charge-off experience and local economic
        conditions.
 
 The
        following table presents an analysis of the Company's allowance for probable
        loan losses for each period (dollars in thousands):
 
 2005
              
              2004
              
              2003
              
              2002
              
              2001Balance,
                  January 1
              
              $
              12,020
              
              $
              10,732
              
              $
              10,046
              
              $
              9,255
              
              $
              9,207Adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              542
              (1)Charge-offs:Commercial
                  and industrial
              
              
              505
              
              
              2,957
              
              
              1,960
              
              
              2,721
              
              
              4,021Real
                  estate - mortgage
              
              
              -
              
              
              -
              
              
              1,251
              
              
              -
              
              
              -Real
                  estate - construction
              
              
              -
              
              
              193
              
              
              -
              
              
              -
              
              
              -Lease
                  receivables
              
              
              280
              
              
              250
              
              
              292
              
              
              237
              
              
              190Loans
                  to individuals
              
              
              13
              
              
              5
              
              
              50
              
              
              13
              
              
              44Total
                  charge-offs
              
              
              798
              
              
              3,405
              
              
              3,553
              
              
              2,971
              
              
              4,255Recoveries:Commercial
                  and industrial
              
              
              816
              
              
              171
              
              
              293
              
              
              196
              
              
              137Real
                  estate - mortgage
              
              
              16
              
              
              3
              
              
              3
              
              
              1
              
              
              4Lease
                  receivables
              
              
              10
              
              
              8
              
              
              1
              
              
              2
              
              
              6Loans
                  to individuals
              
              
              3
              
              
              5
              
              
              7
              
              
              3
              
              
              14Total
                  recoveries
              
              
              845
              
              
              187
              
              
              304
              
              
              202
              
              
              161Net
                  (recoveries) charge-offs
              
              
              (47
              )
              
              3,218
              
              
              3,249
              
              
              2,769
              
              
              4,094Provision
                  charged to income
              
              
              3,650
              
              
              4,506
              
              
              3,935
              
              
              3,560
              
              
              3,600Balance
                  at end of period
              
              $
              15,717
              
              $
              12,020
              
              $
              10,732
              
              $
              10,046
              
              $
              9,255Ratio
                  of net (recoveries) charge-offs during the period to average loans
                  outstanding during the period
              
              
              (0.01)
              %
              
              0.44
              %
              
              0.50
              %
              
              0.47
              %
              
              0.75
              %
 
 (1)
              Opening
                  balance of allowance for probable loan losses of acquired leasing
                  company.
 
 The
        following table presents the allocation of the Company's allowance for probable
        loan losses for each period (dollars in thousands):
 
 2005
              
              Percent
                  ofLoans
                  toTotal
                  Loans
              
              2004
              
              Percent
                  ofLoans
                  to
                Total
                  Loans
              
              2003
              
              Percent
                  ofLoans
                  toTotal
                  Loans
              
              2002
              
              Percent
                  ofLoans
                  toTotal
                  Loans
              
              2001
              
              Percent
                  ofLoans
                  toTotal
                  LoansCommercial
                  and industrial
              
              $
              6,929
              
              
              33.4
              %
              $
              5,071
              
              
              35.6
              %
              $
              5,781
              
              
              39.1
              %
              $
              5,370
              
              
              39.3
              %
              $
              5,828
              
              
              44.6
              %Real
                  estate - mortgage
              
              
              4,733
              
              
              50.0
              
              
              3,694
              
              
              48.1
              
              
              3,157
              
              
              47.1
              
              
              3,327
              
              
              48.1
              
              
              2,366
              
              
              45.9Real
                  estate - construction
              
              
              542
              
              
              8.9
              
              
              523
              
              
              9.5
              
              
              306
              
              
              7.6
              
              
              241
              
              
              6.9
              
              
              98
              
              
              2.9Lease
                  receivables
              
              
              1,578
              
              
              5.5
              
              
              900
              
              
              4.5
              
              
              142
              
              
              3.4
              
              
              113
              
              
              3.2
              
              
              110
              
              
              3.3Loans
                  to individuals
              
              
              77
              
              
              1.1
              
              
              38
              
              
              1.1
              
              
              44
              
              
              1.1
              
              
              46
              
              
              1.2
              
              
              49
              
              
              1.4Tax-exempt
                  and other
              
              
              47
              
              
              1.1
              
              
              47
              
              
              1.2
              
              
              67
              
              
              1.7
              
              
              47
              
              
              1.3
              
              
              63
              
              
              1.9Unallocated
              
              
              1,811
              
              
              -
              
              
              1,747
              
              
              -
              
              
              1,235
              
              
              -
              
              
              902
              
              
              -
              
              
              741
              
              
              -Total
              
              $
              15,717
              
              
              100.0
              %
              $
              12,020
              
              
              100.0
              %
              $
              10,732
              
              
              100.0
              %
              $
              10,046
              
              
              100.0
              %
              $
              9,255
              
              
              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):
 
 *Table
              of Contents*
  2005
              
              2004
              
              2003Average
                Balance
              
              Average
                Rate
              
              Average
                Balance
              
              Average
                Rate
              
              Average
                Balance
              
              Average
                RateDemand
                  deposits
              
              $
              310,720
              
              
              -
              
              $
              290,905
              
              
              -
              
              $
              245,840
              
              
              -Interest-bearing
                  transaction accounts
              
              
              223,101
              
              
              1.53
              %
              
              227,656
              
              
              0.72
              %
              
              193,678
              
              
              0.59
              %Money
                  market deposit accounts
              
              
              158,746
              
              
              1.69
              
              
              160,461
              
              
              0.74
              
              
              152,130
              
              
              0.64Savings
                  deposits
              
              
              321,326
              
              
              1.99
              
              
              273,970
              
              
              0.91
              
              
              269,763
              
              
              0.84Time
                  certificates of deposit of $100,000 or more
              
              
              175,495
              
              
              2.85
              
              
              186,590
              
              
              1.54
              
              
              183,587
              
              
              1.34Other
                  time deposits
              
              
              114,402
              
              
              3.27
              
              
              81,912
              
              
              2.05
              
              
              122,042
              
              
              2.68Total
              
              $
              1,303,790
              
              
              1.63
              %
              $
              1,221,494
              
              
              0.81
              %
              $
              1,167,040
              
              
              0.87
              %
  The
        following table sets forth, by time remaining to maturity, the Company's
        certificates of deposit of $100,000 or more at December 31, 2005 (in
        thousands):
 
 3
                  months or less
              
              $
              213,994Over
                  3 months through 6 months
              
              
              25,402Over
                  6 months through 12 months
              
              
              3,690Over
                  12 months
              
              
              6,874Total
              
              $
              249,960
 
 
 ***Return
        on Equity and Assets***
 
 The
        following table presents the Company's return on average stockholders’ equity
        and assets, the dividend payout ratio and the average equity to average assets
        ratio for each period. The calculations are based on recorded assets and
        give
        effect to the changes in fair value of securities available for
        sale.
 2005
                
                2004
                
                2003Return
                    on average total assets
                
                
                (2.41
                )
                    %
                
                0.90
                %
                
                0.89
                %Return
                    on average total stockholders' equity
                
                
                (36.35
                )
                    %
                
                13.75
                %
                
                13.18
                %Dividend
                    payout ratio
                
                
                N/M
                (1)
                
                38.98
                %
                
                38.68
                %Average
                    equity to average assets
                
                
                6.62
                %
                
                6.56
                %
                
                6.73
                %
 (1)
              N/M
                  - denotes not meaningful.
  ***Short-Term
        Borrowings***
 
 The
        following information is provided on the Bank's short-term borrowings for
        each
        period (dollars in thousands):
 
 *Table
              of Contents*
  2005
              
              2004
              
              2003Balance,
                  December 31 -Securities
                  sold under agreements to repurchase
              
              
              -
              
              
              -
              
              $
              31,601Federal
                  funds purchased
              
              
              -
              
              
              -
              
              $
              10,000Federal
                  Home Loan Bank advances
              
              $
              18,500
              
              $
              32,000
              
              $
              50,000Weighted-average
                  interest rate on balance, December 31 -Securities
                  sold under agreements to repurchase
              
              
              -
              
              
              -
              
              
              1.20
              %Federal
                  funds purchased
              
              
              -
              
              
              -
              
              
              1.25
              %Federal
                  Home Loan Bank advances
              
              
              4.30
              %
              
              2.41
              %
              
              1.04
              %Maximum
                  outstanding at any month end -Securities
                  sold under agreements to repurchase
              
              $
              118,215
              
              $
              123,275
              
              $
              36,669Federal
                  funds purchased
              
              $
              17,000
              
              $
              25,000
              
              $
              31,450Federal
                  Home Loan Bank advances
              
              $
              95,000
              
              $
              122,000
              
              $
              76,000Average
                  daily amount outstanding -Securities
                  sold under agreements to repurchase
              
              $
              16,092
              
              $
              41,652
              
              $
              17,252Federal
                  funds purchased
              
              $
              6,341
              
              $
              7,021
              
              $
              6,778Federal
                  Home Loan Bank advances
              
              $
              47,397
              
              $
              77,390
              
              $
              27,485Weighted-average
                  interest rate on average daily amount outstanding -Securities
                  sold under agreements to repurchase
              
              
              3.18
              %
              
              1.44
              %
              
              1.29
              %Federal
                  funds purchased
              
              
              3.28
              %
              
              1.41
              %
              
              1.36
              %Federal
                  Home Loan Bank advances
              
              
              3.17
              %
              
              1.41
              %
              
              1.25
              %
  ***Selected
        Quarterly Financial Data (Unaudited)***
 (dollars
        in thousands, except per share data)
 
 2005
              
              20041st
                Quarter
              
              2nd
                Quarter
              
              3rd
                Quarter
              
              4th
                Quarter
              
              1st
                Quarter
              
              2nd
                Quarter
              
              3rd
                Quarter
              
              4th
                QuarterInterest
                  income
              
              $
              19,457
              
              $
              20,256
              
              $
              21,033
              
              $
              22,674
              
              $
              16,101
              
              $
              17,258
              
              $
              18,098
              
              $
              18,580Interest
                  expense
              
              
              4,713
              
              
              5,891
              
              
              6,669
              
              
              7,628
              
              
              2,871
              
              
              2,787
              
              
              3,318
              
              
              3,824Net
                  interest income
              
              
              14,744
              
              
              14,365
              
              
              14,364
              
              
              15,046
              
              
              13,230
              
              
              14,471
              
              
              14,780
              
              
              14,756Provision
                  for probable loan losses
              
              
              1,227
              
              
              1,233
              
              
              594
              
              
              596
              
              
              1,077
              
              
              1,086
              
              
              1,152
              
              
              1,191Net
                  interest income after provision for probable loan losses
              
              
              13,517
              
              
              13,132
              
              
              13,770
              
              
              14,450
              
              
              12,153
              
              
              13,385
              
              
              13,628
              
              
              13,565Other
                  income
              
              
              1,215
              
              
              2,081
              
              
              1,268
              
              
              1,247
              
              
              3,703
              
              
              1,305
              
              
              1,516
              
              
              526Operating
                  expenses (1)
              
              
              11,209
              
              
              11,074
              
              
              15,188
              
              
              87,170
              
              
              10,286
              
              
              9,978
              
              
              10,426
              
              
              10,353Income
                  (loss) before income taxes (1)
              
              
              3,523
              
              
              4,139
              
              
              (150
              )
              
              (71,473
              )
              
              5,570
              
              
              4,712
              
              
              4,718
              
              
              3,738Provision
                  (benefit) for income taxes
              
              
              874
              
              
              1,130
              
              
              (235
              )
              
              (29,182
              )
              
              1,675
              
              
              1,347
              
              
              1,345
              
              
              995Net
                  income (loss) (1)
              
              $
              2,649
              
              $
              3,009
              
              $
              85
              
              $
              (42,291
              )
              $
              3,895
              
              $
              3,365
              
              $
              3,373
              
              $
              2,743Basic
                  earnings (loss) per common share (2)
              
              $
              0.25
              
              $
              0.27
              
              $
              0.00
              
              $
              (3.84
              )
              $
              0.36
              
              $
              0.31
              
              $
              0.31
              
              $
              0.26Diluted
                  earnings (loss) per common share (2)
              
              $
              0.23
              
              $
              0.27
              
              $
              0.00
              
              $
              (3.84
              )
              $
              0.35
              
              $
              0.30
              
              $
              0.30
              
              $
              0.25
 
 (1)
              3rd
                  and 4th quarter 2005 amounts were negatively impacted by litigation
                  results previously disclosed.
 (2)
              Retroactive
                  recognition has been given for stock dividends and
                  splits.
 
 *Table
              of Contents*
 
 **ITEM
                  1A.**
              **RISK
                  FACTORS**
 
 The
        following are certain risks that management believes are specific to the
        Company’s business. This should not be viewed as an all inclusive list or in any
        particular order.
 
 ***Changes
        in economic conditions or interest rates may negatively affect the Company’s
        earnings, capital and liquidity.***
 
 The
        results of operations for financial institutions, including the Bank, may
        be
        materially and 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 F ederal
        government. The Company’s profitability is heavily influenced by the spread
        between the interest rates it earns on investments and loans and the interest
        rates it pays on deposits and other interest-bearing liabilities. Substantially
        all of its 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 the Company. Like most banking institutions,
        the
        Company’s net interest spread and margin will be affected by general economic
        conditions and other factors that influence market interest rates and its
        ability to respond to changes in such rates. At any given time, the Company’s
        assets and liabilities may be such that they are affected differently by
        a given
        change in interest rates.
 
 ***The
        Company’s credit losses could increase and the Company’s allowance for probable
        loan losses may not be adequate to cover actual loan
        losses.***
 
 The
        risk
        of nonpayment of loans is inherent in all lending activities and nonpayment,
        if
        it occurs, may have a material adverse effect on the Company’s earnings and
        overall financial condition as well as the value of its common stock. A downturn
        in the economy or the real estate market in its market areas or a rapid change
        in interest rates could have a negative effect on collateral values and
        borrowers’ ability to repay. The Company makes various assumptions and judgments
        about the collectibility of its loan portfolio and provides an allowance
        for
        potential losses based on a number of factors. If the Company’s assumptions are
        wrong, the allowance for probable loan and lease losses may not be sufficient
        to
        cover its losses, thereby having an adverse effect on operating results,
        and may
        cause an increase in the allowance in the future. The actual amount of future
        provisions for loan losses cannot now be determined and may exceed the amounts
        of past provisions. Additionally, Federal banking regulators, as an integral
        part of their supervisory function, periodically review the allowance for
        probable loan losses. These regulatory agencies may require the Company to
        increase its provision for probable loan losses or to recognize further loan
        or
        lease charge-offs based upon their judgments, which may be different from
        those
        of the Company. Any increase in the allowance for probable loan losses could
        have a negative effect on net income, financial condition and results of
        operations.
 
 ***Litigation
        may have a material effect on the Company’s financial
        condition.***
 
 Item
        3 of
        this Form 10-K includes detailed information about litigation arising out
        of the
        Bank’s deposit relationship with Island Mortgage Network, Inc. (“IMN”) and its
        affiliates. The Company has recorded the full $74.2 million nonrecurring
        expense
        for the awarded compensatory damages and prejudgment interest in its 2005
        financial statements. The Company expects to continue to devote significant
        time
        and resources to defending itself, including costs related to a post-verdict
        motion to the District Court and if that motion is unsuccessful, the costs
        of
        pursuing an appeal to the United States Court of Appeals for the Second Circuit,
        including the accrual of post-judgment interest during the pendency of such
        an
        appeal. The Bank believes it has a number of meritorious arguments for the
        post-verdict motion and a possible appeal and will pursue its rights vigorously;
        however, the ultimate outcome of the IMN lawsuits cannot be predicted with
        certainty. It also remains possible that other parties may pursue additional
        claims against the Bank related to the Bank’s dealings with IMN and its
        affiliates.
 
 ***The
        Company’s success is dependent on its ability to compete effectively in the
        highly competitive banking industry.***
 
 The
        Company faces competition in attracting and retaining deposits, making loans,
        and providing other financial services throughout its market area. Many of
        its
        competitors have been in business for many years, have established customer
        bases, are larger and have higher lending limits. The Company’s competitors
        include other community banks, larger banking institutions and a wide range
        of
        other financial institutions such as credit unions, mutual fund and insurance
        companies and other non-bank businesses. Some of the financial institutions
        and
        financial services organizations with which it competes are not subject to
        the
        same degree of regulation. The Company is subject to extensive state and
        Federal
        legislation, supervision and legislation that govern almost all aspects of
        its
        operations. The impact of any changes to laws or regulations or their
        interpretations and/or financial accounting and reporting standards could
        be
        materially adverse to the Company and its shareholders.
 
 *Table
              of Contents*
 
 ***The
        Company’s ability to pay dividends is limited by law and
        contract.***
 
 The
        Company is a holding company and substantially all of its assets are held
        by the
        Bank. Its ability to continue to make dividend payments to its shareholders
        will
        depend primarily on available cash resources at the holding company and
        dividends from the Bank. Dividend payments or extensions of credit 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 its capital levels and current and
        retained earnings, the Bank is prohibited from declaring dividends without
        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 be able to declare dividends at any specific
        time
        in the future.
 
 The
        Company is also prohibited from declaring dividends on its common stock if
        the
        required payments on its subordinated debentures have not been made. 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.
 
 ***The
        Company continually encounters technological change, and may have fewer
        resources than its 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. The Company’s future success
        will depend, in part, on its ability to address the needs of its customers
        by
        using technology to provide products and services that will satisfy customer
        demands for convenience as well as to create additional efficiencies in its
        operations. Many competitors have substantially greater resources to invest
        in
        technological improvements. There can be no assurance that the Company will
        be
        able to effectively implement new technology-driven products and services
        or be
        successful in marketing such products and services to its
        customers.
 
 ***The
        market price for the Company’s common stock
        fluctuates.***
 
 The
        market price for the Company’s common stock fluctuates, ranging between $16.56
        and $23.58 for 2005. There may be significant impact on the market price
        for the
        Company’s common stock due to, among other things:
 
 ·
              Variances
                  in the Company’s anticipated or actual operating results or the results of
                  its competitors;
 ·
              Changes
                  in investors’ or analysts’ perceptions of the risks and conditions of its
                  business;
 ·
              The
                  Company’s announcements of developments related to its
                  business;
 ·
              Regulatory
                  developments;
 ·
              News
                  reports of trends, concerns and other issues related to the financial
                  services industry;
 ·
              Market
                  or general economic conditions.
 
 The
        overall market price of the Company’s common stock may fluctuate significantly
        in the future, and those fluctuations may be unrelated to the Company’s
        performance. General market price decline or market volatility in the future
        could adversely affect the price of its common stock, and the current market
        price may not be indicative of future market prices.
  **ITEM
                  1B.**
              **UNRESOLVED
                  STAFF COMMENTS**
 
 None.
 
 *Table
              of Contents*
  **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, 2005:
 
 **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**Lending
                  Facility:**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
              5/31/2007
              NoneRockville
                  Centre, NY960
                  Port Washington Boulevard
              Leased
              4/24/2012
              Five
                  five-year renewal optionsPort
                  Washington, 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
              4/30/2006
              Two
                  five-year renewal optionsMaspeth,
                  NY75-20
                  Astoria Boulevard
              Leased
              5/30/2006
              Two
                  five-year renewal optionsJackson
                  Heights, NY21-31
                  46th Avenue
              Leased
              1/31/2006
              One
                  five-year renewal optionLong
                  Island City, NY**Subsidiary
                  and Other Facilities:**1403
                  Foulk Road
              Leased
              6/30/2006
              One-year
                  renewal optionsWilmington,
                  DE100
                  Jericho Quadrangle
              Leased
              12/31/2009
              NoneJericho,
                  NY716
                  N. Bethlehem Pike
              Leased
              8/31/2006
              One-year
                  renewal optionsLower
                  Gwynedd, PA300
                  Park Avenue
              Leased
              10/1/2006
              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.
 
 *Table
              of Contents*
 
 **ITEM
                  3.**
              **LEGAL
                  PROCEEDINGS**
 
 The
        largest component of the Company’s legal expenses relates to ongoing litigation
        arising out of the Bank’s deposit relationship with Island Mortgage Network,
        Inc. (“Island Mortgage” or “IMN”) and its affiliates, as previously disclosed in
        the Company’s Form 10-Q,10-K, and 8-K filings with the Securities and Exchange
        Commission. These expenses totaled $82.8 million, $2.3 million and $3.8 million
        in 2005, 2004 and 2003, respectively. The sharp increase in expenses in 2005
        was
        principally the result of an adverse jury verdict rendered on January 30,
        2006,
        in one of the IMN-related cases, as described further below. The Company
        expects
        to incur additional costs related to this litigation during 2006; however,
        these
        costs are not specifically quantifiable at this point in time.
 
 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
        lenders not related to the Bank. The Bank never had a lending relationship
        with
        Island Mortgage.
 
 On
        June
        30, 2000, the Banking Department of the State of New York suspended Island
        Mortgage’s mortgage banker license. On July 19, 2000, Island Mortgage and its
        publicly held parent company, AppOnline.com, Inc., filed a petition under
        Chapter 11 of the Bankruptcy Code in the Eastern District of New York.
        Subsequently, certain of Island Mortgage’s lenders filed an involuntary
        bankruptcy petition against Action Abstract, Inc., an entity to which they
        apparently had regularly wired funds in connection with their dealings with
        Island Mortgage. At the request of the Trustee in the Island Mortgage bankruptcy
        case, various bankruptcy cases involving Island Mortgage entities were later
        substantively consolidated.
 
 In
        the
        course of those bankruptcy cases, it has been alleged that Island Mortgage
        engaged in a widespread pattern of fraud directed at lenders, title agents,
        closing companies and others with whom Island Mortgage regularly dealt. A
        number
        of Island Mortgage’s creditors have since asserted that the Bank participated in
        Island Mortgage’s alleged fraudulent scheme. Currently, there are two Island
        Mortgage-related litigations pending in which claims have been asserted against
        the Bank (and, in one case, the Company.) Those litigations are:
 
 -- *Broward
        Title Co. v. Alan Jacobs, et al.* ,
        Adv.
        Proc. No. 01-8181, Bankruptcy Court for the Eastern District of New York.
        On or
        about July 9, 2002, Broward’s motion to sever its claims against the Bank (and
        certain other defendants) was granted, allowing Broward to conduct a nonjury
        trial of its claims against the remaining defendants in the bankruptcy court.
        Broward’s claims against 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.
 
 -- *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).
        On or
        about June 4, 2002, plaintiffs Household Commercial Financial Services, Inc.
        (“Household”), Matrix Capital Bank (“Matrix”), and HSA Residential Mortgage
        Services of Texas (“RMST”), commenced this adversary proceeding with respect to
        the Bank. The Complaint alleges that plaintiffs extended lines of credit
        to, and
        entered into mortgage purchase agreements with, defendant Island Mortgage.
        According to the Complaint, millions of dollars of funds that plaintiffs
        deposited into the accounts at the Bank maintained by Island Mortgage and
        its
        related entities to fund mortgages were misappropriated as the result of
        Island
        Mortgage’s alleged scheme to defraud plaintiffs and unjustly enrich defendants.
        Plaintiffs claim the following with respect to the Bank: 1) the Bank aided
        and
        abetted the allegedly fraudulent scheme perpetrated by Island Mortgage; 2)
        the
        Bank aided and abetted in a breach of the fiduciary duties an Island Mortgage
        affiliate allegedly owed to plaintiffs; and, 3) the Bank was negligent in
        failing to recognize and act on signs that Island Mortgage was allegedly
        misappropriating the funds plaintiffs advanced to Island Mortgage. Plaintiffs
        claim they are entitled to not less than $52 million, plus interest and punitive
        damages.
 
