UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: SEPTEMBER 30, 2011

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission File No. 001-14783

STATE BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

TWO JERICHO PLAZA, JERICHO, NEW YORK 11753

(Address of principal executive offices) (Zip Code)

(516) 465-2200

(Registrant’s telephone number, including area code)

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

Yes [X]

No [ ]

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

Yes [X]

No [ ]

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

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

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

Yes [ ]

No [X]

As of October 24, 2011, there were 16,959,792 shares of registrant’s Common Stock outstanding.

STATE BANCORP, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2011

Table of Contents

		Page
	PART I
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) at September 30, 2011 and December 31, 2010	1
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010	2
	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	49
	PART II
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults upon Senior Securities	51
Item 4.	Removed and Reserved	51

Item 5.	Other Information	51
Item 6.	Exhibits	51
	Signatures	52

PART I

ITEM 1. - FINANCIAL STATEMENTS

STATE BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2011 and December 31, 2010
(dollars in thousands, except per share data)

	September 30, 2011			December 31, 2010
ASSETS:
Cash and non-interest-bearing balances due from banks	$	22,286		$	13,887
Interest-bearing balances due from banks		61,673			9,234
Securities held to maturity (estimated fair value of $19,530 in 2011 and $21,890 in 2010)		22,000			22,000
Securities available for sale - at estimated fair value		302,568			361,158
Federal Home Loan Bank and other restricted stock		4,402			6,381
Loans (net of allowance for loan losses of $23,467 in 2011 and $33,078 in 2010)		1,138,954			1,098,292
Bank premises and equipment - net		5,527			6,264
Bank owned life insurance		30,755			31,728
Net deferred income taxes		15,532			24,066
Prepaid FDIC assessment		4,180			5,456
Other assets		9,809			11,513
TOTAL ASSETS	$	1,617,686		$	1,589,979
LIABILITIES:
Deposits:
Demand	$	381,710		$	343,331
Savings		626,317			632,425
Time		375,684			372,979
Total deposits		1,383,711			1,348,735
Other temporary borrowings		2,000			25,000
Senior unsecured debt		29,000			29,000
Junior subordinated debentures		20,620			20,620
Payable - securities purchases		3,990			-
Other accrued expenses and liabilities		10,990			11,772
Total liabilities		1,450,311			1,435,127
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized 250,000 shares; 36,842 shares issued and outstanding; liquidation preference of $36,842		36,427			36,245
Common stock, $0.01 par value, authorized 50,000,000 shares; issued 17,672,684 shares in 2011 and 17,518,827 shares in 2010; outstanding 16,960,092 shares in 2011 and 16,695,808 shares in 2010		177			175
Warrant		1,057			1,057
Surplus		179,941			179,293
Retained deficit		(42,418	)		(51,378	)
Treasury stock (712,592 shares in 2011 and 823,019 shares in 2010)		(12,012	)		(13,872	)
Accumulated other comprehensive income (net of taxes of $2,766 in 2011 and $2,193 in 2010)		4,203			3,332
Total stockholders' equity		167,375			154,852
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,617,686		$	1,589,979

See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Nine Months Ended September 30, 2011 and 2010
(in thousands, except per share data)