 On
        January 31, 2005, the bankruptcy court ruled on the Bank’s motion for summary
        judgment. The plaintiffs’ claims for negligence and aiding and abetting a breach
        of fiduciary duty were dismissed. The claim for aiding and abetting fraud
        was
        not dismissed, although the court ruled that one of the plaintiffs (Matrix)
        could not seek damages for the period after June 6, 2000. On October 17,
        2005,
        the Bank announced a settlement with Household and an agreement in principle
        with Matrix with respect to each of their separate claims. The Matrix agreement
        is now fully executed.
 
 *Table
              of Contents*
 
 On
        January 3, 2006, a trial on the remaining claim, aiding and abetting fraud,
        brought by the remaining plaintiff, RMST, commenced in the District Court
        for
        the Eastern District of New York. On January 30, 2006, the jury rendered
        a
        verdict awarding $43.9 million in compensatory damages to plaintiff RMST.
        Prejudgment interest (which will exceed $22 million), in addition to certain
        other potential compensatory damages which have not yet been ruled upon by
        the
        court, could bring the total judgment to approximately $74.2 million. The
        Company has recorded the full $74.2 million nonrecurring expense in its 2005
        financial statements. During 2006, the Company expects to continue to incur
        costs related to the IMN jury verdict, including costs related to a post-verdict
        motion to the District Court for the Eastern District of New York asking
        the
        court to set aside the verdict and enter judgment for the Bank, or, in the
        alternative, grant a new trial, or, in the alternative, reduce the amount
        of the
        judgment. If that motion is unsuccessful, the costs of pursuing an appeal
        to the
        United States Court of Appeals for the Second Circuit, including the costs
        of
        obtaining a supersedeas bond to stay the enforcement of the judgment, and
        the
        accrual of post-judgment interest during the pendency of such an appeal will
        also need to be incurred.
 
 The
        Bank
        believes it has a number of meritorious arguments for its post-verdict motion
        and a possible appeal to the United States Court of Appeals for the Second
        Circuit and will pursue its rights vigorously; however, the ultimate outcome
        of
        the IMN lawsuits cannot be predicted with certainty. It also remains possible
        that other parties may pursue additional claims against the Bank related
        to the
        Bank’s dealings with IMN and its affiliates. The Bank’s legal fees and expenses
        will continue to be significant, and those costs, in addition to any costs
        associated with settling the IMN-related litigations or satisfying any adverse
        judgments, could have a material adverse effect on the Bank’s results of
        operations or financial position.
 
 In
        addition to the litigations noted above, the Company and the Bank are subject
        to
        other legal proceedings and claims that arise in the ordinary course of
        business. In the opinion of management, the amount of ultimate liability,
        if
        any, with respect to such matters will not materially affect future operations
        and will not have a material impact on the Company’s financial
        statements.
  **ITEM
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
  There
        were no matters submitted to a vote of stockholders during the quarter ended
        December 31, 2005.
 
 
 **PART
        II**
 
 
 **ITEM
                  5.**
              **MARKET
                  FOR REGISTRANT'S COMMON EQUITY AND RELATED****STOCKHOLDER
                  MATTERS**
 
 At
        December 31, 2005, the approximate number of equity stockholders was as
        follows:
 
 Title
        of Class: Common
        Stock
 Number
        of Record Holders: 1,477
 
 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, 2005, 2004 and 2003,
        were as follows:
 
 2005
              
              2004
              
              2003High
                  Close
              
              Low
                  Close
              
              High
                  Close
              
              Low
                  Close
              
              High
                  Close
              
              Low
                  Close1st
                  Quarter
              
              $
              23.58
              
              $
              20.96
              
              $
              20.66
              
              $
              18.89
              
              $
              15.13
              
              $
              13.512nd
                  Quarter
              
              
              21.42
              
              
              16.92
              
              
              21.42
              
              
              16.03
              
              
              15.53
              
              
              13.843rd
                  Quarter
              
              
              20.79
              
              
              17.54
              
              
              20.10
              
              
              16.63
              
              
              17.71
              
              
              15.534th
                  Quarter
              
              
              19.40
              
              
              16.56
              
              
              23.49
              
              
              17.68
              
              
              19.44
              
              
              15.50
 
 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, 2005, no dividends could
        be declared without prior approval of those regulatory agencies. The following
        schedule summarizes the Company’s dividends paid for the years ended December
        31, 2005, 2004 and 2003:
 
 *Table
              of Contents*
 
 
 Record
                  Date
              
              Dividend
                  Payment Date
              
              Cash
                  Dividends Paid Per Common Share (1)
              
              Stock
                  Dividends/SplitsDecember
                  10, 2004
              
              
              January
                  7, 2005
              
              
              $0.12March
                  11, 2005
              
              
              April
                  8, 2005
              
              
              0.13June
                  17, 2005
              
              
              July
                  8, 2005
              
              
              0.13
              
              
              6
                  for 5 stock split (2
              )September
                  9, 2005
              
              
              October
                  7, 2005
              
              
              0.15December
                  12, 2003
              
              
              January
                  9, 2004
              
              
              $0.11March
                  12, 2004
              
              
              April
                  9, 2004
              
              
              0.11June
                  11, 2004
              
              
              July
                  9, 2004
              
              
              0.12
              
              
              5%
                  stock dividendSeptember
                  10, 2004
              
              
              October
                  8, 2004
              
              
              0.13December
                  13, 2002
              
              
              January
                  10, 2003
              
              
              $0.10March
                  14, 2003
              
              
              April
                  11, 2003
              
              
              0.11June
                  13, 2003
              
              
              July
                  11, 2003
              
              
              0.11
              
              
              5%
                  stock dividendSeptember
                  12, 2003
              
              
              October
                  10, 2003
              
              
              0.11
 
 (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
        following table discloses the Company’s repurchases of its common stock made
        during the quarter.
 
 Period
              
              Total
                  number of shares purchased
              
              Average
                  price paid per share ($)
              
              Total
                  number of shares purchased as part of publicly announced plans
                  or
                  programs
              
              Maximum
                  number of shares that may yet be purchased under the plans or
                  programsOctober
                  1 - 31, 2005
              
              
              -
              
              
              -
              
              
              -
              
              
              542,094November
                  1 - 30, 2005
              
              
              13,175
              
              
              18.19
              
              
              13,175
              
              
              528,919December
                  1 - 31, 2005
              
              
              16,571
              
              
              18.33
              
              
              16,571
              
              
              512,348Total
              
              
              29,746
              
              
              18.27
              
              
              29,746
              
              
              512,348
 
 On
        February 24, 1998, the Company’s Board of Directors (the “Board”) authorized a
        stock repurchase program enabling the Company to buy back up to 50,000 shares
        of
        its common stock. Subsequently, on November 24, 1998, February 29, 2000,
        June
        26, 2001 and April 27, 2004, the Board authorized increases in the Company’s
        stock repurchase program under which the Company was then able to buy back
        up to
        a cumulative total of 200,000, 500,000, 1,000,000 and 1,500,000 shares of
        its
        common stock, respectively. 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.
        The Company does not presently intend to repurchase stock in 2006.
  **ITEM
                  6.**
              **SELECTED
                  FINANCIAL DATA**
 
 The
        Company's selected financial data for the last five years are set forth below.
 
 *Table
              of Contents*
  As
                  of or for the Fiscal Year Ended December 31,
              
              2005
              
              2004
              
              2003
              
              2002
              
              2001OPERATING
                  RESULTSInterest
                  income
              
              $
              83,420,469
              
              $
              70,037,106
              
              $
              64,682,876
              
              $
              67,132,444
              
              $
              69,937,207Interest
                  expense
              
              
              24,901,496
              
              
              12,800,553
              
              
              11,534,977
              
              
              15,239,307
              
              
              26,745,029Net
                  interest income
              
              
              58,518,973
              
              
              57,236,553
              
              
              53,147,899
              
              
              51,893,137
              
              
              43,192,178Provision
                  for probable loan losses
              
              
              3,650,000
              
              
              4,506,000
              
              
              3,935,004
              
              
              3,560,000
              
              
              3,600,000Net
                  interest income after provision for probable loan losses
              
              
              54,868,973
              
              
              52,730,553
              
              
              49,212,895
              
              
              48,333,137
              
              
              39,592,178Other
                  income
              
              
              5,810,464
              
              
              7,050,925
              
              
              9,142,923
              
              
              4,477,615
              
              
              4,973,313Operating
                  expenses
              
              
              124,640,683
              
              
              41,043,230
              
              
              41,089,081
              
              
              37,477,362
              
              
              31,587,765Net
                  (loss) income
              
              $
              (36,548,251
              )
              $
              13,376,009
              
              $
              12,015,173
              
              $
              11,302,611
              
              $
              10,820,834COMMON
                  SHARE DATABasic
                  (loss) earnings per common share (1)
              
              $
              (3.32
              )
              $
              1.24
              
              $
              1.13
              
              $
              1.06
              
              $
              0.99Diluted
                  (loss) earnings per common share (1)
              
              $
              (3.32
              )
              $
              1.20
              
              $
              1.10
              
              $
              1.04
              
              $
              0.97Stock
                  dividends/splits
              
              
              20%
              (3)
              
              5
              %
              
              5
              %
              
              5
              %
              
              5
              %Cash
                  dividends per common share (1)
              
              $
              0.55
              
              $
              0.48
              
              $
              0.44
              
              $
              0.41
              
              $
              0.39FINANCIAL
                  POSITIONTotal
                  assets
              
              $
              1,598,152,513
              
              $
              1,437,290,967
              
              $
              1,441,000,363
              
              $
              1,362,282,184
              
              $
              985,770,997Total
                  loans (2)
              
              $
              892,021,546
              
              $
              778,191,228
              
              $
              711,216,134
              
              $
              620,383,873
              
              $
              551,597,698Total
                  deposits
              
              $
              1,411,573,946
              
              $
              1,269,634,078
              
              $
              1,216,286,903
              
              $
              1,147,026,508
              
              $
              884,709,462Total
                  stockholders' equity
              
              $
              56,422,118
              
              $
              101,049,842
              
              $
              94,711,522
              
              $
              87,682,631
              
              $
              76,288,429Weighted
                  average number of common shares outstanding (1)
              
              
              10,996,601
              
              
              10,827,816
              
              
              10,678,935
              
              
              10,711,392
              
              
              10,898,797OTHER
                  DATAReturn
                  on average total assets
              
              
              (2.41)
              %
              
              0.90
              %
              
              0.89
              %
              
              0.95
              %
              
              1.08
              %Return
                  on average total stockholders' equity
              
              
              (36.35)
              %
              
              13.75
              %
              
              13.18
              %
              
              13.66
              %
              
              13.94
              %Tier
                  I leverage ratio
              
              
              5.04
              %
              
              7.82
              %
              
              8.08
              %
              
              6.95
              %
              
              7.79
              %Net
                  interest margin (FTE)
              
              
              4.17
              %
              
              4.22
              %
              
              4.31
              %
              
              4.77
              %
              
              4.79
              %Operating
                  efficiency ratio
              
              
              192.5
              %
              
              64.2
              %
              
              70.7
              %
              
              66.0
              %
              
              64.5
              %Dividend
                  payout ratio
              
              
              N/M
              (4)
              
              38.98
              %
              
              38.68
              %
              
              39.06
              %
              
              38.79
              %
 
 (1)
              Retroactive
                  recognition has been given for stock dividends and
                  splits
 (2)
              Net
                  of unearned income and before allowance for probable loan
                  losses.
 (3)
              6
                  for 5 stock split effected in a manner similar to a 20% stock
                  dividend.
 (4)
              N/M
                  - denotes not meaningful.




*Table
          of Contents*


**ITEM
                  7.**
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL****CONDITION
                  AND RESULTS OF OPERATIONS**
 
 **Overview**
 
 State
        Bancorp, Inc. (the “Company”) is a one-bank holding company, which was formed on
        June 24, 1986. The Company operates as the parent for its wholly owned
        subsidiary, State Bank of Long Island and subsidiaries (the "Bank"), a New
        York
        State chartered commercial bank founded in 1966, and its unconsolidated
        wholly-owned subsidiaries, State Bancorp Capital Trust I and II (collectively
        the “Trusts”), entities formed in 2002 and 2003, respectively, to issue Trust
        Preferred securities. The income of the Company is principally derived through
        the operation of the Bank and its subsidiaries, SB Portfolio Management Corp.
        (“SB Portfolio”), SB Financial Services Corp. (“SB Financial”),
        Studebaker-Worthington Leasing Corp. (“SWLC”), New Hyde Park Leasing Corp. and
        SB ORE Corp.
 
 The
        Bank
        serves its customer base through 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, discount brokerage services, sweep
        and
        lock box products and, through its association with U.S. Trust Company, a
        full
        range of wealth management and financial planning services.
 
 SB
        Portfolio and SB Financial, based in Wilmington, Delaware, 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.
 
 For
        the
        year ended December 31, 2005, the Company recorded record levels of loans,
        core
        deposits and total deposits. The Company also recognized legal and litigation
        expenses totaling $83.6 million, resulting in a net loss for the year of
        $36.5
        million. The following discussion is intended to provide the reader with
        further
        insight into the principal factors contributing to the financial results
        of the
        Company and its subsidiaries for the periods shown. It should be read in
        conjunction with the consolidated financial statements and notes thereto
        for a
        full understanding of this analysis.
 
 Financial
                  performance of State Bancorp, Inc.
                (dollars
                  in thousands, except per share data)
                As
                  of or for the years ended December 31,
              
              2005
              
              2004
              
              Over/
                (under)
                2004Revenue
                  (1)
              
              $
              64,329
              
              $
              64,288
              
              
              -
              %Operating
                  expenses
              
              
              124,641
              
              
              41,043
              
              
              204Provision
                  for probable loan losses
              
              
              3,650
              
              
              4,506
              
              
              (19
              )Net
                  (loss) income
              
              
              (36,548
              )
              
              13,376
              
              
              (373
              )Net
                  (loss) income per share - diluted (2)
              
              
              (3.32
              )
              
              1.20
              
              
              (377
              )Dividend
                  payout ratio
              
              
              N/M
              (3)
              
              38.98
              %
              
              N/M
              (3)Return
                  on average total stockholders' equity
              
              
              (36.35)
              %
              
              13.75
              %
              
              N/M
              (3)Tier
                  I leverage ratio
              
              
              5.04
              %
              
              7.82
              %
              
              (278)
              bpTier
                  I capital ratio
              
              
              7.00
              %
              
              12.46
              %
              
              (546
              )Total
                  capital ratio
              
              
              8.26
              %
              
              13.71
              %
              
              (545
              )
 
 bp
        -
        denotes basis points; 100 bp equals 1%.
 (1)
              Represents
                  net interest income plus total other income. See Revenue of State
                  Bancorp,
                  Inc. table in Results of Operations and Financial Condition
                  section.
 (2)
              Retroactive
                  recognition has been given for stock dividends and
                  splits.
 (3)
              N/M
                  - denotes not meaningful.




*Table
          of Contents*


**Opportunities,
      Risks and Threats**





The
      Company’s 2005 performance is discussed in detail on the following pages.
      Certain statements contained in this discussion are “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of 1995.
      These forward-looking statements are based on management’s current expectations
      regarding a range of issues that could potentially impact the Company’s
      performance in future periods. Forward-looking statements are subject to risks
      and uncertainties that may cause actual results to differ materially from those
      discussed herein. Forward-looking statements, which are based on certain
      assumptions and describe future plans, strategies and expectations of the
      Company, are generally identified by the use of the words “believe,” “expect,”
“intend,” “anticipate,” “estimate,” “project,” “is confident that” or similar
      expressions. The Company’s ability to predict results or the actual effect of
      future plans or strategies is inherently uncertain. Factors that could have
      a
      material adverse effect on the operations of the Company and its subsidiaries
      include, but are not limited to, changes in: market interest rates, general
      economic conditions, legislative/regulatory changes, monetary and fiscal
      policies of the U.S. Government, the quality and composition of the loan or
      investment portfolios, demand for loan products, deposit flows, competition,
      demand for financial services in the company’s primary trade area, accounting
      principles and guidelines and other economic, competitive, governmental,
      regulatory and technological factors affecting the Company’s operations, pricing
      and services.





As
      noted
      elsewhere in this annual report to stockholders, the Company experienced its
      most difficult year ever in 2005. The adverse jury verdict in the Island
      Mortgage Network, Inc. (“Island Mortgage” or “IMN”) litigation coupled with a
      difficult interest rate environment resulting from an essentially flat yield
      curve provided significant operating and non-operating challenges for management
      and the Board of Directors throughout the past year. Management expects that
      the
      upcoming year will again provide difficult challenges as the Company appeals
      the
      IMN decision while facing similar interest rate issues as well as a host of
      competitors for its traditional small business and middle market commercial
      and
      industrial customer base. Competition in the Company’s tri-county trade area
      continues to intensify with each passing year from a variety of new and existing
      competitors through de novo branching, acquisition and strategic alliances.
      The
      Company will continue to focus on its core business strengths of careful
      expansion of the loan and lease portfolios, expense reduction initiatives,
      capital management and strategies to improve noninterest income generation.
      State Bank of Long Island opened its sixteenth branch facility in Westbury,
      Long
      Island in January of 2006 and early indications are that this location will
      provide excellent deposit and loan growth opportunities from a strategic
      location on a main thoroughfare contiguous to an industrial park in the heart
      of
      Nassau County. During 2005, the Company continued to expand its staff of
      professional bankers in the areas of branch banking, professional services
      deposit generation and commercial lending. 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. Several strategic technology upgrades and new products are expected
      to be introduced in 2006 to support branch deposit growth and improve
      cross-selling efforts in all areas of the organization. By continuing our
      long-standing philosophy of *Measured,
      Orderly Growth,* maintaining a “Customer First” attitude and adhering to the ideals contained in
      our mission statement which are continually reinforced by our Board of Directors
      and executive management team, the Company has been able to apply a consistent
      standard of excellence honed over many years that management is hopeful will
      again produce a productive year during 2006.





**Critical
      Accounting Policies, Judgments and Estimates**





The
      discussion and analysis of the financial condition and results of operations
      of
      the Company are based on the Consolidated Financial Statements, which are
      prepared in conformity with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      management to make estimates and assumptions affecting the reported amounts
      of
      assets, liabilities, revenues and expenses. Management evaluates those estimates
      and assumptions on an ongoing basis, including those related to the allowance
      for probable loan losses, 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.


*Table
          of Contents*


***Allowance
      for Probable Loan Losses***





In
      management's opinion, one of the most critical accounting policies impacting
      the
      Company's financial statements is the evaluation of the allowance for probable
      loan losses. Management carefully monitors the credit quality of the loan
      portfolio and, on a quarterly basis, charges off the amounts of those loans
      deemed uncollectible. Management evaluates the fair value of collateral
      supporting the impaired loans using independent appraisals and other measures
      of
      fair value. This process involves subjective judgments and assumptions and
      is
      subject to change based on factors that may be outside the control of the
      Company.











Management
      of the Company recognizes that, despite its best efforts to minimize risk
      through a rigorous credit review process, losses will occur. In times of
      economic slowdown, either regional or national, the risk inherent in the
      Company's loan portfolio will increase. The timing and amount of loan losses
      that occur are dependent upon several factors, most notably qualitative and
      quantitative factors about both the micro and macro economic conditions as
      reflected in the loan portfolio and the economy as a whole. Factors considered
      in this evaluation include, but are not limited to, estimated losses from loan
      and other credit arrangements, general economic conditions, changes in credit
      concentrations or pledged collateral, historical loan loss experience and trends
      in portfolio volume, maturity, composition, delinquencies and nonaccruals.
      The
      allowance for probable loan losses is available to absorb charge-offs from
      any
      loan category. Additions to the allowance are made through the provision for
      probable loan losses, which is a charge to operating earnings. The adequacy
      of
      the provision and the resulting allowance for probable loan losses is determined
      by management's continuing review of the loan portfolio, including
      identification and review of individual problem situations that may affect
      a
      borrower's ability to repay, delinquency and nonperforming loan data, collateral
      values, regulatory examination results and changes in the size and character
      of
      the loan portfolio. Thus, an increase in the size of the loan portfolio or
      in
      any of its components could necessitate an increase in the allowance even though
      credit quality and problem loan totals may be improving.





***Accounting
      for Income Taxes***





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 109, which requires the recording of deferred
      income taxes that reflect the net tax effects of temporary differences between
      the carrying amounts of assets and liabilities for financial reporting purposes
      and the amounts used for income tax purposes. Management exercises significant
      judgment in the evaluation of the amount and timing of the recognition of the
      resulting tax assets and liabilities and the judgments and estimates required
      for the evaluation are periodically updated based upon changes in business
      factors and the tax laws.





The
      Company’s New York State income taxes are under examination for the years ended
      December 31, 1999, 2000 and 2001. At this time, management believes it is more
      likely than not that tax positions taken by the Company will be upheld and
      that
      no material additional taxes will be due. As such, no liability has been
      recognized in the consolidated balance sheets at December 31, 2005 or
      2004.


*Table
          of Contents*


***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, 2005, 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.





**Results
      of Operations and Financial Condition**





***Summary
      of Financial Performance***





The
      Company recorded a net loss of $36.5 million during 2005 versus net income
      of
      $13.4 million in 2004. The 2005 loss resulted from expenses incurred as a result
      of the IMN litigation. A basic loss per common share of $3.32 was recorded
      in
      2005 versus earnings per common share of $1.24 a year ago (per share earnings
      have been adjusted to reflect the impact of a six for five stock split paid
      by
      the Company during 2005). A diluted loss per common share of $3.32 and diluted
      earnings per common share of $1.20 were recorded in 2005 and 2004, respectively.
      A significant increase in legal expenses related to the IMN litigation, in
      particular a $74.2 million expense resulting from an adverse jury verdict in
      the
      warehouse lender case captioned *HSA
      Residential Mortgage Services of Texas v. State Bank of Long
      Island* ,
      along
      with a slightly narrower net interest margin were the reasons for the 2005
      loss.
      Growth in net interest income coupled with a lower provision for probable loan
      losses contributed positively to operating income during 2005. The increase
      in
      net interest income resulted from an expanded interest-earning asset base,
      primarily through growth in commercial loans and commercial mortgages and leases
      originated at SWLC.





Revenue
                of State Bancorp, Inc.
              (dollars
                in thousands)
              For
                the years ended December 31,
            
            2005
            
            2004
            
            Over/
              (under)
              2004Net
                interest income
            
            $
            58,519
            
            $
            57,237
            
            
            2
            %Service
                charges on deposit accounts
            
            
            2,107
            
            
            2,279
            
            
            (8
            )Net
                security gains
            
            
            867
            
            
            2,150
            
            
            (60
            )Income
                from bank owned life insurance
            
            
            1,001
            
            
            879
            
            
            14Other
                operating income
            
            
            1,835
            
            
            1,743
            
            
            5Total
                revenue
            
            $
            64,329
            
            $
            64,288
            
            
            -
            %





The
      Company's capital position, by all industry-standard measures, remains strong.
      The ratio of average total stockholders' equity to average total assets was
      6.62% and 6.66% in 2005 and 2004, respectively. Based upon banking industry
      regulatory guidelines, a "well-capitalized" institution must maintain a Tier
      I
      leverage ratio of at least 5.00% and Tier I and total capital to risk-weighted
      assets ratios of at least 6.00% and 10.00%, respectively. At December 31, 2005,
      the Company's Tier I leverage ratio was 5.04% while its risk-weighted ratios
      were 7.00% for Tier I capital and 8.26% for total capital. The Tier I leverage
      and Tier I capital to risk-weighted assets ratios are in excess of the
      regulatory guidelines for a well-capitalized institution while the total capital
      to risk-weighted assets ratio is not. However, the total capital to
      risk-weighted assets ratio does exceed the regulatory minimum guideline. The
      decline in the Company’s year-end capital ratios from the comparable 2004 date
      resulted from the net loss recorded during 2005 as a result of the
      aforementioned IMN-related legal expenses incurred primarily during the third
      and fourth quarters of the year.


*Table
          of Contents*


As
      a
      result of the Company’s net loss in 2005, each of the primary measures of
      financial performance declined during the past year. Return on average equity
      decreased to (36.35)% from 13.75% a year ago. Return on average assets decreased
      to (2.41)% in 2005 versus 0.90% in 2004. As a result of the unusually flat
      slope
      of the yield curve prevalent throughout 2005, the Company’s net interest margin
      (tax-equivalent basis) narrowed by five basis points to 4.17% from 4.22% a
      year
      ago.





The
      Company’s primary market area of Nassau, Suffolk and Queens Counties, provides
      ample opportunity for deposit growth and commercial and residential lending.
      Well over four million people live and work in this contiguous area and over
      120
      thousand businesses also call this home. Higher real estate values and consumer
      spending continued to drive the local economy during 2005, albeit at a slower
      pace than in recent years. The diversity of the local marketplace combined
      with
      a highly educated work force has produced a fertile growth area for small
      business creation, particularly in the high-tech, medical, biotech and services
      sectors. The Company’s lending, cash management and deposit products have been
      developed to address the diverse credit-related needs of the businesses,
      municipalities and residents in this area. Continued growth in consumer,
      business, professional services and municipal deposits is expected to fund
      projected loan growth in 2006. Loan demand once again improved during 2005.
      On a
      year over year basis, total gross loans and leases grew, on average, by 13.0%
      versus 2004. On a spot basis, year-end 2005 loans and leases outstanding were
      $114 million (or 14.6%) above the comparable 2004 date. Consumer spending again
      supported the local and national economies during 2005, however, an increase
      in
      business demand and investment was also evident during the year. Mortgage
      refinance activity, while not at levels experienced several years ago, improved
      somewhat in 2005. Higher real estate values continued to provide a “wealth
      effect” for consumers that propelled spending throughout the year. However, as a
      result of the increased volatility of world events, growth in short-term
      interest rates and the continued overall weakness of the U.S. dollar, many
      businesses have yet to increase their capital investment in infrastructure
      to
      support expansion in a meaningful way. Many economic signs point to a more
      pronounced economic expansion during 2006 for the corporate sector throughout
      the country, a critical element of the Company’s core business model. The
      Company enters 2006 hopeful that an improved outlook for its business clientele
      will translate into greater demand for all varieties of credit and deposit
      products. Management of the Company is, however, well aware that any economic
      improvement is inextricably linked to both the outlook for interest rates and,
      more importantly, the shape of the yield curve. These issues, coupled with
      volatile geopolitical events occurring half a world away from the Company’s
      trade area, may also negatively impact near-term economic growth.





Management **** of
      the
      Company has historically been very conservative with respect to granting credit
      to current and prospective borrowers. Coupled with the continued economic
      uncertainty both locally and nationally, management expects that loan growth
      of
      approximately 8% to 10% in the Company’s core competencies of commercial and
      industrial credits, commercial mortgages and equipment leasing will be achieved
      in 2006. It is expected that spreads will continue to tighten as competitive
      pressures and a flat interest rate yield curve result in thin margins on most
      loan offerings. Funding costs are expected to rise during 2006 as the Federal
      Open Market Committee (“FOMC”), under new leadership, may increase the overnight
      funds rate by up to an additional 25 to 50 basis points from current levels.
      Although the asset sensitivity inherent in the Company’s balance sheet would
      normally result in an improved net interest margin in a period of rising rates,
      the lack of slope in the yield curve is expected to mitigate this improvement
      again in 2006. Management expects that, absent a change in the shape of the
      yield curve, the Company’s net interest margin will decline modestly in 2006
      from current levels.





Excluding
      the loan portfolio, asset growth in 2006 will likely come from the fixed income
      investment portfolio, primarily in the medium-duration, taxable area. The
      Company’s branch network is expected to provide low-cost core deposit funding to
      support anticipated asset growth. The Company will continue to aggressively
      pursue product delivery expense reductions and operating efficiencies along
      with
      revenue-generating sales initiatives to improve net income.





**Net
      Interest Income**





***2005
      versus 2004***





Net
      interest income, the difference between interest earned on loans 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 FOMC, which periodically adjusts
      the Federal funds rate, the rate at which banks borrow funds from one another
      on
      an overnight basis. During 2005, the FOMC increased the Federal funds rate
      eight
      times from its low of 2.25% to its year-end 2005 level of 4.25%. Since 2004,
      the
      FOMC has increased the Fed funds rate 14 consecutive times by a total of 350
      basis points.


*Table
          of Contents*


During
      2005, net interest income increased by 2.2% to $58.5 million. This improvement
      was driven by an increase in average interest-earning assets of $33 million
      (2.4%), primarily loans and short-term investments. Growth in commercial loans,
      commercial mortgages and lease receivables led the $95 million or 13.0% increase
      in average loans outstanding to $830 million in 2005 versus 2004. The loan
      growth resulted from several sources, most notably our relationships with
      experienced builders that the Company has successfully worked with for many
      years, commercial lending opportunities developed in Queens County and expansion
      of the equipment leasing portfolio. Management of the Company expects that
      economic growth in 2006 will provide additional opportunity for the Company’s
      equipment leasing subsidiary, SWLC, to further expand its portfolio. SWLC has
      expanded beyond its traditional base of computer and office equipment over
      the
      past five years through cross-sell opportunities developed by the Bank’s
      relationship officers. Average short-term investments, principally reverse
      repurchase agreements used to collateralize municipal balances, increased by
      $21
      million in 2005. Average investment securities declined by $84 million (13.7%)
      to $527 million primarily due to a lack of economically advantageous
      reinvestment opportunity due to the flat yield curve prevailing throughout
      2005.
      Cash flows from the Bank’s mortgage-backed portfolio and maturing short-term
      municipal investments were utilized, in part, to support loan growth. Short-term
      (under one year) tax-exempt municipal securities and mortgage-backed securities
      declined by $60 million and $53 million, respectively. Somewhat offsetting
      this
      contraction was an increase of $39 million in U.S. Government Agency securities.
      As of December 31, 2005, approximately 82% of the Company’s investment portfolio
      was owned and managed by SB Portfolio.





Average
      interest-earning assets have grown by 2.4%, 9.2% and 12.3% in 2005, 2004 and
      2003, respectively. Low-cost core deposits, principally demand deposits, savings
      accounts and money market accounts, have funded the asset expansion during
      the
      past three years. Growth in each of these deposit categories offset reductions
      in both retail and large denomination certificates of deposit and served to
      mitigate growth in the Company’s cost of funds in 2005 despite another year of
      higher short-term interest rates.





Average
      core deposit balances increased by $61 million or 6.4% to $1 billion in 2005.
      The growth and retention of low-cost core deposit balances is one of the
      Company’s top strategic priorities since the growth of these deposits is a key
      element in the Company’s expansion strategy. These low-cost deposits also are
      critical to the Company’s efforts to improve net income through the widest
      possible net interest margin. During 2005, average core deposit balances
      represented 78% of total deposits, unchanged from 2004 and up from 74% in 2003.
      The maturation of branches opened in the past three years, the expansion of
      the
      Professional Services Group’s book of business and an increase in municipal and
      commercial deposit relationships were responsible for growth in all core deposit
      categories. Average demand deposit balances grew by $20 million or 6.8% in
      2005
      and $45million or 18.3% in 2004. Average savings deposits expanded by $41
      million or 6.2% on a year to year basis. This growth resulted primarily from
      higher levels of rate-indexed savings accounts (up 84%). During 2005, the
      Company’s fully taxable equivalent (FTE) net interest margin contracted by five
      basis points to 4.17%, from 4.22% a year ago. The narrower margin resulted
      from
      multiple factors, most notably higher short-term interest rates and a flat
      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 interest-earning
      assets, the Company’s yield on average interest-earning assets 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 the Company’s supporting funds to
      1.76% in 2005.


*Table
          of Contents*


The
      following table summarizes the net interest margin on a quarterly basis for
      2005.





4th
                Qtr
            
            3rd
                Qtr
            
            2nd
                Qtr
            
            1st
                QtrInterest-earning
                assets:Securities
            
            
            3.84
            %
            
            3.66
            %
            
            3.74
            %
            
            4.14
            %Federal
                Home Loan Bank and other restricted stock
            
            
            5.60
            
            
            5.48
            
            
            4.13
            
            
            2.70Federal
                funds sold
            
            
            3.90
            
            
            3.70
            
            
            2.84
            
            
            -Securities
                purchased under agreements to resell
            
            
            3.89
            
            
            3.33
            
            
            2.87
            
            
            2.27Interest-bearing
                deposits
            
            
            2.70
            
            
            2.63
            
            
            2.43
            
            
            2.12Loans
            
            
            7.78
            
            
            7.52
            
            
            7.46
            
            
            7.07Total
                interest-earning assets
            
            
            6.19
            %
            
            5.98
            %
            
            5.88
            %
            
            5.64
            %Interest-bearing
                liabilities:Savings
                deposits
            
            
            2.09
            %
            
            1.93
            %
            
            1.68
            %
            
            1.39
            %Time
                deposits
            
            
            3.64
            
            
            3.27
            
            
            2.87
            
            
            2.11Total
                savings and time deposits
            
            
            2.58
            
            
            2.33
            
            
            1.99
            
            
            1.59Federal
                funds purchased
            
            
            4.12
            
            
            3.53
            
            
            3.07
            
            
            2.62Securities
                sold under agreements to repurchase
            
            
            3.95
            
            
            3.53
            
            
            2.97
            
            
            2.86Other
                borrowed funds
            
            
            4.14
            
            
            3.62
            
            
            3.13
            
            
            2.76Junior
                subordinated debentures
            
            
            7.72
            
            
            7.18
            
            
            6.69
            
            
            6.22Total
                interest-bearing liabilities
            
            
            2.72
            %
            
            2.49
            %
            
            2.20
            %
            
            1.76
            %Net
                interest margin - tax-equivalent basis
            
            
            4.12
            %
            
            4.10
            %
            
            4.19
            %
            
            4.29
            %





Management
      anticipates a modest narrowing of the net interest margin in 2006 despite
      projected growth in low-cost core deposit balances and expansion of the loan
      and
      lease portfolio. Further increases in short-term rates will increase the
      Company’s cost of funds while a continuation of the flat yield curve from
      overnight funding out to ten years will create additional pricing pressure
      in
      the loan portfolio. Management expects that the recently opened Westbury branch,
      the continued expansion of the Company’s existing retail branches and expected
      growth in the municipal and professional services sectors will provide access
      to
      additional low-cost sources of funds as well as provide significant opportunity
      to expand the Company’s loan portfolio. The Company has been very successful in
      its efforts to develop loan growth in Queens County and will continue to
      strategically target this market during 2006. Other specific geographic areas
      such as northwestern Nassau County, the Deer Park corridor and the south shore
      of western Suffolk County along with additional residential development
      financing are expected to provide ample opportunity for portfolio growth over
      the next year. Management of the Company expects that the existing formula
      of
      high touch personal service delivered by experienced relationship officers,
      coupled with customers dissatisfied with the degradation of their service
      quality resulting from consolidation of the local banking market, will again
      produce numerous commercial and municipal banking relationship opportunities
      for
      both deposits and loans that will improve profitability in 2006 and
      beyond.





Average
      total loans grew by 13.0%, 12.7% and 11.7% in 2005, 2004 and 2003, respectively.
      At the same time that this growth has been achieved, credit quality in the
      Company’s loan portfolio has improved each year. Nonaccrual loans declined to $3
      million or 0.3% of total loans as of December 31, 2005, the lowest level in
      15
      years, while the allowance for probable loan losses as a percentage of
      nonaccrual loans has risen to 512%, its highest level in 17 years.





Although
      short-term rates increased again during 2005, they remained low enough to
      support growth in residential construction and remodeling and commercial real
      estate development expansion, each of which is only expected to abate in the
      next few years because of a finite amount of available land in the Bank’s trade
      area. These factors, along with a targeted Queens County calling effort, the
      fallout from the exit of a major lender from the local commercial marketplace
      during 2004 and an expanded commercial lending staff were the primary reasons
      for the growth in the Company’s loan portfolio during the past year. Management
      of the Company expects additional opportunity for loan growth during the next
      twelve months as the result of additional penetration in the Queens marketplace,
      a large and diverse market with over 50,000 businesses and two million
      residents, where the Company has only begun to improve its corporate visibility
      in the past five years. A suite of competitive loan and deposit products, along
      with numerous equipment leasing options offered by SWLC, provide commercial
      lenders, business development officers and branch managers with an array of
      products suitable for most types of relationships. These products, coupled
      with
      responsive, personal customer service provided by a group of highly experienced
      bankers, will enable the Company to take advantage of opportunities presented
      by
      the consolidation of the local banking market as well as provide an entrée into
      any new markets that demonstrate an opportunity to enhance stockholder
      value.


*Table
          of Contents*


Average
      commercial loans, mortgages and leases grew at rates of 9.8%, 13.1% and 44.7%,
      respectively, in 2005. At December 31, 2005, total gross loans and leases
      outstanding amounted to $892 million, up 14.6% when compared to the comparable
      2004 date. The year-end loan portfolio was composed of approximately 47%
      commercial mortgages, 34% commercial loans, 10% residential mortgages and home
      equity lines of credit and 9% all other loans and leases. It is expected that
      the 2006 loan mix will remain, on a percentage basis, approximately the same
      as
      2005.





Based
      upon recent local and national economic forecasts, management of the Company
      anticipates that loans outstanding will grow at a rate of 8% to 10% in 2006.
      The
      continued consolidation of the New York City and Long Island banking markets
      still provides the greatest potential for loan growth. As local and national
      money center and regional bank competitors continue to enter the local market
      through acquisition and de novo branching strategies, many retail, commercial
      and municipal customers will benefit from a stable, locally run community bank
      with an excellent reputation, a proven service model and a strong capital base.





Management
      of the Company is committed to high-quality loan growth. A comprehensive credit
      review process provides a quality control tool that attempts to ensure that
      only
      high-quality loans are brought to the credit committee for consideration. This
      rigorous process is of paramount importance as the Company attempts to grow
      market share while competing with far larger institutions by offering an
      improved product mix during 2006 and beyond.





***2004
      versus 2003***





Net
      interest income increased by 7.7% to $57.2 million during 2004 as the result
      of
      growth in average interest-earning assets of $116 million (up 9.2%). Growth
      in
      loans and tax-exempt municipal securities accounted for much of the asset
      expansion. Increases in commercial loans, commercial mortgages and lease
      receivables led the $83 million or 12.7% increase in average loans outstanding
      in 2004 versus 2003. Average investment securities grew by $39 million or 6.7%
      due to growth of $36 million short-term (under one-year) tax-exempt municipal
      securities. Somewhat offsetting this growth was a $4 million decline in
      mortgage-backed issues. Primarily funding the growth in interest-earning assets
      was a $92 million (10.6%) increase in core deposits, representing 78% of total
      deposits in 2004 versus 74% in 2003. Growth in demand deposits ($45 million)
      and
      savings balances ($47 million) accounted for the core deposit expansion in
      2004.





During
      2004, the Company’s net interest rate margin narrowed to 4.22% from 4.31% 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. Despite 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 declined by eight basis points to 5.14%. Higher short-term
      interest rates, partially offset by continued growth in low-cost sources of
      core
      funding, resulted in a one basis point increase in the average rate paid on
      supporting funds to 0.92% in 2004.





**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 short-term price differences by
      selling them in the near term. The Company did not hold any trading securities
      at December 31, 2005 and 2004.





At
      December 31, 2005, the Company held $522 million in AFS securities (97% of
      the
      investment portfolio) at a pre-tax unrealized net loss of $6.9 million versus
      an
      unrealized net loss of $344 thousand at year-end 2004. At year-end 2005, the
      AFS
      portfolio was divided into the following categories: 4% corporate and other
      securities; 4% tax-exempt municipal paper; 55% 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
      $16
      million, was composed entirely of Agency securities.


*Table
          of Contents*


After
      two
      years of relatively favorable bond market conditions, the yield curve flattened
      in 2005 creating a challenging interest rate environment. In light of the flat
      yield curve, along with an upward bias in short-term interest rates, the Company
      maintained its defensive investment posture. 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
      accordingly so as 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 shorter-lived securities. A shorter-lived
      security is preferred to a longer dated maturity in a rising rate environment
      because the longer the maturity of a security, the greater the sensitivity
      of
      its market value to changes in interest rates.





Security
      selection is governed by the Company’s investment policy, and serves to
      supplement the Company’s asset/liability position. Securities such as callable
      Agencies, 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,
      remains a prudent strategy and is expected to continue for the foreseeable
      future.





The
      Company’s investment portfolio decreased by $460 thousand at year-end 2005
      versus the comparable 2004 date primarily as the result of reductions in
      tax-exempt municipal securities (down $35 million), MBS issues (down $63
      million) and corporate securities (down $15 million) which were offset by growth
      in Government Agency securities (up $113 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
      Company’s holdings of Agency securities increased during 2005 as these issues
      provided the best risk-adjusted reward among the allowable investments in the
      Company’s investment policy. 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 $62 million and $89 million in 2005
      and 2004, respectively. Management expects that the trend toward lower paydowns
      will continue in 2006 due to declining refinance opportunities available to
      the
      consumer in the face of higher forecasted interest rates.





The
      Company’s investment portfolio is very low-risk in nature due to its
      concentration of U.S. Government Agency, local municipal notes and AAA-rated
      MBS
      issues. As of December 31, 2005, the MBS portfolio had an average life of
      approximately 3.1 years after adjusting for historical prepayment patterns.
      Approximately 77% 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
      5% of the total investment portfolio as of year-end 2005. The Government Agency
      portfolio has final maturities ranging from one to fifteen years and those
      that
      are callable have call dates in 2006 and 2007.


*Table
          of Contents*


The
      Company’s investment subsidiary, SB Portfolio, contributed significantly to the
      success of the Company during 2005. This subsidiary now holds and manages
      approximately 82% of the Company’s investment portfolio. The majority of
      securities domiciled with SB Portfolio are Government Agency and MBS and a
      portion of its portfolio also includes long-term tax-exempt paper. SB Portfolio
      has its own investment policy and Board of Directors; however, it still adheres
      to the stringent safety and quality standards present throughout the Company
      in
      its investment evaluation process. Management of the Company expects that SB
      Portfolio will continue to grow during 2006 through the reinvestment of its
      own
      interest income as well as through additional capital infusions from the parent
      Company if market conditions warrant. The Company provided $50 million in
      additional capital to SB Portfolio during 2005.





**Summary
      of Loan Loss Experience and Allowance for Probable Loan
      Losses**





One
      of
      management's primary objectives is to maintain a high-quality loan portfolio
      in
      all economic climates. This objective is achieved by maintaining high
      underwriting standards coupled with regular evaluation of each borrower's
      creditworthiness and risk exposure. Management seeks to avoid loan
      concentrations within industries and customer segments in order to minimize
      credit exposure. The Company's senior lending personnel work in conjunction
      with
      loan officers to determine the level of risk in the Company’s loan-related
      assets and establish an adequate level for the allowance for probable loan
      losses. An outside loan review consultant is also utilized to independently
      verify the loan classifications and the adequacy of the allowance for probable
      loan losses. Management actively seeks to reduce the level of nonperforming
      assets, defined as nonaccrual loans and other real estate owned, through
      aggressive collection efforts and, where necessary, litigation and charge-off.
      Other real estate owned properties are aggressively marketed for sale utilizing
      local commercial and residential realtors as appropriate.





As
      illustrated in Table I, the Company’s nonperforming assets decreased by $4.9
      million to $3.0 million at year-end 2005 versus 2004 following a $3.4 million
      decrease in 2004 versus 2003. At December 31, 2005, total nonperforming assets
      as a percentage of loans and other real estate owned amounted to 0.3% as
      compared to 1.0% and 1.6% at year-end 2004 and 2003, respectively. The Company
      held one commercial property in other real estate owned at year-end 2004 with
      a
      carrying value of $2.7 million. This property was sold during 2005 at a small
      gain. The year-end 2005 decline in nonperforming assets, as defined by the
      Company, resulted from a $2.2 million decrease in nonaccrual loans coupled
      with
      the aforementioned sale of the other real estate owned property of $2.7 million.
      The reduction in nonaccrual loans during 2005 resulted from the upgrade of
      several commercial credits to performing status coupled with a combination
      of
      paydowns and charge-offs.





Management
      of the Company actively reviews the level and composition of nonperforming
      assets. During 2005, this meant a continuation of the strategy of collection
      through proactive litigation combined with enhanced collateral positions on
      virtually all nonperforming assets. The decrease in nonperforming assets
      resulted in improved coverage ratios at year-end. The allowance for probable
      loan losses as a percentage of nonaccrual loans advanced to 512% from 228%
      at
      year-end 2004, while the allowance for probable loan losses as a percentage
      of
      nonaccrual loans, restructured accruing loans and loans 90 days or more past
      due
      and still accruing interest increased to 469% during 2005 from 224% a year
      ago.
      At December 31, 2005, the Company had no restructured accruing loans. Loans
      in
      this category are composed mainly of loans 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.





Based
      on
      current economic conditions, management has determined that the current level
      of
      the allowance for probable loan 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 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. 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, 2005. The provision for probable loan losses totaled
      $3.7
      million in 2005, $4.5 million in 2004 and $3.9 million in 2003. The resulting
      allowance for probable loan losses balance of $15.7 million at December 31,
      2005
      amounted to 1.8% of loans outstanding compared to 1.5% in 2004 and 2003. The
      increase in the allowance for probable loan losses in 2005 is a result of growth
      in the overall loan portfolio of $114 million or 14.6% as well as an increase
      in
      the balance of loans graded seven through ten. Loans graded in these categories
      represented 5.97% of total loans at December 31, 2005 compared to 3.51% at
      December 31, 2004. The impact of an increase in loans graded adversely was
      somewhat offset by improvements in non-accrual loans and the net recoveries
      realized in 2005.


*Table
          of Contents*


The
      Company recorded net loan recoveries of $47 thousand in 2005 versus net loan
      charge-offs of $3.2 million in both 2004 and 2003. Gross recoveries totaled
      $845
      thousand in 2005 versus $187 thousand in 2004 and $304 thousand in 2003.
      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 2006
      or any additional charge-offs that may be required during the year.





It
      is the
      present intent of management to continue to monitor the level of the allowance
      for probable loan losses in order to properly reflect 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
      portfolio. In recognition of the economic uncertainties previously elaborated
      upon, the normal risks inherent in any credit portfolio and expected growth
      in
      the loan portfolio, management anticipates that the 2006 provision for loan
      losses will approximate the level recorded in 2005. The provision is continually
      evaluated relative to portfolio risk and regulatory guidelines and will continue
      to be closely reviewed throughout the coming year. In addition, various
      regulatory agencies, as an integral part of their examination process, closely
      review the allowance for probable loan losses. Such agencies may require the
      Company to recognize additions to the allowance based on their judgment of
      information available to them at the time of their examinations.





The
      Company has no foreign loans outstanding. The concentration of loans exceeding
      10% of total loans was the Bank’s loans totaling $165 million and $120 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 not separately disclosed herein, management is not aware
      of
      information relating to any material credit that would impact the ability of
      those borrowers to comply with loan repayment terms.