	Three Months					Nine Months
	2011			2010		2011			2010
INTEREST INCOME:
Interest and fees on loans	$	15,887		$	15,426	$	46,606		$	46,122
Federal funds sold and securities purchased under agreements to resell		-			-		-			2
Securities held to maturity - taxable		216			41		649			41
Securities available for sale - taxable		2,449			3,464		7,803			11,609
Securities available for sale - tax-exempt		7			25		29			79
Dividends on Federal Home Loan Bank and other restricted stock		23			25		81			88
Interest on balances due from banks		18			8		36			18
Total interest income		18,600			18,989		55,204			57,959
INTEREST EXPENSE:
Deposits		1,793			2,471		5,462			7,601
Temporary borrowings		10			21		42			69
Senior unsecured debt		280			280		841			841
Junior subordinated debentures		180			188		537			546
Total interest expense		2,263			2,960		6,882			9,057
Net interest income		16,337			16,029		48,322			48,902
(Credit) provision for loan losses		(3,500	)		2,500		(500	)		10,200
Net interest income after (credit) provision for loan losses		19,837			13,529		48,822			38,702
NON-INTEREST INCOME:
Service charges on deposit accounts		392			467		1,250			1,372
Net gains on sales of securities		933			733		1,046			3,514
Other operating income		400			820		1,523			1,682
Total non-interest income		1,725			2,020		3,819			6,568
Income before operating expenses		21,562			15,549		52,641			45,270
OPERATING EXPENSES:
Salaries and other employee benefits		5,997			5,959		18,104			18,553
Occupancy		1,202			1,349		3,971			4,159
Equipment		279			302		933			875
Marketing and advertising		150			377		663			1,283
FDIC and NYS assessment		354			697		1,507			2,053
Data processing		234			280		754			800
Merger-related expenses		154			-		1,511			-
Other operating expenses		1,238			1,592		3,725			5,010
Total operating expenses		9,608			10,556		31,168			32,733
INCOME BEFORE INCOME TAXES		11,954			4,993		21,473			12,537
PROVISION FOR INCOME TAXES		4,827			1,783		8,429			4,651
NET INCOME		7,127			3,210		13,044			7,886

Preferred dividends and accretion		521			517		1,563			1,553
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	6,606		$	2,693	$	11,481		$	6,333

TOTAL COMPREHENSIVE INCOME	$	7,033		$	2,221	$	13,915		$	7,045

NET INCOME PER COMMON SHARE - BASIC	$	0.39		$	0.17	$	0.68		$	0.39
NET INCOME PER COMMON SHARE - DILUTED	$	0.39		$	0.17	$	0.68		$	0.39

WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC		16,553,250			16,303,237		16,512,303			16,243,505
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED		16,693,969			16,401,923		16,648,936			16,318,595

See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
For the Nine Months Ended September 30, 2011 and 2010
(dollars in thousands, except per share data)
	Nine Months
	2011			2010
Preferred Stock
Balance, January 1	$	36,245		$	36,016
Accretion of discount on preferred shares		182			172
Balance, September 30		36,427			36,188
Common Stock
Balance, January 1		175			173
Shares issued under the dividend reinvestment plan (31,309 shares in 2011 and 30,485 shares in 2010; at 95% of market value)		1			-
Stock options exercised (21,551 shares in 2011)		-			-
Stock issued under directors' stock plan (14,000 shares in 2011 and 13,875 shares in 2010)		-			-
Stock-based compensation (86,997 shares in 2011 and 141,903 shares in 2010)		1			2
Balance, September 30		177			175
Warrant
Balance, January 1 and September 30		1,057			1,057
Surplus
Balance, January 1		179,293			178,673
Shares issued under the dividend reinvestment plan (31,309 shares in 2011 and 30,485 shares in 2010; at 95% of market value)		319			240
Stock options exercised (21,551 shares in 2011)		229			-
Stock issued under directors' stock plan (14,000 shares in 2011 and 13,875 shares in 2010)		102			140
Stock-based compensation (86,997 shares in 2011 and 141,903 shares in 2010)		789			987
Treasury stock reissued (110,427 shares in 2011 and 142,665 shares in 2010)		(791	)		(1,220	)
Balance, September 30		179,941			178,820
Retained Deficit
Balance, January 1		(51,378	)		(57,432	)
Net income		13,044			7,886
Accretion of discount on preferred shares		(182	)		(172	)
Stock-based compensation (86,997 shares in 2011 and 141,903 shares in 2010)		17			-
Cash dividend on common stock ($0.15 per share)		(2,538	)		(2,483	)
Cash dividend on preferred stock (5% per annum)		(1,381	)		(1,381	)
Balance, September 30		(42,418	)		(53,582	)
Treasury Stock
Balance, January 1		(13,872	)		(16,276	)
Treasury stock reissued (110,427 shares in 2011 and 142,665 shares in 2010)		1,860			2,404
Balance, September 30		(12,012	)		(13,872	)
Accumulated Other Comprehensive Income
Balance, January 1		3,332			6,304
Unrealized gains (1)		1,501			1,278
Reclassification adjustment (2)		(630	)		(2,119	)
Balance, September 30		4,203			5,463
Total Stockholders' Equity, September 30	$	167,375		$	154,249