TABLE
                I
            
            Analysis
                of Nonperforming Assets at December 31,(Dollars
                in thousands)
            
            2005
            
            2004
            
            2003
            
            2002
            
            2001Nonaccrual
                loans
            
            $
            3,069
            
            $
            5,274
            
            $
            8,666
            
            $
            6,317
            
            $
            8,920Other
                real estate
            
            
            -
            
            
            2,650
            
            
            2,650
            
            
            -
            
            
            -Total
                nonperforming assets
            
            $
            3,069
            
            $
            7,924
            
            $
            11,316
            
            $
            6,317
            
            $
            8,920Restructured
                accruing loans
            
            
            -
            
            
            -
            
            
            -
            
            $
            107
            
            $
            284Loans
                90 days or more past due and still accruing interest
            
            $
            281
            
            $
            89
            
            $
            149
            
            $
            129
            
            $
            405Total
                loans outstanding
            
            $
            892,022
            
            $
            778,191
            
            $
            711,216
            
            $
            620,384
            
            $
            551,598Allowance
                for probable loan losses
            
            $
            15,717
            
            $
            12,020
            
            $
            10,732
            
            $
            10,046
            
            $
            9,255Key
                ratios:Allowance
                for probable loan losses as a percent of total loans
            
            
            1.8
            %
            
            1.5
            %
            
            1.5
            %
            
            1.6
            %
            
            1.7
            %Nonaccrual
                loans as a percent of total loans
            
            
            0.3
            %
            
            0.7
            %
            
            1.2
            %
            
            1.0
            %
            
            1.6
            %Nonperforming
                assets (1) as a percent of total loans and other real
                estate
            
            
            0.3
            %
            
            1.0
            %
            
            1.6
            %
            
            1.0
            %
            
            1.6
            %Allowance
                for probable loan losses as a percent of nonaccrual loans
            
            
            512.1
            %
            
            227.9
            %
            
            123.8
            %
            
            159.0
            %
            
            103.8
            %Allowance
                for probable loan losses as a percent of nonaccrual loans, restructured
                accruing loans and loans 90 days or more past due and still accruing
                interest
            
            
            469.2
            %
            
            224.1
            %
            
            121.7
            %
            
            153.3
            %
            
            96.3
            %





(1)
            Excludes
                restructured accruing loans and loans 90 days or more past due and
                still
                accruing interest.


*Table
          of Contents*


**Other
      Income**





***2005
      versus 2004***





Other
      income decreased by 17.6% in 2005 when compared to 2004, principally the result
      of lower net security gains. 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 income from bank owned life
      insurance (BOLI) and other operating income. Somewhat offsetting the
      aforementioned positive factors was a decline in deposit service charge income
      (down 7.5%) 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. Management of the
      Bank is committed to further improving the collection rate during 2006 to
      enhance this valuable source of fee income. 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 and $5.8 million
      in 2003.





BOLI
      income improved by $122 thousand in 2005 as the result of the timing of that
      asset’s purchase in February 2004.





Other
      operating income improved by $92 thousand or 5.2% in 2005 following an increase
      of 3.6% in 2004. Growth in several categories accounted for the improvement,
      principally growth in mortgage loan sale fees, financial products (customer
      swap) fees, merchant services income and income from the Bank’s recently formed
      title insurance subsidiary, State Title Agency, LLC. Somewhat offsetting these
      positive factors were lower foreign exchange fees, letter of credit fees and
      reduced annuity commission income. 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 and
      the
      Bank’s sweep program during 2005. Two new revenue sources were developed during
      the past year: customer interest rate swaps and commercial title insurance
      through State Title Agency, LLC. 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. State Title Agency LLC, a joint
      venture formed during the fourth quarter of 2004, provides title insurance
      to
      the Bank’s commercial and industrial customer base. Each of these products is
      expected to improve other income generation in 2006 as the Company further
      penetrates the geographic areas surrounding its branch network throughout
      Nassau, Suffolk and Queens Counties. While loan growth has been the hallmark
      of
      the Company’s success since its formation nearly forty years ago, a strong
      branch sales culture has been developed throughout the organization over the
      past ten years. Management of the Company is confident that, armed with
      competitive products and effective back office support, relationship officers
      will be able to improve their sales totals and collection rates. The quality
      of
      the Company’s staff is the key to further growth of other income in 2006 and in
      subsequent years. Management of the Company is confident that the right people
      are in place and they will produce superior results over time. Every effort
      will
      continue to be made to speed the development of new products to satisfy customer
      needs in an effort to provide superior return on investment for our
      stockholders.





***2004
      versus 2003***





Other
      income decreased by 22.9% in 2004 when compared to 2003, solely the result
      of
      lower net security gains. During 2004, the Company recorded $2.1 million in
      net
      security gains versus $5.8 million in 2003. Excluding the impact of net security
      transactions in each year, other income totaled $4.9 million in 2004, up 48.5%
      versus 2003. This improvement resulted from growth in several categories,
      including service charges on deposits (up 40.9%), other operating income (up
      3.6%) and the addition of income associated with the purchase of BOLI during
      2004. A significant increase in return item charges coupled with higher foreign
      exchange fees, letter of credit fees, merchant services income and ATM fees
      accounted for the improvement in income. Somewhat offsetting these positive
      factors were lower mortgage loan sale fees and reduced sweep account
      revenue.


*Table
          of Contents*


**Operating
      Expenses**





***2005
      versus 2004***





As
      noted
      elsewhere in this report, total operating expenses increased by $83.6 million
      to
      $124.6 million in 2005 from a year ago. Higher levels of legal fees, salaries
      and employee benefits, increased occupancy, marketing and advertising and growth
      in audit and assessment fees accounted for the increase in 2005 expenses.
      Partially offsetting these higher costs were reductions in equipment, credit
      and
      collection and other operating expenses. Legal expenses grew by $80.7 million
      during 2005. The largest component of the Company’s legal expenses relates to
      ongoing litigation arising out of the Bank’s deposit relationship with Island
      Mortgage Network, Inc. (“Island Mortgage” or “IMN”) and its affiliates, as
      previously disclosed in the Company’s Form 10-Q, 10-K and 8-K filings with the
      Securities and Exchange Commission (“SEC”). These expenses totaled $82.8
      million, $2.3 million and $3.8 million in 2005, 2004 and 2003, respectively.
      As
      previously noted in the Company’s form 8-K filed with the SEC on February 1,
      2006, the Company received an adverse jury verdict on January 30, 2006, in
      the
      warehouse lender case (formerly captioned *Household
      Commercial Financial Services, Inc. et al v. Action Abstract, Inc., et
      al* ,
      and now
      captioned *HSA
      Residential Mortgage Services of Texas v. State Bank of Long
      Island* )
      which
      has been pending since 2002. The jury verdict awarded $43.9 million in
      compensatory damages to plaintiff, HSA Residential Mortgage Services of Texas,
      Inc. Prejudgment interest (which will exceed $22 million), in addition to
      certain other potential compensatory damages which have not yet been ruled
      upon
      by the court, could bring the total judgment to approximately $74.2 million.
      The
      Company recorded the full $74.2 million nonrecurring expense in its 2005
      financial statements. Additional IMN-related legal expenses incurred during
      2005, including defense costs and settlements, increased by $6.6 million when
      compared to 2004. During 2006, the Company expects to incur additional costs
      related to the IMN jury verdict, including costs related to a post-verdict
      motion to the District Court for the Eastern District of New York asking the
      court to set aside the verdict and enter judgment for State Bank of Long Island
      or, in the alternative, grant a new trial ,
      or, in
      the alternative, reduce the amount of the judgment .
      If that
      motion is unsuccessful, the cost of pursuing an appeal to the United States
      Court of Appeals for the Second Circuit, including the costs of obtaining a
      supersedeas bond to stay the enforcement of the judgment and the accrual of
      post-judgment interest during the pendency of such an appeal will also need
      to
      be incurred. Certain of these costs, in particular the accrual of post judgment
      interest, are dependent upon the final amount of the judgment to be ruled upon
      by the court and are not specifically quantifiable at this point in
      time.





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
      lenders not related to the Bank. The Bank never had a lending relationship
      with
      Island Mortgage.





On
      June
      30, 2000, the Banking Department of the State of New York suspended Island
      Mortgage’s mortgage banker license. On July 19, 2000, Island Mortgage and its
      publicly held parent company, AppOnline.com, Inc., filed a petition under
      Chapter 11 of the Bankruptcy Code in the Eastern District of New York.
      Subsequently, certain of Island Mortgage’s lenders filed an involuntary
      bankruptcy petition against Action Abstract, Inc., an entity to which they
      apparently had regularly wired funds in connection with their dealings with
      Island Mortgage. At the request of the Trustee in the Island Mortgage bankruptcy
      case, various bankruptcy cases involving Island Mortgage entities were later
      substantively consolidated.





In
      the
      course of those bankruptcy cases, it has been alleged that Island Mortgage
      engaged in a widespread pattern of fraud directed at lenders, title agents,
      closing companies and others with whom Island Mortgage regularly dealt. A number
      of Island Mortgage’s creditors have since asserted that the Bank participated in
      Island Mortgage’s alleged fraudulent scheme. Currently, there are two Island
      Mortgage-related litigations pending in which claims have been asserted against
      the Bank (and, in one case, the Company.) Those litigations are:





-- *Broward
      Title Co. v. Alan Jacobs, et al.* ,
      Adv.
      Proc. No. 01-8181, Bankruptcy Court for the Eastern District of New York. On
      or
      about July 9, 2002, Broward’s motion to sever its claims against the Bank (and
      certain other defendants) was granted, allowing Broward to conduct a nonjury
      trial of its claims against the remaining defendants in the bankruptcy court.
      Broward’s claims against 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.





-- *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).
      On or
      about June 4, 2002, plaintiffs Household Commercial Financial Services, Inc.
      (“Household”), Matrix Capital Bank (“Matrix”), and HSA Residential Mortgage
      Services of Texas (“RMST”), commenced this adversary proceeding with respect to
      the Bank. The Complaint alleges that plaintiffs extended lines of credit to,
      and
      entered into mortgage purchase agreements with, defendant Island Mortgage.
      According to the Complaint, millions of dollars of funds that plaintiffs
      deposited into the accounts at the Bank maintained by Island Mortgage and its
      related entities to fund mortgages were misappropriated as the result of Island
      Mortgage’s alleged scheme to defraud plaintiffs and unjustly enrich defendants.
      Plaintiffs claim the following with respect to the Bank: 1) the Bank aided
      and
      abetted the allegedly fraudulent scheme perpetrated by Island Mortgage; 2)
      the
      Bank aided and abetted in a breach of the fiduciary duties an Island Mortgage
      affiliate allegedly owed to plaintiffs; and, 3) the Bank was negligent in
      failing to recognize and act on signs that Island Mortgage was allegedly
      misappropriating the funds plaintiffs advanced to Island Mortgage. Plaintiffs
      claim they are entitled to not less than $52 million, plus interest and punitive
      damages.


*Table
          of Contents*


On
      January 31, 2005, the bankruptcy court ruled on the Bank’s motion for summary
      judgment. The plaintiffs’ claims for negligence and aiding and abetting a breach
      of fiduciary duty were dismissed. The claim for aiding and abetting fraud was
      not dismissed, although the court ruled that one of the plaintiffs (Matrix)
      could not seek damages for the period after June 6, 2000. On October 17, 2005,
      the Bank announced a settlement with Household and an agreement in principle
      with Matrix with respect to each of their separate claims. The Matrix agreement
      is now fully executed.





On
      January 3, 2006, a trial on the remaining claim, aiding and abetting fraud,
      brought by the remaining plaintiff, RMST, commenced in the District Court for
      the Eastern District of New York. On January 30, 2006, the jury rendered a
      verdict awarding $43.9 million in compensatory damages to plaintiff RMST.
      Prejudgment interest (which will exceed $22 million), in addition to certain
      other potential compensatory damages which have not yet been ruled upon by
      the
      court, could bring the total judgment to approximately $74.2 million. The
      Company has recorded the full $74.2 million nonrecurring expense in its 2005
      financial statements. During 2006, the Company expects to continue to incur
      costs related to the IMN jury verdict, including costs related to a post-verdict
      motion to the District Court for the Eastern District of New York asking the
      court to set aside the verdict and enter judgment for the Bank, or, in the
      alternative, grant a new trial, or, in the alternative, reduce the amount of
      the
      judgment. If that motion is unsuccessful, the costs of pursuing an appeal to
      the
      United States Court of Appeals for the Second Circuit, including the costs
      of
      obtaining a supersedeas bond to stay the enforcement of the judgment, and the
      accrual of post-judgment interest during the pendency of such an appeal will
      also need to be incurred.





The
      Bank
      believes it has a number of meritorious arguments for its post-verdict motion
      and a possible appeal to the United States Court of Appeals for the Second
      Circuit and will pursue its rights vigorously; however, the ultimate outcome
      of
      the IMN lawsuits cannot be predicted with certainty. It also remains possible
      that other parties may pursue additional claims against the Bank related to
      the
      Bank’s dealings with IMN and its affiliates. The Bank’s legal fees and expenses
      will continue to be significant, and those costs, in addition to any costs
      associated with settling the IMN-related litigations or satisfying any adverse
      judgments, could have a material adverse effect on the Bank’s results of
      operations or financial position.





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





Operating
                expenses of State Bancorp, Inc.
              (dollars
                in thousands)
              For
                the years ended December 31,
            
            2005
            
            2004
            
            Over/
              (under)
              2004Salaries
                and other employee benefits
            
            $
            26,205
            
            $
            23,898
            
            
            10
            %Occupancy
            
            
            4,733
            
            
            4,001
            
            
            18Equipment
            
            
            1,389
            
            
            1,464
            
            
            (5
            )Legal
            
            
            83,584
            
            
            2,859
            
            
            N/M
            (1)Marketing
                and advertising
            
            
            1,232
            
            
            1,001
            
            
            23Credit
                and collection
            
            
            660
            
            
            748
            
            
            (12
            )Audit
                and assessment
            
            
            1,346
            
            
            1,222
            
            
            10Other
                operating expenses
            
            
            5,492
            
            
            5,850
            
            
            (6
            )Total
                operating expenses
            
            $
            124,641
            
            $
            41,043
            
            
            204
            %





(1)
            N/M
                - denotes not meaningful.





Salaries
      and other employee benefits increased by $2.3 million (9.7%) during 2005 as
      the
      result of staff expansion coupled with higher medical and pension costs. The
      creation of a Professional Services Group (PSG) in 2004, the addition of several
      commercial lending officers in early 2005 and the opening of a new branch in
      Westbury accounted for much of the Company’s growth in staff. Increased health
      care costs, FICA and payroll tax expenses, and related increases in 401(k)
      and
      employee stock ownership plan (ESOP) contributions added to the growth in
      salaries and benefits costs during 2005. Also contributing to the growth in
      operating expenses during 2005 were higher levels of occupancy costs, marketing
      and advertising expenses and audit and assessment fees. Occupancy costs grew
      by
      18.3% as the result of additional space occupied by the PSG staff, higher
      utility costs and increased maintenance and repair expenses incurred during
      2005. Marketing and advertising expenses increased by 23.1% as the result of
      additional product promotions and corporate image advertising. Audit and
      assessment costs grew by 10.1% due to higher costs related to Sarbanes-Oxley
      compliance. Somewhat offsetting the foregoing increases were reductions in
      equipment expense (5.1%), credit and collection expenses (11.8%) and other
      operating expenses (6.1%). Excluding all IMN-related expenses in both 2005
      and
      2004 would have resulted in a year over year cost increase of 7.9% in 2005
      versus 2004.


*Table
          of Contents*


Excluding
      IMN-related costs, the growth in total operating expenses recorded by the
      Company during 2005 is reflective of the Company’s recent trend as it has
      expanded its branch network and corporate infrastructure since 2001. The expense
      increases experienced during 2004 and 2003 were primarily due to increases
      in
      staff to support growth in the Company’s core business model while the higher
      expenses recorded in 2002 and 2001 were due primarily to the previously noted
      IMN litigation, the acquisition of SWLC in 2001 and the opening of five new
      branch offices during the same period. Wherever possible, the Company strives
      to
      embrace and utilize existing and emerging technologies to enhance productivity
      to reduce the level of staff and infrastructure necessary to support the growth
      and expansion of the Company’s primary lines of business. Management 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%, commensurate with our high performing peers. This goal can only
      be
      accomplished through a combination of revenue growth and stringent expense
      control in all areas. Although the expansion of staff and branch facilities
      in
      recent years, along with growth in both the lending staff and operational
      support functions, has resulted in rates of operating expense growth above
      corporate targets, management is confident that these investments in the
      Company’s core business model will pay dividends in the coming years. Total
      operating expenses will decline in 2006 as a result of significant IMN-related
      costs absorbed during 2005. Significant expenses associated with an appeal
      of
      the IMN jury verdict will continue to be incurred in 2006. However, those costs
      will not be quantifiable until a final judgment amount has been determined
      by
      the court. Excluding IMN-related expenses, the Company expects core operating
      expenses to rise at a rate of approximately 5% to 7% in 2006 as the result
      of
      the opening of the new branch in Westbury in January 2006, higher projected
      medical and pension expenses and the planned addition to staff of several
      lending officers to support the Company’s core commercial lending function in
      2006. Expense control measures, including strict guidelines with respect to
      increases in base and supplementary compensation for current staff, will
      continue to be observed. Excluding the impact of any 2006 IMN-related expenses,
      which are not yet specifically quantifiable, the Company’s management expects
      that the projected expansion of the Company's asset and revenue bases will
      offset expected growth in the Company’s operating expenses. The rate of growth
      in loans, core deposit balances and fee-based sources of revenue planned for
      the
      coming year is expected to more than offset the anticipated increase in
      operating expenses that comes with normal growth and expansion.





The
      Company’s primary expense control rates of measurement are the operating
      efficiency ratio and the ratio of total operating expenses to average assets.
      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 and jury verdict expenses, the Company’s 2005 operating
      efficiency ratio would have been 71.4% versus 64.2% and 70.7% in 2004 and 2003,
      respectively. Prior to the IMN litigation and the recent branch expansion
      program, the Company’s efficiency ratio was 52.5% in 2000. It is one of
      management’s primary strategic objectives to reduce the efficiency ratio to this
      level once again. The second measure of expense control utilized by the Company
      is total operating expenses to average assets. Excluding IMN settlement and
      jury
      verdict expenses, the Company recorded ratios of 3.04% in 2005 and 2.77% and
      3.03% in 2004 and 2003, respectively, in this category. Management of the
      Company is extremely cognizant of expense management and places great emphasis
      on control of operating expenses, but always in the context of prudent growth
      and expansion of the Company’s branch network and of profitable lines of
      business with a quantifiable return on equity and accretive impact on earnings
      per share. Management is also aware, however, that the appropriate resources
      necessary to grow the Company’s revenue base must also be made available in
      order to improve earnings for the long term. Along these lines, management
      also
      monitors the ratio of average assets per FTE employee and, at over $5 million
      per employee, the Company ranks in the top 10% of its peer group in this
      category. This efficient utilization of staff is another reason behind the
      Company’s historically excellent record of growth in earnings and assets.





Rates
      of
      growth in both net interest income and other income are expected to outpace
      increases in operating expenses (excluding IMN-related expenses) in the coming
      year, thereby resulting in anticipated improvements in each of the foregoing
      expense control ratios in 2006. The Company’s long-term goal, as stated in
      numerous previous stockholder communications, continues to be to reduce its
      operating efficiency ratio to a level of 55% or less and to lower the operating
      expenses to average assets ratio to 2.25% or lower. While this is not expected
      to occur during 2006, largely as the result of costs related to the IMN
      litigation, it remains a long-term objective to continually improve these ratios
      in both absolute terms and in relation to the Company’s community bank peer
      group. An analysis of the remaining components of 2005 operating expenses,
      by
      category, follows.


*Table
          of Contents*


Occupancy
      expenses totaled $4.7 million in 2005, an increase of 18.3% when compared to
      2004. This increase resulted from a combination of higher rental expenses,
      increased maintenance costs and higher utilities and depreciation expenses.
      The
      increase in rental costs in 2005 (up 20.6%) resulted principally from additional
      space occupied at our Mineola location during the past year coupled with the
      full year impact of costs associated with a small office leased in New York
      City
      for the Professional Services Group in mid-2004. 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. Occupancy costs
      are
      expected to rise at a noticeably slower rate in 2006 as the costs of the new
      branch in Westbury are largely offset by lower projected rates of growth in
      utilities and maintenance costs and anticipated tax certiorari proceedings
      which
      are currently pending.





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 computer software depreciation
      and
      lower equipment maintenance insurance fees. Management of the Company expects
      equipment expenses to increase moderately in 2006 as several technology
      initiatives are expected to be funded and additional equipment purchased to
      support branch expansion.





Legal
      expenses, as previously noted, increased by $80.7 million during 2005.
      Ninety-nine percent of the Company’s legal expenses relate to the ongoing IMN
      litigation previously disclosed in the Company’s Securities and Exchange
      Commission filings, including a charge of $74.2 million resulting from an
      adverse jury verdict rendered on January 30, 2006 in one of the IMN-related
      cases. Management of the Company expects that additional expenses will be
      incurred related to this litigation during 2006, the extent of which is not
      specifically quantifiable at this time.





Marketing
      and advertising costs increased by $231 thousand (23.1%) during 2005 when
      compared to 2004. 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. It is expected that this expense
      category will increase next year as the result of the new branch opening and
      expected costs to be incurred in connection with the Company’s ongoing corporate
      branding and community outreach efforts. Stringent cost control measures will
      continue to be applied to this expense category in the next twelve months.





Credit
      and collection costs declined by $88 thousand (11.8%) in 2005 versus 2004.
      Reduced expenses associated with loan collection work, principally due to
      continued improvement in the overall quality of the loan and lease portfolio,
      accounted for the bulk of the decline in this category. Also contributing to
      this decrease were lower costs associated with 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”). Audit and assessment expenses have increased by approximately 75%
      over the past two years as costs associated with SOX compliance have been borne
      by the Company. It is expected that audit and assessment fees will decline
      in
      2006 as a result of a change in outside audit firms during 2005 coupled with
      reduced SOX-related expenses as the start-up phase of complying with this
      legislation has concluded.





Other
      operating expenses declined by 6.1% to $5.5 million in 2005 versus 2004. This
      reduction resulted from improvements 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 New York State Banking
      Department assessment expenses. Management of the Company expects that operating
      expenses, in absolute terms, will continue to grow as the Company expands its
      operations, the markets it serves and the products it offers. Management
      anticipates an overall rate of increase of 5% to 7% as an expense growth
      estimate for 2006, not including litigation expenses associated with
      IMN.


*Table
          of Contents*


***2004
      versus 2003***





Operating
      expenses declined by 0.1% to $41.0 million during 2004. Higher levels of
      salaries and employee benefits costs, increased occupancy and growth in other
      operating expenses were more than offset by reductions in legal expenses,
      marketing and advertising, equipment and credit and collection costs.





Salaries
      and employee benefits costs rose by $1.2 million (5.3%) in 2004 versus 2003
      as
      the result of the creation of PSG coupled with growth in staff in several other
      areas of the Company. Increased supplementary compensation costs, health care,
      FICA expenses, and related increases in 401(k) and employee stock ownership
      plan
      contributions also added to the growth in this category.





Occupancy
      costs grew by 3.9% in 2004 to $4.0 million due principally to higher real estate
      taxes (up 26.4%), additional space occupied by PSG in New York City and
      increased utility expenses.





Equipment
      expenses decreased by 6.2% to $1.5 million in 2004 as the result of a reduction
      in computer equipment depreciation related to the Company’s mainframe system.
      Also contributing to this decrease were lower equipment rental and repair costs
      and lower equipment maintenance insurance fees.





Legal
      expenses, primarily related to the IMN litigation, declined by $1.0 million
      or
      26.0% during 2004.





Marketing
      and advertising costs decreased by $415 thousand (29.3%) during 2004. This
      decrease resulted principally from a more targeted approach to event
      sponsorships coupled with a reduction in promotions expenses as no new branches
      were opened by the Company during 2004.





Credit
      and collection costs declined by $623 thousand (45.4%) in 2004 versus 2003.
      This
      improvement was the result of a significant reduction in loan collection work
      resulting from fewer nonperforming assets due to an improvement in portfolio
      credit quality.





Other
      operating expenses increased by 11.6% to $7.1 million in 2004 when compared
      to
      2003. This growth resulted from increases in several expense categories, most
      notably, other real estate expenses and correspondent bank service
      charges.





**Effective
      Income Tax Rate**





***2005
      versus 2004 and 2003***





An
      income
      tax credit of $27.4 million was recorded in 2005 while tax provisions of $5.4
      million and $5.3 million were recorded in 2004 and 2003, respectively. 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 a surcharge of 17%. The Company’s overall effective tax rate
      (for those years that a tax provision was recorded) was 28.6% and 30.4% in
      2004
      and 2003, respectively.





The
      decrease in 2004’s effective tax rate was due to a higher level of tax-exempt
      income coupled with a reduction in fully-taxable net security gains. SB
      Portfolio, which provides investment management services to the Bank and the
      Company, managed approximately $441 million, $387 million and $302 million
      in
      assets at year-end 2005, 2004 and 2003, respectively, primarily MBS, Government
      Agency and tax-exempt municipal securities in Delaware. The income from these
      assets is exempt from New York State income taxes and totaled $17.0 million
      in
      2005, including net gains on the sale of securities of $1.1 million, $14.2
      million in 2004, including net gains of $2.2 million and $13.6 million in 2003,
      including net gains of $4.3 million. Management of the Company anticipates
      that
      the consolidated 2006 effective tax rate will be similar to that of 2004 at
      an
      approximate rate of between 29.0% and 30.0%.





The
      Company has received preliminary findings of a New York State Department of
      Taxation and Finance (the "Department") field audit with respect to New York
      franchise tax for the years ended December 31, 1999, 2000 and 2001. The
      Department contends that the Company's tax liability should be increased by
      $4,500,000 (including almost $1,400,000 in penalties and interest, and interest
      continues to accrue) for the years under examination. After deducting the
      estimated Federal tax benefit arising from this matter in the amount of
      $1,530,000, the Company’s net tax liability would be approximately $2,970,000.
      This increase in tax appears to be based on the 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. If the Department were to successfully assert
      the same position for calendar years 2002, 2003, 2004 and 2005, management
      estimates that the additional franchise tax liability for these years including
      interest would be approximately $3,900,000, after taking into consideration
      the
      estimated Federal tax benefit.


*Table
          of Contents*


The
      Company disagrees with the Department's findings and intends to vigorously
      contest any assessment based upon these findings through appropriate
      administrative and, if necessary, court proceedings. At this time, management
      believes it is more likely than not that the Company will succeed in refuting
      the Department’s position. Accordingly, no liability or reserve has been
      recognized in the consolidated balance sheets at December 31, 2005 or 2004
      with
      respect to this matter. However, no assurance can be given as to whether or
      to
      what extent the Company will be required to pay the amount of the tax liability
      asserted by the Department or whether additional tax will be assessed for years
      subsequent to calendar year 2001.





**Off-Balance
      Sheet Arrangements**





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





Commitments
      to extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since many of the commitments are expected to expire without being
      drawn upon, the total commitment amounts do not necessarily represent future
      cash requirements. The Bank evaluates each customer's creditworthiness on a
      case-by-case basis. The amount of collateral obtained, if deemed necessary
      by
      the Bank upon extension of credit, is based on management's credit evaluation
      of
      the customer. Collateral required varies, but may include accounts receivable,
      inventory, equipment, real estate and income-producing commercial properties.
      At
      December 31, 2005 and 2004, commitments to originate loans and commitments
      under
      unused lines of credit for which the Bank is obligated amounted to approximately
      $283,947,000 and $251,502,000, respectively. Approximately $256,018,000 and
      $209,148,000 of these commitments were at variable rates and $27,929,000 and
      $42,354,000 were at fixed rates at December 31, 2005 and 2004, respectively.
      At
      December 31, 2005 and 2004, the fixed rate commitments had interest rates
      ranging from approximately 4.25% to 7.75% and 1.85% to 7.25%,
      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, 2005 and 2004, the Bank had letters
      of
      credit outstanding of approximately $14,644,000 and $13,398,000, respectively.
      At December 31, 2005, the uncollateralized portion was approximately
      $2,698,000.





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. During 2005, the Bank executed customer
      interest rate swap transactions together with offsetting interest rate swap
      transactions with institutional dealers.  At December 31, 2005, the total
      gross notional amount of swap transactions outstanding was
      $9,550,000.





At
      December 31, 2004, 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. The fair value of the swap agreements was ($440,423), inclusive of
      accrued interest of $17,944, contained within other assets in the consolidated
      balance sheets. 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. 
This amount, net of taxes of $359,241, included in accumulated other
      comprehensive income (loss), 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.
      For
      the twelve months ended December 31, 2005, 2004 and 2003, the Company recognized
      interest income, net of expenses associated with unwinding the swap agreements,
      of ($169,882), $849,701 and $318,250, respectively, under the
      agreements.


*Table
            of Contents*




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 2006, $2.8 million; in 2007, $2.8 million; in
        2008,
        $2.8 million; in 2009, $2.5 million; in 2010, $2.2 million; and the remainder
        to
        2016, $2.8 million.




**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, 2005.





Payments
                due by period
              (in
                thousands)Contractual
                Obligations
            
            Total
            
            Less
                than
              1
                year
            
            1-3
                years
            
            3-5
                years
            
            More
                than
              5
                yearsLeases
                covering various Bank equipment, branches, office space and
                land
            
            $
            15,901
            
            $
            2,837
            
            $
            5,532
            
            $
            4,749
            
            $
            2,783Federal
                Home Loan Bank of New York overnight and term borrowings
            
            
            18,500
            
            
            18,500
            
            
            -
            
            
            -
            
            
            -Obligations
                under equipment lease financing
            
            
            114
            
            
            57
            
            
            57
            
            
            -
            
            
            -Junior
                subordinated debentures
            
            
            20,620
            
            
            -
            
            
            -
            
            
            -
            
            
            20,620Total
            
            $
            55,135
            
            $
            21,394
            
            $
            5,589
            
            $
            4,749
            
            $
            23,403




**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. At December 31, 2005, stockholders' equity totaled $56.4 million
      versus $101.0 million at year-end 2004. The net loss of $36.5 million, $6.1
      million in cash dividends paid on common stock and $1.2 million in capital
      utilized to repurchase shares of the Company’s common stock reduced
      stockholders’ equity by $43.8 million in 2005. During 2005, 61,657 shares of
      common stock were acquired in open market transactions as part of the Company’s
      stock repurchase plan. Approximately $1.2 million in capital was allocated
      to
      purchase these shares at an average price of $19.10 per share. Under the Board
      of Directors’ revised share 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 intend to repurchase stock in 2006.
      Somewhat offsetting the foregoing reductions to stockholders’ equity during 2005
      was an increase of $2.8 million from the reinvestment of dividends by
      stockholders participating in the Company’s dividend reinvestment
      plan.





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.





During
      2002 and 2003, the Company enhanced its Tier I capital position through the
      issuance of a total of $20 million in trust preferred securities, each through
      pooled offering structures. The trust preferred securities, which currently
      qualify as Tier I capital for regulatory capital purposes, were issued by newly
      established subsidiaries, State Bancorp Capital Trusts I and II. The securities
      each bear an interest rate tied to three-month LIBOR and are each redeemable
      by
      the Company in whole or in part after five years or earlier under certain
      circumstances. The average rate on all trust preferred securities outstanding
      was 6.49% during 2005 and 4.63% during 2004. As of year-end 2005 and 2004,
      the
      company’s Tier I capital ratios were 5.04% and 7.82%, respectively.


*Table
          of Contents*


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.





The
      Company has no present plans to issue or utilize its authorized preferred stock.
      These shares afford management additional flexibility with respect to future
      equity financing to support business expansion.





Management
      strives to provide stockholders with a competitive return on their investment
      in
      the Company. During 2005, the Board of Directors paid a six for five stock
      split
      while maintaining the quarterly cash dividend of $0.15 per share, resulting
      in
      an effective increase in the cash payout of 20%. Cash dividends on the Company’s
      common stock amounted to $0.55 per share in 2005. Since the payment of its
      first
      cash dividend in 1979, the Company has distributed over $50 million to
      stockholders. In addition, the Company’s stock split paid in 2005 was the 36th
      consecutive year that it has paid a stock dividend or split to holders of its
      common shares.











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 its capital levels and current
      and retained earnings, the Bank is prohibited from declaring
      dividends without 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 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 a 5%
      discount from the current market price under either plan option. During 2005
      and
      2004, $2.8 million and $2.5 million, respectively, were added to stockholders'
      equity through plan participation. Approximately 17% of the Company’s cash
      dividends were reinvested in 2005 under this plan, and since inception,
      approximately $16.1 million in additional equity has been added through plan
      participation. Management anticipates continued future growth in equity through
      the program.


*Table
          of Contents*


State
      Bancorp, Inc. and its subsidiaries are subject to various regulatory capital
      requirements administered by the Federal Reserve Board and the Federal Deposit
      Insurance Corporation. These regulatory authorities measure capital adequacy
      on
      a risk-weighted assets basis. Their guidelines provide a method of monitoring
      capital adequacy that is sensitive to the risk factors inherent in a bank's
      asset base, including off-balance sheet exposures. The guidelines assign various
      weights to different asset types depending upon their risk profile. Generally
      speaking, assets with greater risk require more capital support than do less
      risky assets. In addition, a leverage standard has been established to
      supplement the risk-based ratios in assessing an institution's overall capital
      adequacy. Failure to maintain the Bank’s capital ratios in excess of minimum
      regulatory guidelines requires bank regulatory authorities to take prompt
      corrective action in accordance with the provisions of the Federal Deposit
      Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations
      arising from FDICIA established five categories of capitalization for depository
      institutions: (1) well-capitalized, (2) adequately capitalized, (3)
      undercapitalized, (4) significantly undercapitalized and (5) critically
      undercapitalized. Based upon its December 31, 2005 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 and Tier I Capital/Risk-Weighted Assets
      ratios exceed the minimum requirements for a well - capitalized institution;
      however, the Total Capital/Risk-Weighted Assets ratio does not, thereby
      classifying the Bank as adequately capitalized at year-end 2005. As of December
      31, 2004 and 2003, the Bank met each of the requirements to be considered a
      well
      - capitalized institution. Failure to meet minimum capital requirements can
      initiate certain actions by regulators that could have a direct effect on the
      Company’s and the Bank’s operations and financial statements. The Company has no
      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
              
              
              
              
              
              
              
              
              
              Regulatory
                Criteria
                  for a
                Well-Regulatory
              
              The
                  Bank's Ratios as of December 31,
              
              CapitalizedMinimum
              
              2005
              
              2004
              
              2003
              
              InstitutionLeverage
                  ratio - Tier I Capital to Total Adjusted Assets
              
              
              3.00
                  - 5.00
              %
              
              5.01
              %
              
              7.79
              %
              
              7.97
              %
              
              5.00
              %Tier
                  I Capital/Risk-Weighted Assets
              
              
              4.00
              %
              
              6.96
              %
              
              12.41
              %
              
              12.09
              %
              
              6.00
              %Total
                  Capital/Risk-Weighted Assets
              
              
              8.00
              %
              
              8.22
              %
              
              13.66
              %
              
              13.29
              %
              
              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
      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 $67 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 $124 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 2005, $15 million in such funds, maturing in 2006, were utilized by
      the
      Company. As of year-end 2004, brokered deposits totaling $75 million were
      utilized as a source of funds by the Company.


*Table
          of Contents*


Asset
      liquidity is provided by short-term investments and the marketability of
      securities available for sale. At December 31, 2005, the Company had $505
      million in such liquid assets. The Company's loan portfolio and investment
      securities held to maturity are of high quality and mixed maturity, providing
      an
      excellent source of internal liquidity through maturities and periodic
      repayments of principal. At year-end 2005, approximately $649 million of these
      assets, including mortgage-backed securities, were due to mature or be repaid
      within one year. Cash flows provided by the loan and investment portfolios
      are
      typically utilized to reduce the Company’s borrowed funds position and/or to
      fund loan and investment securities growth. The Company's operating, investing
      and financing activities are conducted within the overall constraints of the
      Company's liquidity management policy.





In
      February 2004, the Bank purchased $25 million in Bank Owned Life Insurance.
      The
      Bank is the beneficiary of this policy that insures the lives of certain
      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.





While
      past performance does not guarantee future results, management believes that
      the
      Company's funding sources, including dividends from the Bank, and the Bank's
      funding sources will be adequate to meet future liquidity
      requirements.




**ITEM
                7A.**
            **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.


*Table
          of Contents*


The
      Company's asset/liability and interest rate risk management policy limits
      interest rate risk exposure to -12% and -15% of the base case net income for
      net
      earnings at risk at the 12-month and 24-month time horizons, respectively.
      Net
      earnings at risk is the potential adverse change in net income arising from
      up
      to +/- 200 basis point change in interest rates ramped over a 12 month period,
      and measured over a 24 month time horizon. The Company’s December 31, 2005
      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 Income


12
      Month
      Interest Rate Ramps


Basis
      Points





December
                31, 2005
            
            December
                31, 2004Time
                Horizon
            
            Down
                100
            
            Down
                50
            
            Base
                Flat
            
            Up
                100
            
            Up
                200
            
            Down
                100
            
            Down
                50
            
            Base
                Flat
            
            Up
                100
            
            Up
                200Year
                One
            
            
            3.5
            %
            
            1.3
            %
            
            0.0
            %
            
            -1.0
            %
            
            -5.2
            %
            
            0.2
            %
            
            0.6
            %
            
            0.0
            %
            
            -1.7
            %
            
            -4.3
            %Year
                Two
            
            
            7.1
            %
            
            4.9
            %
            
            3.6
            %
            
            3.6
            %
            
            -2.8
            %
            
            11.8
            %
            
            11.5
            %
            
            10.3
            %
            
            6.3
            %
            
            1.1
            %





Management
      also monitors equity value at risk as a percentage of market value of portfolio
      equity (“MVPE”). The Company’s MVPE is the difference between the market value
      of its interest-sensitive assets and the market value of its interest-sensitive
      liabilities. MVPE at risk is the potential adverse change in the present value
      (market value) of total equity arising from an immediate hypothetical shock
      in
      interest rates. Management uses scenario analysis on a static basis to assess
      its equity value at risk by modeling MVPE under various interest rate shock
      scenarios.





When
      modeling MVPE at risk, management recognizes the high degree of subjectivity
      when projecting long-term cash flows and reinvestment rates, and therefore
      uses
      MVPE at risk as a relative indicator of interest rate risk. Accordingly, the
      Company does not set policy limits over MVPE at risk.





MVPE
      Variability


Immediate
      Interest Rate Shocks


Basis
      Points





December
                31, 2005
            
            December
                31, 2004Down
                100
            
            Down
                50
            
            Base
                Flat
            
            Up
                100
            
            Up
                200
            
            Down
                100
            
            Down
                50
            
            Base
                Flat
            
            Up
                100
            
            Up
                200%
                Change in MVPE (1)
            
            
            -0.1
            %
            
            0.2
            %
            
            0.0
            %
            
            -2.3
            %
            
            -6.1
            %
            
            -0.5
            %
            
            0.1
            %
            
            0.0
            %
            
            -3.3
            %
            
            -7.6
            %MVPE
                Ratio
            
            
            12.7
            %
            
            12.9
            %
            
            12.9
            %
            
            12.6
            %
            
            12.0
            %
            
            13.2
            %
            
            13.4
            %
            
            13.4
            %
            
            12.9
            %
            
            12.2
            %





(1)
            Assumes
                40% marginal tax rate.





Simulation
      and scenario techniques in asset/liability modeling are influenced by a number
      of estimates and assumptions with regard to embedded options, prepayment
      behaviors, pricing strategies and cash flows. Such assumptions and estimates
      are
      inherently uncertain and, as a consequence, simulation and scenario output
      will
      neither precisely estimate the level of, or the changes in, net interest income
      and MVPE, respectively.


*Table
            of Contents*
  **ITEM
                  8.**
              **FINANCIAL
                  STATEMENTS AND 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 sheet of State Bancorp, Inc.
        as of
        December 31, 2005 and the related consolidated statements of income,
        stockholders' equity and comprehensive income (loss), and cash flows for
        the
        year then ended. 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 audit. The financial statements of State
        Bancorp, Inc. as of December 31, 2004 and for the years ended December 31,
        2004
        and 2003 were audited by other auditors whose report dated March 11, 2005
        expressed an unqualified opinion on those statements.
 
 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 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 audit provides 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, 2005 and the results of its operations and its cash flows for
        the
        year then ended 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, 2005, 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 3, 2006 expressed an unqualified opinion thereon.
 
 
 Crowe
        Chizek and Company LLC
 
 Livingston,
        New Jersey
 March
        3,
        2006
  *Table
            of Contents*
  **CONSOLIDATED
        BALANCE SHEETS**
 December
        31, 2005 and 2004
 
 2005
              
              2004ASSETS:Cash
                  and due from banks
              
              $
              49,652,118
              
              $
              32,934,976Securities
                  purchased under agreements to resell
              
              
              39,500,000
              
              
              41,000,000Total
                  cash and cash equivalents
              
              
              89,152,118
              
              
              73,934,976Securities
                  held to maturity (estimated fair value of $15,944,500 in 2005 and
                  $29,949,000 in 2004)
              
              
              15,992,882
              
              
              29,990,384Securities
                  available for sale - at estimated fair value
              
              
              522,245,615
              
              
              508,708,155Federal
                  Home Loan Bank and other restricted stock
              
              
              2,516,743
              
              
              3,991,343Loans
                  (net of allowance for probable loan losses of $15,716,960 in 2005
                  and
                  $12,020,443 in 2004)
              
              
              876,304,586
              
              
              766,170,785Bank
                  premises and equipment - net
              
              
              6,171,005
              
              
              6,491,365Bank
                  owned life insurance
              
              
              26,879,935
              
              
              25,879,180Other
                  assets
              
              
              58,889,629
              
              
              22,124,779TOTAL
                  ASSETS
              
              $
              1,598,152,513
              
              $
              1,437,290,967LIABILITIES:Deposits:Demand
              
              $
              333,073,091
              
              $
              294,912,979Savings
              
              
              693,822,626
              
              
              657,315,486Time
              
              
              384,678,229
              
              
              317,405,613Total
                  deposits
              
              
              1,411,573,946
              
              
              1,269,634,078Other
                  borrowings
              
              
              18,614,296
              
              
              32,266,489Junior
                  subordinated debentures
              
              
              20,620,000
              
              
              20,620,000Accrued
                  legal expenses
              
              
              77,729,137
              
              
              395,248Other
                  accrued expenses, taxes and liabilities
              
              
              13,193,016
              
              
              13,325,310Total
                  liabilities
              
              
              1,541,730,395
              
              
              1,336,241,125COMMITMENTS
                  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 12,019,426
                  shares in 2005 and 11,993,786 shares in 2004; outstanding 11,031,774
                  shares in 2005 and 10,882,592 shares in 2004
              
              
              60,097,130
              
              
              49,974,110Surplus
              
              
              56,424,544
              
              
              63,014,247Retained
                  earnings (deficit)
              
              
              (38,601,709
              )
              
              4,008,970Treasury
                  stock (987,652 shares in 2005 and 925,995 shares in 2004)
              
              
              (16,646,426
              )
              
              (15,468,528
              )Accumulated
                  other comprehensive loss (net of taxes of ($2,686,335) in 2005
                  and
                  ($323,915) in 2004)
              
              
              (4,851,421
              )
              
              (478,957
              )Total
                  stockholders' equity
              
              
              56,422,118
              
              
              101,049,842TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              1,598,152,513
              
              $
              1,437,290,967
 
 *See
        Notes to Consolidated Financial Statements.*
  *Table
            of Contents*
  **CONSOLIDATED
        STATEMENTS OF INCOME**
 For
        the
        Years Ended December 31, 2005, 2004 and 2003
 
 2005
              
              2004
              
              2003INTEREST
                  INCOME:Interest
                  and fees on loans
              
              $
              61,836,169
              
              $
              49,195,179
              
              $
              44,401,518Federal
                  funds sold and securities purchased under agreements to
                  resell
              
              
              1,613,849
              
              
              354,616
              
              
              444,902Securities
                  held to maturity:Taxable
              
              
              537,926
              
              
              1,879,710
              
              
              883,161Tax-exempt
              
              
              -
              
              
              1,439
              
              
              4,233Securities
                  available for sale:Taxable
              
              
              17,561,509
              
              
              15,337,083
              
              
              15,417,097Tax-exempt
              
              
              1,614,016
              
              
              2,789,022
              
              
              3,025,596Dividends
              
              
              257,000
              
              
              480,057
              
              
              506,369Total
                  interest income
              
              
              83,420,469
              
              
              70,037,106
              
              
              64,682,876INTEREST
                  EXPENSE:Deposits
              
              
              21,214,704
              
              
              9,871,241
              
              
              10,121,206Temporary
                  borrowings
              
              
              2,253,112
              
              
              1,870,008
              
              
              845,857Junior
                  subordinated debentures
              
              
              1,433,680
              
              
              1,059,304
              
              
              567,914Total
                  interest expense
              
              
              24,901,496
              
              
              12,800,553
              
              
              11,534,977Net
                  interest income
              
              
              58,518,973
              
              
              57,236,553
              
              
              53,147,899PROVISION
                  FOR PROBABLE LOAN LOSSES
              
              
              3,650,000
              
              
              4,506,000
              
              
              3,935,004Net
                  interest income after provision for probable loan losses
              
              
              54,868,973
              
              
              52,730,553
              
              
              49,212,895OTHER
                  INCOME:Service
                  charges on deposit accounts
              
              
              2,107,546
              
              
              2,278,718
              
              
              1,617,718Net
                  security gains
              
              
              867,208
              
              
              2,149,588
              
              
              5,841,972Income
                  from bank owned life insurance
              
              
              1,000,755
              
              
              879,180
              
              
              -Other
                  operating income
              
              
              1,834,955
              
              
              1,743,439
              
              
              1,683,233Total
                  other income
              
              
              5,810,464
              
              
              7,050,925
              
              
              9,142,923Income
                  before operating expenses
              
              
              60,679,437
              
              
              59,781,478
              
              
              58,355,818OPERATING
                  EXPENSES:Salaries
                  and other employee benefits
              
              
              26,204,886
              
              
              23,897,728
              
              
              22,691,938Occupancy
              
              
              4,733,005
              
              
              4,001,184
              
              
              3,852,847Equipment
              
              
              1,388,794
              
              
              1,463,855
              
              
              1,560,448Legal
              
              
              83,583,980
              
              
              2,858,970
              
              
              3,862,538Marketing
                  and advertising
              
              
              1,232,172
              
              
              1,001,210
              
              
              1,415,725Credit
                  and collection
              
              
              660,022
              
              
              748,285
              
              
              1,371,048Audit
                  and assessment
              
              
              1,346,064
              
              
              1,222,149
              
              
              774,587Other
                  operating expenses
              
              
              5,491,760
              
              
              5,849,849
              
              
              5,559,950Total
                  operating expenses
              
              
              124,640,683
              
              
              41,043,230
              
              
              41,089,081(LOSS)
                  INCOME BEFORE INCOME TAXES
              
              
              (63,961,246
              )
              
              18,738,248
              
              
              17,266,737(BENEFIT)
                  PROVISION FOR INCOME TAXES
              
              
              (27,412,995
              )
              
              5,362,239
              
              
              5,251,564NET
                  (LOSS) INCOME
              
              $
              (36,548,251
              )
              $
              13,376,009
              
              $
              12,015,173BASIC
                  (LOSS) EARNINGS PER COMMON SHARE
              
              $
              (3.32
              )
              $
              1.24
              
              $
              1.13DILUTED
                  (LOSS) EARNINGS PER COMMON SHARE
              
              $
              (3.32
              )
              $
              1.20
              
              $
              1.10CASH
                  DIVIDENDS PAID PER COMMON SHARE
              
              $
              0.53
              
              $
              0.47
              
              $
              0.43WEIGHTED
                  AVERAGE NUMBER OF SHARES - BASIC
              
              
              10,996,601
              
              
              10,827,816
              
              
              10,678,935WEIGHTED
                  AVERAGE NUMBER OF SHARES - DILUTED
              
              
              10,996,601
              
              
              11,179,986
              
              
              10,961,596
 
 *See
        Notes to Consolidated Financial Statements.*
  *Table
            of Contents*
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 For
        the
        Years Ended December 31, 2005, 2004 and 2003
 