Comprehensive Income (Loss)
Net income	$	13,044		$	7,886
Other comprehensive income (loss), net of tax:
Unrealized gains (1)		1,501			1,278
Reclassification adjustment (2)		(630	)		(2,119	)
Total other comprehensive income (loss), net of tax		871			(841	)
Total Comprehensive Income, September 30	$	13,915		$	7,045

(1) Unrealized gains (losses) on securities available for sale, net of taxes of $989 and $842 in 2011 and 2010, respectively.
(2) Adjustment for (gains) losses included in net income, net of taxes of $416 and $1,395 in 2011 and 2010, respectively.

See accompanying notes to unaudited condensed consolidated financial statements.

STATE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2011 and 2010
(in thousands)
	Nine Months
	2011			2010
OPERATING ACTIVITIES:
Net income	$	13,044		$	7,886
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit) provision for loan losses		(500	)		10,200
Depreciation and amortization of bank premises and equipment		1,203			1,182
Amortization of net premium on securities		2,015			2,083
Deferred income tax expense		7,960			3,713
Net gains on sales of securities		(1,046	)		(3,514	)
Net gains on sales of loans held for sale		-			(322	)
Income from bank owned life insurance		(265	)		(353	)
Change in fair value of derivative contracts		153			97
Stock-based compensation expense - net		807			989
Directors' stock plan expense		108			78
Net payments and proceeds from sales of loans held for sale		3,580			992
Decrease in other assets		1,779			2,251
Decrease in prepaid FDIC assessment		1,276			1,570
Decrease in other accrued expenses and other liabilities		(1,016	)		(160	)
Net cash provided by operating activities		29,098			26,692
INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale		108,537			89,284
Proceeds from prepayments and maturities of securities available for sale		79,138			122,003
Purchases of securities held to maturity		-			(22,000	)
Purchases of securities available for sale		(124,620	)		(212,817	)
Decrease in Federal Home Loan Bank and other restricted stock		1,979			88
Increase in loans - net		(43,742	)		(22,351	)
Benefit payments received on bank owned life insurance		1,239			-
Purchases of bank premises and equipment - net		(466	)		(1,201	)
Net cash provided by (used in) investing activities		22,065			(46,994	)
FINANCING ACTIVITIES:
Increase (decrease) in demand and savings deposits		32,271			(16,061	)
Increase in time deposits		2,705			52,206
Decrease in other temporary borrowings		(23,000	)		(5,000	)
Cash dividends paid on common stock		(2,538	)		(2,483	)
Cash dividends paid on preferred stock		(1,381	)		(1,382	)
Proceeds from reissuance of treasury stock		1,069			1,184
Proceeds from shares issued pursuant to compensation awards		229			-
Proceeds from shares issued under dividend reinvestment plan		320			240
Net cash provided by financing activities		9,675			28,704
NET INCREASE IN CASH AND CASH EQUIVALENTS		60,838			8,402
CASH AND CASH EQUIVALENTS - JANUARY 1		23,121			28,624
CASH AND CASH EQUIVALENTS - SEPTEMBER 30	$	83,959		$	37,026
SUPPLEMENTAL DATA:
Interest paid	$	7,149		$	9,199
Income taxes paid	$	714		$	802
Loans transferred to held for sale	$	3,580			-

See accompanying notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The unaudited interim condensed consolidated financial statements include the accounts of State Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, State Bank of Long Island and its subsidiaries (the “Bank”). State Bancorp, Inc. and subsidiaries are collectively referred to hereafter as the “Company.” All intercompany accounts and transactions have been eliminated.