 2005
              
              2004
              
              2003OPERATING
                  ACTIVITIES:Net
                  (loss) income
              
              $
              (36,548,251
              )
              $
              13,376,009
              
              $
              12,015,173Adjustments
                  to reconcile net (loss) income to net cash provided by operating
                  activities:Provision
                  for probable loan losses
              
              
              3,650,000
              
              
              4,506,000
              
              
              3,935,004Depreciation
                  and amortization of bank premises and equipment
              
              
              1,429,278
              
              
              1,519,631
              
              
              1,615,482Amortization
                  of intangibles
              
              
              36,137
              
              
              36,137
              
              
              36,137Deferred
                  income tax (benefit) expense
              
              
              (31,005,600
              )
              
              (864,304
              )
              
              483,954Amortization
                  of net premium on securities
              
              
              3,435,779
              
              
              6,009,576
              
              
              7,556,686Net
                  security gains
              
              
              (867,208
              )
              
              (2,149,588
              )
              
              (5,841,972
              )Net
                  gains on sales of other real estate owned ("OREO")
              
              
              (43,903
              )
              
              -
              
              
              -Income
                  from bank owned life insurance
              
              
              (1,000,755
              )
              
              (879,180
              )
              
              -Amortization
                  of unearned compensation
              
              
              -
              
              
              -
              
              
              82,601Accelerated
                  vesting of stock options
              
              
              36,389
              
              
              -
              
              
              -(Increase)
                  decrease in other assets
              
              
              (6,284,601
              )
              
              (1,712,992
              )
              
              7,097,236Increase
                  in accrued expenses, taxes and other liabilities
              
              
              76,905,643
              
              
              4,482,342
              
              
              876,463Net
                  cash provided by operating activities
              
              
              9,742,908
              
              
              24,323,631
              
              
              27,856,764INVESTING
                  ACTIVITIES:Proceeds
                  from maturities of securities held to maturity
              
              
              19,997,544
              
              
              85,060,524
              
              
              41,694,886Purchases
                  of securities held to maturity
              
              
              (5,992,500
              )
              
              (59,985,000
              )
              
              (70,000,000
              )Proceeds
                  from sales of securities available for sale
              
              
              311,306,545
              
              
              302,733,658
              
              
              724,880,417Proceeds
                  from maturities of securities available for sale
              
              
              179,411,568
              
              
              229,223,404
              
              
              317,133,091Purchases
                  of securities available for sale
              
              
              (513,364,937
              )
              
              (549,073,823
              )
              
              (956,088,350
              )Decrease
                  (increase) in Federal Home Loan Bank and other restricted
                  stock
              
              
              1,474,600
              
              
              (81,992
              )
              
              (541,200
              )Increase
                  in loans - net
              
              
              (113,783,801
              )
              
              (70,192,729
              )
              
              (96,730,703
              )Proceeds
                  from sales of OREO
              
              
              2,693,903
              
              
              -
              
              
              -Purchases
                  of bank premises and equipment - net
              
              
              (1,108,917
              )
              
              (927,148
              )
              
              (819,563
              )Increase
                  in bank owned life insurance
              
              
              -
              
              
              (25,000,000
              )
              
              -Net
                  cash used in investing activities
              
              
              (119,365,995
              )
              
              (88,243,106
              )
              
              (40,471,422
              )FINANCING
                  ACTIVITIES:Increase
                  (decrease) in demand and savings deposits
              
              
              74,667,252
              
              
              (2,180,833
              )
              
              239,765,843Increase
                  (decrease) in time deposits
              
              
              67,272,616
              
              
              55,528,008
              
              
              (170,505,448
              )(Decrease)
                  increase in Federal funds purchased
              
              
              -
              
              
              (10,000,000
              )
              
              5,200,000Decrease
                  in securities sold under agreements to repurchase
              
              
              -
              
              
              (31,601,147
              )
              
              (18,381,853
              )Decrease
                  in other borrowings
              
              
              (13,652,193
              )
              
              (18,447,660
              )
              
              (1,951,495
              )Proceeds
                  from issuance of junior subordinated debentures
              
              
              -
              
              
              620,000
              
              
              10,000,000Cash
                  dividends paid
              
              
              (5,766,476
              )
              
              (5,050,091
              )
              
              (4,565,273
              )Proceeds
                  from shares issued under the dividend reinvestment plan
              
              
              2,841,412
              
              
              2,461,066
              
              
              2,812,209Proceeds
                  from stock options exercised
              
              
              655,516
              
              
              719,650
              
              
              436,103Proceeds
                  from shares issued under the Directors' Stock Plan
              
              
              -
              
              
              30,361
              
              
              17,226Purchases
                  of treasury stock
              
              
              (1,177,898
              )
              
              (1,987,172
              )
              
              (1,037,240
              )Net
                  cash provided by (used in) financing activities
              
              
              124,840,229
              
              
              (9,907,818
              )
              
              61,790,072NET
                  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              15,217,142
              
              
              (73,827,293
              )
              
              49,175,414CASH
                  AND CASH EQUIVALENTS AT BEGINNING OF YEAR
              
              
              73,934,976
              
              
              147,762,269
              
              
              98,586,855CASH
                  AND CASH EQUIVALENTS AT END OF YEAR
              
              $
              89,152,118
              
              $
              73,934,976
              
              $
              147,762,269SUPPLEMENTAL
                  DATA:Interest
                  paid
              
              $
              24,619,835
              
              $
              12,214,917
              
              $
              11,808,391Income
                  taxes paid
              
              $
              5,459,406
              
              $
              5,699,219
              
              $
              5,551,010Transfers
                  from loans to OREO
              
              
              -
              
              
              -
              
              $
              2,650,000Adjustment
                  to unrealized net gain or loss on securities available for
                  sale
              
              $
              (6,533,252
              )
              $
              (3,990,792
              )
              $
              (4,563,553
              )Dividends
                  declared but not paid as of year-end
              
              $
              1,656,251
              
              $
              1,360,298
              
              $
              1,196,071
 
 *See
        Notes to Consolidated Financial Statements.*
  *Table
            of Contents*
  **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
        (LOSS)**
 For
        the
        Years Ended December 31, 2005, 2004 and 2003
 
 Common
                Stock
              
              Surplus
              
              Retained
                Earnings
                (Deficit)
              
              Treasury
                Stock
              
              Accumulated
                  Other
                Comprehensive
                Income
                  (Loss)
              
              Unearned
                Compensation
              
              Total
                Stockholders'
                Equity
              
              Comprehensive
                Income
                  (Loss)Balance,
                  January 1, 2003
              
              $
              43,818,395
              
              $
              45,714,829
              
              $
              5,419,517
              
              $
              (12,444,116
              )
              $
              5,218,101
              
              $
              (44,095
              )
              $
              87,682,631Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              12,015,173
              
              
              -
              
              
              -
              
              
              -
              
              
              12,015,173
              
              $
              12,015,173Other
                  comprehensive loss, net of tax:Unrealized
                  holding gains during the period (1)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              898,631Reclassification
                  for gains included in net income (2)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (3,730,124
              )Cash
                  flow hedges (3)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              181,711Total
                  other comprehensive loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (2,649,782
              )
              
              -
              
              
              (2,649,782
              )
              
              (2,649,782
              )Total
                  comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              $
              9,365,391Cash
                  dividend ($.44 per share)
              
              
              -
              
              
              -
              
              
              (4,647,399
              )
              
              -
              
              
              -
              
              
              -
              
              
              (4,647,399
              )5%
                  stock dividend (401,978 shares at market value)
              
              
              2,009,890
              
              
              5,587,494
              
              
              (7,597,384
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Shares
                  issued under the dividend reinvestment plan (158,239 shares at
                  95% of
                  market value)
              
              
              791,195
              
              
              2,021,014
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,812,209Stock
                  options exercised (53,102 shares at $5.00 par value)
              
              
              265,510
              
              
              170,593
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              436,103Stock
                  issued under Directors' Stock Plan
              
              
              4,785
              
              
              12,441
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              17,226Treasury
                  stock purchased (54,041 shares)
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,037,240
              )
              
              -
              
              
              -
              
              
              (1,037,240
              )Amortization
                  of unearned compensation
              
              
              -
              
              
              38,506
              
              
              -
              
              
              -
              
              
              -
              
              
              44,095
              
              
              82,601Balance,
                  December 31, 2003
              
              
              46,889,775
              
              
              53,544,877
              
              
              5,189,907
              
              
              (13,481,356
              )
              
              2,568,319
              
              
              -
              
              
              94,711,522Comprehensive
                  income:Net
                  income
              
              
              -
              
              
              -
              
              
              13,376,009
              
              
              -
              
              
              -
              
              
              -
              
              
              13,376,009
              
              $
              13,376,009Other
                  comprehensive loss, net of tax:Unrealized
                  holding losses during the period (1)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (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 at $5.00 par value)
              
              
              385,475
              
              
              334,175
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              719,650Stock
                  issued under Directors' Stock Plan
              
              
              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 at $5.00 par value)
              
              
              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 at $5.00 par value)
              
              
              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
              )
              $
              -
              
              $
              56,422,118
 
 (1)
              Net
                  of taxes of $379,787, ($674,613) and ($1,979,758) in 2003, 2004
                  and 2005,
                  respectively.
 (2)
              Net
                  of taxes of $2,111,848, $725,818 and $302,090 in 2003, 2004 and
                  2005,
                  respectively.
 (3)
              Net
                  of taxes of $120,938, ($304,103) and ($80,572) in 2003, 2004 and
                  2005,
                  respectively.
 
 *See
        Notes to Consolidated Financial Statements.*
  *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 probable loan 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 is credited to income when earned. The Bank discontinues the accrual
        of
        interest on loans whenever there is reasonable doubt that interest and/or
        principal will be collected, or when either principal or interest is 90 days
        or
        more past due and the loan is not well collateralized and in the process
        of
        collection. Income is not accrued for installment loans which are 90 days
        past
        due unless the Bank holds cash collateral. Interest received on nonaccrual
        loans
        is either applied against principal or reported as income, according to
        management's judgment as to the collectibility of the principal.
 
 ***Allowance
        for Probable Loan Losses*** *-* The
        allowance for probable loan losses is established through a provision for
        loan
        losses charged to expense. Loans are charged against the allowance when
        management believes that the collectibility of the principal is unlikely,
        while
        recoveries of previously charged-off loans are credited to the allowance.
        The
        balance in the allowance for probable loan losses is maintained at a level
        that,
        in the opinion of management, is sufficient to absorb probable incurred losses.
        To determine that level, management evaluates problem loans based on the
        financial condition of the borrower, the value of any collateral and/or
        guarantor support. Based upon the resultant risk categories assigned to each
        loan and the procedures regarding impairment described below, an appropriate
        reserve level is determined. Management also evaluates the quality of, and
        changes in, the portfolio, while also taking into consideration the Bank’s
        historical loss experience, the existing economic climate of the service
        area in
        which the Bank operates, examinations by regulatory authorities, internal
        reviews and other evaluations in determining the appropriate allowance balance.
        While management utilizes all available information to estimate the adequacy
        of
        the allowance for probable loan losses, the ultimate collectibility of a
        substantial portion of the loan portfolio and the need for future additions
        to
        the allowance will be based upon changes in economic conditions and other
        relevant factors.
  *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, such as
        consumer and residential mortgages, are collectively evaluated for
        impairment.
 
 The
        allowance for probable loan losses related to loans that are impaired includes
        reserves which are based upon the expected future cash flows, discounted
        at the
        loan’s effective interest rate, or the fair value of the underlying collateral
        for collateral-dependent loans, or the observable market price. This evaluation
        is inherently subjective as it requires material estimates, including the
        amount
        and timing of future cash flows expected to be received on impaired loans,
        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
        Origination Fees and Costs*** -
        Certain loan origination fees and direct origination costs may be capitalized
        and recognized as an adjustment of the yield on the related loan.
 
 ***Income
        Taxes*** *-* The
        Company recognizes deferred tax assets and liabilities for the expected future
        tax consequences of events that have been included in the Company's consolidated
        financial statements or tax returns. Under this method, deferred tax assets
        and
        liabilities are determined based on the differences between the financial
        accounting and tax bases of assets and liabilities using enacted tax rates
        in
        effect for the year in which the differences are expected to reverse. As
        changes
        in tax laws are enacted, deferred tax assets and liabilities are adjusted
        through the provision for income taxes.
 
 ***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 (treasury stock method). These purchases were assumed to have
        been
        made at the average market price of the common stock. The average market
        price
        is based on the average closing price for the common stock. Retroactive
        recognition has been given for stock dividends 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.
  *Table
            of Contents*
 
 For
                  the Years Ended December 31,
              
              2005
              
              2004
              
              2003Net
                  (loss) income
              
              $
              (36,548,251
              )
              $
              13,376,009
              
              $
              12,015,173Average
                  dilutive stock options outstanding
              
              
              N/A
              (1)
              
              1,009,126
              
              
              950,121Average
                  exercise price per share
              
              
              N/A
              (1)
              $
              12.57
              
              $
              10.95Average
                  market price
              
              
              N/A
              (1)
              $
              19.31
              
              $
              15.59Weighted
                  average common shares outstanding
              
              
              10,996,601
              
              
              10,827,816
              
              
              10,678,935Increase
                  in shares due to exercise of options - diluted basis
              
              
              N/A
              (1)
              
              352,170
              
              
              282,661Adjusted
                  common shares outstanding - diluted
              
              
              10,996,601
              
              
              11,179,986
              
              
              10,961,596Net
                  (loss) income per share - basic
              
              $
              (3.32
              )
              $
              1.24
              
              $
              1.13Net
                  (loss) income per share - diluted
              
              $
              (3.32
              )
              $
              1.20
              
              $
              1.10
 
 (1)
              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. Losses arising
        at
        the time of foreclosure are charged against the allowance for probable loan
        losses. Revenues and expenses from operations or changes in the carrying
        value
        of these assets are included in operating expenses.
 
 ***Intangibles*** *-* Intangibles consist of the excess market value of leases acquired. Intangibles
        are carried at cost less accumulated amortization. Amortization is provided
        over
        the period of anticipated benefit (17 to 19 years). Management evaluates
        the
        carrying amount of intangible assets for impairment whenever events or changes
        in circumstances indicate that the carrying amount of an asset may not be
        recoverable. The Company has not recognized an impairment loss based on this
        evaluation.
 
 ***Goodwill*** *-* The
        excess of cost over fair value of net assets acquired generated from the
        acquisition of SWLC in February 2001 is reviewed annually for impairment
        and no
        evidence of impairment has been identified.
 
 ***Accounting
        for Stock Options*** - The
        Company accounts for stock-based compensation using the intrinsic value method
        which recognizes as expense the difference between the market value of the
        stock
        and the exercise price at grant date. The Company discloses the pro forma
        effects of accounting for stock-based compensation using the fair value
        method.
 
 In
        December 2004, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based
        Payment.” This Statement is a revision of SFAS No. 123, “Accounting for
        Stock-Based Compensation,” and supersedes Accounting Principles Board (“APB”)
        Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related
        implementation guidance. This Statement focuses primarily on accounting for
        transactions in which an entity obtains employee services in share-based
        payment
        transactions. On April 14, 2005, the Securities and Exchange Commission
        announced the adoption of a rule that defers the required effective date
        of this
        Statement to the beginning of the first **** fiscal
        year beginning after June 15, 2005, instead of at the beginning of the first
        quarter after June 15, 2005 (as prescribed originally by the Statement). The
        effect on the Company's results of operations will depend on the level of
        future
        option grants and their relative fair values, as well as the vesting periods
        provided, and so cannot currently be predicted.
  *Table
            of Contents*
  The
        estimated fair value of options granted during 2005, 2004 and 2003 was $7.62,
        $5.95 and $4.40 per share, respectively. The Company applies Accounting
        Principles Board (“APB”) Opinion No. 25 and related interpretations in
        accounting for its plans. Accordingly, no compensation cost has been recognized
        for its incentive stock option plans. Had compensation cost for the Company’s
        four plans been determined at the fair value on the grant dates for awards
        under
        those plans, consistent with the method in SFAS No. 123, “Accounting for
        Stock-based Compensation,” the Company’s net income and earnings per share would
        have been reduced to the pro forma amounts indicated below.
 
 2005
              
              2004
              
              2003Net
                  (loss) income, as reported
              
              $
              (36,548,251
              )
              $
              13,376,009
              
              $
              12,015,173Deduct:
                  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
              )
              
              (278,192
              )Pro
                  forma net (loss) income
              
              $
              (37,689,887
              )
              $
              12,986,568
              
              $
              11,736,981(Loss)
                  earnings per share:Basic
                  - as reported
              
              $
              (3.32
              )
              $
              1.24
              
              $
              1.13Basic
                  - pro forma
              
              $
              (3.43
              )
              $
              1.20
              
              $
              1.10Diluted
                  - as reported
              
              $
              (3.32
              )
              $
              1.20
              
              $
              1.10Diluted
                  - pro forma
              
              $
              (3.43
              )
              $
              1.16
              
              $
              1.07
 
 The
        fair
        value of options granted under the Company’s incentive stock option plans during
        2005, 2004 and 2003 was estimated on the date of grant using the Black-Scholes
        option pricing model with the following weighted-average assumptions
        used:
 
 2005
              
              2004
              
              2003Dividend
                  yield
              
              
              2.4
              %
              
              2.5
              %
              
              3.1
              %Expected
                  volatility
              
              
              28.3
              %
              
              25.5
              %
              
              28.4
              %Risk-free
                  interest rate
              
              
              3.88
              %
              
              3.55
              %
              
              3.38
              %Expected
                  life of options
              
              
              7.3
                  years
              
              
              7.3
                  years
              
              
              7.4
                  years
 
 ***Accounting
        for Derivatives*** *-* ****** During
        2005, the Bank executed 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 in earnings
        as
        other income.  For the twelve months ended December 31, 2005, income
        associated with these swaps was not material to the financial statements.
        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.
        At December 31, 2004, 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. The fair value of the swap agreements was ($440,423),
        inclusive of accrued interest of $17,944, contained within other assets in
        the
        consolidated balance sheets. 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.  This amount, net of taxes of $359,241, included in accumulated
        other comprehensive income (loss), 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.
        For the twelve months ended December 31, 2005, 2004 and 2003, the Company
        recognized interest income, net of expenses associated with unwinding the
        swap
        agreements, of ($169,882), $849,701 and $318,250, respectively, under the
        agreements.
  *Table
            of Contents*
  ***Accounting
        for Bank Owned Life Insurance*** ** -
        The
        Bank is the beneficiary of this policy that insures the lives of certain
        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
        shareholders. (See the Regulatory Matters note for more specific
        disclosure.)
 
 ***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.
 
 ***Recent
        Accounting Developments*** - In
        November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1, “The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments,” guidance similar to that provided in EITF Issue No. 03-1, “The
        Meaning of Other-Than-Temporary Impairment and Its Application to Certain
        Investments,” regarding the accounting for debt securities subsequent to an
        other-than-temporary impairment. The FSP addresses the determination as to
        when
        an investment is considered impaired, whether that impairment is other than
        temporary and the measurement of an impairment loss. This FSP also includes
        accounting considerations subsequent to the recognition of an
        other-than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary
        impairments. The guidance in this FSP shall be applied to reporting periods
        beginning after December 15, 2005. The Company’s management does not expect the
        application of this guidance to have a material impact on the Company’s
        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,
        2005 and 2004, are as follows:
  *Table
            of Contents*
 
 Amortized
                Cost
              
              Gross
                Unrealized
                Gains
              
              Gross
                Unrealized
                Losses
              
              Estimated
                Fair
                  ValueDecember
                  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
                  Securities Available for Sale
              
              
              529,123,371
              
              
              107,974
              
              
              (6,985,730
              )
              
              522,245,615Total
                  Securities
              
              $
              545,116,253
              
              $
              109,565
              
              $
              (7,035,703
              )
              $
              538,190,115December
                  31, 2004Securities
                  Held to Maturity:Government
                  Agency securities
              
              $
              29,990,384
              
              $
              -
              
              $
              (41,384
              )
              $
              29,949,000Securities
                  Available for Sale:Obligations
                  of states and political subdivisions
              
              
              53,247,451
              
              
              644,097
              
              
              (311,301
              )
              
              53,580,247Government
                  Agency securities
              
              
              162,313,981
              
              
              165,974
              
              
              (481,537
              )
              
              161,998,418Corporate
                  securities
              
              
              34,329,733
              
              
              25,000
              
              
              (142,733
              )
              
              34,212,000Mortgage-backed
                  securities and collateralized mortgage obligations
              
              
              259,161,494
              
              
              1,108,459
              
              
              (1,352,463
              )
              
              258,917,490Total
                  Securities Available for Sale
              
              
              509,052,659
              
              
              1,943,530
              
              
              (2,288,034
              )
              
              508,708,155Total
                  Securities
              
              $
              539,043,043
              
              $
              1,943,530
              
              $
              (2,329,418
              )
              $
              538,657,155
 
 The
        amortized cost and estimated fair value of securities held to maturity and
        securities available for sale at December 31, 2005, by contractual maturity,
        are
        shown below. Expected maturities will differ from contractual maturities
        because
        borrowers may have the right to call or prepay obligations with or without
        call
        or prepayment penalties.
  *Table
            of Contents*
 
 Amortized
                Cost
              
              Estimated
                Fair
                  ValueSecurities
                  Held to Maturity:Due
                  after ten years
              
              $
              15,992,882
              
              $
              15,944,500Securities
                  Available for Sale:Due
                  in one year or less
              
              
              33,723,946
              
              
              33,429,932Due
                  after one year through five years
              
              
              207,268,050
              
              
              205,371,397Due
                  after five years through ten years
              
              
              27,978,087
              
              
              27,712,489Due
                  after ten years
              
              
              60,616,070
              
              
              60,128,673Subtotal
              
              
              329,586,153
              
              
              326,642,491Mortgage-backed
                  securities and collateralized mortgage obligations
              
              
              199,537,218
              
              
              195,603,124Total
                  Securities Available for Sale
              
              
              529,123,371
              
              
              522,245,615Total
                  Securities
              
              $
              545,116,253
              
              $
              538,190,115
 
 In
        2005,
        2004 and 2003, gross gains of $1,112,134, $3,021,312 and $6,620,272 and gross
        losses of $244,926, $871,724 and $778,300, respectively, were realized on
        the
        sale of securities available for sale.
 
 At
        December 31, 2005, the Company owned securities held to maturity and securities
        available for sale for one issuer in excess of 10% of stockholders’ equity. The
        issuer was TPREF Funding LTD and the 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
        $508,116,789 and $468,170,086 and an estimated fair value of $501,525,645
        and
        $467,596,442 at December 31, 2005 and 2004, 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, 2005, there were
        no
        other-than-temporary impairments of the Company’s investment securities.
 