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

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

Accounting for Derivative Financial Instruments

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

For the three and nine months ended September 30, 2011, net credit valuation adjustments (“CVA”) of $143 thousand and $153 thousand, respectively, were recorded as reductions to other income. For the three and nine months ended September 30, 2010, $17 thousand and $97 thousand, respectively, were recorded as reductions to other income. The CVA represents the consideration of credit risk of the counterparties to a transaction and the effect of any credit enhancements related to the transaction. As all customer interest rate swap transactions are currently offset by swap transactions with institutional dealers, we expect that their future impact on the Company’s financial statements will be immaterial. At September 30, 2011 and December 31, 2010, the total gross notional amount of swap transactions outstanding was $34 million and $35 million, respectively.

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

	Fair Values of Derivative Instruments

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

Accounting for Bank Owned Life Insurance

The Bank is the beneficiary of a policy that insures the lives of certain current and former senior officers of the Bank and its subsidiaries. The Company has recognized the cash surrender value, or the amount that can be realized under the insurance policy, as an asset in the consolidated balance sheets. Changes in the cash surrender value and insurance benefit payments are recorded in other income.

Allowance for Loan Losses

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

The allowance consists of specific and general components. The specific component relates to loans that are impaired. Commercial and industrial loans and commercial real estate loans of all loan classes are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all of the principal and interest due under the contractual terms of the loan. Problem loans, for which certain terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”). Generally, management individually evaluates all non-accrual loans and TDRs in excess of $250 thousand for impairment. Those non-accrual loans and TDRs of all classes with balances less than $250 thousand as well as other groups of smaller-balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment. The allowance for loan losses related to loans that are impaired includes reserves which are generally based on underlying collateral, discounted cash flow or the observable market price if the intent is to sell the loan.

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

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

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

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

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

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

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

Recent Accounting Guidance

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

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

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

Merger-Related Expenses

In connection with the Company’s previously announced transaction with Valley National Bancorp (“Valley”), the Company has incurred expenses of $1.5 million for the nine months ended September 30, 2011. These consist primarily of legal expenses and investment bankers’ costs.

2. STOCKHOLDERS’ EQUITY

The Company has 250,000 shares of preferred stock authorized. In December 2008, the U.S. Department of the Treasury (the “U.S. Treasury”) purchased 36,842 shares of the Company’s fixed-rate cumulative perpetual Series A Preferred Stock par value $0.01 per share and liquidation preference $1,000 per share, with a redemption and liquidation value of $37 million and an initial annual dividend of 5% for five years and 9% thereafter. The U.S. Treasury also received a warrant to purchase 465,569 shares of the Company’s common stock with an exercise price of $11.87 per share representing an aggregate market price of $6 million or 15% of the preferred stock investment. The warrant is immediately exercisable and expires in ten years. Pursuant to the American Recovery and Reinvestment Act of 2009 (“ARRA”), subject to approval by the U.S. Treasury and the Company’s primary federal regulator, the Company may redeem the preferred stock without regard to whether the Company has replaced such funds from any other source or to any waiting period. If the Company were to redeem the preferred stock, the Company may repurchase the warrant. However, such a repurchase would not be mandatory.

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

3. EARNINGS PER COMMON SHARE

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Distributed earnings allocated to common stock	$	828		$	815		$	2,478		$	2,435
Undistributed earnings allocated to common stock		5,621			1,820			8,735			3,777
Net earnings allocated to common stock	$	6,449		$	2,635		$	11,213		$	6,212
Average market price	$	11.76		$	9.06		$	11.30		$	8.60
Weighted average common shares outstanding, including shares considered participating securities (1)		16,959,056			16,659,283			16,905,995			16,560,961
Less: weighted average participating securities (1)		(405,806	)		(356,046	)		(393,692	)		(317,456	)
Weighted average common shares outstanding		16,553,250			16,303,237			16,512,303			16,243,505
Dilutive effect of stock options, restricted stock grants and common stock warrants		140,719			98,686			136,633			75,090
Adjusted common shares outstanding - diluted		16,693,969			16,401,923			16,648,936			16,318,595
Net income per common share - basic	$	0.39		$	0.17		$	0.68		$	0.39
Net income per common share - diluted	$	0.39		$	0.17		$	0.68		$	0.39
Antidilutive common stock warrant issued to the Treasury under the CPP and not included in the calculation		465,569			465,569			310,379			465,569
Other antidilutive potential shares not included in the calculation		391,145			463,298			402,935			490,381

(1) The Company's restricted stock grants are considered participating securities.

4. INVESTMENT SECURITIES

At the time of purchase of a security, the Company designates the security as either available for sale or held to maturity, depending upon investment objectives, liquidity needs and intent. Securities held to maturity are stated at cost, adjusted for premium amortized or discount accreted, if any. The Company has the positive intent and ability to hold such securities to maturity. Securities available for sale are stated at estimated fair value. Unrealized gains and losses are excluded from income and reported net of tax as accumulated other comprehensive income (loss) as a separate component of stockholders’ equity until realized. Interest earned on securities is included in interest income. Realized gains and losses on the sale of securities are reported in the consolidated statements of operations and determined using the adjusted cost of the specific security sold.

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value
September 30, 2011
Securities held to maturity:
Corporate securities	$	22,000	$	-	$	(2,470	)	$	19,530
Securities available for sale:
Obligations of states and political
subdivisions	$	600	$	-	$	-		$	600
Government Agency securities		44,857		117		(52	)		44,922
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		68,569		3,369		(30	)		71,908
FNMA		97,339		2,667		(103	)		99,903
GNMA		79,146		1,195		(181	)		80,160
Mortgage-backed securities and
collateralized mortgage obligations - commercial:
GNMA		5,088		-		(13	)		5,075
Total securities available for sale		295,599		7,348		(379	)		302,568
Total securities	$	317,599	$	7,348	$	(2,849	)	$	322,098

December 31, 2010
Securities held to maturity:
Corporate securities	$	22,000	$	-	$	(110	)	$	21,890
Securities available for sale:
Obligations of states and political
subdivisions	$	1,883	$	23	$	-		$	1,906
Government Agency securities		40,894		176		(514	)		40,556
Mortgage-backed securities and
collateralized mortgage obligations - residential:
FHLMC		106,040		4,803		(95	)		110,748
FNMA		111,841		2,190		(414	)		113,617
GNMA		89,874		648		(1,050	)		89,472
Mortgage-backed securities and
collateralized mortgage obligations - commercial:
GNMA		5,101		-		(242	)		4,859
Total securities available for sale		355,633		7,840		(2,315	)		361,158
Total securities	$	377,633	$	7,840	$	(2,425	)	$	383,048

The amortized cost and estimated fair value of securities held to maturity and securities available for sale at September 30, 2011 are shown below by expected maturity (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Estimated
	Cost		Fair Value
Securities held to maturity:
Due after one year through five years	$	8,000	$	6,990
Due after five years through ten years		14,000		12,540
Total securities held to maturity		22,000		19,530
Securities available for sale:
Due in one year or less		3,292		3,389
Due after one year through five years		29,181		29,143
Due after five years through ten years		4,000		3,994
Due after ten years		8,984		8,996
Subtotal		45,457		45,522
Mortgage-backed securities and
collateralized mortgage obligations - residential		245,054		251,971
Mortgage-backed securities and
collateralized mortgage obligations - commercial		5,088		5,075
Total securities available for sale		295,599		302,568
Total securities	$	317,599	$	322,098

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Proceeds	$	43,351	$	32,533	$	108,537	$	89,284
Gross gains		1,002		734		1,642		3,517
Gross losses		69		1		596		3
Tax provision, net		370		291		415		1,395