 Information
        pertaining to securities with gross unrealized losses at December 31, 2005
        and
        2004, aggregated by investment category and length of time that individual
        securities have been in a continuous loss position, follows:
  *Table
            of Contents*
 
 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, 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
              )
              $
              518,758,328December
                  31, 2004Securities
                  held to maturity:Government
                  Agency securities
              
              $
              (41,384
              )
              $
              29,949,000
              
              $
              -
              
              $
              -
              
              $
              (41,384
              )
              $
              29,949,000Securities
                  available for sale:Obligations
                  of states and political subdivisions
              
              
              (311,301
              )
              
              32,599,067
              
              
              -
              
              
              -
              
              
              (311,301
              )
              
              32,599,067Government
                  Agency securities
              
              
              (481,537
              )
              
              131,183,043
              
              
              -
              
              
              -
              
              
              (481,537
              )
              
              131,183,043Corporate
                  securities
              
              
              (142,733
              )
              
              19,287,000
              
              
              -
              
              
              -
              
              
              (142,733
              )
              
              19,287,000Mortgage-backed
                  securities and collateralized mortgage obligations
              
              
              (1,116,585
              )
              
              128,728,492
              
              
              (235,878
              )
              
              12,555,592
              
              
              (1,352,463
              )
              
              141,284,084Total
                  securities available for sale
              
              
              (2,052,156
              )
              
              311,797,602
              
              
              (235,878
              )
              
              12,555,592
              
              
              (2,288,034
              )
              
              324,353,194Total
                  securities
              
              $
              (2,093,540
              )
              $
              341,746,602
              
              $
              (235,878
              )
              $
              12,555,592
              
              $
              (2,329,418
              )
              $
              354,302,194
 
 The
        securities that have been in a continuous loss position for 12 months or
        longer
        at December 31, 2005 may be categorized as either: (1) adjustable rate
        mortgage-backed securities totaling $24,036,896, (2) adjustable rate U.S.
        Government Agency securities totaling $38,898,763, (3) fixed rate
        mortgage-backed securities totaling $71,828,354, (4) fixed rate U.S. Government
        Agency securities totaling $55,660,989, (5) fixed rate corporate debt securities
        totaling $12,007,400 or (6) fixed rate municipal securities totaling
        $3,026,730.
 
 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, 2005 were purchased in an environment of historically low
        interest rates and the Company expects the likelihood of an increase in interest
        rates to be greater than the likelihood of a decline in interest rates. Higher
        interest rates will cause the adjustable 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.
  *Table
            of Contents*
  Management
        of the Company believes the securities are providing an attractive level
        of
        interest income and, as the Bank has access to various alternate liquidity
        sources, the ability to hold these securities until maturity exists. However,
        those classified as “available for sale” could be sold, regardless of their
        market value, should business conditions warrant such sale.
 
 **3.  Loans
        - Net**
 
 At
        December 31, 2005 and 2004, net loans consisted of the following:
 
 2005
              
              2004Commercial
                  and industrial
              
              $
              297,886,701
              
              $
              277,171,483Real
                  estate - mortgage
              
              
              446,003,667
              
              
              374,307,089Real
                  estate - construction
              
              
              79,200,268
              
              
              73,648,204Lease
                  receivables
              
              
              49,151,369
              
              
              34,844,406Loans
                  to individuals
              
              
              9,400,585
              
              
              8,723,662Tax
                  exempt and other
              
              
              10,378,956
              
              
              9,496,384Loans
                  - net of unearned income
              
              
              892,021,546
              
              
              778,191,228Less:Allowance
                  for probable loan losses
              
              
              15,716,960
              
              
              12,020,443Loans
                  - net
              
              $
              876,304,586
              
              $
              766,170,785
 
 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, 2005 and 2004, the
        concentration of loans exceeding 10% of total loans was the Bank’s loans
        totaling $164,642,000 and $129,906,000, respectively, to real estate operators,
        lessors and developers and $120,477,000 and $112,072,000, 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 $2,922,810 and $2,500,139
        at
        December 31, 2005 and 2004, respectively. New loans totaling $1,224,721 and
        $905,239 were extended and payments of $802,050 and $439,858 were received
        during 2005 and 2004, respectively, on these loans.
 
 Activity
        in the allowance for probable loan losses for the three years ended December
        31,
        2005 is as follows:
 
 2005
              
              2004
              
              2003Balance,
                  January 1
              
              $
              12,020,443
              
              $
              10,732,078
              
              $
              10,045,516Provision
                  charged to income
              
              
              3,650,000
              
              
              4,506,000
              
              
              3,935,004Charge-offs,
                  net of recoveries of $844,750 , $187,323 and $303,824
              
              
              46,517
              
              
              (3,217,635
              )
              
              (3,248,442
              )Balance,
                  December 31
              
              $
              15,716,960
              
              $
              12,020,443
              
              $
              10,732,078
 
 As
        of
        December 31, 2005, 2004 and 2003, the recorded investment in loans that are
        considered to be impaired is summarized below.
  *Table
            of Contents*
  2005
              
              2004
              
              2003Amount
                  measured using the present value of expected future cash flows,
                  discounted
                  at each loan's effective interest rate
              
              $
              -
              
              $
              -
              
              $
              433,088Impaired
                  collateral-dependent loans
              
              
              1,471,128
              
              
              3,275,403
              
              
              7,747,117Total
                  amount evaluated as impaired
              
              $
              1,471,128
              
              $
              3,275,403
              
              $
              8,180,205Average
                  impaired loan balance
              
              $
              2,012,540
              
              $
              4,579,424
              
              $
              7,814,272Interest
                  income recognized on impaired loans
              
              $
              115,623
              
              $
              71,665
              
              $
              67,395
 
 As
        a
        result of the Bank’s measurement of impaired loans, an allowance for probable
        loan losses of approximately $734,000 and $1,492,000 was established for
        $1,471,128 and $3,275,403 of the total impaired loans at December 31, 2005
        and
        2004, respectively.
 
 At
        December 31, 2005 and 2004, loans with unpaid principal balances on which
        the
        Bank is no longer accruing interest income were $3,068,808 and $5,273,807,
        respectively. Interest income was approximately $5,000 greater in 2005 than
        it
        would have been had these loans been current. Interest income would have
        been
        approximately $137,000 and $372,000 greater in 2004 and 2003 respectively,
        had
        these loans been current. Interest income on total nonaccrual loans, which
        is
        recorded only when received, amounted to approximately $122,000, $31,000
        and
        $24,000 for 2005, 2004 and 2003, respectively. At December 31, 2005, 2004
        and
        2003, there were no restructured loans still accruing interest. At December
        31,
        2005 and 2004, loans 90 days or more past due and still accruing interest
        totaled $281,107 and $88,680, respectively.
 
 At
        December 31, 2005 and 2004, commercial real estate mortgages of $155,588,328
        and
        $151,439,130, respectively, were pledged at the Federal Home Loan Bank of
        New
        York (“FHLB”).
 
 **4.  Bank
        Premises and Equipment - Net**
 
 At
        December 31, 2005 and 2004, Bank premises and equipment consisted of the
        following:
 
 Cost
              
              Accumulated
                Depreciation/
                Amortization
              
              Net
                  Book
                ValueDecember
                  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
              
              $
              6,171,005December
                  31, 2004:Building
              
              $
              2,537,344
              
              $
              1,161,351
              
              $
              1,375,993Leasehold
                  improvements
              
              
              3,966,258
              
              
              1,548,744
              
              
              2,417,514Furniture
                  and fixtures
              
              
              4,924,979
              
              
              3,199,993
              
              
              1,724,986Computer
                  equipment and software
              
              
              5,167,025
              
              
              4,194,153
              
              
              972,872Total
              
              $
              16,595,606
              
              $
              10,104,241
              
              $
              6,491,365
 
 Depreciation
        expense totaled $1,429,278, $1,519,631 and $1,615,482 for the years ended
        December 31, 2005, 2004 and 2003, respectively.
  *Table
            of Contents*
  **5.  Other
        Assets**
 
 At
        December 31, 2005 and 2004, other assets consisted of the
        following:
 
 2005
              
              2004Interest
                  receivable - investments
              
              $
              4,813,303
              
              $
              4,048,235Interest
                  receivable - loans
              
              
              4,283,013
              
              
              2,823,627Net
                  deferred income taxes
              
              
              37,457,832
              
              
              4,089,815Current
                  income tax receivable
              
              
              1,832,138
              
              
              -Prepaid
                  expenses
              
              
              1,256,963
              
              
              1,115,118Excess
                  market value of leases acquired (net of accumulated amortization
                  of
                  $475,791 and $439,654)
              
              
              146,675
              
              
              182,812Goodwill
                  (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
              
              
              1,683,787
              
              
              1,621,424Customer
                  sweep accounts, net balances
              
              
              807,305
              
              
              1,103,000Other
                  real estate owned
              
              
              -
              
              
              2,650,000Other
              
              
              4,217,689
              
              
              2,099,824Total
              
              $
              58,889,629
              
              $
              22,124,779
 
 **6.  Deposits**
 
 At
        December 31, 2005 and 2004, certificates of deposit of $100 thousand or more
        were $249,959,842 and $254,186,015, respectively. Scheduled maturities of
        all
        certificates of deposit for the next five years are as follows: $334,966,420
        in
        2006; $31,536,832 in 2007; $1,948,136 in 2008; $1,615,893 in 2009; and
        $9,081,163 in 2010.
 
 **7.  Lines
        Of Credit and Borrowed Funds**
 
 At
        December 31, 2005 and 2004, correspondent banks extended unsecured lines
        of
        credit aggregating $67,000,000 and $47,000,000, respectively, as well as
        $10,000,000 in secured lines at both December 31, 2005 and 2004, 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 $224,000,000 of collateral, including approximately $156,000,000
        in commercial real estate mortgages, it currently has pledged at FHLB,
        approximately $124,000,000 of this line may be drawn on a term or overnight
        basis. The FHLB line is renewed annually.
 
 As
        a
        result of the acquisition of its leasing subsidiary, SWLC, in February of
        2001,
        another component of the Bank’s borrowed funds is obligations under equipment
        lease financing that are secured by the underlying collateral.
 
 The
        following summarizes borrowed funds at December 31, 2005 and 2004:
 
 Outstanding
                  at December 31,
              
              Average
                  Amount Outstanding
              
              Weighted-Average
                  Interest Rate
                on
                  Average Amount Outstanding2005
              
              2004
              
              2005
              
              2004
              
              2005
              
              2004Federal
                  funds purchased
              
              
              -
              
              
              -
              
              $
              6,341,000
              
              $
              7,021,000
              
              
              3.28
              %
              
              1.41
              %Securities
                  sold under agreements to repurchase
              
              
              -
              
              
              -
              
              $
              16,092,000
              
              $
              41,652,000
              
              
              3.18
              %
              
              1.44
              %FHLB
                  - overnight and term
              
              $
              18,500,000
              
              $
              32,000,000
              
              $
              47,397,000
              
              $
              77,390,000
              
              
              3.17
              %
              
              1.41
              %Obligations
                  under equipment lease financing
              
              $
              114,296
              
              $
              266,489
              
              $
              229,000
              
              $
              563,000
              
              
              12.37
              %
              
              11.60
              %
  *Table
            of Contents*
  Of
        the
        total borrowed funds outstanding at December 31, 2005, required payments
        of
        $18,557,006 and $57,290 will be made in 2006 and 2007,
        respectively.
 
 **8.  Junior
        Subordinated Debentures**
 
 On
        December 19, 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.
 
 On
        October 29, 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
        2005, the weighted-average rate on all of the Company’s junior subordinated
        debentures was 6.49%.
 
 **9.  Income
        Taxes**
 
 The
        components of income tax expense for the years ended December 31, 2005, 2004
        and
        2003, are as follows:
 
 2005
              
              2004
              
              2003Federal:Current
              
              $
              6,083,611
              
              $
              5,845,209
              
              $
              3,950,960Deferred
              
              
              (26,407,049
              )
              
              (884,000
              )
              
              517,438Subtotal
              
              
              (20,323,438
              )
              
              4,961,209
              
              
              4,468,398State:Current
              
              
              (2,491,006
              )
              
              381,334
              
              
              816,650Deferred
              
              
              (4,598,551
              )
              
              19,696
              
              
              (33,484
              )Subtotal
              
              
              (7,089,557
              )
              
              401,030
              
              
              783,166Total
              
              $
              (27,412,995
              )
              $
              5,362,239
              
              $
              5,251,564
  *Table
            of Contents*
  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:
 
 2005
              
              2004
              
              2003Amount
              
              %
                  of
                Pretax
                Income
              
              Amount
              
              %
                  of
                Pretax
                Income
              
              Amount
              
              %
                  of
                Pretax
                IncomeIncome
                  tax expense at statutory rate
              
              $
              (22,386,436
              )
              
              (35.0
              ) %
              $
              6,558,387
              
              
              35.0
              %
              $
              6,043,358
              
              
              35.0
              %Surtax
                  exemption
              
              
              639,612
              
              
              1.0
              
              
              (47,783
              )
              
              (0.3
              )
              
              (172,667
              )
              
              (1.0
              )(Reduction)
                  increase in taxes resulting from:Tax-exempt
                  interest on investments, net of interest expense
                  disallowed
              
              
              (507,109
              )
              
              (0.8
              )
              
              (929,975
              )
              
              (5.0
              )
              
              (1,122,087
              )
              
              (6.5
              )Bank
                  owned life insurance
              
              
              (340,257
              )
              
              (0.5
              )
              
              (305,471
              )
              
              (1.6
              )
              
              -
              
              
              -State
                  income tax - net of Federal tax benefit
              
              
              (4,679,108
              )
              
              (7.3
              )
              
              261,692
              
              
              1.4
              
              
              516,890
              
              
              3.0Other
              
              
              (139,697
              )
              
              (0.2
              )
              
              (174,611
              )
              
              (0.9
              )
              
              (13,930
              )
              
              (0.1
              )Income
                  tax expense
              
              $
              (27,412,995
              )
              
              (42.8
              ) %
              $
              5,362,239
              
              
              28.6
              %
              $
              5,251,564
              
              
              30.4
              %
  At
        December 31, 2005 and 2004, the deferred tax assets and liabilities are composed
        of the following:
 
 December
                  31,
              
              2005
              
              2004Deferred
                  tax assets:Litigation
                  judgment
              
              $
              30,382,623
              
              $
              -Allowance
                  for probable loan losses
              
              
              6,068,820
              
              
              4,836,576Intangible
                  assets
              
              
              105,245
              
              
              198,782Unrealized
                  holding loss on securities available for sale
              
              
              2,686,335
              
              
              323,915State
                  NOL and other
              
              
              -
              
              
              32,232Subtotal
              
              
              39,243,023
              
              
              5,391,505Deferred
                  tax liabilities:Leasing
                  activities
              
              
              (1,567,785
              )
              
              (1,301,690
              )Other
              
              
              (217,406
              )
              
              -Subtotal
              
              
              (1,785,191
              )
              
              (1,301,690
              )Net
                  deferred tax assets
              
              $
              37,457,832
              
              $
              4,089,815
 
 The
        deferred tax assets and liabilities are netted and presented in a single
        amount,
        which is included in other assets in the accompanying consolidated balance
        sheets. The income tax expense associated with net security gains amounted
        to
        $302,090, $725,818 and $2,111,848 in 2005, 2004 and 2003,
        respectively.
 
 The
        Company has received preliminary findings of a New York State Department
        of
        Taxation and Finance (the "Department") field audit with respect to New York
        franchise tax for the years ended December 31, 1999, 2000 and 2001. The
        Department contends that the Company's tax liability should be increased
        by
        $4,500,000 (including almost $1,400,000 in penalties and interest, and interest
        continues to accrue) for the years under examination. After deducting the
        estimated Federal tax benefit arising from this matter in the amount of
        $1,530,000, the Company’s net tax liability would be approximately $2,970,000.
        This increase in tax appears to be based on the 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. If the Department were to successfully assert
        the same position for calendar years 2002, 2003, 2004 and 2005, management
        estimates that the additional franchise tax liability for these years including
        interest would be approximately $3,900,000, after taking into consideration
        the
        estimated Federal tax benefit.
 
 The
        Company disagrees with the Department's findings and intends to vigorously
        contest any assessment based upon these findings through appropriate
        administrative and, if necessary, court proceedings. At this time, management
        believes it is more likely than not that the Company will succeed in refuting
        the Department’s position. Accordingly, no liability or reserve has been
        recognized in the consolidated balance sheets at December 31, 2005 or 2004
        with
        respect to this matter. However, no assurance can be given as to whether
        or to
        what extent the Company will be required to pay the amount of the tax liability
        asserted by the Department or whether additional tax will be assessed for
        years
        subsequent to calendar year 2001.
  *Table
            of Contents*
  **10.  Incentive
        Stock Option Plans**
 
 Under
        the
        terms of the Company's incentive stock option plans adopted in January 1987,
        April 1994, February 1999 and February 2002, options have been granted to
        certain key personnel that entitle each holder to purchase shares of the
        Company's common stock. The option price is the higher of the fair market
        value
        or the book value of the shares at the date of grant. Such options 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.
 
 On
        December 13, 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) (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. The Company’s decision to accelerate the vesting of the affected
        incentive stock options was made primarily to eliminate or reduce the
        compensation expense relating to such options that the Company would otherwise
        be expected to record in its consolidated statements of income for future
        periods beginning with the Company’s 2006 fiscal year as a result of the
        application of SFAS No. 123(R) which would require the Company to record
        compensation expense with respect to certain stock options that remain unvested
        as of the first day of fiscal year 2006.
 
 At
        December 31, 2005, options for the purchase of 1,090,529 shares were outstanding
        and exercisable and 397,375 shares were reserved for possible issuance. A
        summary of stock option activity follows after giving retroactive effect
        to all
        stock dividends and splits:
 
 Number
                of
                  Shares
              
              Weighted-Average
                Exercise
                  Price
                Per
                  ShareOutstanding
                  -January
                  1, 2003
              
              
              854,885
              
              $
              10.08Granted
              
              
              165,139
              
              $
              13.61Exercised
              
              
              (68,832
              )
              $
              6.34Cancelled
                  or forfeited
              
              
              (2,020
              )
              $
              10.49Outstanding
                  -December
                  31, 2003
              
              
              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
              
              $
              14.23
 
 The
        following summarizes shares subject to purchase from options outstanding
        and
        exercisable as of December 31, 2005:
  *Table
            of Contents*
 
 Range
                  of Exercise Prices
              
              Shares
                Outstanding
              
              Weighted-Average
                Remaining
                Contractual
                  Life
              
              Weighted-Average
                Exercise
                  Price
              
              Shares
                Exercisable
              
              Weighted-Average
                Exercise
                  Price$8.25
                  - $10.37
              
              
              382,562
              
              
              2.5
                  years
              
              $
              9.86
              
              
              382,562
              
              $
              9.86$12.45
                  - $13.61
              
              
              389,905
              
              
              5.5
                  years
              
              $
              13.04
              
              
              389,905
              
              $
              13.04$19.16
                  - $22.63
              
              
              318,062
              
              
              8.6
                  years
              
              $
              20.92
              
              
              318,062
              
              $
              20.921,090,529
              
              
              5.4
                  years
              
              $
              14.23
              
              
              1,090,529
              
              $
              14.23
 
 The
        following presents information on options exercisable at December 31, 2005,
        2004
        and 2003 after giving retroactive effect to all stock dividends and
        splits:
 
 At
                  December 31,
              
              2005
              
              2004
              
              2003Number
                  of shares exercisable
              
              
              1,090,529
              
              
              580,316
              
              
              503,721Weighted-average
                  exercise price
              
              $
              14.23
              
              $
              10.79
              
              $
              10.00
 
 **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, 2005, the ESOP had all of its assets invested in the Company's
        common stock. The Bank funds all amounts when due. At December 31, 2005 and
        2004, the number of shares of stock held by the ESOP, all of which have been
        allocated to employees, totaled 1,157,991 and 1,148,847, respectively. None
        of
        the allocated shares are subject to a repurchase obligation.
 
 In
        conjunction with the Rights Offering in July 1996, the ESOP borrowed $1,200,000
        from the Company to purchase 210,396 (adjusted for stock dividends and splits)
        of the Company’s shares. As such, the Company recorded a deduction from
        stockholders’ equity to reflect the unearned compensation for the shares. As the
        unearned shares were released from collateral and allocated among participants,
        the Company recognized compensation expense equal to the current market price
        of
        the shares released. As of December 31, 2003, all shares had been released
        from
        collateral and allocated among participants. Compensation expense of $108,227
        was applicable to the 5,845 shares allocated in 2003. Contributions under
        the
        ESOP charged to operations amounted to $1,587,241, $1,382,645 and $1,229,019
        in
        2005, 2004 and 2003, respectively.
 
 The
        Bank
        has a 401(k) Retirement Plan and Trust (the "401(k) Plan"), which covers
        substantially all full-time employees. Employees may elect to contribute
        up to
        16% of their annual gross compensation to the 401(k) Plan, and the Bank will
        match one-half of the employee's contribution up to a maximum of 3% of the
        employee's annual gross compensation. Employees are fully vested in both
        their
        own and the Bank’s contributions. Bank contributions under the 401(k) Plan
        amounted to $477,251, $437,757 and $408,118 in 2005, 2004 and 2003,
        respectively. The Bank funds all amounts when due. At December 31, 2005,
        contributions to the 401(k) Plan were invested in various bond, equity, money
        market or diversified funds as directed by each employee.
 
 During
        1995, the Bank adopted nonqualified deferred compensation plans (the “Plans”)
        for each officer for whom contributions under the ESOP are limited by the
        applicable provisions of the Internal Revenue Code. Bank contributions under
        the
        Plans totaled $112,471, $90,366 and $71,221 in 2005, 2004 and 2003,
        respectively.
 
 **12.  Commitments
        and Contingent Liabilities**
 
 ***Leases*** - The
        Bank is obligated under various leases covering certain equipment, branches,
        office space and the land on which its head office is built. The minimum
        payments under these leases, certain of which contain escalation clauses,
        are:
  *Table
            of Contents*
 
 2006
              
              $
              2,837,2712007
              
              
              2,752,3672008
              
              
              2,779,2052009
              
              
              2,537,6762010
              
              
              2,211,888Remainder
                  to 2016
              
              
              2,783,055Total
              
              $
              15,901,462
 
 Rent
        expense was approximately $2,907,000, $2,394,000 and $2,281,000 for 2005,
        2004
        and 2003, 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 158,494 shares reserved for possible issuance. During 2004, 1,252
        shares were distributed to retired directors. No shares were distributed
        during
        2005.
 
 During
        2005, 2004 and 2003, the Bank charged approximately $99,000, $243,000 and
        $202,000, respectively, to operations relating to the retirement and stock
        plans.
 
 ***Severance
        Commitments*** - The
        Company has five Executive Severance Plans (the "Plans") for certain key
        executives who are full-time employees with the title of Senior Vice President
        and above and who are designated as Plan participants by the Board of Directors.
        The Plans provide for certain rights accruing to participants in the event
        of a
        termination of the participant's employment within one year after a change
        in
        control of the Company. These rights include a cash payment and the continuation
        of certain employee benefits. In addition, all stock options held by a
        participant will become immediately exercisable. In the event that the
        participant enters into an employment contract, as defined in the Plans,
        all
        rights to the severance payment and other benefits set forth above will
        terminate. No amounts have been paid or accrued under the Plans.
 
 ***Pending
        Claims and Contingent Liabilities*** *-* The
        largest component of the Company’s legal expenses relates to ongoing litigation
        arising out of the Bank’s deposit relationship with Island Mortgage Network,
        Inc. (“Island Mortgage” or “IMN”) and its affiliates, as previously disclosed in
        the Company’s Form 10-Q,10-K, and 8-K filings with the Securities and Exchange
        Commission. These expenses totaled $82.8 million, $2.3 million and $3.8 million
        in 2005, 2004 and 2003, respectively. The sharp increase in expenses in 2005
        was
        principally the result of an adverse jury verdict rendered on January 30,
        2006,
        in one of the IMN-related cases, as described further below. The Company
        expects
        to incur additional costs related to this litigation during 2006; however,
        these
        costs are not specifically quantifiable at this point in time.
  *Table
            of Contents*
  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
        lenders not related to the Bank. The Bank never had a lending relationship
        with
        Island Mortgage.
 
 On
        June
        30, 2000, the Banking Department of the State of New York suspended Island
        Mortgage’s mortgage banker license. On July 19, 2000, Island Mortgage and its
        publicly held parent company, AppOnline.com, Inc., filed a petition under
        Chapter 11 of the Bankruptcy Code in the Eastern District of New York.
        Subsequently, certain of Island Mortgage’s lenders filed an involuntary
        bankruptcy petition against Action Abstract, Inc., an entity to which they
        apparently had regularly wired funds in connection with their dealings with
        Island Mortgage. At the request of the Trustee in the Island Mortgage bankruptcy
        case, various bankruptcy cases involving Island Mortgage entities were later
        substantively consolidated.
 