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

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

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

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

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

5. LOANS

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

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

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

	For the			For the Three Months Ended
	Last			September 30,			June 30,			March 31,			December 31,
	12 Months			2011			2011			2011			2010
Beginning balance	$	32,488		$	27,731		$	27,589		$	33,078		$	32,488
Provision (credit)		2,200			(3,500	)		1,100			1,900			2,700
Charge-offs		(11,973	)		(1,151	)		(1,042	)		(7,629	)		(2,151	)
Recoveries		752			387			84			240			41
Ending balance	$	23,467		$	23,467		$	27,731		$	27,589		$	33,078

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

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

	Commercial and industrial			Real estate - commercial			Real estate - residential (1)			Loans to individuals			Tax exempt and other			Unallocated			Total
Three months ended September 30, 2011
Total allowance for loan losses:
Beginning balance	$	15,992		$	8,322		$	1,087		$	173		$	16		$	2,141		$	27,731
(Credit) provision		(4,368	)		426			223			(58	)		(1	)		278			(3,500	)
Charge-offs		(750	)		(90	)		(300	)		(11	)		-			-			(1,151	)
Recoveries		339			-			47			1			-			-			387
Ending balance	$	11,213		$	8,658		$	1,057		$	105		$	15		$	2,419		$	23,467

Nine months ended September 30, 2011
Total allowance for loan losses:
Beginning balance	$	20,144		$	7,893		$	1,809		$	181		$	17		$	3,034		$	33,078
(Credit) provision		(2,133	)		2,128			150			(28	)		(2	)		(615	)		(500	)
Charge-offs		(7,258	)		(1,531	)		(974	)		(59	)		-			-			(9,822	)
Recoveries		460			168			72			11			-			-			711
Ending balance	$	11,213		$	8,658		$	1,057		$	105		$	15		$	2,419		$	23,467

September 30, 2011
Total allowance for loan losses:
Individually evaluated for impairment	$	4,682		$	1,553		$	-		$	-		$	-		$	-		$	6,235
Collectively evaluated for impairment		6,531			7,105			1,057			105			15			2,419			17,232
Ending balance	$	11,213		$	8,658		$	1,057		$	105		$	15		$	2,419		$	23,467

Total loans:
Individually evaluated for impairment	$	21,805		$	12,982		$	942		$	14		$	-		$	-		$	35,743
Collectively evaluated for impairment		503,290			538,817			78,640			4,032			1,899			-			1,126,678
Ending balance	$	525,095		$	551,799		$	79,582		$	4,046		$	1,899		$	-		$	1,162,421

December 31, 2010
Total allowance for loan losses:
Individually evaluated for impairment	$	11,728		$	729		$	123		$	-		$	-		$	-		$	12,580
Collectively evaluated for impairment		8,416			7,164			1,686			181			17			3,034			20,498
Ending balance	$	20,144		$	7,893		$	1,809		$	181		$	17		$	3,034		$	33,078

Total loans:
Individually evaluated for impairment	$	30,153		$	8,184		$	2,304		$	16		$	-		$	-		$	40,657
Collectively evaluated for impairment		501,207			486,008			96,302			4,754			2,442			-			1,090,713
Ending balance	$	531,360		$	494,192		$	98,606		$	4,770		$	2,442		$	-		$	1,131,370

(1) This portfolio segment is comprised of the real estate - residential mortgage and the real estate - residential construction classes.