 In
        the
        course of those bankruptcy cases, it has been alleged that Island Mortgage
        engaged in a widespread pattern of fraud directed at lenders, title agents,
        closing companies and others with whom Island Mortgage regularly dealt. A
        number
        of Island Mortgage’s creditors have since asserted that the Bank participated in
        Island Mortgage’s alleged fraudulent scheme. Currently, there are two Island
        Mortgage-related litigations pending in which claims have been asserted against
        the Bank (and, in one case, the Company.) Those litigations are:
 
 -- *Broward
        Title Co. v. Alan Jacobs, et al.* ,
        Adv.
        Proc. No. 01-8181, Bankruptcy Court for the Eastern District of New York.
        On or
        about July 9, 2002, Broward’s motion to sever its claims against the Bank (and
        certain other defendants) was granted, allowing Broward to conduct a nonjury
        trial of its claims against the remaining defendants in the bankruptcy court.
        Broward’s claims against 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.
 
 -- *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).
        On or
        about June 4, 2002, plaintiffs Household Commercial Financial Services, Inc.
        (“Household”), Matrix Capital Bank (“Matrix”), and HSA Residential Mortgage
        Services of Texas (“RMST”), commenced this adversary proceeding with respect to
        the Bank. The Complaint alleges that plaintiffs extended lines of credit
        to, and
        entered into mortgage purchase agreements with, defendant Island Mortgage.
        According to the Complaint, millions of dollars of funds that plaintiffs
        deposited into the accounts at the Bank maintained by Island Mortgage and
        its
        related entities to fund mortgages were misappropriated as the result of
        Island
        Mortgage’s alleged scheme to defraud plaintiffs and unjustly enrich defendants.
        Plaintiffs claim the following with respect to the Bank: 1) the Bank aided
        and
        abetted the allegedly fraudulent scheme perpetrated by Island Mortgage; 2)
        the
        Bank aided and abetted in a breach of the fiduciary duties an Island Mortgage
        affiliate allegedly owed to plaintiffs; and, 3) the Bank was negligent in
        failing to recognize and act on signs that Island Mortgage was allegedly
        misappropriating the funds plaintiffs advanced to Island Mortgage. Plaintiffs
        claim they are entitled to not less than $52 million, plus interest and punitive
        damages.
 
 On
        January 31, 2005, the bankruptcy court ruled on the Bank’s motion for summary
        judgment. The plaintiffs’ claims for negligence and aiding and abetting a breach
        of fiduciary duty were dismissed. The claim for aiding and abetting fraud
        was
        not dismissed, although the court ruled that one of the plaintiffs (Matrix)
        could not seek damages for the period after June 6, 2000. On October 17,
        2005,
        the Bank announced a settlement with Household and an agreement in principle
        with Matrix with respect to each of their separate claims. The Matrix agreement
        is now fully executed.
 
 On
        January 3, 2006, a trial on the remaining claim, aiding and abetting fraud,
        brought by the remaining plaintiff, RMST, commenced in the District Court
        for
        the Eastern District of New York. On January 30, 2006, the jury rendered
        a
        verdict awarding $43.9 million in compensatory damages to plaintiff RMST.
        Prejudgment interest (which will exceed $22 million), in addition to certain
        other potential compensatory damages which have not yet been ruled upon by
        the
        court, could bring the total judgment to approximately $74.2 million. The
        Company has recorded the full $74.2 million nonrecurring expense in its 2005
        financial statements. During 2006, the Company expects to continue to incur
        costs related to the IMN jury verdict, including costs related to a post-verdict
        motion to the District Court for the Eastern District of New York asking
        the
        court to set aside the verdict and enter judgment for the Bank, or, in the
        alternative, grant a new trial, or, in the alternative, reduce the amount
        of the
        judgment. If that motion is unsuccessful, the costs of pursuing an appeal
        to the
        United States Court of Appeals for the Second Circuit, including the costs
        of
        obtaining a supersedeas bond to stay the enforcement of the judgment, and
        the
        accrual of post-judgment interest during the pendency of such an appeal will
        also need to be incurred.
  *Table
            of Contents*
  The
        Bank
        believes it has a number of meritorious arguments for its post-verdict motion
        and a possible appeal to the United States Court of Appeals for the Second
        Circuit and will pursue its rights vigorously; however, the ultimate outcome
        of
        the IMN lawsuits cannot be predicted with certainty. It also remains possible
        that other parties may pursue additional claims against the Bank related
        to the
        Bank’s dealings with IMN and its affiliates. The Bank’s legal fees and expenses
        will continue to be significant, and those costs, in addition to any costs
        associated with settling the IMN-related litigations or satisfying any adverse
        judgments, could have a material adverse effect on the Bank’s results of
        operations or financial position.
 
 In
        addition to the litigations noted above, the Company and the Bank are subject
        to
        other legal proceedings and claims that arise in the ordinary course of
        business. In the opinion of management, the amount of ultimate liability,
        if
        any, with respect to such matters will not materially affect future operations
        and will not have a material impact on the Company’s financial
        statements.
 
 ***Other*** - The
        Bank is required to maintain balances with the Federal Reserve Bank of New
        York
        to satisfy reserve requirements. These balances averaged approximately
        $2,486,000 and $4,237,000 in 2005 and 2004, respectively.
 
 **13.  State
        Bancorp, Inc. (Parent Company Only)**
 
 Certain
        condensed financial information follows (dollars in thousands):
 
 December
                  31,
              
              2005
              
              2004BALANCE
                  SHEETAssets:Cash
              
              $
              483
              
              $
              411Dividends
                  receivable and other assets
              
              
              2,384
              
              
              2,150Investment
                  in the Bank
              
              
              75,926
              
              
              120,437Investment
                  in the Trusts
              
              
              628
              
              
              626Total
                  Assets
              
              $
              79,421
              
              $
              123,624Liabilities:Junior
                  subordinated debentures
              
              $
              20,620
              
              $
              20,620Dividends
                  payable and other liabilities
              
              
              2,379
              
              
              1,954Total
                  Liabilities
              
              
              22,999
              
              
              22,574Stockholders'
                  Equity:Preferred
                  stock
              
              
              -
              
              
              -Common
                  stock
              
              
              60,097
              
              
              49,974Surplus
              
              
              56,424
              
              
              63,014Retained
                  earnings (deficit)
              
              
              (38,602
              )
              
              4,009Treasury
                  stock
              
              
              (16,646
              )
              
              (15,468
              )Accumulated
                  other comprehensive loss, net of taxes
              
              
              (4,851
              )
              
              (479
              )Total
                  Stockholders' Equity
              
              
              56,422
              
              
              101,050Total
                  Liabilities and Stockholders' Equity
              
              $
              79,421
              
              $
              123,624
  *Table
            of Contents*
 
 For
                  the years ended December 31,
              
              2005
              
              2004
              
              2003INCOME
                  STATEMENTDividends
                  from the Bank, net of expenses
              
              $
              8,557
              
              $
              7,209
              
              $
              6,642Interest
                  expense on junior subordinated debentures
              
              
              1,474
              
              
              1,088
              
              
              583Equity
                  in the undistributed (loss) earnings of the Bank and the
                  Trusts
              
              
              (43,631
              )
              
              7,255
              
              
              5,956Net
                  (Loss) Income
              
              $
              (36,548
              )
              $
              13,376
              
              $
              12,015CASH
                  FLOWSOperating
                  Activities:Net
                  (loss) income
              
              $
              (36,548
              )
              $
              13,376
              
              $
              12,015Increase
                  in other assets
              
              
              (234
              )
              
              (90
              )
              
              (258
              )Increase
                  in other liabilities
              
              
              425
              
              
              310
              
              
              103Equity
                  in the undistributed loss (earnings) of the Bank and the
                  Trusts
              
              
              43,631
              
              
              (7,255
              )
              
              (5,956
              )Net
                  cash provided by operating activities
              
              
              7,274
              
              
              6,341
              
              
              5,904Financing
                  Activities:Cash
                  dividends paid
              
              
              (5,766
              )
              
              (5,050
              )
              
              (4,565
              )Junior
                  subordinated debentures
              
              
              -
              
              
              -
              
              
              10,310Proceeds
                  from issuance of common stock
              
              
              3,497
              
              
              3,211
              
              
              3,266Capital
                  contribution to the Bank
              
              
              (3,794
              )
              
              (3,346
              )
              
              (13,002
              )Capital
                  contribution from (to) the Trusts
              
              
              39
              
              
              26
              
              
              (295
              )Payment
                  to repurchase common stock
              
              
              (1,178
              )
              
              (1,987
              )
              
              (1,037
              )Net
                  cash used in financing activities
              
              
              (7,202
              )
              
              (7,146
              )
              
              (5,323
              )Net
                  Changes in Cash
              
              $
              72
              
              
              ($805
              )
              $
              581
 
 **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, 2005 and 2004, commitments to originate loans and commitments
        under
        unused lines of credit for which the Bank is obligated amounted to approximately
        $283,947,000 and $251,502,000, respectively. Approximately $256,018,000 and
        $209,148,000 of these commitments were at variable rates and $27,929,000
        and
        $42,354,000 were at fixed rates at December 31, 2005 and 2004, respectively.
        At
        December 31, 2005 and 2004, the fixed rate commitments had interest rates
        ranging from approximately 4.25% to 7.75% and 1.85% to 7.25%,
        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, 2005 and 2004, the Bank had letters
        of
        credit outstanding of approximately $14,644,000 and $13,398,000, respectively.
        At December 31, 2005, the uncollateralized portion was approximately
        $2,698,000.
  *Table
            of Contents*
  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. During 2005, the Bank executed customer
        interest rate swap transactions together with offsetting interest rate swap
        transactions with institutional dealers.  At December 31, 2005, the total
        gross notional amount of swap transactions outstanding was
        $9,550,000.
 
 At
        December 31, 2004, 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.
 
 **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, 2005 and 2004 and is not reflective of current
        or
        future fair values. Furthermore, the value of long-term relationships with
        depositors is not reflected. The value of those relationships is
        significant.
 
 The
        following methods and assumptions were used to estimate the fair value of
        each
        class of financial instruments for which it is practicable to estimate that
        value.
 
 ***Cash
        and Short-Term Investments*** *-* For cash
        and short-term investments (due from banks, Federal funds sold, securities
        purchased under agreements to resell, accrued interest receivable and certain
        other short-term assets), the carrying amount is a reasonable estimate of
        fair
        value.
 
 ***Securities
        Held to Maturity and Securities Available for Sale*** *-* For
        securities held to maturity and securities available for sale, the estimated
        fair value equals quoted market price, if available. If a quoted market price
        is
        not available, fair value is estimated using a quoted market price for similar
        securities.
 
 ***Loans*** *-* The fair
        value of loans is estimated by discounting the expected future cash flows
        using
        the current rates at which similar loans would be made to borrowers with
        similar
        credit ratings and for the same remaining maturities.
 
 ***Deposits*** *-* The fair
        value of demand deposits, savings accounts and time deposits is the amount
        payable on demand at the reporting date. The fair value of fixed-maturity
        certificates of deposit is estimated using the interest rate swap rates of
        similar term points.
 
 ***Junior
        Subordinated Debentures*** - The
        fair value of junior subordinated debentures is estimated using the interest
        rate swap rates of similar term and repricing points and spreads of equivalent
        new issues.
 
 ***Other
        Short-Term Liabilities*** *-* Other
        short-term liabilities (Federal funds purchased, securities sold under
        agreements to repurchase, accrued interest payable and certain other short-term
        liabilities) are considered to have fair values equal to their carrying amounts
        due to their short-term nature. These instruments are included in other
        short-term liabilities in the accompanying table.
 
 ***Commitments
        to Extend Credit, Standby Letters of Credit and Commercial Letters of
        Credit*** *-* The fair
        value of commitments is estimated using the fees currently charged to enter
        into
        similar agreements, taking into account the remaining terms of the agreements
        and the present creditworthiness of the counterparties. For fixed-rate loan
        commitments, fair value also considers the difference between current levels
        of
        interest rates and the committed rates. The fair value of standby letters
        of
        credit and commercial letters of credit is based on fees currently charged
        for
        similar agreements, which are not material to the financial
        statements.
  *Table
            of Contents*
  The
        estimated fair values of the Company's financial instruments are as follows
        (in
        thousands):
 
 At
                  December 31,
              
              2005
              
              2004Carrying
                Amount
              
              Estimated
                Fair
                  Value
              
              Carrying
                Amount
              
              Estimated
                Fair
                  ValueFinancial
                  assets:Cash
                  and short-term investments
              
              $
              99,505
              
              $
              99,505
              
              $
              81,922
              
              $
              81,922Securities
                  held to maturity and securities available for sale
              
              
              538,238
              
              
              538,190
              
              
              538,699
              
              
              538,657Loans
                  - net of the allowance for probable loan losses
              
              
              876,305
              
              
              866,542
              
              
              766,171
              
              
              766,454Total
              
              $
              1,514,048
              
              $
              1,504,237
              
              $
              1,386,792
              
              $
              1,387,033Financial
                  liabilities:Deposits
              
              $
              1,411,574
              
              $
              1,410,601
              
              $
              1,269,634
              
              $
              1,268,852Junior
                  subordinated debentures
              
              
              20,620
              
              
              21,133
              
              
              20,620
              
              
              21,157Other
                  short-term liabilities
              
              
              19,687
              
              
              19,687
              
              
              32,905
              
              
              32,905Total
              
              $
              1,451,881
              
              $
              1,451,421
              
              $
              1,323,159
              
              $
              1,322,914
 
 **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, 2005, 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. Management
        believes, as of December 31, 2005, that the Company and the Bank meet all
        capital adequacy requirements to which they are subject. There are no conditions
        or events subsequent to that date that management believes have changed the
        Company’s or the Bank’s capital adequacy, since the adverse jury verdict in the
        Island Mortgage litigation previously discussed has been accrued as of December
        31, 2005. The Company’s and the Bank’s capital amounts (in thousands) and ratios
        are as follows:
  *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, 2005:Tier
                  I Capital to Total AdjustedAverage
                  Assets (Leverage):The
                  Company
              
              $
              78,735
              
              
              5.04
              %
              $
              62,488
              
              
              4.00
              %
              
              N/A
              
              
              N/AThe
                  Bank
              
              $
              78,239
              
              
              5.01
              %
              $
              62,466
              
              
              4.00
              %
              $
              78,083
              
              
              5.00
              %Tier
                  I Capital to Risk-Weighted Assets:The
                  Company
              
              $
              78,735
              
              
              7.00
              %
              $
              44,991
              
              
              4.00
              %
              
              N/A
              
              
              N/AThe
                  Bank
              
              $
              78,239
              
              
              6.96
              %
              $
              44,965
              
              
              4.00
              %
              $
              67,447
              
              
              6.00
              %Total
                  Capital to Risk-Weighted Assets:The
                  Company
              
              $
              92,806
              
              
              8.26
              %
              $
              89,885
              
              
              8.00
              %
              
              N/A
              
              
              N/AThe
                  Bank
              
              $
              92,301
              
              
              8.22
              %
              $
              89,831
              
              
              8.00
              %
              $
              112,288
              
              
              10.00
              %As
                  of December 31, 2004:Tier
                  I Capital to Total AdjustedAverage
                  Assets (Leverage):The
                  Company
              
              $
              118,955
              
              
              7.82
              %
              $
              60,847
              
              
              4.00
              %
              
              N/A
              
              
              N/AThe
                  Bank
              
              $
              118,342
              
              
              7.79
              %
              $
              60,766
              
              
              4.00
              %
              $
              75,958
              
              
              5.00
              %Tier
                  I Capital to Risk-Weighted Assets:The
                  Company
              
              $
              118,955
              
              
              12.46
              %
              $
              38,188
              
              
              4.00
              %
              
              N/A
              
              
              N/AThe
                  Bank
              
              $
              118,342
              
              
              12.41
              %
              $
              38,144
              
              
              4.00
              %
              $
              57,216
              
              
              6.00
              %Total
                  Capital to Risk-Weighted Assets:The
                  Company
              
              $
              130,894
              
              
              13.71
              %
              $
              76,379
              
              
              8.00
              %
              
              N/A
              
              
              N/AThe
                  Bank
              
              $
              130,263
              
              
              13.66
              %
              $
              76,289
              
              
              8.00
              %
              $
              95,361
              
              
              10.00
              %
 
 **ITEM
                  9.**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
 
 On
        August
        12, 2005, the Audit Committee of the Company’s Board of Directors (“the Audit
        Committee”) dismissed Deloitte & Touche LLP (“Deloitte”) as the Company’s
        independent registered public accounting firm. This dismissal followed the
        Audit
        Committee’s receipt of proposals from other independent auditors to audit the
        Company’s consolidated financial statements for the fiscal year ended December
        31, 2005. The reports of Deloitte on the financial statements of the Company
        for
        each of the past two fiscal years contained no adverse opinion or disclaimer
        of
        opinion and were not qualified or modified as to uncertainty, audit scope
        or
        accounting principle. During the Company’s two most recent fiscal years and
        through August 12, 2005 there were no disagreements with Deloitte on any
        matter
        of accounting principles or practices, financial statement disclosure or
        auditing scope or procedure, which disagreements if not resolved to the
        satisfaction of Deloitte would have caused them to make reference thereto
        in
        their reports on the financial statements of the Company for such
        years.
 
 On
        August
        12, 2005, the Audit Committee engaged Crowe Chizek and Company LLC as the
        Company’s independent auditors with respect to the audit of the Company’s
        consolidated financial statements for the fiscal year ended December 31,
        2005.
 
 **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.
  *Table
            of Contents*
  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 2005 that have materially affected, or
        are
        reasonably likely to materially affect, the Company's internal control over
        financial reporting.
 
 **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, 2005. 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, 2005.
 
 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.
  *Table
            of Contents*
  **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, 2005 based on ** criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO). State Bancorp,
        Inc.
        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, 2005, 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 (COSO). Also in our opinion, State Bancorp, Inc.
        maintained, in all material respects, effective internal control over financial
        reporting as of December 31, 2005, based on ** criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO).
 
 We
        have
        also audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheet of State
        Bancorp, Inc. as of December 31, 2005 and the related consolidated statements
        of
        income, stockholders' equity and comprehensive income (loss), and cash flows
        for
        the year then ended and our report dated March 3, 2006 expressed an unqualified
        opinion on those consolidated financial statements.
 
 Crowe
        Chizek and Company LLC
 
 Livingston,
        New Jersey
 March
        3,
        2006
 
 
 **PART
        III**
 
 
 **ITEM
                  10.**
              **DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT**
 
 Incorporated
        herein by reference is the Company's 2006 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
        "Principal 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 .
  *Table
            of Contents*
  **ITEM
                  11.**
              **EXECUTIVE
                  COMPENSATION**
 
 Incorporated
        herein by reference is the Company's 2006 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 2006 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 may be found
        below:
 
 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
              
              
              1,090,529
              
              
              14.23
              
              
              397,375Equity
                  compensation plans not approved by security holders (1)
              
              
              14,378
              
              
              N/A
              
              
              158,494Total
              
              
              1,104,907
              
              
              14.23
              
              
              555,869
 
 (1)  The
        amounts in column (a) and (c) 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. For a further discussion of
        the
        Plan, see the Notes to the Company’s Consolidated Financial
        Statements.
 
 **ITEM
                  13.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
 
 Incorporated
        herein by reference is the Company's 2006 Proxy. Certain relationships and
        related transactions may be found under “Certain Transactions” and “Election of
        Directors.”
 
 **ITEM
                  14.**
              **PRINCIPAL
                  ACCOUNTING FEES AND
                  SERVICES**
 
 Incorporated
        herein by reference is the Company's 2006 Proxy. Audit fees, audited related
        fees, tax fees and all other fees may be found under “Independent Registered
        Public Accounting Firm.” Pre-approval policies and procedures may be found under
“Corporate Governance.”
  *Table
            of Contents*
  **PART
        IV**
 
 **ITEM
                  15.**
              **EXHIBITS,
                  FINANCIAL STATEMENT SCHEDULES AND REPORTS ON****FORM
                  8-K**
 
 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.
 
 **Reports
        on Form 8-K:**
 ·
              On
                  October 11, 2005, the Company gave notice that its common stock
                  commenced
                  trading on the NASDAQ National Market under the symbol “STBC” as of
                  October 5, 2005.
 
 ·
              On
                  October 17, 2005, the Company announced the settlement of two claims
                  related to Island Mortgage Network, Inc. and certain related entities
                  resulting in the recording of a legal expense provision in its
                  third
                  quarter consolidated financial statements reducing net income by
                  approximately $3.1 million.
 
 ·
              On
                  October 21, 2005, the Company issued the earnings release for the
                  period
                  ended September 30, 2005.
 
 ·
              On
                  December 19, 2005, the Company announced the amendment of the Company’s
                  1994 Incentive Stock Option Plan and 1999 Incentive Stock Option
                  Plan
                  effective as of December 13, 2005, permitting the payment of all
                  or any
                  part of the exercise price of any incentive stock option by delivery
                  to
                  the Company of common stock of the Company previously owned by
                  the option
                  holder, provided that such shares shall have been owned by the
                  optionee
                  for at least one year. In addition, the Company announced 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)(together, the “Plans”), accelerating the vesting
                  of all unvested incentive stock options granted under the Plans.
                  This
                  acceleration is effective as of December 13,
                  2005.
 
 **Exhibits:**
 Upon
        payment of the Company’s reasonable expenses, State Bancorp, Inc. will furnish
        any exhibit upon written request of the shareholder 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)Articles
                  of incorporation
              Incorporated
                  by reference from exhibit B to the Company's Registration Statement
                  on
                  Form S-4, file No. 33-2958, Filed February 3, 1986.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.(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.
  *Table
            of Contents*
 
 **No.**
              **Item**
              **Method
                  of Filing**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.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
              Incorporated
                  by reference from exhibit 10e to the Company's December 31, 1997
                  Form
                  10-K.e)(ii)
                  Change of control agreement no. 2
              Incorporated
                  by reference from exhibit 10e to the Company's December 31, 1997
                  Form
                  10-K.e)(iii)
                  Change of control agreement no. 3
              Incorporated
                  by reference from exhibit 10e to the Company's December 31, 1997
                  Form
                  10-K.e)(iv)
                  Change of control agreement no. 4
              Incorporated
                  by reference from exhibit 10e to the Company's December 31, 1997
                  Form
                  10-K.e)(v)
                  Change of control agreement no. 5
              Incorporated
                  by reference from exhibit 10e to the Company's December 31, 1997
                  Form
                  10-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,
                  1999
                Form
                  10-K.j)(ii)
                  1998 Directors’ Stock Plan Amendment No. 1
              Incorporated
                  by reference from exhibit 10j to the Company’s December 31,
                  2000
                Form
                  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.
  *Table
            of Contents*
 
 **No.**
              **Item**
              **Method
                  of Filing**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.(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
              Filed
                  herein.(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 pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
              Filed
                  herein.(99.1)
              Disclosure
                  re Fee Dispute with Deloitte & Touche, LLP
              Filed
                  herein.
  *Table
            of Contents*
  **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, 2006
 
 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
              3/16/06Thomas
                  F. Goldrick, Jr.
              (Chief
                  Executive Officer)/s/
                  Daniel T. Rowe
              President
              3/16/06Daniel
                  T. Rowe/s/
                  Richard W. Merzbacher
              Vice
                  Chairman
              3/16/06Richard
                  W. Merzbacher/s/
                  Brian K. Finneran
              Secretary/Treasurer
              3/16/06Brian
                  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. FinneranBrian
                  K. FinneranAttorney-in-factMarch
                  16, 2006