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

	September 30,			December 31,
	2011			2010
Troubled debt restructurings with specifically allocated allowances for loss	$	16,500		$	26,500
Allowance for loan loss specifically allocated to troubled debt restructurings		(2,738	)		(8,158	)
		13,762			18,342
Troubled debt restructurings with no specifically allocated allowance for loan loss		492			547
Net troubled debt restructurings		14,254			18,889

Other impaired loans with specifically allocated allowances for loss		18,153			13,610
Allowance for loan loss specifically allocated to other impaired loans		(3,497	)		(4,422	)
		14,656			9,188
Other impaired loans with no specifically allocated allowance for loan loss		598			-
Net other impaired loans		15,254			9,188

Total net impaired loans	$	29,508		$	28,077
Average impaired loan balance	$	28,938		$	15,602
Interest income recognized on impaired loans	$	517		$	448

The Company has TDRs at September 30, 2011 that include a $10 million commercial loan and a $7 million commercial real estate loan performing according to their revised terms. The Company’s TDRs primarily resulted from interest rate concessions and maturity extensions. The Company has allocated $3 million of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2011. The Company has no commitments to lend any additional amounts to customers with outstanding loans that are classified as TDRs. The Company had no new TDRs in 2011.

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

	Number of loans		Recorded investment (in thousands)

Loans to individuals		1	$	14
Total		1	$	14

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

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

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

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

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

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

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

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

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

At September 30, 2011 and December 31, 2010, non-accrual loans were $12 million and $15 million, respectively. There was no interest income recognized on non-accrual loans for either of the three or nine month periods ended September 30, 2011 and 2010. At September 30, 2011 and December 31, 2010, there were two loans totaling $55 thousand and three loans totaling $104 thousand, respectively, restructured and no longer accruing interest. At September 30, 2011 and December 31, 2010, there were four TDRs totaling $17 million and five TDRs totaling $27 million, respectively, still accruing interest. At both September 30, 2011 and December 31, 2010, loans 90 days or more past due and still accruing interest totaled $1 thousand.

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

	Non-accrual loans		Loans past due over 90 days still accruing
September 30, 2011
Commercial and industrial - general purpose	$	4,223	$	-
Real estate - commercial mortgage		6,643		-
Real estate - residential mortgage		690		-
Loans to individuals		84		1
Total	$	11,640	$	1

December 31, 2010
Commercial and industrial - general purpose	$	11,017	$	-
Real estate - commercial mortgage		1,684		-
Real estate - residential mortgage		973		-
Real estate - residential construction		1,078		-
Loans to individuals		104		1
Total	$	14,856	$	1

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

	30 - 59 days past due and accruing		60 - 89 days past due and accruing		Greater than 90 days past due and still accruing		Non-accrual loans		Total past due		Loans not past due and still accruing		Total loans
September 30, 2011
Commercial and industrial - owner-occupied mortgage	$	7,456	$	-	$	-	$	-	$	7,456	$	170,298	$	177,754
Commercial and industrial - general purpose		1,163		11,471		-		4,223		16,857		330,484		347,341
Real estate - commercial mortgage		1,609		-		-		6,643		8,252		496,584		504,836
Real estate - residential mortgage		2,809		423		-		690		3,922		71,100		75,022
Real estate - commercial construction		-		-		-		-		-		46,963		46,963
Real estate - residential construction		-		-		-		-		-		4,560		4,560
Loans to individuals		15		-		1		84		100		3,946		4,046
Tax exempt and other		-		-		-		-		-		1,899		1,899
Total	$	13,052	$	11,894	$	1	$	11,640	$	36,587	$	1,125,834	$	1,162,421

December 31, 2010
Commercial and industrial - owner-occupied mortgage	$	-	$	-	$	-	$	-	$	-	$	191,913	$	191,913
Commercial and industrial - general purpose		452		20,247		-		11,017		31,716		307,731		339,447
Real estate - commercial mortgage		1,344		3,341		-		1,684		6,369		443,492		449,861
Real estate - residential mortgage		198		175		-		973		1,346		82,350		83,696
Real estate - commercial construction		-		-		-		-		-		44,331		44,331
Real estate - residential construction		-		-		-		1,078		1,078		13,832		14,910
Loans to individuals		24		8		1		104		137		4,633		4,770
Tax exempt and other		-		-		-		-		-		2,442		2,442
Total	$	2,018	$	23,771	$	1	$	14,856	$	40,646	$	1,090,724	$	1,131,370

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

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

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

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

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

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

6. LEGAL PROCEEDINGS

A case was filed on May 6, 2011 in the Supreme Court of the State of New York, Nassau County, on behalf of a putative class of the Company’s stockholders against the Company, the Company’s directors and Valley challenging the merger of the Company into Valley (Edith K. Grossman v. State Bancorp, Inc., et al (No. 600469/2011)). The complaint alleges that the individual defendants, who are directors of the Company, breached their fiduciary duties of care, loyalty, good faith and independence owed to the stockholders of the Company, and that the Company and Valley aided and abetted the alleged fiduciary breaches. The complaint generally alleges that the individual defendants did not maximize stockholder value and agreed to transaction terms that limited their ability to pursue and accept competing offers for the Company, resulting in a “deficient sales process.” The complaint seeks, among other things, an order enjoining the defendants from proceeding with and consummating the transaction, and other equitable and monetary relief.

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

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

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

7. REGULATORY MATTERS

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital and Tier I capital, as defined in the federal banking regulations, to risk-weighted assets and of Tier I capital to average assets as shown in the following table. Each of the Company’s and the Bank’s capital ratios exceeds applicable regulatory capital requirements and the Bank meets the requisite capital ratios to be well-capitalized as of September 30, 2011 and December 31, 2010. There are no subsequent conditions or events that management believes have changed the Company’s or the Bank’s capital adequacy. The Company’s and the Bank’s capital amounts and ratios are as follows (dollars in thousands):

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

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

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

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

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

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

8. STOCK-BASED COMPENSATION

Incentive Stock Options

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

At September 30, 2011, incentive stock options for the purchase of 174,763 shares were outstanding and exercisable. The options outstanding and exercisable at September 30, 2011 had no intrinsic value. The total intrinsic value of options exercised and the total cash received from option exercises for the first nine months of 2011 were $11 thousand and $229 thousand, respectively. The Company recognized tax benefits resulting from option exercises for the nine months ended September 30, 2011 of $4 thousand. No options were exercised in 2010. A summary of stock option activity follows:

				Weighted-Average
	Number			Exercise Price
	of Shares			Per Share
Outstanding - January 1, 2011		235,286		$	16.15
Granted		-			-
Exercised		(21,551	)	$	10.62
Forfeited or expired		(38,972	)	$	12.89
Outstanding - September 30, 2011		174,763		$	17.57

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

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

Restricted Stock Awards

Under the Company’s 2006 Equity Compensation Plan (the “2006 Plan”), the Company can award options, stock appreciation rights (“SARs”), restricted stock, performance units and unrestricted stock. The 2006 Plan also allows the Company to make awards conditional upon attainment of vesting conditions and performance targets. During the first nine months of 2011, the Company awarded 126,993 shares of restricted stock to certain key employees.

The restricted stock awards currently outstanding primarily vest one-third on each of the third through fifth anniversaries of the award date. The fair value of restricted stock awards vested during the first nine months of 2011 and 2010 was $539 thousand and $225 thousand, respectively. Based on an estimated forfeiture rate, of the 369,587 shares currently outstanding, 354,000 shares are expected to vest over the remaining vesting life. The Company recognizes compensation expense over the vesting period at the fair market value of the shares on the award date. If a participant’s service terminates for any reason other than death or disability, then the participant shall forfeit to the Company any shares acquired by the participant pursuant to the restricted stock award which remain subject to vesting conditions.

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

A summary of restricted stock activity follows:

	Number			Weighted-Average
	of Shares			Grant-Date Fair Value
Nonvested - January 1, 2011		313,563		$	9.85
Granted		126,993		$	10.74
Vested		(42,503	)	$	12.69
Forfeited or expired		(28,466	)	$	9.59
Nonvested - September 30, 2011		369,587		$	9.85

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

Non-Plan Stock-Based Compensation

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

In Novem

STATE BANCORP INC 10-Q